Heartland Payment Systems (HPY)

Q2 2011 Earnings Call

July 28, 2011 8:30 am ET

Executives

Robert Baldwin - President

Robert Carr - Executive Chairman and Chief Executive Officer

Maria Rueda - Chief Financial Officer

Analysts

Robert Dodd - Morgan Keegan & Company, Inc.

Brett Huff - Stephens Inc.

Christopher Shutler - William Blair & Company L.L.C.

Thomas McCrohan - Janney Montgomery Scott LLC

David Koning - Robert W. Baird & Co. Incorporated

Tien-Tsin Huang - JP Morgan Chase & Co

Roman Leal - Goldman Sachs Group Inc.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Presentation

Operator

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Good day, and welcome to the Heartland Payment Systems Second Quarter 2011 Earning Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Maria Rueda, Chief Financial Officer. Please go ahead, ma'am.

Maria Rueda

Thank you, and good morning, everyone. I'd like to welcome you to the Heartland Payment Systems Second Quarter 2011 Earnings Call. Joining me are Bob Carr, Chairman and CEO; and Bob Baldwin, President. Today, Bob Carr will begin our discussion with an overview of the quarter and then I'll return to go through some of the financials in detail before opening the call where we will all be available to take your questions.

Before we begin, I’d like to remind you that some of our discussions may contain statements of a forward-looking nature, which represent management’s beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions that are based on information currently available to us. Actual results may differ materially from those expressed in the forward-looking statements due to many factors. Information concerning these factors is contained in our financial results released early this morning and in the company’s SEC filings. We undertake no obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances.

Now I'd like to turn the call over to our Chairman and CEO, Bob Carr.

Robert Carr

Thank you, Maria, and good morning, everyone. I'd like to thank you all for joining us today and for your interest on Heartland. By now, you should have seen our financial results for the second quarter that we released this morning. On an adjusted basis, we reported net income of $12.5 million or $0.31 per diluted share, increases of 38% and 35%, respectively, compared to the second quarter of last year. Results in the quarter were led by a record small merchant processing volume and continued disciplined cost management that drove our operating margin to 17.7%. This is one of the best quarters in recent years, and we are pleased to once again be consistently growing our business, improving efficiencies and generating nice returns for our shareholders without the benefit of any meaningful economic improvements.

For the quarter, we achieved record SME processing volumes of $17.5 billion, a 7.2% year-over-year increase due to the fifth consecutive quarter of same-store sales growth, our best merchant retention levels in 4 years plus solid improvement in our new business initiatives.

New margin installed for the quarter was $12.6 million, up 3.6% from the second quarter of 2010, as we once again achieved an increase in relationship manager productivity which rose to an all-time record of $6,013 in June, more than a 100% improvement in less than one year. This is a very important metric because success breeds success in the sales profession, and we can now accurately say that our sales organization is not only the largest in the payments industry, but now Heartland has become the home for the elite business-to-business sales professionals in America. Virtually all of our sales people now are earning good incomes.

In the quarter, Network Services grew transaction processing by 6%, which is all organic, while net revenue was up 4.5%. In our non-card businesses, payroll, loyalty and gift and equipment, revenues grew at double-digit rates as we continue to introduce innovative new products that leveraged our core technology, unique direct sales force and strong merchant relationships.

Our pipelines for SME petroleum and our SmartLink products are the deepest they have ever been. And we are nearing completion of the conversion of our payroll customer base to our new Heartland-designed and Heartland-developed PlusOne Payroll platform. Finally, we will have a modern platform which offers enhanced features and functionality that are extremely relevant in this new era of heightened compliance.

Also, we have now deployed more than 19,000 end-to-end encryption devices, a small merchant-spend money to enhance their security with this best-of-breed solution that is proving itself to be superior to other solutions introduced. And we rolled out a new loyalty product in the second quarter that has caught on remarkably well right out of the box and has driven our year-over-year installed margin growth in this segment to record levels.

We've implemented a disciplined expense management program that drove us significantly, a significant quarterly decrease in our processing and servicing costs relative to last year, in addition to the clients and customer acquisition depreciation and amortization expenses. In the second quarter, these improvements led to a 17.7% operating margin, our best operating margin in 3 years.

Our improved model for the local servicing of our merchant base combined with the signed retention experts to each division has allowed us to reduce merchant attrition to a 4-year low this past month. The best news for us is that this model is working well and is sustainable for the long term. We've made tremendous progress in finding efficiencies to keep a tight lid on our costs, and I want to thank all of our Heartland team members across the country for their focus on the productivity gains that are responsible for this outstanding performance.

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