Heartland Payment Systems (HPY)

Q3 2011 Earnings Call

October 27, 2011 8:30 am ET

Executives

Robert O. Carr - Executive Chairman and Chief Executive Officer

Robert H. B. Baldwin - President

Maria Rueda - Chief Financial Officer

Analysts

Greg Smith - Sterne Agee & Leach Inc., Research Division

Christopher Shutler - William Blair & Company L.L.C., Research Division

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Kartik Mehta - Northcoast Research

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Tien-Tsin T Huang - JP Morgan Chase & Co, Research Division

Roman Leal - Goldman Sachs Group Inc., Research Division

Robert J. Dodd - Morgan Keegan & Company, Inc., Research Division

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Unknown Analyst -

Richard Cheever - SunTrust Robinson Humphrey

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Good day, and welcome to the Heartland Payment Systems Third Quarter 2011 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Maria Rueda. Please go ahead.

Maria Rueda

Good morning. Thank you, and good morning, everyone. I'd like to welcome you to our third quarter 2011 earnings call. Joining me this morning is 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 taking your questions.

Before we begin, I'd like to remind you that some of our discussions may contains that are forward-looking in 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 those factors is contained in the reports of our financial results we released early this morning, as well as in the company's SEC filings. We undertake no obligation to update any forward-looking statements to reflect the events or circumstances that may arise after this call.

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

Robert O. Carr

Thank you, Maria, and good morning, everyone. I'd like to thank you all for joining us today and for your interest in Heartland. And by now you should've seen our financial results for the third quarter that we released this morning.

For the quarter, we reported net income of $12.7 million or $0.31 per fully diluted share on an adjusted basis, increases of 59% and 55%, respectively, compared to the same quarter of last year. We've achieved consistent strong performance this year across our key metrics: Card processing volume, same-store sales and volume attrition. We have also improved sales productivity and achieved cost efficiencies throughout the organization, all of which have contributed to exceptional earnings performance. Cash returns on our investment have been even better, and we are using that cash to strategically grow the business as well as reward our shareholders through both dividends and our share repurchase program that we announced this morning.

One of the uses of cash in the third quarter was the purchase of terrific company, School-Link Technologies, which provides K-12 school nutrition and point-of-sale solutions, including school meals payments processing. Considered together with our 3 other K-12 service providers acquired over the past 10 months, we are now the leading provider of K-12 payments in the U.S. with a nearly 20% market share. Our K-12 strategy is another growth initiative that leverages our core processing capabilities similar to our loyalties, SmartLink and payroll products. And this quarter, all of those products achieved double-digit revenue growth.

In addition to the fundamental attractiveness of the K-12 business, our 20% market share provides us with a proprietary marketing channel to the parents of the 12.5 million students, who passed through the launch lines in the schools we serve.

Of course, our success so far in 2011 has preceded the October 1 implementation of the Durbin Amendment, which many of us believe has the potential to offset the balance of industry power as we think it should. Through our Durbin Dollars campaign, we are accentuating our fair dealing philosophy by passing along 100% of all debit interchange reductions to our merchants across the U.S. Durbin Dollars should be put where they belong: into merchant's bank accounts. We believe that the intent of Durbin was not to temporarily increase the profits for processors. And while we understand this may not be the case with the vast majority of our competitors, our fair deal and transparency are the fundamental principles by which we have always operated so this has effectively no real change for Heartland. We believe our business model is sustainable and will allow us to continue our organic growth well into the future, which we do not believe may be the case for those who sacrificed their customers' interest for the sake of their own short-term profitability and 2012 bonuses.

Durbin has been like an adrenaline boost for our sales organization and our partners, and we expect it to empower our relationship managers just like the Wal-Mart settlement did 8 years ago.

In addition to the many associations which endorse us, including the National Restaurant Association, the American Hotel & Lodging Association, 45 state restaurant associations and 38 hotel associations are telling us that they feel very good about that they have selected the right partner. They are energized because they see us treating their members fairly.

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