Improved economic conditions helped Heartland Payment Systems Inc. turn a profit in the second quarter after reporting a loss a year earlier, but price competition for merchant processing will remain a challenge.
"Perceived price is a major driver and there's no question that various forms of teaser rates and low ball sales are as aggressive today or more aggressive than they've ever been," Bob Baldwin, the company's president and chief financial officer, said in an earnings conference call Wednesday. He said there are "a lot of hungry salespeople out there who don't know how to … compete any other way" than "putting out a low price."
That trend, along with the rise of more "nontraditional" players, such as point of sale terminal vendors that are getting into payment authorization, has made it more difficult to drive growth, said Andrew Jeffrey, a managing director with SunTrust Robinson Humphrey in San Francisco.
Additionally, many merchant acquirers rely more heavily now on independent sales organizations to land customers, he added.
"What that's done is it's created a multiplier effect in the market, which has resulted in a lot more competition," Jeffrey said.
Heartland, over the last year, has beefed up its own in-house sales force and has been working to organize the team into market segments, such as retail and health care, to avoid situations that arose in the past in which multiple salespeople would pitch the same prospect.
"It wasn't so much that we were losing business because of it," Bob Carr, Heartland's chairman and chief executive, said in an interview Wednesday. "It just made us look unprofessional. We were definitely in a trajectory where that was happening more and more often."
The company's relationship manager count grew by 24% over the previous quarter, to 1,393.
"I think we're going to slow down, because we have so many new people to train," Carr said. "We really had a more successful quarter of hiring" than expected.
Despite the flurry of hiring, Heartland will still face headwinds because of increased market competition and the need to train the new hires, Jeffrey said.
"The efficiency of the average sales person in the organization is reduced by the lack of experience," he said.
Heartland, of Princeton, N.J., reiterated its previous per-share earnings estimate for the full year of 95 cents to $1, excluding 11 cents for stock compensation and 3 cents for interest expense from the data breach.
However, it lowered its full-year net revenue projection to between $450 million and $458 million from a previous range of $460 million to $475 million.
Net revenue rose 8.1% year over year, to $115.1 million. The increase was mainly the result of an 8% increase in card processing volume for small and midsize merchants, to $16.3 billion.
Net income for the quarter was $6.1 million, or 16 cents per diluted share. For the year-earlier period Heartland reported a net loss of $2.6 million, or 7 cents per diluted share.
Heartland recorded $4.9 million pretax expenses resulting from its highly publicized data breach.
During the quarter the company introduced its E3, or end-to-end encryption, terminal in response to the breach. The systems encrypt card data when a card is swiped to avoid the chance of merchants retaining the data. Heartland said more than 3,000 of the terminals have been installed by more than 2,500 merchants.
