Record second-quarter highs in processing sales volume and net revenue have Heartland Payment Systems Inc. executives singing the praises of a retooled sales force and diligence in monitoring expenses.
During the period ended June 30, sales volume for the Princeton, N.J.-based processor involving small and midsize merchants totaled a company record $17.5 billion, up 7.2% from a year earlier, helping to drive one of the best quarters for the company in recent years.
The company also experienced “the fifth consecutive quarter of same-store sales growth, our best merchant retention in four years, plus solid improvement in our new business initiatives,” Robert Carr, Heartland chairman and CEO, told analysts during a July 28 conference call.
Net income rose 102%, to $12.3 million from $6.1 million a year earlier, while net revenue, which excludes interchange, dues and other fees, produced a quarterly record at $122.2 million, up 6.1% from a year earlier, according to Heartland. Total revenues for the second quarter were $526 million, an increase of 10.4% from $475.9 million.
The adjusted basis earnings for the quarter were 31 cents per share, or a 35% increase from the 23 cents per share reported in last year’s second quarter, Maria Rueda, Heartland’s chief financial officer, told analysts.
“In broad strokes, our best performing industries were quick-service restaurants, utilities, hotel, electronics and furniture,” Rueda said. “This quarter, we saw a slight increase in average ticket and a continued year-over-year shift to more debit spending.”
Heartland’s balance sheet “is in great shape,” Rueda contends, citing adjusted operating cash flow at $23.6 million, up 15.7% from the $20.4 million a year earlier.
Asked by an analyst how a sales force about half the size it was a year ago was able to produce the positive Q2 numbers, Carr cited a change in productivity standards that created “some lingering loss of unproductive salespeople” that the company countered with a renewed philosophy regarding the type of salespeople it employed.
“The production of our average sales rep is up over 100% over a year ago,” he said. “We had a big headcount a year ago, but a lot of people sign up and work in a sales organization on a commission model and they work part-time. We just decided that we wanted people who are really committed to making a good living working here.”
Carr called the jump to a 17.7% operating margin on net revenue compared with 13.2% from the second quarter of 2010 “as our best operating margin in three years.”
Fueled by its second-quarter earnings, Heartland raised its earnings forecast for 2011, saying fully diluted earnings per share would be between $1 and $1.04 after eliminating a stock-compensation expense.
Chris Shutler, an equity research analyst for William Blair & Co. in Chicago, contends Heartland’s second-quarter earnings were “somewhat mixed.”
“This has been a cost-savings story for the most part, and reducing costs has driven most of the stock appreciation to date,” Shutler tells PaymentsSource.
Heartland must continue the type of positive revenue growth it reported for the quarter on a consistent basis, but through accelerating revenue growth, he says, noting the key will be “improving the number of productive sales reps” in the coming year.
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