Heartland Payment Systems Inc. is adding merchant accounts and is processing more transactions for its established merchants, thanks to a well-honed sales effort and a healthier economy.
Not surprisingly, the increasing number of new customers and the burgeoning strength of older ones are driving increases in revenue and normalized income, according to analysts and company executives.
“Small businesses appear to finally be joining the economic recovery–same store sales were up 3.2%,” Robert Carr, chairman and CEO of the Princeton, N.J.-based card processor, said during a May 4 conference call with analysts to discuss first-quarter earnings.
Heartland achieved the same-store sales increase even though the company’s sales staff was dwindling, an outcome that indicates the company is keeping its best reps and shedding the low producers, according to David J. Koning, a senior analyst with Robert W. Baird & Co. Inc. of Milwaukee.
“It seems the good reps are sticking around, which is encouraging,” Koning says.
The sales staff recently shrank by 155, from 917 in December to 762 in March, because of Heartland’s efforts to improve sales productivity, Carr said. The effort includes fine-tuning the hiring process and sharing best practices, he noted.
The remaining reps created an average of $6,000 of new margin in the first quarter, a record-high for the company, Carr said. Those efforts and the improving economy are reflected in Heartland’s first-quarter increase in revenue, he added.
Heartland reported a 13.7% increase in first-quarter total revenue, to $467.7 million from $411.2 million during the same period last year. At $112.7 million, net revenue for the quarter was up 8.5%, the strongest gain in six quarters, with all of the company’s card and noncard businesses registering gains during the quarter, Carr said.
The company reported an operating margin on net revenue of 12.9%, reflecting a 7.8% decrease in processing and servicing costs compared with the first quarter of last year.
Small and midsize merchant transaction processing volume totaled $15.4 billion, up 7.1% from a year earlier.
Heartland processed 747 million transactions for network-services merchants, up 9%, contributing to a 2.7% year-over-year increase in network services net revenue for the quarter.
The number of new merchants added grew during the first quarter, but exact figures will not become available until Heartland files a Form10Q with the U.S. Securities and Exchange Commission later this month, Koning said.
Heartland’s smaller units contributed to the strong results, says Koning. Payroll processing, for example, grew by 15%, while equipment sales, mainly of private-label and other terminals, increased 10%. The latter grew more slowly than in previous periods but still outpaced the company as a whole, he notes.
While increasing revenue, Heartland has been reducing costs, Carr said.
“On the cost side, processing and servicing cost was down nearly 8% year-over-year, reflecting facility consolidations, reduced offices, efficiencies improvement and cost containment measures,” he said.
At the same time, net income declined by an initially startling 44.4%, to $7.9 million from $14.2 million, but extenuating circumstances explain the drop, says Koning.
“Last year, they had a recovery of some breach costs that hit in Q1, which was virtually all of their profits in Q1” of last year, he says. Heartland reported a costly and well-publicized data in January 2009.
On a normalized basis, Heartland earnings per share was 4 cents in the first quarter of last year, compared with 20 cents in the same period this year, Koning says.
The earnings statement, released before the markets opened Wednesday, sent Heartland stock prices strongly upward, he notes, adding that the stock closed May 3 at 18.83 and reached a high of 21.41 in midday trading May 4.
During the analysts’ call, a question arose about the mood of the Heartland sales force, and Carr replied with optimism.
“I think it feels the best it has been, frankly, since October of 2008, when things went south in terms of the economy,” he said.
But the optimism reflected the improvements the company has made in the sales force and the hopes for a continuing economic upturn, Carr added.
“We have a smaller group, and our productivity is more than doubled in the last 12 months,” Carr said of the sales staff. “It seems that folks who weren’t successful have more complaints and take up a disproportionate amount of time of their management team. So we are managing the organization more closely.”
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