Heartland Q2 net income rises

The company's operating margin expanded by 250 basis points to 19.2% of net revenues (defined as total revenues less interchange and dues and assessments), driving operating income up 50% to $12.1 million from $8.1 million in the year earlier period. Net income for the three months was $7.4 million, or $0.19 per fully diluted share, increases of 70% and 58%, respectively, compared to net income of $4.4 million, or $0.12 per fully diluted share, in the second quarter of 2005. Earnings per share in the second quarter of 2006 are based on a 12% higher average diluted share count than in the same period in 2005.

Robert Carr, Chairman and CEO, said, "Results this quarter were driven by record merchant processing volumes, which grew 29% over the year ago period and reached almost $11 billion in the second quarter. In addition, our continued use of technology to improve efficiency throughout the organization helped drive our operating margin to a quarterly best 19.2%. On the front end, 78% of new merchants installed and 62% of total transactions processed this quarter were on HPS Exchange. During the second quarter we also completed the conversion to our Passport back end processing platform. Passport provides us with a powerful and versatile tool not only to improve processing and servicing efficiency, but also to create and introduce new products and services that respond to the evolving needs of the market. In addition to our transparent pricing and skilled sales force, small and mid-sized merchants are increasingly choosing Heartland for our innovative solutions that save them time and money."

Processing volume for the three months ended June 30, 2006 increased 29% to $11.0 billion from $8.5 billion during the same period in 2005. The Company's active card processing merchant count rose to 124,800 at June 30, 2006, a 23% increase over the past twelve months. Same store sales at our installed base rose 4.8%, below the level of growth the company has experienced in recent years.

COMPANY INITIATES QUARTERLY DIVIDEND; SHARE BUYBACK AUTHORIZATION INCREASED

The Company also declared an initial quarterly dividend of $0.025 per common share. The dividend is payable to shareholders of record on August 25, 2006 and will be paid on September 15, 2006. It was also announced that the Board of Directors has increased the Company's common stock repurchase authorization by 1,000,000 shares. This authorization is in addition to the 1,000,000 common share buyback the Board authorized on January 17, 2006, of which 873,900 shares have been repurchased.

Commenting on the new dividend and increased repurchase authorization, Mr. Carr said, "I am pleased to announce two programs that will enhance returns to our shareholders. We are initiating a dividend in order to start sharing a portion of our growing free cash flows with our shareholders. With a business model based on generating organic growth, we are capable of both funding continuing market share gains and returning excess cash to shareholders through dividends. At the same time, by doubling our buyback authority, the Board has endorsed the continuation of our existing program to reinvest essentially all of the proceeds of option exercises in Company stock, thus reducing the dilution from such exercises. For the first half of this year, this has meant that over $20 million of proceeds from option exercises has been invested in Heartland stock."

SIX MONTH RESULTS

For the first six months of 2006, revenues were $514.9 million, up 36% compared to $379.6 million for the first six months of fiscal 2005. Net income in the first half of 2006 was $11.8 million or $0.30 per fully diluted share, increases of 67% and 50%, respectively, compared to net income of $7.1 million, or $0.20 per fully diluted share in the first half of 2005. Earnings per share in the 2006 period are based on a 13% higher average diluted share count than in the same period in 2005.

Mr. Carr continued, "This was another outstanding quarter as growth remained robust, and we made significant strides toward our objective of a better than 20% operating margin. At the same time, we are investing across the organization to strengthen our resources, people, products and infrastructure, to support our existing merchants as well as sustain our momentum."

FULL YEAR 2006 GUIDANCE

For the year, the Company is raising its guidance, and now expects net revenue (total revenue less interchange, dues and assessments) to grow by 28% - 30%; operating income as a percentage of net revenue to be 20% - 22% on a pro forma basis, which excludes the $2 million interchange estimate change in the first quarter; and earnings per share of $0.74 - $0.78, which only excludes $0.04 per share of after-tax 123R expense currently anticipated for fiscal 2006.