Heartland swings to Q1 net loss

Source: Heartland Payment Systems

Heartland Payment Systems (NYSE: HPY), a leading provider of credit/debit/prepaid card processing, payroll, check management and payment services, today announced a first quarter GAAP net loss of $2.5 million and a fully diluted loss per share of $0.06.

Results for the quarter are after $12.6 million (pre-tax), or $0.20 per diluted share, of various expenses and accruals, all of which are attributable to the processing system intrusion. Excluding these expenses and accruals, Adjusted Net Income and Diluted Earnings per Share were $5.4 million and $0.14, respectively, for the first quarter.

Highlights for the First Quarter include:

  • Transaction processing volume of $15.5 billion, up 17.4%
  • Net Revenue up 23.4% with card net revenue advancing 26.6%
  • Adjusted Net Income and Diluted Earnings per Share of $5.4 million and $0.14, respectively, excluding various expenses and accruals, all of which are attributable to the processing system intrusion
  • Same store sales declined a record 7.6%
  • New margin installed decreased by 9.7% in the first quarter

Robert Carr, Chairman and CEO, said, "I am proud of our many associates who demonstrated the resilience of our organization by quickly adapting to the many challenges of the first quarter to sustain our record of transaction processing and net revenue growth, and investing for the long term. Importantly, we demonstrated the flexibility of our model by directing our Relationship and Account Managers to communicate the facts about the processing system intrusion, and so assuring our existing merchants that the intrusion had no impact on their payments processing or business. This effort unavoidably took time away from new sales, which can be seen in our new margin installed, but we believe helped our merchant attrition performance. Results in the first quarter were also adversely impacted by the weak economy and various expenses and accruals, both separately identified and normal operating, resulting from the processing system intrusion as well as the disruption to our new margin install momentum. Same store sales fell an unprecedented 7.6% in the quarter, and growth of our pented 7.6% in the quarter, and growth of our pll momentum. Same store sales fell an unprecedented 7.6% in the quarter, and growth of our payroll, remote deposit, and campus card programs were also slowed by economic conditions. With the first quarter behind us, we believe we are effectively managing the disruption to operations from the processing system intrusion and increasingly freeing additional sales resources to focus on our growth initiatives."

Net revenues in the first quarter of 2009 were $98.5 million, an increase of 23.4% compared to $79.8 million in the first quarter of 2008. Card processing volume for the three months ended March 31, 2009 was $15.5 billion, an increase of 17.4% compared to the three months ended March 31, 2008, primarily due to the addition of the petroleum vertical as well as modest growth in SME merchant volumes. In the first quarter of 2009, operating income, excluding various expenses and accruals, all of which are attributable to the processing system intrusion, as a percentage of net revenues was 9.3% reflecting the economy's impact on revenue growth, lower margins in the petroleum vertical, the timing of the expensing of our periodic Sales and Servicing Summit, as well as an increase in processing and servicing and other costs associated with the processing system intrusion that cannot be effectively segregated from normal operating costs. Various expenses and accruals, all of which are attributable to the processing system intrusion in the first quarter, were $12.6 million pre-tax, or $0.20 per fully diluted share. These various expenses and accruals are shown separately in the Company's Statement of Operations. The majority of these expenses relate to a fine imposed by MasterCard due to our allegedly not taking appropriate action subsequent to learning of the possibility of the breach. We believe we took immediate and extraordinary actions to address the intrusion and cooperate with the card brands' investigation of the intrusion, and that we responded appropriately to concerns that were raised leading up to the discovery of the intrusion, and so we will vigorously contest any effort to hold us liable for the MasterCard fine.

Mr. Carr continued, "Despite many distractions, we are making progress toward our objectives to strengthen our technology infrastructure and improve our new business opportunities, though there are few signs those efforts will get much help from the economy in the near term. We just received our PCI DSS recertification. This is an exhaustive process in which we demonstrated the high level of security of our systems. In addition, Heartland returned to Visa's and MasterCard's Lists of PCI DSS Validated Service Providers. Further, we expect to introduce our fully encrypted end-to-end terminal solution in the third quarter, offering merchants what we believe will be the highest level of data security in the market. Our American Express One Point and Discover MAP programs are both rolling out. We are confident that regardless of short-term distractions, by maintaining a disciplined approach to executing our long term strategy we can improve the strength of our franchise and create value for our shareholders."


The economy in the first quarter was worse than expected, and revenue suffered from the combined impact on attrition and installed margin growth from economic weakness and the processing system intrusion. As a result, the Company is reducing guidance for fiscal 2009. For the full year 2009, we now expect net revenue (total revenues less interchange, dues and assessments) to grow by 12-14%, to between $430 and $438 million, with 7-9% of that growth organic. For the year, earnings per share are expected to be $0.95 - $1.00. The Company's guidance for 2009 does not include any estimates for potential losses, costs, expenses and accruals arising from the previously announced security breach, including exposure to credit and debit card companies and banks, exposure to various legal proceedings that are pending, or may arise, and related fees and expenses, and other potential liabilities, costs and expenses. Neither the costs nor the potential losses are estimable at this point beyond sums already accrued, and further the potential losses are not currently deemed probable.


After considering economic conditions and our potential financial obligations related to the processing system intrusion, our Board of Directors reduced our quarterly dividend rate. The Company declared a second quarter dividend of $0.01 per common share, payable to shareholders of record on May 25, 2009 and will be paid on June 15, 2009. The payment of dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend on, among other factors, our earnings, stockholders' equity, cash position and financial condition.


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