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Heartland Payment Systems (NYSE:HPY)

Q1 2013 Earnings Call

April 30, 2013 8:30 am ET

Executives

Maria Rueda - Chief Financial Officer and Principal Accounting Officer

Robert O. Carr - Executive Chairman and Chief Executive Officer

Robert H. B. Baldwin - Vice Chairman

Analysts

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Roman Leal - Goldman Sachs Group Inc., Research Division

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Brett Huff - Stephens Inc., Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Christopher Shutler - William Blair & Company L.L.C., Research Division

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Glenn T. Fodor - Autonomous Research LLP

John Davis

Gaston F. Ceron - Morningstar Inc., Research Division

Operator

Good day, everyone, and welcome to the Heartland Payment Systems Q1 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Maria Rueda, Chief Financial Officer.

Maria Rueda

Thank you, Lynette, and good morning, everyone. I'd like to welcome you to our First Quarter 2013 Earnings Call. Joining me this morning are Bob Carr, Chairman and Chief Executive Officer; and Bob Baldwin, Vice Chairman, both of whom are calling in from the ETA convention in New Orleans.

Before we begin, I want to remind you that some of our discussions may contain statements of a forward-looking nature, which represent management's beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions that are based on information currently available to us. Actual results may differ materially from those expressed in the forward-looking statements due to many factors. Information concerning these factors is contained in the report of our financial results we released earlier this morning, and that accompanies our SEC filing. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances that may arise after this call.

Now I'd like to turn the call over to our Chairman and Chief Executive Officer, Bob Carr.

Robert O. Carr

Thank you, Maria, and good morning, everyone. I'd like to thank you all for joining us today and for your interest in Heartland.

I am pleased to report the most profitable first quarter in Heartland's history. For the quarter, we reported adjusted net income of $19.4 million or $0.51 per share. Maria is going to provide more detail on adjusted net income, but I will note that results in the quarter were up 21% and 31%, respectively, from results calculated on the same basis 1 year ago.

After 2 consecutive years of record earnings, I am very pleased to be starting off the new year with a record quarter. The industry continues to evolve at a frenetic pace, and Heartland is focused on ensuring that we are positioned to capitalize on the many profitable growth opportunities that are being created.

One of the keys to our success, of course, has been our unique sales organization, which provides us with one of the largest and most productive distribution networks in the industry. Over these past few years, the productivity of our relationship managers has tripled. In this quarter, we saw another increase in the productivity of our most accomplished RMs. In all, new margin installed was up more than 10% in the quarter, returning to the double-digit growth rates experienced throughout most of last year, and the best quarterly new margin installed since 2008.

Volume attrition was below industry averages again this quarter, which we attribute to the strong brand identity only an all-employee sales organization like Heartland can build with merchants.

Importantly, with our established relationship managers producing at a record rate, we have been hard at work on programs that will enable us to build out our sales organization with similarly-productive new hires. For the first quarter, these new programs have added 48 new relationship managers net, increasing our total to 816 and giving us the strongest sales organization we have ever had. I'm encouraged that we will be able to continue to grow the sales organization over the balance of the year.

In order to assure the success of both our existing and new relationship managers, we are aggressively leveraging our iPad-based sales enablement application called atlas, that not only streamlines and enhances the sales process, but also enables our RMs and their managers to establish and maintain the robust sales pipeline that is critical to long-term recurring success. In fact, Atlas was recently honored with a Silver Stevie Award, and is just one of the reasons Heartland was recognized as one of the 5 Best Companies to Sell For by Selling Power Magazine for the fifth consecutive year.

Another important Heartland sales innovation is the introduction of specialized product advisors or SPAs. SPAs are experts in a specific product, who not only develop their own clients, but also provide relationship managers with the technical and other support they need to help close sales in their field of expertise. We expect SPAs to help us increase the proportion of RMs that sell multiple Heartland products to their merchants.

To assure continued growth, we are arming our sales organization with an expanded portfolio of products that address merchants' most pressing needs. Through internal development, partnerships or acquisitions, we are investing in a variety of new technologies, such as those that integrate payment terminals with business management systems or which enable mobile payments. The goal is to not only enable merchants to accept electronic payments, but to improve their ability to attract and close more sales, while gaining the efficiencies of managing payment and business operations from a single system.

An area receiving a great deal of our attention, of course, has been mobile, where we have already been a participant in the Isis NFC-enabled mobile wallet pilot. But the mobile application that seems to be getting the most attention is LevelUp, where after a successful pilot program, we are partnering on a nationwide rollout of this promising mobile payment solution. One of the reasons we've chosen LevelUp from the staggering number of potential partners that have approached us, is because we believe LevelUp's performance-based model is consistent with our merchant-friendly philosophy. As their Chief Revenue and Strategy Officer related, LevelUp's biggest challenge is achieving scale, and Heartland's 800-plus strong sales organization and 250,000 merchants may just be the ideal solution to this problem. For Heartland, we can now offer our merchants the opportunity to further improve their bottom lines through performance-based marketing campaigns and powerful marketing analytics to measure campaign success in real time. This will help merchants stay ahead in the competitive food service and retail markets.

In addition to the app for individual merchants, we are also co-promoting white-labeled apps for multi-location businesses. We think this cost-effective marketing and loyalty solution satisfies a major need of the larger merchants that we have added to our target clientele. All of these recent initiatives highlight the value that we can add to innovative partners, who are trying to scale their products and see -- and who see us as a great partner in providing modern solutions to our common merchants.

This past December, we acquired companies to add to the scale and to accelerate the growth of our payroll and campus businesses. And in the first quarter, each of these businesses met our expectations. With Ovation on board, payroll revenues in the first quarter more than doubled, while new payroll margin installed almost tripled. With ECSI's added revenue from loan payment processing, tuition payment plans and other complementary payment solutions, our campus business now accounts for more than 5% of our net revenue. Campus is adding to the growth in non-card revenues, which amounted to 30% of total net revenues in the first quarter. Meanwhile, within approximately 30% market share, our K-12 business has also exhibited strong growth.

This year, our plan is to invest heavily in our organization to capitalize on the tremendous growth opportunities before us for the long term. In large part, thanks to the data center consolidations and other efficiency initiatives implemented over the past few years, we managed to fund these growth initiatives, integrate 2 significant acquisitions and still expand the operating margin in the quarter. That is a strong testament to the efforts of many -- of the many dedicated Heartland employees throughout our company.

Heartland remains the industry's most merchant-focused organization. Nowhere is that more evident than in our Durbin Dollars campaign, which has now saved merchants more than $413 million since its inception. We are the only processor to have given back every Durbin-mandated dollar to every single merchant, no matter how large or how small. Our goal is to build upon this strong franchise to grow our share of the payments and related markets in order to create value for our shareholders.

And now, Maria, let me turn the call back to you.

Maria Rueda

Thank you, Bob. For the first quarter, we recorded GAAP net income of $19.6 million or $0.51 per share, which includes $4 million or $0.10 per share from discontinued operations, mostly from the gain on the sale of collective CPOS. GAAP net income from continuing operations was $15.6 million or $0.41 per share through the first quarter of 2013, up from $13.5 million or $0.33 per share in the year-ago quarter. Adjusted income for the quarter was $19.4 million or $0.51 per share, up 21% and 31%, respectively, from $16 million or $0.39 per share, calculated on the same basis a year ago.

As shown in the reconciliation in our press release, adjusted net income excludes acquisition-related amortization and stock-based compensation expenses from GAAP net income from continuing operations. Due to heightened acquisition activity, there has been a corresponding increase in the related amortization expense, $0.04 this quarter, compared to $0.02 in the year-ago quarter, which we do not believe is reflective of our ongoing operating performance.

Furthermore, adjusted net income is now more consistent with the manner in which industry earnings are analyzed, including the deduction of stock-based compensation expense, which was over $0.06 per share in the first quarter compared to $0.04 in the year-ago quarter. I would also remind you that since our senior executives received significant performance-based share awards, we could experience significant variability in stock-based compensation expense.

First quarter net revenue increased almost 17% and was comprised of growth across all dimensions of our business, card and non-card, as well as our organic and acquisition-related. SME card transaction processing volumes were up 3.8% in the quarter, on the strength of our best quarter of new margin installed since 2008, a 2.2% increase in same-store sales and just 12.8% of volume attrition.

Note that there is one less processing day in the first quarter of this year compared to a year ago, which equates to a little over 1% of volume. We're still guiding to a 1% to 2% increase in same-store sales this year.

Non-card revenue was 30% of total revenue in the quarter, led by more than doubling of our payroll revenue, attributable primarily to the acquisition of Ovation and an over 80% increase in Heartland's School Solutions revenue, driven by both organic and acquisition-related growth. Non-card revenue is likely to have a material impact on our growth over the next couple of years, as we expect these businesses to grow faster than the card businesses.

For the quarter, processing and servicing costs were up just 6.8%, with the bulk of that cost increase resulting from our 2 December acquisitions. General and administrative expenses were up 45% from a year ago, with the increase split about equally between acquisition-related cost and organic cost growth, including a nearly $1 million increase in stock compensation this year. As a result, operating income increased 17.5% from a year ago, as the operating margin expanded to 18.2% from 18.1% a year ago.

As shown in our calculation of adjusted income, the operating margin on an adjusted basis was actually better than 20% this quarter. As Bob mentioned, we are very pleased with the operating margin this quarter, as we faced a number of obstacles compared to a year ago, including the integration of both Ovation and ECSI and a ramp-up in spending on a number of exciting growth opportunities reflected in our organic G&A growth. We continue to expect that full-year GAAP operating margins will be in line with those of 2012, if not somewhat lower, due to a near doubling in our acquired intangibles amortization, the effect of trading the ECSI innovation operating margins for the above corporate average margins of the recently-divested CPOS and the increased investment in growth initiatives. Over the long term, our plan remains to get to a 25% operating margin.

Cash flow was also up for the quarter, with management's measure of operating cash flow at $30.6 million or $0.80 per share, up over 4% and 11%, respectively, from last year. And our free cash generation amounted to $19.2 million in the quarter, down around 12% from the first quarter of last year, due to a roughly $4 million year-over-year increase in capital expenditures, supporting our growth initiatives.

In the quarter, we utilized $15.3 million of cash to repurchase 491,000 shares at an average cost of $31.08 per share. Another $5 million was used to reduce our term loan. We have $58 million of borrowing capacity remaining on our existing revolving credit facility. Our standing commitment is to use our free cash flow to reward shareholders, primarily in the form of dividends and share repurchases.

We are reiterating our prior guidance for 2013. For the full year of 2013, we expect net revenue of approximately $600 million to $610 million. Adjusted earnings per share are expected to be $2.29 to $2.33, excluding $0.15 of acquired intangible amortization and $0.22 of stock-based compensation expense.

Now I'd like to turn the call back to Bob Carr for some concluding remarks.

Robert O. Carr

Thank you, Maria. The new year is off to a great start, with another quarter of strong earnings growth. Our results clearly demonstrate that if you look beyond the headlines and ignore the noise, you will find that in our industry, real companies with real products that deliver real value to merchants are building value for shareholders every day.

Before closing today's call and opening it up to questions, I am pleased to announce that the Board of Directors has declared a quarterly dividend of $0.07 per share, payable June 15 to shareholders of record on May 24. And finally, I would like to thank all of the great Heartland team members for making these powerful results possible.

Lynette, we are now ready to open the call for question.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Tien-Tsin Huang from JPMorgan.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

I just wanted to ask, first, I guess, what surprised us was the sales hiring. I think, I heard 816, which is much better than what we had expected. Curious if some of the sales force changes that you put in place, how did that come in versus plan? And I know that you put in the specialist role as well. I'm curious what the feedback has been so far with some of the new hires.

Robert O. Carr

Well, it's been pretty good, Tien-Tsin. We have been pretty disciplined about requiring performance from our folks. And the word has gotten out that you can make a lot of money working at Heartland in a great environment with a great set of products. And we've also brought in some real quality recruiting people, who have industry experience. And I think the net effect of that is growth, and we expect that to continue. We think we've sort of broken through a brick wall in this whole area. That's to be determined. But we have some results to back that up now, and we think we are on a great track right now there.

Robert H. B. Baldwin

And we -- in terms of the specialist -- product specialist, we had the 29 from Ovation, who continue their productive efforts. We are hiring SPAs, who are payroll specialists plus a couple of selected other product areas. So that program is going to expand. In the first quarter, we just had the 29 that came over with Ovation, but that number will -- is expected to grow as well.

Robert O. Carr

But the production of those 29 did not -- we did not include.

Robert H. B. Baldwin

It isn't.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Okay. Just to be clear, that 29 is included in the 816, correct?

Robert O. Carr

Correct.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Okay. And then just as a follow up, in terms of the gross margin installs being much better than we had thought, what was that versus your internal plan? And any sort of new outlook on gross margin install? I think you talked about sort of double digit as the plan for the year. You're already running at that level. What's the new outlook, if any, for the year?

Robert H. B. Baldwin

We always target very aggressive levels of installs. That's what we have woken up trying to do every day since the company started 16 years ago -- is installing as much margin as we can on the economic model that the 1994 plan allows us very attractive return on. The -- clearly, we got a good help from -- on the payroll side with the Ovation installs. But the card margin installed was a multiyear record as well on a quarterly basis. And we're targeting continued aggressive growth in the out quarters. What we'll achieve, obviously, will be driven by a combination of the productivity, which remains at very high levels and then our success that -- at growing and retaining the new sales force levels. It -- margin installed, by definition, is a forward-looking concept. And so while it's critical to our driving long-term growth in our SME volumes and net revenue, it really has a pretty minimal impact on short-term results. It's really a very cumulative thing, but it's obviously a very encouraging trend.

Operator

We'll take your next question from Roman Leal from Goldman Sachs.

Roman Leal - Goldman Sachs Group Inc., Research Division

Maybe a question first on the LevelUp partnership. I know there's a national rollout now. Is it right to think about that as having maybe no impact today -- or maybe minimal impact today? And maybe we'll start seeing some revenue, kind of -- sometime this year? And then how do the expenses or are there any expenses there in terms of integration that we need to think about? Just -- just curious to see how that could potentially impact the income statement this year.

Robert O. Carr

LevelUp is a great product for our customers. We're not supplying the services for that, so our revenues are not high on the LevelUp product itself. There -- we do have revenue, but a lot of that goes to the sales organization. The real benefit to Heartland is that we have a great product to talk to merchants about, and when we get that service, we also get our core product. So it's a way of us building our core business. The revenues directly from LevelUp are not going to be significant to Heartland this year. And also, we're opening it up market-by-market. We can't just open up the entire country, because LevelUp doesn't have the infrastructure to support that. So it's going to be slow going in terms of dollars as they impact Heartland. But it's going to be very significant for LevelUp, because we hope to keep them very, very busy in that capacity for quite some time.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay, that's interesting. And then maybe a kind of high-level question on pricing. I know that one of your strategies is to maybe move a little bit more into kind of a mid-market, the larger merchants than the kind of the average in your portfolio. What kind of impact would you expect that to have on pricing given that pricing is -- tends to decline as you go into the upper tiers? But just not -- help us think through how much bigger are some of the merchants you're targeting? And is that going to have significant impact on the pricing going forward for the total portfolio?

Robert H. B. Baldwin

Well, Roman, obviously, as a merchant gets larger, your basis points is going to come down. And we have been -- our portfolio is well larger than your average SME merchant portfolio already. And our net revenue margin is reflecting that. We're targeting a host of both pre-large, as well as mid-market opportunities. As you get toward the larger ones, you stop using basis points as your measurement. It's in pennies per transaction. That can and will be profitable, only if you have a disciplined approach to your costs, and if you come to that business with a very good cost structure on your processing, which is something that we have established over the last number of years. So over time, just as we'll try -- we'll be reporting. When we move to a transaction-based merchant, we'll try to highlight that, because it is going to be a different basis points of net revenue versus volume than a SME merchant will have. But the mix will generally be at relatively fewer basis points, but we hope a lot more dollars.

Operator

We'll go next to Greg Smith from Sterne Agee.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Just with the increase in the K-12 revenues and the Campus Solution revenues, can you, maybe, Maria, just help us with the quarterly cadence? What we should expect on a quarterly cadence -- quarterly basis for the rest of the year?

Maria Rueda

Well, there is some seasonality in Heartland School Solutions revenues but as we've said, now that we're going to have the benefit of having our acquisitions in for the full year, we're looking at $40 million to $50 million in net revenue annually from our Heartland School Solutions offering.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And that includes K-12 and campus?

Maria Rueda

That includes K-12.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Oh, okay. And then what about the Campus Solutions?

Robert H. B. Baldwin

We haven't really seen the seasonality on ECSI revenues very much. I'm not sure they should be very seasonal. And on Campus, the other part of the business actually tends to have a higher summer season because of installs, where a new system might go live at a school. And the other thing is, I mean, in ECSI, there is a good first quarter bump, because they do some -- these tax forms that parents get or the 1098 form, and that's a first quarter phenomenon, sort of like the W-2 phenomenon in payroll.

Operator

Brett Huff with Stephens Inc. has your next question.

Brett Huff - Stephens Inc., Research Division

Back to the new hires. I mean, great job adding the 48 new relationship managers, much higher than I think most expected. Obviously, another 48 in any one quarter might just be unreasonable expectation. If you guys could just maybe give us a sense of kind of what you're expecting by year end. And just maybe any color on just the phasing of the hiring throughout the remainder of the year?

Robert O. Carr

Well, we do expect the hiring to continue. The production that we reported does not include the Ovation people, but the headcount does, just to get that right. We did -- we didn't really get our traction on hiring until mid-February, so we think the pace is going to continue to be pretty solid. And we have ambitious goals to hit by the end of the year that we're very, very focused on. The good news is that, it's going to be all plus for us, because we don't have all that built into our -- budget in our forecast, but we have high expectations to grow our organization. We've just been able to break through some of the issues we've been really fighting hard with over the last couple of years.

Brett Huff - Stephens Inc., Research Division

Sure. Could you maybe talk a little bit about why the traction kind of picked up mid-February?

Robert O. Carr

Because we began to focus on -- we were really focused last year as we -- we have -- we reorganized our leadership and the way we handle our highest level of sales management in the field. And we reduced the number of regional directors to 6 executive directors and the folks who were -- stepped down into division manager roles. And we were very much focused on that -- reorganization structure, did not get it fully implemented until the end of the year, and then the focus on recruiting began in February. But it took some time to really get some traction. Also, we brought a new recruiting director in, and she's had a big impact in bringing in additional recruiters, as well as identifying good prospects, who have history in our industry.

Robert H. B. Baldwin

The only thing I'd add, Brett, is that this is going to be something we're -- we have a very high production standard for a salesperson. We're working very hard on helping our sales leaders help people get to and maintain that high level of production. And that's critical, because if they don't, then the hire that we made in February won't be with us at the end of the year. So that's really important that we try to -- the second part of that in our model, is got to be success at getting these new producers not only ramped up but continuing their pace. We think we're doing a lot of things right, but there's more work to be done. And so I would not extrapolate the net -- net gains that we had in the first quarter to the 4 quarters. That would, obviously, represent almost 200 net new hires, which would be an awful lot of people for us to successfully train and support. So it's something that's going to play out with varying degrees of success on a quarterly basis. But what we're focused on is getting the right hires and then helping them establish themselves with a recurring business model.

Operator

Dave Koning from Baird has your next question.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

A few -- just short things. I guess, first of all, pricing in SME was down, I think, about 2% year-over-year. I mean, I know you anniversaried a little bit of pricing adjustment last quarter -- or the Q4 quarter. Is that just a shift to mildly bigger merchants year-over-year?

Robert O. Carr

It's that plus -- also, I mean, the reality is Square is going to lose money on certain ticket merchants. And we just can't compete with them if we're really tiny ticket merchants. And I think we've seen the full impact of that here in the last couple of quarters. So one of the -- we are losing some of our smaller, really nice margin accounts there. It's not a material item, obviously, in our numbers. And we think we have a good competitive answer. As soon as Square stops, we'll be willing to actually lose cents per transaction on every transaction for small tickets.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay, good. And then maybe if you can give a little commentary on April, if you have any numbers around that. And then also K-12, you said was going well, even excluding acquisitions on an organic basis, maybe what organic growth was year-over-year in K-12?

Robert H. B. Baldwin

I'm not sure we have the organic growth numbers, because the most recent acquisition, NUTRIKIDS, was back in June, and I don't have -- that's been merged in with the other business, so it's really hard to call that out separately in terms of that part. And the other part of your question was what Dave?

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

April.

Robert H. B. Baldwin

April, nothing to comment on April.

Robert O. Carr

April was a strong sales month, doing well in installed margin.

Operator

Moving next to Steven Kwok from KBW.

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

I was just wondering if you could comment a little bit about Network Services. It seems like the revenues and the transactions and volume were a bit light in the quarter. I was wondering if you could provide some more color around that.

Robert H. B. Baldwin

Sure. The Network Services is a business with some -- as you know, some large merchants. And we have one large contract that has been over the -- actually, the last 6 months, in essence, has been repriced, so that we have fewer transactions from that, and say -- in essence, we were getting paid twice for some transactions by that client, and so we were counting those transactions twice, whereas now it's down to one time, and so it results in both a reduction in the number of transactions, and unfortunately, also the revenue. It's -- that business is one we're deeply focused on as -- to reverse that trend. And we feel like we have some good prospects for turning that revenue growth around, but it remains a challenging business. And the legacy contracts that you have, there's no question the other side of the table is pushing hard on price.

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

Got it. And then in terms of capital management, I was just wondering, are you seeing any opportunities on the acquisitions front? And if not, what's kind of the assumption on share repurchases for the year within your guidance?

Robert O. Carr

Well, we believe in share repurchases, and we've done a lot of them in the last year or 2, and we're considering doing additional ones always. The M&A front is busy, lots of things in the air, nothing too -- nothing that's imminent, but there's lots of interesting opportunities out there, particularly with all the mobile companies that are trying to find partners that can help them with distribution. So it's a fun time to be in the business right now looking at opportunity.

Operator

Andrew Jeffrey with SunTrust, your line is open.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Just a question on timing around the Heartland Summit. I've noticed expenses down year-on-year. Is that going to be a timing issue? Does that contribute at all to the EBIT margin guidance for the full year?

Robert H. B. Baldwin

Yes, it does. It is, absolutely, a timing thing. It's scheduled for the fourth quarter, and so we really have trivial expenses at this point, but we'll be building those through the year.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay, so is it safe to assume that the fourth quarter is the period in which we see the greatest impact on margin? Or does it go more rateably?

Robert H. B. Baldwin

Third and fourth?

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Third and fourth.

Robert H. B. Baldwin

Third and fourth quarters. The event itself is in October, so that's in the fourth quarter, but you definitely will have expense in the third quarter.

Robert O. Carr

And the travel expenses will be incurred in the third quarter, and the actual meeting expense is in the fourth, so it'll be third and fourth. Good catch, by the way.

Operator

Moving on to Chris Shutler from William Blair.

Christopher Shutler - William Blair & Company L.L.C., Research Division

On the sales force, I mean, I understand it's a bit of a work in progress. Obviously, good progress this quarter. But could you just kind of go back and refresh us on what gives you confidence these 48 net new salespeople are going to stick around at a much better rate than what you've seen in the recent past? And then, I guess, as a follow up, can you give us some color on your efforts to get more leads for your existing salespeople?

Robert O. Carr

Well, we're working on lead-generation systems that are much more robust than we've had in the past. And with our atlas technology, we're about to roll out a new system there, and that gives us a little bit of confidence. But the main point is that our attrition of the new hires is lower, and that's because we have put requirements on the territory managers and the division managers to be much more -- inspect their hires much more closely. And also, through our atlas product, we're able to track a pipeline of new appointments and first-time appointments. And the focus on that, I think, is one of the major reasons that we're having this success. And in the process of restructuring our top leadership -- Rob, we also committed to focus on building our territory managers up. The territory manager is the player coach. And it doesn't make sense intuitively that it would work but in fact has worked very well for us, and we're really building that out. So we've had fewer regional directors, we have fewer division managers, but many, many more player coaches across the country, who are much more intently focused on new hires. We also don't let territory managers hire multiple new hires now. They have to hire one at a time and bring them on and make them successful before they hire the next one. So those are a combination of events, of changes in our model that are working and think that they'll continue to work long term.

Operator

[Operator Instructions] We'll move next to Tom McCrohan from Janney.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

What should we be modeling, guys, for relationship managers? The 816, how should that track over the year?

Robert O. Carr

It's going to go up, Tom.

Robert H. B. Baldwin

If you think about it, if we were to -- I think that we would describe ourselves as disappointed on a rolling 12-month basis, if we were less than 100 net adds. We aspire to more, but the critical thing is getting people who are succeeding. And we're -- the things we're doing are really trying to make sure that, that hiring manager is very engaged with the person. As Bob said, don't hire a couple of people, make sure you've had one succeed before you move onto the next. And so it is not going to be the case, we don't expect, where we have a -- as I said, do not extrapolate this 48 in a linear fashion. That would be setting, I think, too high a bar. Not that we wouldn't -- we wouldn't mind it, because we -- more people installing margin is a very good thing for Heartland and its shareholders. So we're not against it, but it's -- the reality is that it's a tough business out there. There will be people that you hire that you think are going to work, that they think it's going to work out, and then they find it's not for them. And we're still doing -- we're still learning as an organization how that manager, what the things that manager needs to do to make sure that the person is successful on a long-term basis. And so it's a -- it's going to be a quarter-by-quarter thing. As Bob said, we're looking for up every quarter, but not likely at the rate of the first quarter.

Robert O. Carr

Another major factor, Tom, is that with the 120 territory managers now going to 140, we have a lot of people that can hire and bring on a new person, and that's a dynamic we did not have before. We had a lot -- before, we had division managers hiring more people than they could properly bring on. And I think we're solving that problem. And that's a reason for a lot of confidence on our end that this will continue.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

That makes tremendous sense. If I could ask a follow-up on things that are happening at the point of sale. Are you starting to see an increasing amount of these emerging tablet point-of-sale offerings at some of your current merchants? And how are you integrating with that, to the extent that some of these tablet-based point-of-sale systems maybe influence who the merchant uses for payment processing? If you could just kind of address that, that would be helpful.

Robert O. Carr

Sure, we think that trend is going to continue. We're in the middle of doing lots of work in that area and have lined up with a couple of companies who are -- who brought out those tablets. There's 2 directions to go. One is to use the tablet as a replacement for an ECR, a more sophisticated electronic cash register. That's an approach that we've started with. And then there's all these side-by-side applications that -- where the tablet does a part of the job, often in loyalty areas, which are important to merchants. But there's very few completely integrated solutions that add value to the merchant. So merchants are doing side-by-side installations now of tablets. We think that we can come along later in the year in providing integrated tablet solutions, and that's the direction we're moving.

Operator

Mike Grondahl from Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

SME net revenue growth of 2%, how did that compare with your forecast? And how should we think about that growth going forward?

Robert H. B. Baldwin

I'll take a shot at that. It was not what we wanted to be. We're -- some things are out of our control. We had decent same-store sales growth, but not great. We had good attrition, given the same-store sales growth. But, clearly, we are -- well, part of it was, of course, the year-over-year comparison, we lost a day. But beyond that, we want to -- that's really the driving factor behind what we're trying to do on the sales side. We need to be installing more merchants. We'd love to get more benign backdrop with better economy, that would help us on our attrition. But what we can try to control is the new installs. And that's what we are hopeful that this quarter, the positive results on the new installs this quarter is the start of a trend that will get that SME net revenue back up to higher levels.

Operator

Moving on to Tulu Yunus from Nomura.

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Just going back to productivity for a second. My math, it seems like your current sales force is producing at around -- right around 7,000 in new install margin per month. Can you give us a sense as to what the distribution is like across your sales organization, sort of like what the top 25% produce at versus sort of the median? And just to kind of get a sense as to where this can go potentially?

Robert O. Carr

Yes, that's a great question. And the 80-20 rule does not work in Heartland in sales. Our top 20% of our people do about 50% of our business. We have a group of ambassadors that don't have a lot of productivity. They're veterans, who don't get benefits who sell a little bit but not much, and that brings our averages down. But we -- our top 20% are really, really great salespeople, but half of our business is done by the other 80%.

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Got it. And then, if I could ask about -- should we expect any margin drag at all from the plans to hire new sales? I know how they're incentivized on -- more on variable basis, but any G&A-type headwinds? And also, just on same-store sales growth, to pick up there. How much of that would you attribute to an earlier Easter this quarter?

Robert O. Carr

I'll let Bob answer the Easter question. But we do not -- we have been able to do this sales restructuring without additional G&A, and that's part of the good news about this. We're -- the new hires are -- the rookies are -- actually have higher averages than our veterans in terms of margin. And they're trained better, and they don't have a lot of bad habits that were learned years ago before we adopted this model. So I think we're in really good shape on those 2 fronts. In terms of Easter, I don't know what to -- I'll defer to Bob.

Robert H. B. Baldwin

Nothing significant about -- out of the Easter. It's sort of often hard to see that in the numbers, anyway. But if it was there, it was not significant.

Operator

Moving next to Meghna Ladha from the Susquehanna.

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

I want to get your thoughts around EMV in the U.S. I know you had the ETA constant. When do you think we will see merchants in the U.S. start upgrading to EMV technology now that majority of the acquirers are EMV-compliant?

Robert H. B. Baldwin

It -- those terminals that are going up today are EMV ready. There are still ongoing implementation challenges in that business because of the differences in the U.S. market with the multiple PIN networks, you really have trouble with -- we don't have a complete solution at this point. And frankly, it's been frustrating to -- we, as an industry, the acquiring side had a mandate to get our platforms ready to handle the message formats, and we've all accomplished substantially all of that. But as we look out, it's still frustrating to have the card brands not have a well-articulated rationale for merchants. It's frustrating to -- the limited amount of information we have on issuance -- on the issuance side. And merchants are sitting there looking at this solution emerging, while also all the new tablet-based and new processing methods are coming along, it's a very confusing time. So right now, I'd say that it's going to be sort of slow, because the whole model is still evolving. And then we'll see what the impact of that is. There are some large merchants who are already saying that it's too late in their product rollout cycle or terminal rollout cycle to hit the October 2015 date. Obviously, for an SME merchant, which is our primary customer, that can happen relatively quickly, once you have a solution and once you have a rationale built for the merchant to move on to the new technology.

Operator

We'll take your next question from Glenn Fodor from Autonomous Research.

Glenn T. Fodor - Autonomous Research LLP

To the extent you're getting asked by your merchant customers for these emerging solutions, whether it's an online solution or mobile or advanced ordering or anything else, is there any type of pattern you can discern among which type of verticals are raising the issue the most? I mean, where is the greatest uptick in demand here? Is it really in restaurants and exclusive to that vertical right now? Or are there others?

Robert O. Carr

There are others. Restaurants are very significant. There's just a lot of application software developed for the tablet and for mobile apps. But QSRs is another place. And mobile payment at the table is picking up a lot of steam. And we think, frankly, that the new health care law, the Obamacare laws are going to have a decent impact in the servers -- in the number of servers that are employed at fast casual restaurants. There's going to be a move away from the servers going to the tables. It'll be food runners with people ordering and paying through a mobile device. So that's where we're seeing a lot of traction right now.

Glenn T. Fodor - Autonomous Research LLP

That's an interesting dynamic. Just a question on payroll, obviously, you did very well. Could you just disclose for us what was organic growth in the segment? And then I have just one quick follow-up on payroll.

Robert H. B. Baldwin

Maria, do you have that -- I'm not sure we have that entirely broken out.

Maria Rueda

Actually, Bob, we don't have it broken out right now.

Robert H. B. Baldwin

It's fairly modest on an organic basis. Clearly, the majority of the increase in payroll is driven by Ovation. The legacy Heartland business is going along fine, a good level of installs there. But the driving impact was, no question, the addition of Ovation.

Robert O. Carr

It's probably -- I think, it'll be safe to say organically, we're probably growing at the same rate that we were last year.

Robert H. B. Baldwin

Yes, teens, in that number.

Robert O. Carr

But bringing on the Ovation sales model and their affiliate process is a significant move upstream for Heartland, and we expect to have a very nice growth in our payroll business organically for the rest of the year.

Glenn T. Fodor - Autonomous Research LLP

Okay, then last follow-up on payroll. Can you shed any light for us on what you're seeing from emerging providers out there? It seems there's a clear pricing discount versus some of the common players like yourself? Are you seeing that pricing gap widen or narrow or stay the same?

Robert O. Carr

Are you speaking of Square?

Glenn T. Fodor - Autonomous Research LLP

No, it's on the payroll side and...

Robert O. Carr

Oh, I'm sorry.

Robert H. B. Baldwin

I'm not sure the dynamic is changing particularly. There's sort of a -- in the new business world, the -- we can -- we are generally priced a little bit inside of where the large incumbents are. I think, generally, because the large incumbents do have a history and practice of 3 months- or 6 months-free kind of pricing, which, obviously, is tremendously competitive. But overall, our approach to the business is built around having a price that's a little bit inside where we expect the competitive, normalized pricing to be and then offer the merchants the 3-year price guarantee, which is a very different experience than what they've been driven to expect from the large incumbents, who have a model of raising price every year. So that -- it's -- the opportunity remains one where a merchant's gone along, they may have been priced appropriately for a while, but then they're up. If you grow it 3%, 5% a year for 2, 3, 4 years, all of a sudden the merchant's at a much higher price point when the services haven't really changed and it's hard to justify that. We're going to offer that merchant a stable pricing model.

Operator

Moving next to Chris Brendler from Stifel.

John Davis

This is actually John Davis on for Chris Brendler. I was wondering if you could just give us an idea of the organic installed margin in the card business. I think you mentioned payroll had an impact -- any way you could give us kind of an idea of what that impact was in the quarter?

Robert H. B. Baldwin

Well, we tripled our -- nearly tripled our installed margin for payroll. Some of that was organic Heartland sales force. The remainder was from Ovation, but in terms of our other businesses. Actually, we've had a restructuring in our gift and loyalty business, so that margin was down some. And as I said, card installed margin was at a multiyear record. So it was very strong on the card side, with payroll driving some of the increase, but offset by some reduction in gift marketing and a couple of other more ancillary products.

Operator

Gaston Ceron from Morningstar Equity Research.

Gaston F. Ceron - Morningstar Inc., Research Division

Just going back to the new hires issue for a second. I wonder if you could share any color on how the new hires are generally being deployed? I mean, are you focusing more -- I mean, I would think you're focusing more on territories that -- where you've got the greatest growth prospects or the opportunity to gain market share is the greatest? Or no, is it occurring just more organically from the territory manager level and up? Just curious on how the new hires are being deployed across your system.

Robert O. Carr

Right, it's very organic at the TM level. It's basically -- our growth in hires is limited by the number of territory managers, who aren't coaching and bringing on -- already bringing on a new hire. And around -- geographically, around the country, there's very few territory managers who are at capacity. We don't put a restriction on how many hires a territory manager can have, as long as the ones they have are successful. So we have almost 100 territory managers, who should be coaching and bringing on a new hire, and that process takes a couple of months, usually. So in theory, a territory manager could add as many as 6 new hires in a year if they had no false starts. And, of course, nobody is perfect in that respect. So we have a lot of capacity to bring on folks, and we have big areas of the country where we are strong, but we have big areas of the country, too, that we're not very strong, and especially, in some of the bigger cities around the country. So there's just tremendous, tremendous opportunities out there. And the more real solid products that we add to our portfolio, the more people we need, so that we can present all those products. And with our SPA model, the specialist's model, now we have player coaches that are in the specialist role, so that the territory manager and the division manager are no longer expected to learn and know all the nuances of selling every product, which has become too daunting, and frankly, has been one of the problems we've been trying to overcome. And our manager, Tony Capucille, came out with this brilliant idea of handling the SPA model without adding to our costs. And we have a lot of faith that, that's going to work, even though that's very new right now, and isn't responsible for the results we report so far.

Robert H. B. Baldwin

Just to give a little granularity on the products side. We're -- in April, we rolled out the -- our SME petro solution, which is a -- literally, a new market that our sales force can go after with a product that we think is very, very effective for the merchant. In May, we're going to be rolling out e-comm in a box. Not that we haven't had an e-comm capability, we have thousands of SME e-comm merchants that are mostly brick-and-mortar that also we do their website. But we productized it and made it much better for the -- experience for the merchant, so that a salesperson can go out. And those are 2 examples of new markets that, that salesperson has. And we'll have some people who decide to specialize in one or more of those areas. And they can be selling right next to another salesperson in the same geography, but because of the different focus, won't run across each other too much.

Gaston F. Ceron - Morningstar Inc., Research Division

Great. And then just very quickly, on the release, I saw you guys mention something about -- that your volumes benefited from just better efforts to minimize attrition. And I'm just curious if there was anything kind of particularly special going on there? Or if this is just good execution on your plan?

Robert H. B. Baldwin

Just good execution. We think that our attrition is at lower levels than is industry standard because of our model, and we are always trying to improve on that.

Operator

We do have time for one final question, and that will come from Greg Smith from Sterne Agee.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Bob, you sort of mentioned gift and loyalty, the prepaid revenue was down a fair amount year-over-year. Just what's going on there?

Robert H. B. Baldwin

The prepaid card, is that...

Robert O. Carr

It's really the loyalty that's down. And we had a product that was not really working as well as it should have for our customers. And we pulled it and changed it, so that it would work better, but that caused our new installs to go down. But it's not -- mature -- the long-term impact of that is going to be a plus, but the short-term impact is a negative.

Operator

And that does conclude our Q&A session. I'd like to turn the conference back to Ms. Maria Rueda for any concluding remarks.

Maria Rueda

Thank you very much, Lynette, and thanks, everyone. And have a great day.

Operator

That does conclude today's teleconference. We thank you, all, for your participation.

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