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Heartland Payment Systems (NYSE:HPY)

Q3 2013 Earnings Call

October 30, 2013 8:30 am ET

Executives

Robert H. B. Baldwin - Vice Chairman and Interim Chief Financial Officer

Robert O. Carr - Executive Chairman and Chief Executive Officer

Analysts

Roman Leal - Goldman Sachs Group Inc., Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Ramsey El-Assal - Jefferies LLC, Research Division

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

Brett Huff - Stephens Inc., Research Division

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

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

Smittipon Srethapramote - Morgan Stanley, Research Division

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

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

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

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Glenn T. Fodor - Autonomous Research LLP

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

Operator

Good day, and welcome to the Heartland Payment Systems Third Quarter Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bob Baldwin. Please go ahead, sir.

Robert H. B. Baldwin

Thank you, Trish, and good morning, everyone. I'd like to welcome you to our third quarter 2013 earnings call. Joining me this morning is Bob Carr, Chairman and CEO.

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 financial results we released early 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. Our discussion today may include the use of non-GAAP financial information. The reconciliation of GAAP and non-GAAP disclosures can be found in our earnings press release.

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

Robert O. Carr

Thanks, Bob, and I'd like to thank everyone for joining us today and for your interest in Heartland.

For the third quarter, we reported adjusted net income of $25.1 million or $0.66 of adjusted earnings per share, increases of 14% and 22%, respectively, from the comparable results in the year ago quarter.

Not only was this the most profitable quarter in the company's history, but it was also a quarter of tremendous success across a number of dimensions that are key to our continued success, not only today in our core markets, but also, strategically, over the longer term as we helped lead the transformation of this entire electronic payments industry.

In our core business, we added another 22 productive relationship managers this quarter and have built our senior product advisor or SPA team to a total of 41, virtually all payroll specialists. Altogether, we added 34 sales people in the quarter, which, together with the 90 added in the first 6 months, has enabled us to surpass our goal of adding 100 new sales people this year. In total, we now have 851 generalist, relationship and territory managers.

And relationship manager productivity improved once again. As a result, we installed record amounts of new business, with total installed margin of $18.5 million, up 28% from 2012 and card new margin installed of 29% from the year ago quarter. Further, new margin installed in September was a monthly all-time record, as we benefit from the growth of highly productive sales people. With the increase of the rate of new margin installed over the last 2 quarters, we are achieving the kind of production that, if maintained, will lead to faster overall card transaction processing and net revenue growth in the future.

We are also maintaining strong growth in our non-card business. Payroll revenue continues to run at better than double that of a year ago, as Ovation has proven a model of consistency and our SPA strategy gains traction. In the quarter, we saw a 51% increase in payroll sales among our legacy Heartland sales force, which is beginning to lever the expertise of our SPAs to work through technical questions and other nuance concerns that previously discouraged RMs for more vigorously pursuing these sales opportunities. Based on the success in payroll, we are rolling the SPA strategy out across other non-card businesses to help our RMs better penetrate other attractive growth markets.

Heartland School Solutions had a great back-to-school season that our comprehensive marketing campaigns enabled them to increase the number of parents actively making electronic payments by 17% from July to October. This sets the stage for steady growth in recurring revenue.

This is an exciting time in this industry that is so ripe for change. We believe our technology and industry-leading sales organization provides us with competitive advantages, and we are capitalizing on these strengths, both through internally developed new products, as well as by entering into exciting agreements with or partnering with companies we believe will be industry winners.

For instance, we recently introduced a robust, new small merchant petroleum solution, PetroPay, which has been generating significant installed margin or RM, selling to independent petroleum dealers nationwide. We are expanding our market opportunity by moving both upmarket, targeting larger national chains, as well as downmarket with products such as WaveRider, the leading micropayment solution for multi-tenant building laundry market.

An example of this strategic partnership is our agreement with Bigcommerce to power our new online storefront. Bigcommerce offers one of the industry's most comprehensive integrated eCommerce platforms. Our online storefront enables merchants to quickly launch their online stores or upgrade their existing eCommerce sites with advanced shopping cart functionality and a host of other features to effectively compete with larger players and ultimately grow sales. Online storefront illustrates our evolving focus on omni-commerce solutions designed to empower merchant competitiveness and profitability.

Online storefront, WaveRider, PetroPay and other growing products, such as SmartLink and Mobuyle, all provide our relationship managers with an array of products for increasing number of markets that should drive growth.

As the small merchants' strongest advocate, we are spearheading a new wave of innovation across this industry that empowers business owners to aggregate valuable services. In September, we made a major investment in Leaf, an open commerce platform that enables integrated commerce solutions. Leaf's POS technology empowers retail stores, restaurants and other local merchants through a tablet-based payment platform built to improve the speed and ease of checkout and offer easy-to-use business management, analytics and customer engagement.

Most importantly, to us, Leaf offers a truly open system that gives merchants the freedom to work with the payments and business solution providers that they deem best for their business. This is a business philosophy that is consistent with our merchant advocacy. In addition to adding our nearly 900-strong sales organization to Leaf's growing network of distribution partners, we will be building an array of value-added apps on the Leaf platform, including payroll apps, mobile apps and online ordering apps.

We also formed a strategic partnership with Tabbedout, the free mobile payment app that allows consumers to open, view and pay restaurant and bar tabs with their phones. Again, we chose Tabbedout because they share our goal of supporting an open merchant and consumer platform that starts with payments and provides an infrastructure to engage with consumers. By aggregating customer data, Tabbedout enables operators and consumer product brands to offer targeted rewards and incentives, increase loyalty and attract new customers, all within the venues' existing infrastructure.

As the easiest, most cost-effective and most productive partner, with whom merchants and third-party vendors can work, Heartland is making tremendous progress in creating an open platform that, we believe, represents the future of the industry.

I've never felt more convinced that we are in a great position to capitalize on the change taking place in our industry. I really wouldn't want to trade places with anyone else, and that is why I recently committed to remaining with Heartland, God willing, as its CEO for at least the next 4 to 5 years. I am proud to what our team has accomplished, and I'm even more excited by the growth prospects that I see before us.

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

Robert H. B. Baldwin

Thanks, Bob. For the third quarter, we reported adjusted net income of $25.1 million and adjusted earnings per share of $0.66, up 14% and 22%, respectively, compared with the adjusted net income of $22 million and adjusted earnings per share of $0.54 a year ago. Third quarter net revenue increased 9.5% to a record $153 million through a combination of steady card processing net revenue growth and much faster growth in our non-card businesses.

Card net revenue benefited from successful factors we control from pricing in new card margin installed, which was up 29%, somewhat muted by incrementally weaker performance in drivers that are outside our control, same-store sales and volume attrition. Continued strong growth in new card margin installed can be expected to help drive an increase in SME card net revenue growth, given same-store sales and volume attrition stability.

Growth in non-card net revenue was, again, very strong this quarter, contributing 26% of total net revenue in the quarter. Payroll revenue growth remains more than 100% above levels of a year ago, thanks largely to the Ovation acquisition. However, as Bob mentioned, we are also seeing great growth in new payroll margin installed from our Heartland relationship managers and a new SPA team, so we believe payroll will continue to be a strong engine of growth.

Non-card revenues also benefited from a nice growth in Campus, reflecting the ECSI acquisition, and an 88% increase in MicroPayments revenue. MicroPayments revenue growth is primarily attributable to our WaveRider Laundry business, which has gained traction in the multi-tenant building market where we have introduced the industry's leading electronic payment solution.

Operating income in the quarter was a record $34.9 million. The operating margin of 22.8% of net revenue was down from a year ago, consistent with our expectations that planned spending on growth initiatives in the third quarter was going to weigh on what has typically been our highest margin quarter. More importantly, on a year-to-date basis, the operating margin is down only marginally from a year ago, again, consistent with our expectation of a slight positive margin expansion this year, due to anticipated investment growth spending.

On the cost side, processing and servicing was up 10.8% for the quarter, a little higher than the pace of the first 6 months, due to spending on growth initiatives and the completion of our IT consolidation, which has yielded significant productivity gains.

In the third quarter, we slowed G&A expense growth considerably from the first half of the year, for the quarter G&A was up 13.8%, primarily additional costs inherited from the Ovation and ECSI acquisitions that are being mitigated as their operations are integrated and efficiencies are achieved.

Our noncash share-based compensation and acquisition-related amortization reduced earnings by approximately $0.08 per quarter -- per share in the quarter, up from $0.07 in the third quarter of 2012. For the quarter, management's measure of operating cash flow was $36.9 million, up 18% from a year ago, which equates to $0.97 per share, a 26% increase from last year. And our free cash generation in the quarter amounted to $24.1 million, up around 6% from the third quarter of last year. Capital spending in the third quarter was up approximately $4 million from the year ago quarter.

We also used cash of $18.5 million to execute the Leaf and Tabbedout transactions in the third quarter. While Tabbedout is being carried as an investment, Leaf's financial performance will be consolidated into our results, net of the founder's interest. As a result, we expect to record a loss of $0.04 per share in our upcoming fourth quarter financial results, reflecting our proportionate share of Leaf's expected December quarter loss.

Leaf represents an strategic investment in a development stage enterprise in the emerging tablet POS systems market. We believe tablet POS systems are the future of the industry, and we believe Leaf offers the industry's leading solution. Leaf is an important component of our strategy to develop a totally new commerce platform and why we are willing to temporarily accept their dilutive impact on GAAP EPS.

In the quarter, we utilized approximately $6 million of cash to repurchase 158,000 shares for an average cost of $38 per share. We have now repurchased $40 million of our stock this year and more than $150 million of our stock over the last 2 years. We have almost $65 million remaining under our current repurchase authorization.

Our standing commitment is to use our free cash flow to reward shareholders, primarily in the form of dividend and share repurchases. Just last week, we closed on a new bank facility. The new facility increases our bank group from 5 to 13 participants and increases our borrowing capacity under our revolver from $140 million to $350 million. Pricing has also nicely improved from our prior facility. At the end of the quarter, we had $91 million outstanding on our revolver, the same as at June 30.

For the full year of 2013, we now expect net revenue of approximately $600 million to $605 million and adjusted earnings per share between $2.30 and $2.33, excluding $0.37 per share of combined acquisition-related amortization and share-based compensation expense. Earnings guidance for the fourth quarter is also now net of an estimated $0.04 per share of our proportionate share of Leaf losses.

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

Robert O. Carr

Thank you, Bob. I have never felt better about our competitive position. Our sales organization is growing, improving its productivity and is invigorated by the many new tools and products we are placing at our disposal.

We just came back from the Heartland Summit where the energy levels were high and we laid out a great range of new and improved products. Our solutions are resonating with merchants, putting us on a path of the best year of new margin installed in the company's history. Virtually all of the new players entering the market with new technology and products want to do business with Heartland.

Despite a significant increase in spending and growth initiatives, we are maintaining margins at or near last year's levels, and our financial condition has never been better as we are generating significant cash, which we are returning to shareholders. I hope you can see the same opportunity that convinced me that the next few years could be my best years at Heartland.

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 common share, payable December 13, 2013 to shareholders of record on November 22. And finally, I would like to thank all of the great Heartland team members for making all of these powerful results possible.

Trish, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Roman Leal with Goldman Sachs.

Roman Leal - Goldman Sachs Group Inc., Research Division

Bob Baldwin, you mentioned that there are certain aspects or certain fundamentals that you think can -- you can directly manage like with pricing, for example. Can you walk us through what's the strategy there, just given the evolving competitive landscape and how are you managing on the pricing side? And then, on the attrition side, which partly is driven by same-store sales, there's also certain things you can do in managing -- on the retention side, so kind of the nonmacro-related attrition, if you will. What is the strategy around that?

Robert H. B. Baldwin

Sure. Good questions, Roman. Thanks. Pricing at the merchant level has always been something we delegated to the sales organization. And so the question really is, are our sales people generating the same levels of basis points for a business that they're writing? Well, we look very closely at this on an ongoing basis, and there's really no new trends. The recent basis points deals are very, very comparable to what they were 2, 3, 4 years ago. Actually, given a certain volume for the merchant, and one of the things that is striking about what's going on now, we talked a little bit about it, is how our sales force, as you know, we're paying them the same way we always have. They're having more success with larger merchants, and larger merchants always have slightly lower pricing in terms of net revenue and basis points, but obviously, larger dollars of margin. And just to put some granular statistics on that, we took a look at the August and September installs in 2010 and then compared that to 2013. And in 2010, merchants over 500,000 in estimated volume -- remember, this is the estimate that the sales person puts in. It's not an audited number. It's a forecast of the first year's volume and margin. The merchants over 500,000 in estimated margin represented -- estimated volume, excuse me, represented 42% of our installed margin and 58% of our expected volume in 2010. In the same 2 months in 2013, those same -- over 500,000 merchants, the -- represented 50% of our installed margin and 67% of our expected volume. So what we're seeing is, as we've discussed, is a migration toward larger merchants. More sophisticated solutions are getting really good traction with those merchants, and that's where we're generating more of our business. It's driving up our average merchant, it's driving down incrementally the basis points that we're seeing because larger merchants just get a better pricing. So overall, within the constraints of that growing average merchant, we're seeing absolutely nothing new there. And another fact that I've observed to people is that we have minimum standards of basis points for different volume people, and those minimums have been unchanged since 2000 when I joined the company. So it's really another example of tremendous pricing stability that we're seeing. On the attrition side, we have a retention group that we're very proud of and think do a great job. And the interesting thing there is that we looked in the last year or so, we were able to retain -- we get indicators that our merchants are about -- potentially going to leave us. They call and ask for statements or other indicators that encourage our call center people to push the call over to our retention group. That group is able to retain somewhere around 75% to 80% of the merchants that are referred over to them as being attrition risks. And about 80% of the time, they do it without reducing the merchant's price. Now sometimes, a merchant has grown and really deserves a better price, and they reflect that. But most of the time, when they retain them, they're able to retain them without making a price adjustment, which is very important. Overall, we think we do a very good job of managing attrition, and that's what your goal is everyday when you wake up is keep every merchant you can. But as we saw in this quarter, we saw a weaker same-store sales growth and so a commensurate increase in the volume attrition rate for the quarter.

Roman Leal - Goldman Sachs Group Inc., Research Division

Sure. And just a follow-up, Bob Carr, when you look at the next 4 to 5 years and your decision to stay at Heartland, what excites you the most? Is it the kind of the new partnerships and new strategy in your core SME business? Or is it the non-card businesses that seem to be growing a little bit more rapidly right now?

Robert O. Carr

Well, great question. I think we're -- I'm sure, going back to my roots, I think, I used to be a software developer for accounting packages and doing core enterprise work for smaller merchants. And I think that's what's happening. We're -- the industry is moving to a business solutions industry with the low-cost products that are out there now to enable those industries with all the app developers around the world. So what excites -- I think we're at a cusp in the industry where we're going to move from payments to general business solutions. So our motto the last 10 years of building a payroll business and building a loyalty and gift business and SmartLink, and all these products, I think, are coming together. And we are recognized in the industry. We're the brand, the sales organization out there, and so the strengths that we have had up to this point are going to, I think, give us a chance to really show our stripes over the next 4 or 5 years in creating this new business solutions environment and not just a commodities payments environment.

Operator

We'll go next to Mike Grondahl of Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

The first one is kind of a follow-up. Could you maybe highlight 2 of the products of the enhancements that you're most excited about, whether it's eCommerce In-a-box or Tabbedout or the independent petrol stations? And then secondly, I was a little bit surprised by the payroll strength and that K-12 didn't see a little bit of a bounce with signing up 17% more parents July to October. Could you just kind of speak to both of those businesses and maybe the seasonality or just the trends?

Robert O. Carr

Yes, I'll take the first part of that. We're really excited about Leaf and Tabbedout because these products enable us to take consumer packaged goods coupons and redeem them in realtime in a very powerful way, and merchants like it. We've had some really great results in some of the things we're doing there, but we're also excited about eCommerce In-a-box and SmartLink as well. We've had some really good traction with all those, so -- but if I had to pick one, I would say that enabling merchant -- not merchant-funded rewards, but vendor-funded rewards, it's very exciting to merchants to be able to have -- give lower prices to consumers without coming out of their pocket. And these things -- these products seem to be working very well. So that would be the top of my list. And Bob, will you answer the questions on the School Solutions?

Robert H. B. Baldwin

Yes, and Campus -- School Solutions and Payroll. Payroll, it's something we felt for a long time was a great opportunity. I think that with the team led by Tony Tortorella that came from Ovation a year ago had really brought a new focus to the business. The SPA strategy takes -- adds just depths of knowledge out there into the field. One of the exciting things that Tony mentioned to me about the summit that we just had, he was having SPAs, the product specialists, the payroll specialists, coming up to him and saying, "Let me introduce you to my RMs, the RMs that are in -- we're in their division that they're going to be working with." And that kind of collegial approach, that kind of local expertise that we think can drive much better sales out of the sales force -- those SPAs, by the way, are also selling themselves. So they're out there everyday proving their own ability to bring in margin while they're working with people. So we think we've just scratched the surface. We've obviously added a lot of SPAs this quarter, and that was really in anticipation of the fourth quarter payroll selling season. So we're pretty excited about things. A lot of work to be done, still working on our own platform and building that out, but a lot of good things going on in payroll. On the Campus side, that has a seasonal aspect to it when you have -- it's back-to-school season in August and September. And what you're -- you inevitably lose the parents whose kids have left the school. So you're going to lose some of your base every year, but then you're getting a whole new group of parents that are coming in. What I like to observe about the group of the parents that are coming in is they're always younger, and that younger cohort are, each year, more accustomed to paying convenience fees and less accustomed to writing checks. And so that's a very good generational change that's in our favor, but you have to go after them in an aggressive way to get their attention to adopt the payments solution right at the beginning. Once you get them at the beginning of school, you can keep them. So we're very gratified to get that 17% growth in the number of active net -- that's a [ph] deck growth number, that number of active parents, and we see a lot more opportunity to improve engagement in the quarters and years ahead.

Robert O. Carr

And also, the third quarter, people -- students don't come back to school until late in...

Robert H. B. Baldwin

Right. So the revenues are going to be light in the processing side. I mean, both the Campus and the School Solutions businesses will tend to have more of their installations, their equipment and licensing revenues in the summer, because that's when the schools are less active, so they'll do the installation then. But then in terms of the processing side, you really go for the September through June period as the most active part of the year for that activity.

Operator

We'll go next to Ramsey El-Assal from Jefferies.

Ramsey El-Assal - Jefferies LLC, Research Division

It was good to see your SME card processing volume, I mean, holding up relatively well. Your SME net revenue growth decelerated quite a bit. I was wondering if you could help us kind of understand the dynamics there. You mentioned the migration to larger merchants getting better pricing. That might be something that plays out over a greater amount of time. I'm just curious about sort of the dynamics in the quarter between volume growth and the net revenue growth. Was it pricing or -- any color there would be appreciated.

Robert H. B. Baldwin

Yes. Well, there's some -- yes, we reported, in SME, a growth of about 0.8%. And as we look at it, there's some apples-to-oranges that are getting more evident there and we can't give granularity, but it's having something of an effect. For example, in the School Solutions business, the volume that the parents process is shown in our SME volume, but the revenues, the convenience fee revenues, are down in the School Solutions revenue line. So we're getting a little bit of noise in some of that, that's likely to grow over time, and we'll do some work to try to isolate that. But it can be challenging to look at the definitions. And there'll be other areas. Campus is also getting bigger in some of the card processing as well. Second factor is just this quarter, there were some -- this quarter and the same quarter last year, there were some one-timers that benefited the results last year's third quarter and some other ones that hurt the results in this year's third quarter. The net of that was that, we think, that instead of the 0.8%, if you get out the one-timers, we were about 2% growth in organic SME processing-related net revenue growth. Still not the 3.9% volume growth. Again, that 3.9% is a little, if you will, inflated because revenues associated with that are down in Campus and School Solutions. But still, there is a delta there, and we think that the majority of that delta is attributable to the larger merchants that we're going after right now and signing very successfully that's going to reduce the basis points in the average portfolio by just a hair.

Robert O. Carr

And also, as we get more successful in multiproduct sales, then we give better deals on both products to a customer, which is to be expected. So the more successful we are growing our revenues with multiple product sales, which should give us better retention, we are going to have a little bit of drop in margins there, too.

Robert H. B. Baldwin

That's a good point. And we -- to that end, we've, in fact, rolled out a pricing tool in atlas that really helps the salesperson do that and -- but that's done very consciously because our observation is, when you get multiple products into a merchant, their attrition goes down. So yes, you're giving up a little bit of pricing with that second or third product or the bundle has a little less pricing to it than it might otherwise have, but you get that benefit for a longer time as a result of better attrition. So that's going to be another factor that plays into things.

Ramsey El-Assal - Jefferies LLC, Research Division

Great, that's very helpful. On the network services side, it's kind of like the opposite happened. Segment revenue growth had a pretty -- it looks like it had a pretty showing, whereas volume kind of remained in the -- where it's been sort of trending, kind of flattish. Would it -- how did it -- the same question, only applied to that segment. Can you help us understand the data in that segment?

Robert H. B. Baldwin

Well, that's where we -- we give a lot of detail, and yet you can't ever give too much detail. SmartLink is in there, which doesn't have anything to do with processing at all. But that is doing well, as Bob mentioned, and so we're seeing improved results there.

Ramsey El-Assal - Jefferies LLC, Research Division

Is PetroPay yet feeding in there? Or is that -- is it little early for that yet?

Robert O. Carr

Well, a, it's early; but, b, that is actually -- that is going to be in there, right? PetroPay is going to be an example of the blurring of the lines. I know you guys want as much separateness and distinction as possible, but PetroPay is a perfect example. It's sold by an SME sales person. We have petroleum, as you can see, in our same-store sales, that's in the SME portfolio. And then -- but some of the revenue is also going to go up into Network Services. But overall, right now, the PetroPay really got a good start in -- I think May, June was when we rolled it out, but it's really just a start. It's going to take a while to get to be a big impact.

Operator

We'll go next to Steven Kwok with KBW.

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

The first question is around the same-store sales. It seems like there's been a bit of deceleration over the last couple of quarters. I was wondering, is there any particular trend you can attribute it to, and if there is any way to also decompose it in terms of some -- by month, and then how it has recently been performing through October?

Robert H. B. Baldwin

Yes. Steven, it's hard to be -- sound smart about something -- the big economy stuff, and we don't spend a lot of time analyzing it. Clearly, we're seeing sequential declines. The consumer is soft, and we are Main Street consumers. So even some of the other, like the first data spend trend, that's our -- stronger than ours, but you'd expect that. As consumers, you don't go to Main Street to save money. You go to the big box to try to save money. And so that -- there is a shift going on there. It's all in the context, though, of bouncing around every month, since back in the spring of 2010 has had positive same-store sales growth. It's bounced around in ways that we can't really explain. I think September, in terms of this quarter, September was the weakest month of the quarter, and I think that's consistent with what other people have observed. October, we just don't have any data on it. We do have, based on just the volume we're seeing -- if I had to say, is it better or worse than September? I would say it's better, but that's a really inexact and dangerous thing. So I don't think we've seen anything dramatically different. Obviously, you'd expect September, with all the noise out of Washington, that it would not be surprising if that was light. Obviously, that noise has subsided, at least for now, and so we could be hopeful as we go forward to have a little better results. But as always, we don't control it. We just observe it and live with it.

Operator

We'll go next to Brett Huff with Stephens Inc.

Brett Huff - Stephens Inc., Research Division

And Bob, glad you're sticking around for a few more years. Can you talk a little bit about the productivity of the new sales folks in the SPAs? I think you articulated kind of, of the new folks you hired, and maybe you can talk a little bit about the roughly 100 that you've hired in the past few quarters, kind of what the split is between sort of more run-of-the-mill sales folks versus the SPA specialty. And how is their productivity ramping, better or worse than you expected?

Robert O. Carr

One of the -- okay, great questions. The productivity is beyond my imagination. I never thought it would be possible for us to be doing what we're doing now. And there's moments, over the course of many years, where you run into -- you find key solutions. Yes, I think we found a key solution, thanks to Tony Capucille, our Chief Sales Officer. Tony came up with this idea of having a senior product advisor in the field. And this can't be overemphasized, the importance of it, in terms of our long-term growth, in my view. It's been so frustrating. We've been in the Payroll business for 10, 12 years, and just a small percentage of our sales people have been able to sell both products. But the reason isn't that they're not capable, they just don't have the knowledge, right? So by having this senior product advisor in the field actually selling like our territory managers do, these people have a lot of credibility with the payroll product. And so our sales people are eager to work with them to learn the business because they have someone they can ride along with them that's local, and at the same time, if they get into a complicated situation, they can throw it over to the fence, to the SPA who will close it, and they'll still get some commission and they'll get the benefit of that retention of that merchant. So the SPA program, I think, it's just beginning to impact us in a way that I think it's going to be really terrific. Nobody has figured out how to sell multiple products, and we've never declared victory on that either. But I think, with the seeds that are sown that we might have some big wins with this whole approach. And it's all about sales compensation and having leaders in the field that are respected by the team folks. So we're attracting the highest quality sales people we've ever attracted. We don't hire everybody. In the old days, we would tend to hire more people that were less qualified, but we realized that they can be counterproductive. And so we're hiring fewer people. We're retaining the ones much better than we were. And we think the SPA strategy is going to help us, not only at payroll, but with SmartLink and with other products like Leaf that we'll be distributing in 2014.

Robert H. B. Baldwin

And just to add, in terms of the rookies, and when we measure rookies, it's RMs in their first 6 months. So we -- obviously, it's only -- in September, it was only -- those 2 have been hired since March. In September, the rookie production was the highest that we've ever seen out of the rookies. So they're getting -- hitting the ground running. We have a methodology to team them up with their hiring manager to get out and get new installs right away, but also remain focused and increase -- have increased our focus on what do they do to maintain their pipeline. Always focus on the pipeline. And again, we try to be cautious about our optimism that we're getting it right and we may have setbacks in the future. But I think we're now -- can say that we're pretty pleased with 3 consecutive quarters of very, very solid net gains in our sales force, so we feel very good about that.

Operator

[Operator Instructions] We'll go next to Tulu Yunus with Nomura Securities.

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

First, great job on the GMI metric this quarter. I think, as far as I can tell, it looks to be one of the strongest growth rates since you've started disclosing that metric. But just as it relates to revenues and sort of why we didn't really see a commensurate follow-through, if you will, in the revenue growth pickup, are you -- Bob, you alluded to the fact that you're adding larger merchants. Is that -- are you adding those merchants at sort of a higher gross margin as it relates to sort of that GMI? Because from what I understand, sort of the processing costs and servicing costs that are computed in that metric are more related to -- are more on a per-transaction basis, and maybe you're adding folks with higher tickets or just the higher merchant is kind of affecting the cost of services and processing, if you will.

Robert H. B. Baldwin

Okay, that's a complicated question, Tulu. The -- it is a larger volume merchant. The average ticket is staying pretty much unchanged. The average ticket of the new installed merchants are pretty much unchanged. And our portfolio runs around $46 [ph], which is well lower than the number of our competitors. I can't explain exactly why, but it just is. So that isn't changing. Our comp model has always focused people on dollars of margin installed. We do not care whether you install 2 merchants with $3,000 of margin or 6 merchants with $1,000 each. That's up to the sales person, what he or she can accomplish in the field. Our people are just having more success right now with larger merchants. As far as the cost factors go, we charge a per-transaction fee, which is unchanged from -- in a material way in the last few years. I can't remember when we last changed that, but it's been a little bit -- it's been a while. We also charge a servicing fee that's at dollars per month basis. Now that's a -- there's leverage in that, if you will, for the sales person. They can -- with a larger merchant, it's fixed dollars per month. But that dollars per month, by the way, is higher today than it was in 2010. The statistic I gave, to generate $1 of margin today, you have to price it higher than you did in 2010, because we've raised the per-month fee with the SRM fee that you may recall in the fourth quarter of 2011. So overall, we're -- what we're laying out is that as you get significant increases in card installed margin -- and to remind you, our card installed margin is in the 80%, 85% area of total installed margin. As we get that card margin materially up for a couple of quarters, and I appreciate, it's sort of frustrating, it takes a while to move the speedometer. But as we maintain or exceed these kind of $18.5 million levels, really, when you look at it, it's only in the last 2 quarters that we've seen a material breakaway from the $14 million, $15 million area we were for a while. As we maintain or grow up even higher installed margin, we will see a pickup in the net revenue growth from the SME portfolio.

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

And then, maybe just -- so that I understand it correctly, do you think it's reasonable to expect the $18.5 million or this sort of run rate for GMI going forward, given what you're doing with the sales force, the productivity, as well as sort of the new headcount that you're adding on? Is that a reasonable go-forward assumption?

Robert H. B. Baldwin

I think if we maintain -- sort of the math is, if we maintain or grow the sales force and we maintain or grow productivity that we will have at least $18.5 million. Now the only -- I'll give you a little caveat here. Fourth quarter is selling season for payroll, and we've got a lot of payroll SPAs out there. They're going to be getting a lot of mine share in the fourth quarter. So that -- the mix may change a little bit at a fundamental level at Heartland, we don't care. We're happy to have $1 of installed margin in payroll or from card or other products. So that could be a delta, but yes, I would say that if we maintain the same number of sales people, which we expect to do or grow it, if we maintain or grow the productivity, which we expect to do, then we're going to maintain or grow the installed margin.

Operator

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

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

Just 2 questions on Leaf. Which -- how should we think about the impact on the P&L in 2014? And then what's the economic model there? Are you planning on just bundling that as part of a total sort of solution, or is there an opportunity for individual kind of hardware app-related sales?

Robert H. B. Baldwin

Well, their model -- I mean, they are creating a purpose-built tablet that they are selling with various business management solutions. They are selling it through Heartland, and they are selling it through other people. And we are going to look to introduce that to merchants as part of, as Bob was saying, a solutions sale. We're also going to be building our own apps that will go through that, as Bob mentioned. So the Leaf, and Leaf will get a percentage of the revenues that are sort of -- it's sort of like the Apple App Store, iTunes sales, the 30% take model. So it's an open platform. We -- they are encouraging. We are encouraging other people to develop apps that will go through that -- onto that platform. We think we're in the best position to both develop apps that are attractive to and exciting for merchants, as well as to sell those solutions. We think we have a tremendous advantage with our W-2 sales force, with the training we can do, with the expertise that we can bring in various verticals. So it's a great opportunity for us. From a financial standpoint, we'll be consolidating their results in there. They are a development-stage company. This is in the order of a venture capital investment that we're -- that we end up having to consolidate their results onto our financials, and there's no question that in the fourth -- in the -- in 2014, it will be dilutive to our earnings. We're still working on the numbers. There's a number of puts and takes on things, including how quickly they ramp up, what the potential impact of tax -- of their taxes and a host of other factors. Probably, as we look at it right now, that $0.04 in the quarter that we had in this quarter is probably not a bad benchmark for the quarterly run rate of losses that we'll be absorbing, but it's unfortunately very early on in their development as a company and what opportunities they have. So it's hard to be granular right now.

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

Okay. And then just one last one. Are there any -- other them Leaf, are there any other big sort of spending items you see in 2014 that might require some sort of notable uptick in spending, I guess?

Robert H. B. Baldwin

Internally, no. I don't think that there's any big deltas that I can think of. Obviously, we are still out looking for acquisitions this year. It's shaping up as sort of a corky acquisition year in terms of -- really focused on some of the new development -- newly developing companies like Leaf and Tabbedout. We are engaged in and looking at a variety of other more traditional opportunities, whether it's in payment processing, although that's, so far, good [ph], relatively light, and some of the other Campus and School Solutions, where there's some potentially interesting opportunities. Obviously, nothing to announce right now, and we'll have to watch it. But from an internal standpoint, no. We do want to continue to grow through acquisitions and expect to see lots of interesting opportunities.

Operator

We'll go next to Smitty Srethapramote from MS.

Smittipon Srethapramote - Morgan Stanley, Research Division

Just a follow-up to the previous question. You made direct investments in Leaf and Tabbedout, but chose to partner with other guys like LevelUp. Can you talk about how you decide between investing versus partnering? And do you expect these investments to hinder any potential partnerships with other emerging technology companies going forward?

Robert H. B. Baldwin

Good question. I don't know. I mean, we don't go into anything looking to -- the main thing is, let's figure out, is this a solution, a partner we want to work with? We want to be the place that all of the new guys are coming to and saying, "Will you distribute for us?" And then that leads into a discussion about, what do we think about the business model, how much money do they need, a whole host of decisions going to whether we will invest, as well as partnering in terms of distribution, and I had to take to general...

Robert O. Carr

I would say that there is a theme. And that is that if we like the management team and if they believe as we do that an open platform is the right direction, then it's much more interesting to us. We don't -- it's a little bit strange, I think, for a processor to say, "Hey, we're going to enable our competitors to do payments or payroll, and we're going to be offering other solutions to that customer." A lot of companies borrow money and they are locked into a bank. It's not Heartland. And we still want to be able to do their payroll and we still want to be able to do their SmartLink, manage telecom services or their loyalty programs or their kitchen display systems or whatever. And so with this idea of being open and not locked into another third party is really key to our strategy. And of course, the needs of the business and the existing ownership and so on, it's complex. But I'd say the overriding theme is whether or not the business philosophy coincides with ours, which is really dominant and important here at Heartland.

Smittipon Srethapramote - Morgan Stanley, Research Division

And then maybe just a quick follow-up on -- any updates you may have on the new CFO search?

Robert O. Carr

We're working on it and expect -- we're working on it and making progress.

Operator

We'll go next to Tom McCrohan with Janney.

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

A quick question on equipment sales for School Solutions. The sequential increase you saw this quarter, is that a leading indicator that you'll see growth in the processing side next quarter?

Robert H. B. Baldwin

No, really -- it really isn't -- this is, in particular, Chicago being implemented. That is going to continue, by the way. That's not a -- that's a big, big installation. But in that business, getting engaged at the schools or adding a new school is a good thing in terms of the processing, but that's not nearly as impactful as getting a higher share of the parents' electronic processing. The growth in our base of schools is really not that dramatic, even with a big deal like Chicago. And Chicago does not have a big payments delta. The reality of Chicago public schools is that an awful lot of the kids are on free lunches, and so the parents aren't asked to reload their accounts. So that's not going to -- that one is not a big payment opportunity. It's still a very attractive business, but it's not on the payment side.

Smittipon Srethapramote - Morgan Stanley, Research Division

Great. And a follow-up on payroll. It sounds like you're still very optimistic about the prospects there. Can you remind us, have you completed the conversion? I think you're consolidating platforms to how your price relative to the competition. Do you expect to display some [ph] 3, what your current attach rates are? Like kind of what percentage of the current portfolio merchants are currently using Heartland payments for payroll, and how that's going to trend over time?

Robert H. B. Baldwin

Okay, the last one first. About 1/4 of our merchants -- the combined merchant base is on Heartland for card. It really comes from 1/2 of our legacy portfolio being card, and that's going to grow over time, but don't have anything granular on that. We think our pricing is somewhat inside the big guys on average. They can go with free for the first 3 months or 6 months. It's hard to be -- to over generalize. But we think we are somewhat inside those guys. And the first question was conversion. The conversion of the platform is -- we're going to be very careful in this. We've analyzed the cost of maintaining the Ovation platform. They're just not that much higher than the cost of maintaining our own platform, and so we're really sensitive to the attrition risk that a conversion entails. So we're going to be cautious. The benefits -- we're not going to see any consolidation -- platform consolidation savings until 2015. But as I say, the costs -- the incremental costs aren't that big that's worrisome. But just for clarity, we are putting substantially all new merchants, whether they're coming from an Ovation sales person or a legacy Heartland sales person are going onto the Heartland PlusOne platform. And by the way, I've mentioned the legacy Ovation sales force. That sales force is moved over and now is merged into the Heartland SME sales force. So they are -- they have become SPAs as well. So that -- organizationally, that's how we're handling it.

Operator

We'll go next to Tim Willi with Wells Fargo.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

I just have some modeling questions, some housekeeping stuff. I apologize if this was asked. But on the tax rate, it came in a little bit lower than I would have thought, actually one of your lower tax rates, at least over the last 1.5 years. Anything we should think about there in terms of a run rate or is it just sort of something around tax credits or what-have-you to push that down for the quarter?

Robert H. B. Baldwin

Great. It's truing [ph] tax credits because that's exactly what it was. We have some significant R&D tax credit that we proved up in the quarter. We'd love it if it was going to be a permanent thing, but it isn't. We're going to be back to our typical 38-ish number going forward. But it's obviously a good benefit for the company to get those credits.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Okay, great. And then just 2 other sort of on the modeling. With Leaf and your commentary about sort of the run rate of loss that you'll probably absorb through 2014, does that, at all, impact how we should think about the uptakes [ph] of your operating margin versus sort of your multi-year plan that you've articulated?

Robert H. B. Baldwin

Yes. I think it sort of have to, depending on the speed with which they improve. And we'll be calling out the results. Obviously, we'll have the consolidating entries, so you'll be able to see it as we go forward. But obviously, it represents a hurdle to our overall operating margin improvement as -- on a GAAP basis, and we're just going to have to call it out. We are still focused on getting better economics, better leverage out of our existing business, and then this is going to be a sort of a separate thing that, as a development stage company that obviously, their operating margins are -- it's not a relevant discussion for them. So we'll just have to call it out, and we'll look to continue improving our sales on the other parts of the business away from Leaf.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Great. And then my last one and I'll hop off was just around sort of the discussion around the strength of the installed margin, which is obviously a very positive development and a leading indicator. In terms of the expense side of the customer acquisition cost, how should we think about those numbers as they roll to the income statement through 2014? Because those have been pretty steady numbers over the last 4 to 5 quarters, even as the GMI has picked up a bit. So how would we think about that?

Robert H. B. Baldwin

It's going to start ticking up. We -- there's some idiosyncratic things that we took the EDs off of the 94 [ph] plan a year plus ago. We're -- because of their success that's driving good outcomes in the sales organization, we're putting them back on, so they're going to be getting -- that signing bonus is going to be reintroduced at that level and that plays through the customer acquisition cost and the amortization. And overall, you're going to see other things that drive that toward higher numbers as we keep improving the installed margin.

Operator

We'll go next to Wayne Johnson with Raymond James.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Most of my questions have been addressed, but just a follow-up on Leaf and Tabbedout. Just to reaffirm, so is there any exclusivity business arrangement with Leaf or Tabbedout with Heartland?

Robert H. B. Baldwin

No, there's no exclusivity with either of those. We're going to work hard to be their best partner, but they're going to have other partners as well.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Right. And so they're going to have the...

Robert O. Carr

But we'll be exclusive on our products, but not...

Wayne Johnson - Raymond James & Associates, Inc., Research Division

That you're [indiscernible]

Robert O. Carr

Yes, but not [indiscernible] Those are open platform.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

All right, fair enough. And so you've talked about swimming upstream in the $500,000 kind of average -- or the $500,000 annual payment volume retail or becoming more important to the portfolio of Heartland and that's terrific. I guess, my question is, when you're making those sales, when the sales people are making those sales, without making this a softball advertisement in too much of a softball question, what is the 1 or 2 reasons why Heartland's successful in those particular circumstances? So if it's -- is it price? Is it we offer more features? Just -- is there a way to encapsulate why you guys are being so successful at [indiscernible]? The numbers are good, the gross margins installed, that's terrific. And so if you could just flush that out a little bit, that will be great.

Robert H. B. Baldwin

It's really hard to, Wayne. It's -- every situation is different. The competition is intensely local in this business. I think as Heartland has grown as a company, each day, we're burnishing our reputation. It's easier for a bigger guy who might have traditionally gone to a better-known name, they're a large bank provider and things like that. It's just that much easier to work to -- work with us as we get more visibility. And the solutions, it's hard to generalize. I think we're just a more effective player than we were. We think we're the toughest competition for just about everybody out there, and that's exactly the position we want to be, and we're doing okay.

Operator

We'll go next to Tien-tsin Huang with JPMorgan.

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

Most of the questions were asked already. But just payroll, who are you taking shares from? Is it service bureau or do-it-yourself? And is the bundle really the key attractiveness?

Robert H. B. Baldwin

No, it's -- we're taking it from the guys who have share, which is paychecks [ph] and ADP [ph], not so much de novo. Although with the Ovation model of referrals from CPAs, that's going to start coming more into play, the people who have not outsourced previously. But generally, it's taking away from the incumbent, and it's -- I mean, one reality is the big guys like to raise price every year. We're out there with a 3-year fixed price guarantee, and that makes a big impact on the market.

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

Got it, got it. Good to know. And then on the Leaf front, I know, tons of questions already, but just on -- just trying to understand the landscape a little bit better. Thinking about this MPA [ph] solutions, First Data with Clover and you got a lot of VAR [ph] companies, and you got Global buying APT, Element at Vantiv. Let me -- I'm just trying to understand like why is this the best strategy from a -- why is Heartland making this bet versus some of the bets that are out there?

Robert O. Carr

Well, I think, mainly, Tien-tsin, because it is an open platform and we're not going to force everybody to do all their business with us if they have other reasons to stay with their incumbent. So we feel like we need to have a point-of-sale product. We are in the field today with Leaf with countertop payments. We're going to be expanding that over time. But we want to have a product that allows us to compete with all the other players out there, and we think that Leaf gives that to us in the best possible way. And I think that everybody's going to wind up aligning themselves somehow or other with this technology because it's so much more cost-effective and so much easier to develop applications on.

Robert H. B. Baldwin

That's the thing. I think there is a really fundamental shift that we're just at the very early days of -- where those established POS systems, and they do a great job for restaurants and retailers and all kinds of things, the MICROS and the Alohas, that's a computer installation in a store, maintained by a local dealer. When you look at the future, we think it's going to be cloud-enabled tablets, and that is a huge, huge shift. It's not happening today or tomorrow. All of these changes in payments processing take longer than anybody would like. But on the margin, in 2 years' time, a restaurateur who's considering going to a system, when faced with the alternative of investing $30,000 in a computer system or $3,000 in 15 tablets, and then a SaaS model, paying $200 a month is the way it's going to go. And we think Leaf is -- gives us a great position as that market grows up.

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

Last quick one, promise. Just revenue -- the revenue change from the top end. What were the factors that drove that? I may have missed it.

Robert H. B. Baldwin

The revenue -- I'm not -- you lost me.

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

The revenue guidance, Bob, sorry. The revenue, I think, the range was dependent on [indiscernible]

Robert O. Carr

Well, the reality is that we're -- yes, it's just that we're saying that we've been at $600,000 to $610,000 all year as the years gone on. We loved our revenue to be stronger. The reality is for -- as we've seen the fourth quarter -- is that we expect it to put us in that $600,000, $605,000 area.

Operator

We'll go next to David Koning with Baird.

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

Just a few really quick ones. Leaf, just the Accounting 101, it'll be -- it'll go through as an operating loss through the P&L. And then the 40% or whatever you don't own will be a positive to minority interest. Is that the right way to think about the P&L?

Robert O. Carr

Yes.

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

Okay. Good, secondly, what was the total acquisition contribution to revenue in Q3?

Robert H. B. Baldwin

Well, you mean like from Leaf?

Robert O. Carr

Ovation...

Robert H. B. Baldwin

Ovation and ECSI?

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

Yes.

Robert H. B. Baldwin

ECSI is easy because it's a separate line item there. That was $6.5 million. Ovation was around numbers half of the payroll revenues, so that's probably $5 million. So about $11 million.

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

Okay, good. And then finally, prepaid was -- it continues to be down. I think it was about 40%. Year-to-date, I think it's down. I guess, what exactly is happening there? When can that flat line start to grow again?

Robert H. B. Baldwin

Well, we're -- we had a very major contract with Subway when we acquired Chockstone, and we held onto it for far longer than we expected. But a year ago, we lost that, and that's the driver of the impact there. And then so that's -- we're -- now for the fourth quarter, they were gone, so that's going to be that way.

Operator

We'll go next to Chris Brendler with Stifel.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

I just wanted to see if we could get a little more detail on the revenue growth in the quarter -- SME business this quarter. It came in a little lighter than we are looking for. Transaction growth seemed to be solid. You mentioned the move upmarket. I guess, my big overarching question is, are you seeing any signs of pricing pressure at the smaller end? We heard First Data talk about a 6% decline in revenue for transactions. [indiscernible] successfully called out some pricing pressure in their merchant-acquiring business, so I think the smaller end. Are you guys seeing anything at the smaller end and anything related to the uptick in attrition that causes the revenue weakness in SME this quarter? And I have a follow-up.

Robert H. B. Baldwin

Well, let's take in the last part. I mean, the attrition ticked up by -- sequentially by 0.2%, which was pretty much directly related to the same-store sales decline of 0.2%. So no change that I would call out in attrition at all. The -- listen, it's very hard to look at what is going on in terms of prices day to day. Perceived price is a huge competitive issue. The reality of our business is teaser rates are very prevalent as a way to sell. So the merchant almost always thinks they're getting a better deal, whether they are or not. We have been, for years and remain, the low-cost guys out there. We're not the ones who kept the Durbin Dollars, the Durbin reduction, for example. And so no, I would say, if I look at our basis points of estimated margin as adjusted for the growth, I've mentioned the change from 2010 to 2013, the basis points were essentially unchanged in that period. Just isn't much going on with new [indiscernible]. Are you -- as you look at your attrition, are you generally -- you'll lose merchants that on -- typically will be the fatter-priced merchants that you might have in your portfolio will tend to be a higher attrition than your lower-priced merchants. That's what you'd expect. But I don't think there's anything dramatic going on. I would say that our observation that a lot of our competitors' prices have to be better than they used to have to be. Years ago, we looked at some of our -- the ISOs, and we were thinking that they were priced -- we were in the low-50s in basis points, they were in 70 and 80 basis points. Probably, now, they're more like in the 60 to 70 basis points, so I can see that. And you mentioned, per transaction, our average ticket is staying the same, give or take and -- but per-transaction pricing is just not relevant to the -- to our SME business. I don't have an observation about anybody else's, but ours is not. It's really looked at in basis points. That is down a little bit, driven by the continued increase in the size of the merchants.

Operator

[Operator Instructions] We'll take our next question from Meghna Ladha with Susquehanna.

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Most of them actually have been answered. But Bob, you talked a lot about M&A and you plan to make acquisitions in the future. But what is the sustainable organic growth for the company, excluding M&A next couple of years?

Robert H. B. Baldwin

I think -- we think we can get the SME Card business growing higher-single digits through installed margin growth, and then overlay that with -- that's about 3/4 of the business. The other 1/4 is non-card, which can grow significantly higher. We aspire to getting back to double digit revenue growth. It's hard. This is a tough economy, but that's what we aspire to. And let's say, the levers are installed -- assuming the economy stays okay, not great, but we'd love to have some more wind at our back, but assume the economy is unchanged, we'd love to drive the SME business through higher installed margin and then as I say, have a higher growth in the smaller and faster-growing businesses that we have.

Operator

We'll go next to Glenn Fodor with Autonomous Research.

Glenn T. Fodor - Autonomous Research LLP

You have several emerging players like Leaf and Tabbedout where you're building the infrastructure in order to link your systems into theirs. So can you give just some detail on the work involved here? I mean, do you need to do a new integration for every partner you sign with? Or have you developed a type of middleware, that it's just a matter of bolting on new partners as they come onboard?

Robert O. Carr

Great question. Yes, we have developed middleware. We have RFCKs and APIs that can be connected to. We've developed a gateway called Portico. It's -- we've consolidated most of our gateway activity into Portico. So we are working to become the easiest player to integrate with. On our end, we are already hooked into Tabbedout and Leaf, and I think that works pretty much behind us.

Operator

We'll go next to Chris Shutler with William Blair.

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

I jumped on a little bit late, so I apologize if this was asked already. But in the Heartland School Solutions segment, it looks like that grew about 3% in the quarter. To your point earlier about some of the smaller pieces of the business growing faster than the SME piece, was that segment negatively impacted in any way in the quarter by anything? And just curious about the outlook for that business longer term.

Robert H. B. Baldwin

No. I think that, overall, we feel very good about the School Solutions business. The Chicago conversion is a big focus, and that didn't happen quite as quickly as we would have hoped. It's a big, complicated thing to work with. But no, we feel great. The core of that business is going to be continuing to grow the number of schools that we have, taking them away from other people, or in the case of Chicago, empowering a new solution. We think we're going to be good there, and then overlaying that with the growth in the payment side, which is the primary focus. And we think that 17% growth in the -- active parents is a great leading indicator for the opportunity in the -- as we're actually getting the payments and the convenience fees in the -- during the actual school year.

Operator

All right, and thank you. That will conclude today's question-and-answer session, as well as today's conference call. We thank you for your participation.

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