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Heartland Payment Systems (NYSE:HPY)

Q4 2013 Earnings Call

February 05, 2014 8:30 am ET

Executives

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

Robert O. Carr - Executive Chairman and Chief Executive Officer

Analysts

Roman Leal - Goldman Sachs Group Inc., Research Division

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

Michael J. Grondahl - Piper Jaffray Companies, Research Division

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

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

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

Smittipon Srethapramote - Morgan Stanley, Research Division

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

Ramsey El-Assal - Jefferies LLC, Research Division

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

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

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

Brett Huff - Stephens Inc., Research Division

Gaston F. Ceron - Morningstar Inc., Research Division

Operator

Good morning, and welcome to the Heartland Payment Systems' Fourth Quarter and Fiscal Year-end 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Bob Baldwin, Vice Chairman. Please go ahead.

Robert H. B. Baldwin

Thank you, Emily, and good morning, everybody. I'd like to welcome you to our fourth quarter and fiscal year-end 2013 earnings call. Joining me this morning is our Chairman and Chief Executive Officer, Bob Carr.

Before we begin, I'd like to remind you that some of our discussions may contain statements of a forward-looking nature, which represent management's belief and assumptions concerning future events. Forward-looking statements involve risk, uncertainty 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 filings. 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 Bob Carr.

Robert O. Carr

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

We had another great quarter in our second consecutive year of record results. For the quarter, we reported adjusted net income from continuing operations of $20.5 million or $0.55 per share, increases of 16% and 22%, respectively, over the comparable quarter a year ago.

For the year, comparable earnings were up 22% to $2.32 per share. Our results, once again, reflect the growing strength of the Heartland brand in both our card and noncard markets.

In card, the key headline is that our aggressive new business initiatives are generating excellent results. In September, our new margin installed exceeded the $6 million mark for the month, eclipsing a threshold we had previously broken only one time in our history that was October of 2008. But since September, we believe we have cracked the code and haven't looked back. Every month is coming in above $6 million, including January, which is one of our seasonally toughest months of the year.

As a result, the rate of new margin installed growth accelerated to 33% in the fourth quarter, the fastest rate of new margin installed growth this year and the best quarter of new margin installed in the company's history.

For the year, new margin installed was up 22% to a record of $71 million. By sustaining installs at these appreciably higher levels, as well as through a concerted effort to reduce attrition, we are making significant progress on the initiatives that we believe are the key to increasing the rate of card volume and revenue growth.

Record new business is the result of continued growth of our sales team and increased relationship manager productivity.

For the first time in our history, our average monthly production exceeded $7,000 per salesperson, and our hiring success continues. At the end of the year, we had 902 relationship managers, up 134 from the end of last year and well in excess of our goal of adding 100 for the year.

This includes 58 Payroll SPAs, or special product advisors, a role that has proven successful in improving Payroll production.

As part of our plan to grow our sales team in 2014 by at least as much as it grew this year, we intend to begin to add SPAs to support our other business lines as well. We believe they have helped to improve productivity across Heartland as they have with -- we hope to do that as we had with Payroll.

As a result of both organic growth and strategic acquisitions, the rate of revenue growth in our noncard business exceeded the rate of card revenue growth. In fact, Payroll grew 114% this quarter in revenue.

The Ovation acquisition, the support of our SPAs and the synergies being achieved through the integration of the Ovation and Heartland sales organizations have all contributed to our growth. And we believe the Affordable Care Act can be a catalyst for additional growth since small merchants will need the expertise of a knowledgeable payroll provider more than ever before.

In 2014, we expect to begin to integrate the Heartland innovation processing platforms, which should help to improve margin, and we are integrating Payroll technologies into the Leaf POS system. So we believe 2014 will be a very exciting year in Payroll.

Heartland School Solutions and Campus also did well, with Campus revenue tripling in the quarter and quadrupling for the year, while HSS was up better than 20% for the quarter and nearly 40% for the year.

MicroPayments is another business that has been achieving outstanding growth. This business is focused on unattended payments at locations, such as kiosks, vending machines, laundry, and its revenues grew better than 50% in 2013.

We continue to strengthen our various product offerings and, in the quarter, added new capabilities that are consistent with our efforts to empower our merchants to be competitive and profitable.

We formed a strategic partnership with AJB Software Design, a leader in integrated payment solutions to some of the leading retail brands. Combining our unique technologies will enable us to allow merchants to offer flexible payment options to their customers at the lowest possible cost, as well as help merchants comply with security mandate, EMV and other emerging forms of payment.

The combined solution is designed to meet the needs of a wide range of merchants, including big-box, general merchandise, grocery, petroleum and convenience stores.

In the last quarter, we were the first processor selected to distribute American Express' Merchant Financing solution. This program provides small businesses with highly-priced competitive loan of up to $750,000 based on their annual card processing volume.

Though early, we are pleased with the progress being achieved with this program. Our success reflects our ability to help merchants improve their business operations through a comprehensive suite of valuable business services.

Our steady growth reflects our focus on effectively leveraging our competitive advantages, our ability to develop and integrate new technologies, our ownership of the last mile to the merchant, our strong brand in the SME markets and our proprietary sales organization, unquestionably, the industry's most productive channel of distribution.

We operate with the best interest of our merchants in mind. Durbin Dollars, open architecture, transparent pricing are all hallmarks of Heartland that provide merchants with the tools and insight to make informed decisions, because what is best for merchants is also best for Heartland.

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

Robert H. B. Baldwin

Thanks, Bob. For the fourth quarter, we reported GAAP net income of $17.4 million or $0.46 per share. Adjusted net income from continuing operations was $20.5 million or $0.55 per share for the quarter, up 16% and 22%, respectively, from $17.7 million or $0.45 per share for the fourth quarter of last year.

As shown in our Reg G reconciliation, adjusted results add back share-based compensation and acquisition-related amortization expenses to our GAAP results. However, both our GAAP and adjusted results reflect our proportionate share of lease losses, which were $0.03 in the quarter and $0.04 for the year.

Also, for the quarter, the tax rate rose to 42% as a result of our loss from Leaf being nondeductible. For the same reason, in 2014, we are modeling a 40% tax rate for the company.

Fourth quarter net revenue increased 12.8%, driven by growth in SME card and continued strong growth in noncard revenues, especially Payroll and Campus.

Total net revenue for the quarter was just short of expectations, due primarily to processing volumes in card that came in a bit light.

Note that in the statistical supplement, we have reclassified revenues to align with our 5 business segments. We eliminated the equipment category and included those revenues in the respective business units and assigned card processing margin back to each of the units that generates any processing. We think these changes provide a more complete picture of the different business lines that drive our net revenue as a company.

Per segment reporting in our GAAP notes to financials, we began using these segments as of year-end 2012.

SME card achieved a 4% increase in transaction processing volume and a 5% increase in net revenue in the quarter, reflecting slightly better pricing. Note that both the SME card processing volume and net revenue generated by our Campus School Solutions and prepaid business lines are included in these aggregate card performance net metrics.

For the quarter, volume attrition was relatively stable at 12.9%. Same-store sales grew 2.4%, with October coming in very strong, as noted previously, followed by a much weaker performance in November and December.

Given the lack of any clear direction in the same-store sales statistics, we have continued to model same-store sales in the 1% to 2% range and attrition to be stable for 2014.

Sustaining the growth achieved in new card margin installed over the last few quarters, together with favorable same-store sales and stable-to-improving volume attrition, is expected to start driving increasing card volume and net revenue growth in 2014.

As Bob mentioned, noncard revenue growth has been outstanding. For the quarter, noncard revenue was up 59%. For the year, it was up 71%. Mostly reflecting our 2 year-end acquisitions in 2012, Payroll revenue more than doubled in the quarter, while Campus Solutions tripled.

Noncard revenue was 26% of total revenue for both the quarter and the year and is on track to reach as much as 30% of net revenue in the not-too-distant future.

With installed margin growing by 139% in the fourth quarter, Payroll exited the year with strong momentum, which we expect to lead to another great year in 2014.

We also expect margins to benefit from increased scale, as well as the integration of our processing platforms that will begin during 2014.

For the company as a whole, processing and servicing costs were up 16% in the quarter, due primarily to increases in underlying depreciation and amortization, residual commissions and expenses added by acquisitions. General and administrative expense growth was held with just 5.1% in the quarter despite the addition of costs from the acquisitions and Leaf.

Maintaining expense discipline will be a major focus for 2014.

In total, we kept the rate of aggregate spending increase below the rate of revenue growth so that our operating margin increased to 20.9% for the quarter from 19.1% a year ago.

For the full year, the operating margin came in at 21.1%, up 40 basis points from last year.

Interest expense this quarter included $561,000 for the acceleration of prepaid costs associated with our previous credit facility.

These had to be expensed when we terminated that agreement and entered into our new facility.

Going forward, we will achieve attractive interest cost reductions due to the improved pricing in the new facility.

Cash flow was also up for this quarter. With management's measure of operating cash flow at $32.7 million or $0.86 per share, which is up 23% from $0.70 per share in the fourth quarter of 2012.

Free cash flow generated amounted to $16.7 million, down from $17.6 million in last year's fourth quarter.

The decrease in free cash reflects primarily an increase in software development expenditures, which rose to $16 million this quarter from $9.5 million in the quarter a year ago.

For 2014, we expect capital expenditures to be in line with 2013 levels.

As we have previously articulated, we intend to continue to use our free cash flow primarily for dividends and share repurchases going forward.

In the quarter, we utilized $10 million to repurchase 237,000 shares at an average cost of $42.54 a share. Since starting the share repurchase program in the fourth quarter of 2011, we have repurchased $170 million of our stock.

Let me wrap up with our guidance for 2014. We expect to see continued progress in growing our card and total installed margin. And so you should see a steady improvement in the rate of card net revenue growth throughout the year.

For the full year, we expect net revenue to grow 8% to 10% to be between approximately $645 million and $660 million, with growth accelerating in the second half of the year. Adjusted EPS is expected to be in the range of $2.37 to $2.41. Guidance assumes after-tax share-based compensation and acquisition-related amortization expenses to reduce earnings per share by $0.41 for the share -- for the year and a 40% tax rate due to the nondeductibility of the company's proportionate share of Leaf's operating losses. And adjusted EPS is after our proportionate share of Leaf losses, which is expected to come in at approximately $0.14 in 2014.

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

Robert O. Carr

Thank you, Bob. We are entering 2014 with a strong momentum of 2 consecutive record years. New business activity is at an all-time high, and we are engaged in a number of exciting new ventures to expand our capabilities and strengthen our competitive position with small and midsized merchants in a number of growing markets. I'm confident that we are in a path that will drive superior revenue and earnings growth and deliver attractive returns for our shareholders.

Before closing today's call and opening it up to questions, I'm pleased to announce that the Board of Directors has increased the quarterly dividend by 21% to $0.085 per share. The new dividend is payable March 14 to holders of record as of March 3.

And finally, I would like to thank all of the great Heartland team members for making these powerful results so positive. Emily, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Roman Leal of Goldman Sachs.

Roman Leal - Goldman Sachs Group Inc., Research Division

Just curious, is there a meaningful difference between the Payroll SPAs and the card RMs in terms of productivity?

Robert O. Carr

There is a meaningful difference there in that the SPAs are responsible not only for their own production, but also for the production of the people that -- the RMs that they're working with. So the SPA production is a little bit lower than our average RM production right now. We hope that improves, though.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay. So -- but -- so the card RM is still kind of the leading driver there of total productivity?

Robert O. Carr

Absolutely, yes. Right.

Robert H. B. Baldwin

But also, you have the SPAs helping RMs sell deals that the RM get credits for, so it's a -- they are partially a management job, as well as a production job, the SPA job is.

Roman Leal - Goldman Sachs Group Inc., Research Division

Got it. That makes sense. Okay. So they're kind of contributing to that card RM productivity as well.

Robert O. Carr

Yes.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay, okay. And it seems like you -- so you changed the reporting a little bit in terms of segments, so I wonder, can -- do you have, just to help us with the modeling, the kind of -- and we can take this kind of off-line maybe, but maybe the like-for-like segments from last quarter to just kind of complete the year. Obviously, a lot more attention on the SME card revenue -- net revenue, that's comparable to what you reported last quarter?

Robert H. B. Baldwin

What we've done, just to give you a sense, I mean, the lines are getting increasingly blurred. And as we were trying to sort of come up with -- for example, we've been converting a lot of former petrol partner merchants over to the PetroPay solution that's ours in addition to selling new ones. That's on the NWS-run end platform, but it's obviously SME business. It's independent gas stations that are there. As we've had successes with larger merchants, those are increasingly priced on the per -- pennies-per-transaction metric that we guided people to on -- in drawing this careful distinction between the NWS business, which was very distinct a few years ago. It's just getting much more blurred, and it's coming down to where it's very difficult for us to feel good about what we're giving you, and that's the concern and why we've gone this way. At the same time, as we've said, well, really, it is card processing that we're doing and then these other business lines, Payroll, Campus, et cetera. So let us think about that a little bit more. I hear you on the comparison to last year, but I think we're really going to be trying to make a break on this, this year. But if we do present something to anybody, we will get the word out to the rest of the street as well.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay. That -- yes. That will be helpful. Last one for me, and then I'll get -- I'll hop off. Margins were stronger at least when we're modeling. Can you tell us if they were also ahead of your expectations and kind of where you saw? If so, where did you see the extra leverage?

Robert H. B. Baldwin

Well, there's no question that the business levels, the activity levels were not as strong as we were looking for. And so we were very cost conscious through the quarter, and we wanted to make sure we maintain very good discipline with not as high a top line as we would've liked, so I think that was a driver.

Operator

Our next question is from Dave Koning of Baird.

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

I guess, my first question, just when we look at guidance, it looks like if we kind of back into margins that they'll be down in the ballpark of 200 basis points. And I'm guessing, well, Leaf certainly is probably the biggest driver of that. But the other one that I'm wondering about is because the sales momentum has been so strong, if we get the customer acquisition cost that years ago used to be 10% to 12% of revenue, but have been down to 7%, if those started to go up, too, and have a little bit of a margin impact?

Robert H. B. Baldwin

That's exactly right, Dave. To remind you on Leaf, the accounting reality is that the full operating margin, the loss is -- we absorbed 100% of the operating margin impact that their losses reflect. We only back out the 1/3 that's not owned by us at the per-share item, so it really hurts us on our operating margin. But yes, customer acquisition costs, that's a good point, are going to be accelerating. They're going to grow faster than our revenue in 2014. And ultimately, that's a good thing. It's reflective of the strong, new business that we're showing. The other thing that's going to be growing faster is depreciation and amortization, and that's really the reflection of, we've been talking about, investing a lot in our capabilities. A lot of that is software development. We have a substantial commitment to IT development resources. And as projects come online, that increases your D&A. So those are going to be both sources of a little bit of negative operating leverage, but we think, again, that the focus of all this has been and remains to drive that revenue organically to higher levels. We're obviously pleased to be able to think that essential -- substantially, all of this year's, '14's, numbers are organic. And so you're looking at a top line that we're looking to improve and keep improving in the out years.

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

Yes, that's great. And I guess, the organic part of it. I guess, how much revenue do you expect from Leaf? I mean, could it be 1% of revenue or not even?

Robert H. B. Baldwin

That -- it's in that ballpark, yes. That's about right. [indiscernible] very hard to handicap. Sorry, Bob?

Robert O. Carr

It's around 1.5%, I think.

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

Okay. And what was the acquisition contribution in Q4?

Robert H. B. Baldwin

That was a lower contribution, $0.03 negative.

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

I meant revenue. So revenue, on some of the school payroll.

Robert H. B. Baldwin

Revenue?

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

Yes.

Robert H. B. Baldwin

That's less than $1 million.

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

I actually meant that the acquisition-related revenue from all the stuff you bought.

Robert H. B. Baldwin

Oh, I don't have that. You have a full fourth quarter of Ovation. So that's just -- we've got -- ECSI is about just under $6 million, $5.9 million, and Ovation was about $5.1 million.

Operator

Our next question is from Mike Grondahl of Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Could you talk a little bit about the Payroll offering now and some of the momentum you saw sort of from late last year into January and February?

Robert H. B. Baldwin

Well, oh you want to go, Bob?

Robert O. Carr

Yes, let me take that. We have -- when we bought Ovation, we just got a real crack management team to help us with Payroll. And they've really -- over the year of 2013, really helped bring things together for us, and it culminated in just a powerful fourth quarter, which we expect to continue throughout this year. They've known -- they brought a lot of talent with them and helped us really get our act together in the Payroll segment. So it's really a matter of execution, and having the right people in the right place, which we hadn't had for quite some time in Payroll up until the Ovation acquisition.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And then I know you guys sort of have an informal policy of using your free cash flow for dividends and buyback, and it looked like it was a little bit light in 2013. Does that mean you'll be a little bit more aggressive in 2014 to catch up, or how should we think about that?

Robert H. B. Baldwin

I don't think we'd necessarily view it as a catch-up situation. We -- philosophically, we've said we're -- that's where we think we are, and that's going to be for as long as we are -- we remain what we consider our current situation to be, which is under-leveraged. So, implicitly, acquisitions we make, and we are actively looking at things, will be funded with debt. And so we have the free cash to spend on our shares. But we also want to be opportunistic and buy them back at prices that are really attractive to the shareholders. Obviously, we achieved a fantastic share performance in 2013, and so we were trying to be cautious in -- and buying on dips and things like that. And the reality was we didn't have so many dips as you might have expected. So we will be active this year and try to be opportunistic so that the shareholders will achieve the greatest benefit.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And then just lastly, real quick, can you guys disclose total equipment sales just to sort of help us understand how that's trending?

Robert H. B. Baldwin

See -- and my -- it's probably -- if you want to use a round number, it's probably up a few percentage points from the third quarter rate. It's such a mix of things. What we were uncomfortable with was you have card equipment, which we make a little bit of money on, and then you have a POS system sale by School Solutions, which they don't make good money on that, then they're not -- that's a critical part of their business. So we were really -- I'm -- mixing apples and oranges when we were giving the equipment. It was frankly a legacy of the old card-driven business. So I think that the ballpark was probably a little bit of growth from the third quarter of this year, but it's just not something we want to focus on.

Operator

Our next question is from Andrew Jeffrey of SunTrust.

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

Bob, I'm just trying to get a little bit of a sense, it would appear from your comments that organic revenue growth in the fourth quarter was 4 and change percent, something like that, and your -- the midpoint of your guidance for '14 is closer to 9%. Could you just break down a little bit or kind of directionally give a sense of how much of that acceleration is coming from the card business versus the noncard business? As you anniversary some of the faster growing noncard businesses, is that informing organic revenue growth, or is it a little bit of both that are driving that?

Robert H. B. Baldwin

Well, Andrew, thank you. The key drivers are: a, we're -- as we continue to drive installed margins at a higher level in the card business, which is, as I've said before, is around 80% to 85% of our total margin installed. Just for clarity, that's at the -- very much at the low end of that percentage in the fourth quarter because Payroll, as we reported, had a very strong installed margin because that's the selling season for Payroll, is the fourth quarter of the year with people looking to start with new processor in the new year. But with good strong installs of card, we also -- we should be able to drive faster growth with same-store sales and attrition holding to our expectations in the card business and then overlay that better, higher single-digit growth in card with mid-teens or better growth in our other business lines. And that's how you get to that weighted average with round numbers, 3/4 being card and 1/4 being from the noncard business as they are growing much faster.

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

Okay. Yes. That's helpful. And then with regard to the fourth quarter, again, and I think get this question a lot for investors. I expect you do, too. Yes. I'm just trying to kind of piece together some of the commentaries. Same-store sales were the best they were all year. NMI has been strong and consistently so. And granted, I recognize some of that's not card, yet you made some commentary about SME processing volume and net revenue being a little soft. So I guess, part of what I hear you saying is that, especially at the second half of '14, better NMI growth is going to accelerate the top line. How much visibility do you have -- did it have? Because it sounds like you didn't necessarily see that in the fourth quarter, for that matter, for much of '13?

Robert H. B. Baldwin

No. And I think you're right, and it's really got to be driven by the accumulated effect of the continued execution on the installed margin. And as we talked, any one quarter, relative to the size of the portfolio, just has trouble moving the ship much faster. But we -- as we look out, especially toward the second half of the year, and assuming the strong install margin that we expect to be able to achieve in 2014, you will definitely see an accelerating volume growth in the card business, and that's really what's going to be behind the revenue growth.

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

Okay. All right. And then one last one, if I may. It sounds like you're going a little bit back into investment mode. Does that affect the company's view about ultimately being able to get to a mid-20s EBIT margin? Are we just pushing it out a year, or is it more than that, or is this structural?

Robert H. B. Baldwin

At this point, Andrew, we do not think it's structural. Although, there's no question that we're -- the things that we are doing and need to do to really be able to drive products where we need to is costing more than we would otherwise prefer. So to give you a specific example, it's clear that the successful partners for a lot of the emerging players are going to be those who can -- be really, really easy to work with. And we're doing some pretty substantial changes in our back-end infrastructure so that we can be dramatically more responsive to a potential partner. And it's work that plays out very nicely. It sort of breaks up the back-end so that if you need to do one change to a part of it, you don't have to change other parts of it. It makes it much more flexible. And it's a very valuable investment, one that we see as being critical to be a partner of choice to emerging players in the coming years. But it doesn't do you any good in the current period. It's just making yourself more attractive as a partner. So what I would say is that we don't think there's anything structural that sets us back in terms of that 25% margin long-term objective. But no question that this year, it's going to be deferred.

Robert O. Carr

I would add to that, Bob, we are making heavy investments to be a leader in mobile payments. And we're investing in our E3 product. We think the E3 product is really -- a lot of runway ahead of it, which is the tokenization work that we've done. So we're investing in the future. We're continuing to work on consolidating our platforms, trying to do the right thing to stay with all the movement in the industry and to maybe get a little bit ahead of our competitors, and that's part of the reason too.

Operator

Our next question is from Tim Willi of Wells Fargo.

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

Bob, just going back to the guidance a bit. I just want to make sure that I'm thinking about this correctly. So if we think about the adjusted number you gave out for '13, which I think was a $2.32.

Robert H. B. Baldwin

Correct.

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

And then the numbers that you talked about for '14, about $2.37 to $2.41. If we add back the $0.14 you call out on Leaf, that gets us basically to like, an 8% to 10% EPS growth number. Is there anything else we should think about on top of that, around the tax rate? I'm just trying to get sort of like an underlying growth rate of Heartland x the Leaf investments. And would that, just a simple add back of the $0.14, capture the tax effect and everything? And give us a little bit more apples-to-apples of the $2.51 to $2.55 off the $2.32.

Robert H. B. Baldwin

I think that the tax effect is included, in essence, in the $0.14. So yes, I think, what -- when you forget Leaf, you're really saying revenue growth is in the 8% to 10%, and that our earnings growth is in that same 8% to 10% area.

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

Okay. And that sort of dial down on the growth rate is attributable to the product development and increase in customer acquisition cost. It was referenced earlier in the call. And those would sort of be the 2 biggies to sort of keep the sort of the growth rate at that 8% to 10% versus what we have seen in the prior years, correct? No pricing or yield or anything like that? Okay.

Robert H. B. Baldwin

Nothing about around pricing or yield. It's -- It really is that -- those expense drivers, more than anything else.

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

Okay, perfect. Second question, just on Leaf. Could you talk a bit, I guess, as that product develops over this year and into next year and this whole ecosystem evolves, is there another phase of an, I guess, distribution and growth of that product? Does that require additional resources from Heartland in any way, shape or form as sort of that evolves and momentum accelerates? Or will the existing sales force infrastructure and other sort of channel partners that they have be able to accomplish that without incremental dollars from Heartland in '15 or beyond?

Robert O. Carr

I'll take that, Bob. We are planning on making investments on Leaf throughout the year. We made a commitment of $20 million, and we've -- we will put that in through 2015. And the plan is for us to turn cash flow positive with that $20 million.

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

Now is that $20 million more around product engineering? Or does that include the actual getting the sales momentum going in that revenue stream at a much higher level? That's what I'm trying to figure is if sort of once the product's ready for prime time, if there's another level of investments around sales and distribution that kicks in?

Robert O. Carr

No, that includes the investment for sales.

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

Perfect. One last one real quickly. Network Solutions, transactions and volumes seem to -- growth rate, et cetera, sort of went the opposite direction of what I -- at least and what I had thought. Anything around customer base that went on there or seasonal sales activity around storms or anything like that, that would have impacted those transaction and volume numbers?

Robert H. B. Baldwin

There's nothing particular. Remember that the dollar volumes processed is also reflecting the price of gasoline, which isn't really relevant to the economics of those contracts. But there's nothing else, particularly, that I would call out.

Operator

Our next question is from Chris Shutler of William Blair.

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

First of all, I just want to get an update on the CFO search?

Robert O. Carr

We have 2 really great candidates, and we expect to be making one of them an offer in the next couple of weeks.

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

Okay, great. Are you looking outside of the business, or can you say at this point?

Robert O. Carr

Yes, we're looking outside of the company.

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

Okay. And on the Campus Solutions business this quarter, it looked like revenue was down quarter-over-quarter. Can you just help us -- in that business, I know it's not a big one for you, but help us think about what the normal seasonality is that we should be thinking about going forward?

Robert H. B. Baldwin

Well, in Campus Solutions, you're going to have a strong first quarter, because of their 1098 business. That's sort of like a W-2 business, it's a payroll business. I'm not aware of any -- you've got a strong payments volume in the third quarter. It is -- and that's a little bit softer in the fourth quarter. As people went back to school, that's where you'll see the big payments, tuition -- card-related tuition and payments made and fees they're off of.

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

Okay, thanks. And then just the last one for me on the hiring of the SPAs. So I think you're up to 58, if I remember correctly. Where are most of those folks coming from? Is it largely from competing payroll providers? Or -- I'm just trying to get a sense how tenured the people are in the industry.

Robert O. Carr

Yes, they're very tenured. Lots of experience, and many of them came from one of our 2 largest competitors.

Robert H. B. Baldwin

Yes, we're looking to really bring in people who have been done -- been there, done that in payroll and then can help the Heartland sales force to understand the opportunity and sales processes there, so it's a great mixing of capabilities.

Operator

Our next question is from Smittipon Srethapramote of Morgan Stanley.

Smittipon Srethapramote - Morgan Stanley, Research Division

I was wondering if you guys can give us your updated thoughts on the integrated point-of-sale market, since your initial investment in Leaf. Has -- have you gotten incrementally more positive on that market as time has evolved?

Robert O. Carr

I'm sorry. Could you repeat the question?

Smittipon Srethapramote - Morgan Stanley, Research Division

Yes. I was wondering if you guys can give us your updated thoughts on the integrated point-of-sale market, since your initial investment in Leaf?

Robert O. Carr

Yes, we're very much involved in the integrated market. It's a big part of the industry, growing, obviously. And we're making a major play, working with integrated partners.

Robert H. B. Baldwin

I'd say, my view is at least as positive. The tablet capabilities, the ongoing appetite in almost need of all of the emerging -- all the wallets that interact with those. It's a powerful, long-term trend. I say, long-term. People will get too optimistic about the rate of change. It's just a classic, and so it's not going to be to the moon. This is not a consumer product. It's a business solution and businesses have other things on their minds besides focusing on their cards, but -- as long as it's working. But long term, it's a very powerful and a great opportunity for us.

Smittipon Srethapramote - Morgan Stanley, Research Division

And just -- maybe just a quick follow-up on the Payroll business. You guys mentioned that the ACA will be a catalyst for growth the next year. Can you sort of help us quantify what kind of outlet you guys expect to see from the ACA?

Robert H. B. Baldwin

We can't. I mean, the ACA is just a -- it's really put out there as an example of -- today, think about how much more complex the world is today versus 3 years ago, versus 13 years ago for a small business owner. And so that decision to rely on your sister-in-law or your college buddy to do your books is just, on the margin, less attractive. Now you've got all the complexities associated with tracking your employees' time and all that for the ACA. We expect it to be a contributor, but impossible to judge how much of that will be versus, for example, the increasing comfort of the Heartland sales force in selling payroll, which we won't be able to distinguish. We're just looking for a very strong year of originations in payroll.

Robert O. Carr

And a lot of that is the HR reporting parts of it that we never had before. And the ACA just requires a lot more reporting. And it's a good byproduct of an automated system. And it's not a very good byproduct of a manual system.

Operator

Our next question is from Tom McCrohan of Janney.

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

I had just a modeling-related question. The growth rate and new margin installed, which is really strong this quarter, is that offsetting the volume attrition?

Robert H. B. Baldwin

Well, yes. I mean, that's really the dynamic. That's always the case, Tom. So you have -- every year, every quarter, you've got a hole that's being created, and the hole is your volume attrition. The first thing you've got to do is fill that hole. If you just do that, then you're going to show no growth. And then you're, obviously, trying to overfill that hole with installs. So getting the dollars of installed margin, maintaining them at the higher levels that we're at and growing that is -- that's -- if we can keep volume attrition consistent and get a higher amount that's being put into the hole every quarter, that's what's going to drive the higher growth rate.

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

Is there kind of rule of thumb of how to convert new margin installed into processing volume?

Robert H. B. Baldwin

Unfortunately, no. It's really a -- it's a pretty complicated dynamic.

Operator

Our next question is from Ramsey El-Assal of Jefferies.

Ramsey El-Assal - Jefferies LLC, Research Division

Forgive me if you addressed this already. I've been juggling a couple of different calls. How close is the Leaf solution right now to being kind of production-ready for large-scale deployment? How clear is the path, kind of, to get the solution ready to roll out sort of en masse with your sales force? Or is there a significant amount of development left to get to that post-beta stage, where it's sort of ready to go?

Robert O. Carr

Right. Well, we're in market now, in a very limited marketplace, basically, countertop payment restaurants. But we -- it's going to be second half of 2014, probably in the fall of 2014, before we are really going to be able to generate big numbers.

Robert H. B. Baldwin

Okay. it's really a steady expansion of the functionality, the capabilities of the system. And as Bob said, it's fairly limited. Now what we're trying to take on is really much more of a business management capability, and that just takes time to build out.

Ramsey El-Assal - Jefferies LLC, Research Division

Okay. Can you talk a little bit about the genesis of the Mercury lawsuit announced recently? It -- was -- are Mercury's kind of pricing practices and policies, was that something that was tough enough to kind of deal with that aside from just the general pursuit of justice that it's -- that this was the kind of the strategy to potentially address what they're doing in the market place? Or can you just speak a little...

Robert O. Carr

Yes, I'll be happy to. I was invited to give a keynote speech at the ETA in October. And I talked about the industry needs to stop with some of these outrageous practices of misrepresenting Interchange, misrepresenting MCC code and using extortion to enhance merchant retention. And the next day, I saw an agent magazine came out and sort of misrepresented my speech in some significant ways, and so I wrote an open letter to the industry. And that created a flood of new information that came into our offices from around the country, pointing out the outrageous policy of Mercury to add -- to be adding $0.04 per ticket into Interchange. It's like where do you draw the line? How much -- there's been so many outrageous actions that have been taken, but when you misrepresent Interchange -- when you buy 10 gallons of gas, you want 10 gallons of gas, and when you want to -- there needs to be a level playing field. We at least need to have words that mean something, and that merchants can rely on. And we just felt like that was the last straw. We've got hundreds of Mercury merchant statements. 75% of them showed this deceptive practice, and we said, "This is enough. We need to draw the line and clean -- help clean up this industry." And we have a lot of support from a lot of other people.

Ramsey El-Assal - Jefferies LLC, Research Division

Okay. Last quick one for me. You mentioned the American Express loan product. Can you comment a little bit on take up or metrics? Or could this be a growth driver for you guys? Or is it still a pretty -- did you anticipate it to be rather kind of a niche product going forward? Or is this something we should kind of continue moderating in terms of actually contributing significantly to the top line?

Robert H. B. Baldwin

This year, it's never going to be a huge top line contributor. We're not taking any -- we're not lending -- we work with partners to provide the lending, so we take no credit risk. So it's a fee that we're taking. We're working with partners that we push -- well, we push hard to be the most economically attractive deal to the merchants. The merchant cash advance business has a lot of different players that most of whom play at much higher interest -- implied interest rates. We're trying to offer a product to our merchants that's the best deal in the market, and we're delighted to work with American Express, which -- with what we are confident is the best deal in the market. So our impact is going to be just the fees that we've also kept relatively low, so that we don't deteriorate the overall attractiveness, the all-in cost to the merchant very much. And so it's not really a meaningful top line number, but it is really a fee income that we just take commissions on and have a certain operational load. And besides that, it's profitable, so it's a pretty profitable revenue stream.

Operator

Our next question is from Steven Kwok of from KBW.

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

I just have one quick follow-up. With regards to Leaf, how should we think about the possibility as it relates to the operating margin? I mean, is there a timeline where you think you'll be able to take it, and at least be breakeven?

Robert H. B. Baldwin

We think that's going to happen in 2015.

Operator

Our next question is from Chris Brendler of Stifel.

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

So I guess, if I understand correctly, we do not have the core SME revenue growth from prior quarters. And you don't really know exactly what that number is for the fourth quarter for these new disclosures. But if I look at the numbers and try to guess, it looks like we're still right around 0% for year-over-year revenue growth in that core SME business, maybe even negative, depending on how strong some of your non-card businesses were this quarter.

Robert H. B. Baldwin

No, Chris. Actually, if -- we said in the comments that SME revenue growth was 5%.

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

And that's an apples-to-apples basis?

Robert H. B. Baldwin

Yes.

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

Okay. So the tailwind you're getting from the increase in same-store sales this quarter, it sounded like that was more of an October phenomenon. Did you see any of the weakness that Visa and MasterCard saw in their domestic volumes? I'm trying to reconcile those 2 numbers. And then back to SME, the attrition number, the 12.9%, that's still calculated on the same basis this quarter?

Robert H. B. Baldwin

That's calculated on exactly the same basis we've -- go with the last thing. Attrition has always been calculated exactly the same way. As far as correlation to Visa and MasterCard, their businesses are very fundamentally different from ours. We are Main Street merchants, which is a segment of theirs, but theirs is much broader, has a much higher penetration of Internet. I mean, there's a lot of big box, lots of things. So we definitely saw a very strong October, a record same-store sales growth in October. And on average, for the quarter, we came in at something of a bump compared to the prior quarters, but you can -- it's clear that the last 2 months of the quarter were much weaker and continuing that same pattern of the stronger quarters. Actually, this was a little bit different, because it was a relatively stronger quarter, but it was carried by October with October, November -- November and December, rather, both being relatively weak. And just in case anybody's wondering how about January, we don't have our figures at this point. But clearly, we had a very strong same-store sales growth last year, January, in January of '13, and when you combine that with the very tough whether that we continue to experience today, and it seems never to be ending, we do not think January is going to be very strong at all.

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

Okay. And then a separate question on expenses. Relative to the G&A expense line that was growing 30-plus percent in the first half of the year, I thought that was acquisition-related, but it dropped off last quarter. And I thought that was going to be a bounce back up in the fourth quarter, yet where I'm showing only a 1% or 2% G&A growth this quarter. Can you just talk about the dynamics that happened first half versus second half and give us an outlook for G&A for 2014?

Robert H. B. Baldwin

G&A had all of Ovation, ECSI and NUTRIKIDS in it for the first half of the year as nonorganic contributors to their growth. As of June 30, NUTRIKIDS annualized, and so that growth rate fell off. And that's a business that has a fairly heavy G&A component to it. And I'd say, it's also fair to say that we were spending more aggressively in the first half of the year, if you will, organically, anticipating greater, more robust business activity, and we cut things back. We were very careful about our expenses. The first half, we also bore the cost of the -- much of the cost of the summit was borne in the first half as well. So it's a variety of things, but we were and remain pretty focused on maintaining low growth in the G&A line. And as we've indicated, some of the higher up in the expense structure, customer acquisition cost, D&A and processing of servicing are going to be more challenging in 2014.

Operator

Our next question is from Tulu Yunus from Nomura.

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

Just a couple of quick ones. One was, I think, Bob, you'd mentioned that free cash flow in the quarter was weighed down by some software expenses. Could you actually remind me, if you didn't mention it, how free cash flow was on a year-over-year basis for the full year? And then, kind of, in '14, should we expect that to sort of bounce back, or are those expenses going to persist? And kind of related to that -- sorry for the long question, but related to that, is that -- what does that sort of mean for repurchases next year? And are you baking any repurchases into your guidance?

Robert H. B. Baldwin

Yes, Tulu, free cash flow in -- for full year 2013 was very much spot on with 2012, very modest difference, with a fairly sizable increase in CapEx in the year. And we've indicated we're going to maintain the same levels of CapEx. We are looking for, obviously, earnings growth and -- from the business, so that should result in something of an increase in free cash flow. And as indicated, we expect to be aggressive or active in our buyback and dividend. Obviously, we just raised -- the board just chose to raise the dividend. That really doesn't have that big an impact, just a few million dollars on our cost. So we have plenty of room to be buying back stock from our free cash generation.

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

Okay. And does your EPS guidance assume any repurchases?

Robert H. B. Baldwin

It assumes a fairly steady throughout the year use up of the remaining $50 million or so in the $75 million. I'm not saying that's what we will do. If we see opportunities, we will be more aggressive, and that might be helpful to us, but we're not assuming that in our numbers and don't have any particular target or threshold with respect to the buyback, we will go with the buyback until it's used up, and then presumably, the board will choose to authorize another one.

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

Got it. And then just lastly, we talked quite a bit on G&A. Maybe on the other cost line, processing and servicing. That one was actually a little bit higher than I'd modeled, growing a little faster than net revenues. Anything contributing to that? And sort of should we see some leverage coming out of that line next year? Or just kind of any forward-looking thoughts on processing and servicing costs?

Robert H. B. Baldwin

Yes, you're seeing some increase in our -- in the D&A. D&A for the company is in 2 line items. One is in the D&A, that's on the income statement, the other is when we do improvements to the operating platforms, that goes into processing and servicing. And so as we put things into service, that started to pick that up. Another line item -- element in processing and servicing is commissions. That's going to remain strong as an expense. And we did have slightly -- in the back part of the year, if you remember, a year ago, plus we took our Executive Directors of Sales off the 94 plan, their overrides model to a salary and bonus situation, so they're expense was down in G&A. We -- they say, we're not particularly happy about that. And given their strong performance in driving, not just the installs, but also the hiring and really embracing the new approaches that we think are necessary to sustain growth in our sales organization, they were put back onto the 94 plan, which then moves their expenses up into either customer acquisition costs in terms of the amortization of the signing bonuses they get or commissions, which goes up into processing and servicing. So for all those reasons -- we -- and if anything, processing and servicing is going to be a drag on our operating margin in 2014 as well.

Operator

Our next question is from Brett Huff of Stephens Inc.

Brett Huff - Stephens Inc., Research Division

A couple of questions. And I missed the first part of the call, so stop me if this one has been answered. But can you just talk about Leaf and sort of the development that's going on there? I know that you bought it largely the product and it had limited distribution and had lots of plans on it. Where are we on that? I know there's going to be new modules and things? Where are we going on that? Where are we now? And how do we as outsiders measure success on that project?

Robert O. Carr

Well, we're in the development stages of a much more robust platform. We're working on app store development, APIs. And we're expecting to have a much more powerful set of products by fall of this year and expecting us to get into breakeven situation sometime in 2015.

Brett Huff - Stephens Inc., Research Division

Okay. And then how does this -- does this relate at all to the Mercury press release that you all put out a couple of days ago? And is there any -- what's the interaction between the Leaf and Mercury? Is there anything related there?

Robert O. Carr

There's nothing related whatsoever there.

Brett Huff - Stephens Inc., Research Division

Okay. And then I also recall this past year, you guys were doing some additional marketing spend, and it might have been in the first half, trying some different things to see what might drive future growth. And Bob, I wondered if in the forward guide, it was a little bit lower than we thought. Is there some more marketing spending there of things that you're trying out to see what will juice the organic growth a little bit?

Robert O. Carr

Yes, there is. It is ongoing. I wouldn't call that out though as a particular driver of our expenses. Marketing is something that we put a fair amount of money into. Various initiatives, I think that there's some growth in there, but that is not a driver of the operating expense for 2014.

Brett Huff - Stephens Inc., Research Division

Okay. And then just one follow-up from a question before. Did you say you're assuming $50 million of repurchase ratable over the year at this point in guidance?

Robert O. Carr

I would say that's correct, yes.

Operator

Our next question is from Gaston Ceron of Morningstar Equity Research.

Gaston F. Ceron - Morningstar Inc., Research Division

Just a quick question. And I do apologize if you've mentioned this before. But in light of some of the recent investments and what not, just curious where you stand next to the long-term 25% operating margin target, if that's still sort of your goal and the timeline for that?

Robert H. B. Baldwin

It remains a goal. We were expecting to have a -- to set ourselves back in 2013. We actually improved the operating margin in 2013. And, obviously, with Leaf, that represents a significant setback to getting there in the next year, or -- certainly, it's going to be a negative factor. As I've mentioned, even disproportionate to its earnings per share impact because of the way the accounting works. So that's a setback, but we're going to be focusing on in the non-Leaf business, getting back on the track to getting to 25% operating margin, and we think we can get there. We look at the individual components of our business. They all have intrinsic operating margins that are at or above our -- that long-term goal. And so the question becomes, "Can we -- how do those relate to the shared services, the corporate that is -- that doesn't contribute our positive operating margin?" And long-term, we think we can still get there.

Robert O. Carr

We think it's important also to invest in the mobile technologies and all the new alternative payment systems to stay ahead of the industry in that area and also to continue to consolidate our platforms and take on those expenses as they come. So I think it's a wrong time to stop investing in technology, and we're doing plenty of that right now.

Operator

This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.

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