Heartland Payment Systems Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Heartland Payment (HPY)

Heartland Payment Systems (NYSE:HPY)

Q1 2014 Earnings Call

April 30, 2014 8:30 am ET

Executives

Robert H. B. Baldwin - Vice Chairman and Principal Accounting Officer

Robert O. Carr - Executive Chairman and Chief Executive Officer

Samir Zabaneh - Chief Financial Officer

Analysts

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

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

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

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

David S. Hochstim - The Buckingham Research Group Incorporated

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

Ramsey El-Assal - Jefferies LLC, Research Division

Vasundhara Govil - Morgan Stanley, Research Division

Matthew Lipton - Autonomous Research LLP

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

Operator

Good morning, and welcome to the Heartland Payment Systems' First Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

Now I'd like to turn the conference over to Mr. Bob Baldwin, Vice Chairman. Please go ahead, sir.

Robert H. B. Baldwin

Thank you, and good morning, everybody. I'd like to welcome you to our First Quarter 2014 Earnings Call. Joining me this morning are Bob Carr, our Chairman and CEO; and Samir Zabaneh, our new Chief Financial Officer.

Before we begin, I'd like to remind you that some of our discussions may contain statements that are forward-looking in nature, which represent management's beliefs 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 would like to turn the call over to Bob Carr.

Robert O. Carr

Thanks, Bob, and good morning, everyone. I just want to let you know that we are, due to airplane travel problems, Bob is in California, Samir and I are here in Louisville, and the rest of our staff is back in Princeton. So we'll try to coordinate questions as best as we can. And I'd like to thank you, all, for joining us today and for your interest in Heartland.

We had another great quarter, with adjusted earnings from continuing operations of $0.52, our best first quarter earnings ever. In a minute, I'll be introducing our new CFO, Samir Zabaneh, who will take you through all of the numbers. But let me just say that despite the strong headwinds of a pretty tough winter, I think the year is off to a strong start.

Once again, the story is continued strength and new margin installed. This quarter, new margin installed was up 24% to $19.8 million, our third straight quarter of record new business. In the process, we extended our streak of consecutive months in which we installed more than $6 million. And in March, we actually had our first month in which new margin installed exceeded $7 million. We feel we are on the verge of our first-ever $20 million new margin installed quarter.

While continued new business growth reflects progress across a number of fronts, we are particularly pleased with the success we are achieving in getting our message to rise above all the noise in the market. What we are finding is that more and more merchants are looking for simple easy-to-use solutions that help them solve their everyday basic fundamental business problem, of which there are many, and they are growing.

New security requirements, regulations and taxes, a dizzying array of royalty and reward programs at the advent of new devices and new tools to analyze sales data, are all confronting merchants. These are just some of the variables that merchants need to evaluate in choosing a payments processor, and it is no wonder that merchants are confused. Increasingly, merchants are recognizing that they need a knowledgeable partner that can help them sort through this noise. This often leaves them with 2 choices: bundling proprietary solutions from a variety of different vendors or enlisting the services of a Heartland relationship manager, who brings a full disclosure and transparent business philosophy to solving their problems.

We are focused on innovation that improves merchant productivity, helps their business grow, and is permanent and sustainable. Whether developed internally or in partnership with firms like AJB software for big box retail, we are taking an open platform approach that leverages the best new ideas, whether it be cloud security or the self-serve model, to offer merchants the freedom to choose what is best for them.

Every day, we are adding to our capabilities in order to ensure we can offer merchants best-of-breed solutions. Let me note just one important example.

It is clear that the many system breaches we have seen in recent months have touched a nerve among merchants, consumers and the card networks. Merchants are getting tuned into security and when they do, Heartland is the name that merchants identify with industry-leading security features. To capitalize on heightened security sensitivity, we are rebranding E3 as Heartland Secure, and launching an aggressive new marketing campaign. Though we were clearly way out in front of the market, our long-standing commitment to offer merchants the best security available is now beginning to provide a nice tailwind. Consequently, our sales organization is rising to new levels of efficiency and productivity. We are growing our sales organization, improving efficiency and developing new sales leaders that are generating results in territories that have long been underperforming for us. Our special product advisors, or SPAs, are also playing an important role in our new business success, especially in payroll. We remain on track to grow our sales organization this year by at least as much as last year to add more SPAs to the mix and to continue to increase individual relationship manager productivity, which this quarter had an all-time high of more than $7,300 per month per rep.

Whether the weather clearly -- while the weather clearly impacted processing volume this quarter, we continued to see the acceleration in the growth of our card business. Based on April month-to-date results, I am happy to say, in our view of the overall economy, we see nothing that would suggest that we need to change our existing outlook for same-store sales or volume attrition this year. Together with the strong growth in new margin installed, we believe both card processing volumes and net revenue will steadily improve as we move throughout the year. Meanwhile, our non-card businesses are growing at the faster rates we anticipated. In our largest non-card business, Heartland School Solutions, we generated an almost 20% organic growth rate in the quarter.

Early in April, we acquired MCS Software, an innovative provider of school foodservice point-of-sale, back-office and online payment solutions for more than 4,000 K-12 schools nationwide. With this acquisition, Heartland extends its market-leading position in the growing K-12 school nutrition and POS technology industry, and now serves over 34,000 K-12 schools nationwide, representing a 35% share of the public schools in the U.S.

Payroll had strong growth this quarter as well at the successful new business selling season. Payroll is the business where we are focusing our SPA program and we are achieving significant success. We expect to continue to push this program forward and we believe we can sustain strong Payroll growth rates over the foreseeable future and begin to realize scale economies as the business ramps.

On balance, therefore, the first 3 months of 2014 marked another quarter of significant progress across the many dimensions of Heartland. We are making investments in areas that build on our strong foundation of merchant advocacy to develop new products and services that deliver true enduring value to the market. Over the long term, this is a strategy that will create greater trust with merchants and greater value for shareholders.

Finally, I'd like to welcome Samir Zabaneh to Heartland as our new CFO. Among his many responsibilities, Samir will work directly with me and the senior management team to help develop innovative business solutions and strategies to ensure corporate objectives are achieved. He will also become the key point of contact for many of you on this call. Samir comes to us with a wealth of experience gained in various industries and roles, most recently in payments, having served as the Chief Financial and Strategy Officer and the Chief Operating Officer of Moneris Solutions in Canada.

On behalf of everyone at Heartland, we are very pleased to welcome Samir to our company, and with that, I will turn the call over to him now.

Samir Zabaneh

Thank you, Bob, and good morning, everyone. For the first quarter, we reported GAAP net income from continuing operations of $15.7 million or $0.42 per share. However, adjusted net income from continuing operations was $19.4 million or $0.52 per share for the quarter, compared to $19.4 million or $0.51 per share for the first quarter of last year.

As shown in our Regulation G reconciliation, adjusted results add back share-based compensation and acquisition-related amortization expenses to our GAAP results. It is important to note that both our GAAP and adjusted results reflect our proportionate share of losses incurred by Leaf, which were $0.05 per share in the quarter. Also, due to the fact that Leaf is not included in our consolidated tax returns, its losses are not deductible, driving our effective tax rate above 40%.

First quarter net revenue of $155.5 million increased 5.9% compared to the same period last year. Card transaction, processing volume in the SME segment was up 3.7%, and related net revenue was up 3% during the quarter. As Bob mentioned, the SME card results were impacted by severe winter weather, with same-store sales down 0.2 percentage points, our first quarterly decline since the first quarter of 2010.

Looking at same stores by industry category. I would observe that the industry that are more sensitive to the weather: retail, entertainment and services, were the worst performing in the quarter. However, we see no fundamental change in our outlook for the economy. We continue to expect that same-store sales will increase by 1% to 2%, and attrition will remain stable during this year.

While weather held back volume growth, it did little to slow our new business initiatives. New margin installed increased to $19.8 million, exceeding 20% growth for the third consecutive quarter. We do believe that the strong new business momentum will result in steady sequential improvement in card processing volumes and net revenue, with growth accelerating most noticeably in the second half of the year.

Net revenue outside our card processing segment was up 13% for the quarter, which was delivered by organic growth. Non-card net revenue rose to 30.7% of total revenue for the quarter, and it was led by a 19.9% increase in Heartland School Solutions, and a 15.6% increase at Campus Solutions. Payroll revenue was also up double-digits and had another great quarter of new margin installed. So we continue to expect to see steady double-digit payroll revenue growth.

Processing and servicing costs were up 15.5% in the quarter due primarily to increased cost of sales and servicing related to the previously mentioned increases in School Solutions, Campus Solutions and Payroll revenues. General and administrative expenses declined by 3% in the quarter, even after absorbing the costs incurred by Leaf.

As we continue to integrate our Payroll businesses, this quarter, we reclassified approximately $1.7 million of expenses from G&A to processing and servicing to bring operating expenses in our legacy payroll business and the Ovation business into alignment. This contributed to the respective decrease and increase in the individual expense lines, which will continue for the remainder of this year.

On a GAAP basis, the operating margin was 17% for the quarter compared to 18.2% a year ago. However, excluding our proportionate share of Leaf's operating losses during the first quarter results, our operating margin would have been 18.7%, a 50-basis-point improvement compared to a year ago.

Management's measure of operating cash flow for the quarter was $35.5 million, up 16% from a year ago and equivalent to $0.94 per share, a 17.5% increase from a year ago. Free cash flow generated amounted to $22.6 million, up 17.6% year-over-year. Capital expenditures in the quarter were $12.8 million, and we expect those during the year to be in line with the amount spent last year, which was approximately $50 million.

To pay for the MCS Software acquisition announced earlier this month, we did draw down on our borrowing facility early in the second quarter. As we have previously articulated, we intend to continue to use our free cash flow primarily for dividends and share purchases. In the quarter, we utilized $28.7 million to repurchase 696,000 shares at an average cost of $41.22 per share. We have now repurchased nearly $200 million of our stock under board authorization that first began in the fourth quarter of 2011. Let me wrap up with our guidance for 2014.

We expect continued progress in growing our card and total installed margin and hence, a steady improvement in the rate of growth of card net revenue throughout the year. We also expect continued strong momentum of net traffic increases generated by non-card businesses.

Finally, we will continue to balance between strategic investments in the business to propel our growth forward, and prudent management of our expenses to deliver continued healthy bottom line growth. For the full year, we expect to deliver net revenue growth of 8% to 10% to be between $645 million and $666 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 per share.

Guidance assumes after-tax share-based compensation and acquisition-related amortization expenses to reduce earnings per share by $0.43 for the year. And the tax rate, above 40%, due to the nondeductibility of the company's proportionate share of Leaf's operating losses, which is expected to come in at approximately $0.14 per share in 2014.

Before I turn the call back to Bob, I would like to thank Heartland management, employees and the board for their warm welcome. This is an excellent company with sound business strategy, and I am pleased to be part of its exciting future. Bob?

Robert O. Carr

Thank you, Samir. In the first quarter, we delivered record earnings and laid the foundation for another year of very solid organic revenue growth. Our message is rising above the noise and attracting increasing attention from merchants that are growing weary of big promises that deliver little results. Whether it be our open-platform, industry-leading security or the individual attention of our employee relationship managers, Heartland is increasingly recognized as the brand to which merchants can turn when they need help solving real business problems. In our highly competitive industry, this trust is invaluable.

Before closing today's call and opening up for questions, I am pleased to announce that the Board of Directors has declared $0.085 per share dividend, payable June 13 to shareholders of record on May 23. And finally, as always, I would like to thank all of the great Heartland team members for making these very powerful results so positive.

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

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Tien-tsin Huang of JPMorgan.

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

I just wanted to first ask about attrition, which I guess, I heard did come up a little bit a couple of points sequentially, I guess. Anything to read into there? What's driving the attrition change?

Robert O. Carr

All right. When same-store sales are negative, the incentives, it impacts attrition. There's a direct relationship there, and I think that's probably the major driver of the first quarter results.

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

So no change, Bob, in terms of what's happening competitively out there? It looks like spreads and yield were pretty positive or stable here, not surprising. Just wanted to make sure nothing changed on the competitive front.

Robert O. Carr

It's very competitive as it has been over the last number of years, and we don't expect that to change too much. Samir, do you have anything to add?

Samir Zabaneh

No, I think, yes, so our attrition for the rest of this year should be aligned with what -- with our expectation.

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

Okay. So nothing scary there, which is good. I guess just on the encryption, I caught the rebranding side of it. I know, obviously, you guys and all at the ETA, there was a lot of talk about security encryption, tokenization, sort of EMV. How big, Bob, do you think this encryption offering could be? I saw First Data made some announcements here. Are you seeing a lot of demand? Just curious about what kind of contribution it could have to the P&L?

Robert O. Carr

Yes, we're seeing a lot of demand. By the way, the reason we aren't using the E3 moniker is because we couldn't trademark it. So we were using the Heartland Secure as our brand. There's a lot of demand and we're combining our offering with some new technology, some new functionality in product, as well as with some new services. So we think this is a time where the small and large merchants are reevaluating their growth -- and add an EMV reader, they might as well look at doing a bigger change, and that's what we're offering to our customers.

Robert H. B. Baldwin

And if I could add there, Tien-tsin, you mentioned the profitability. The focus of our initiative here is to offer a better solution for the merchant and so get more merchants. We've never really tried to make a ton of money in the hardware, the card hardware business and are not planning on doing that here, but we absolute think it's part of a solution that can allow, in a sale, you to maintain margins, whether that's to a smaller guy or frankly, to some larger players, where we're having some interesting discussions right now.

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

Makes sense as a selling tool. Last question, just a factual question, what's the EMV penetration rate amongst your merchants in terms of those that are EMV-ready?

Robert O. Carr

Thanks. We have 80,000 merchants that have purchased our E3 hardware, which are all EMV-enabled. And then an additional group, much smaller than that, that have purchased recently EMV-enabled hardware. So I'm estimating about 100,000, between 90,000 and 100,000 devices.

Robert H. B. Baldwin

Just to be clear, many of those may need a software update to be fully enabled. And of course, we just recently nailed down some of the PIN debit capabilities. So that's going to be rolled out, actually, starting this month, where they'll be actually processing EMV transactions.

Robert O. Carr

Get some cards out.

Operator

And the next question comes from Dave Koning from Baird.

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

I guess first of all, just gross margin installed. It has been very strong in the last 9 quarters. It's averaged about, I think, 18% growth, if we looked out over the last 9 quarters. Yet customer acquisition costs are still declining and revenue growth is still reasonably slow. I'm just trying to kind of connect the dots. I know it's going to get better soon, but I guess, why has growth remained a little slow and customer acquisition costs have not started to really ramp?

Robert O. Carr

That's a great question, and that's a question I really dug into myself because I was wondering why. And what has happened is that we have -- we offer salespeople the opportunity to have a signing bonus and that pretty much was almost 100% for years and years. But as some of our veterans have built a bigger portfolio, they would rather have the larger residual spread instead of taking the signing bonus. And we also have some accounts that we've taken signing bonus availability away from on the high-risk side. So what's happened is our signing bonuses have gone down significantly as a percentage of our overall installed base, and that's the primary driver of it. Bob, do you see anything else in there?

Robert H. B. Baldwin

Just that when you look at the customer acquisition costs, we did see a significant increase in the signing bonuses paid in the quarter, but the amortization did not pick up all that much. And one of the consequences of the higher attrition that we had in the quarter is that our accrued buyout liability, the liability doesn't grow as much as it otherwise would because the merchants that are subject to that liability are not -- there's not as many of them there or not as much activity there. And so that also kept the growth in the liability down and, really, in the over 1-year-old merchants, if you reduce that liability, actually, that goes as a reduction in the costumer acquisition cost line. So that's keeping that down. We do expect that to accelerate the customer acquisition cost line during this year as we continue to make progress. And the only other thing, again, is that we are relatively stronger in Payroll, as we talked about the success of the SPAs. And so a little bit less of the production of the installed margin is actually in the card business. So that's having a little impact, too.

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

Okay. Okay, great. And then what were Leaf revenues in Q1 and then also, what was Leaf's EPS impact last year as well?

Robert H. B. Baldwin

Well, the revenues were, honestly, fairly trivial, well under $1 million. They are a development stage company and they're focused on development, which is exactly what they need, the robust solution that they were looking to bring out later this year. And last year, there was no contribution because they were off on their own. We just bought them in September.

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

Well, wasn't there an EPS impact, like negative $0.03 or something like that last year?

Robert H. B. Baldwin

It was $0.04 in the fourth quarter.

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

$0.04, okay.

Robert H. B. Baldwin

I'm pretty sure.

Robert O. Carr

Joe, do you have the number?

Robert H. B. Baldwin

They're on mute. It was either $0.04 or $0.05.

Robert O. Carr

$0.04 is good.

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

How about in the third quarter, anything in the third quarter?

Robert O. Carr

I think it might have been $0.005 or $0.01.

Operator

And the next question comes from Tom McCrohan of Janney.

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

I just want to confirm, the full year revenue guidance, what does that bake in for volume attrition, 15% or something else?

Samir Zabaneh

14%. We have a range of 13% to 14%. So we will use 14%.

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

Excellent. And can you give us some insight into the trends in same-store sales and volume attrition month-to-date in April?

Samir Zabaneh

I think we will come up with the results for the second quarter when we have the call, but the results for April look encouraging. They are anywhere between mid-single digit to the 3 quarters of the high-single digits. So between 5% and 7% so far.

Robert H. B. Baldwin

Yes, well, that's speaking about the volume. And then Tom, it's an inexact science at best to estimate our same-store sales growth out of the volume. But we're seeing, month-to-date, an acceleration in year-over-year growth in our volume. And so that would be consistent not only with the continued strong installs but also with, apparently, somewhat better same-store sales. How much better is -- you can't get that fine-tuned.

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

Okay. And just a question on the non-card business. The 13% growth you saw for all 4 of those non-card segments, is that in line with what you were expecting for the quarter?

Samir Zabaneh

Yes.

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

And can you give us some thoughts about how you think that's going to trend for the rest of the year? Do you need to see any uptick in that growth rate to achieve your 8% to 10% revenue guidance this year?

Samir Zabaneh

So far, the growth in these line items have sort of exceeded what we were -- and in terms of contribution to the total revenue, it's already higher than what we thought it would be. So we do expect similar level of increases for the remainder of this year. And if we continue on the same trend, this is what's built into our guidance of revenue.

Robert O. Carr

Bob, do you have any additional color to add to that?

Robert H. B. Baldwin

No, I think that's good.

Operator

And the next question comes from Wayne Johnson with Raymond James.

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

Could you talk a little bit about expectations for sales managers? And could you link the very good new margin installed in the quarter with, I think, what was a lower sales rep number than what had been at the end of the year? So if you could comment on that, that would be great.

Robert O. Carr

Yes, great questions, Wayne, thank you. We decided a couple of months ago that our ambassador program needed to be trimmed a little bit. We were allowing sort of the retirement and placed folks to remain and we decided that we wanted fewer numbers of those for reasons of just efficiency and management time. So while we grew our productivity levels, partly, that was because we did reduce our ambassadors by about 34 headcount, which took away very little production. In terms of the sales managers, one of the things that has happened in Heartland in the last 6 months is that we've learned how to bring in experienced sales managers from the outside and we've put them into some areas that have not been productive for us, either ever or in the recent few years. And we've been able to take some parts of the country that have been unproductive for us and turned them into productive areas. And that's been one of the reasons we've had the success that we've had the last 9 months.

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

That's helpful. And since you brought it up, if you don't mind me following up on that, then what areas have become more productive than was previously the case?

Robert O. Carr

Well, New York state's one of them. We've had good results in parts of the New York state but not in others, that's one area. Southern California is another area, and probably 7 or 8 areas around the country.

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

And I think a prior caller had asked on this before, but I'm going to follow up. Can you talk a little bit about the competitive landscape? Has there been any change? The average size of -- on the card side, the average size of the retail that you're attracting, any change there? The annual card volume that you're targeting? Can you just kind of flesh that out a little bit?

Robert O. Carr

Yes. Our average merchant does about $400,000 of Visa and MasterCard, and what has happened again over the last year, is that our salespeople have been successful, more successful getting into the larger midmarket, not midmarket, but the larger SME merchants. We had a program for small merchants that had a fairly high minimum monthly fee. And one of the competitive issues has been it's -- Square has come in. They don't have a monthly minimum. And frankly, for our tiniest merchants, Square is maybe an attractive option if they don't need customer service. So our sales organization has migrated more towards the bigger clients, and I think with security, there's more interest on the part of the bigger clients. And also, the bigger merchants tend to be more sophisticated and they understand the way things are working in the market, of the bait-and-switch pricing tactics. So we've had success moving upstream, and I think that's -- it's a fairly significant change, Wayne. So good question.

Operator

And the next question comes from David Hochstim from Buckingham Research.

David S. Hochstim - The Buckingham Research Group Incorporated

I wondered, could you just give us a little more color on the trends in the quarter in terms of same-store sales and, I guess, volumes? Was March a lot better than January and February? And you indicated that April sounds pretty good.

Samir Zabaneh

Yes. So as I mentioned in my remarks, overall same-store sales was down by 0.2 percentage points. We do have a supplemental information that's disclosed or will be disclosed, or you can look at it on an MCC category basis. In terms of April, just the overall volume, as we mentioned earlier, it is already better. And we can somewhat conclude that same-store volume will be better in April, just judging by the overall volume increase. In terms of March, March compared to the January and February, there's not a material difference and, by the way, we had seen that before, where the Q1 ended up being slightly slower than the rest of the quarters. So it is anticipated that the same-store volume will continue to increase. They were -- I mean, sort of, Q1 is typically slower. And given the impact of the weather this year and the impact on the type of merchants that we have, not that we are out of it, we expect improvement.

Robert O. Carr

Bob, do you have anything to add to that?

Robert H. B. Baldwin

Yes, well, the other factor is we did have Easter move into April from March. So somebody was saying it was all sort of directionally, it was around plus or minus 1%. And so we're looking forward to something much better.

David S. Hochstim - The Buckingham Research Group Incorporated

I appreciate that. I guess I was just trying to understand how much of an impact do you think weather was on your volume in Q1. When you look at the supplement retail, same-store sales were down and they've been growing pretty nicely in prior quarters like Petroleum, but that doesn't seem like it's weather.

Robert H. B. Baldwin

Yes, with Petroleum, it's, of course, price. And we've even discussed whether we should just sort of take it out because it's the only commodity-like thing in our -- in these numbers. It doesn't have that big of an impact, maybe 0.3% obviously to the negative, in this quarter. But clearly, retail and services and electronic -- and furniture, which is another retail and entertainment, were all weak. But how much it impacted is necessarily speculative. But it felt pretty significant. And much as all of us were hoping for a better March, as individuals, if you think back on March, there were a few nice days in the Princeton area but not a hell of a lot. So it was, all in all, a tough winter.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then, is there kind of a target for relationship managers at year end, given the tweaking you've done to the sales structure?

Robert O. Carr

We expect this year to be comparable to last year's growth.

Robert H. B. Baldwin

With one caveat, I mean that -- we've got -- we've put ourselves a little bit behind the 8-Ball because of the greater discipline on the ambassadors. But we think that's the right thing to do. We will continue to have ambassadors but we're going to hold them to a higher production standard if they want to remain in that position. So it becomes a higher hurdle to surpass, but we think we can achieve it and get the same number as last year and, in fact, are targeting to do better.

David S. Hochstim - The Buckingham Research Group Incorporated

So can we get -- is there a breakdown of the sort of, I guess, 100 -- 891 you have between the salespeople and ambassadors?

Robert O. Carr

Yes, it's not something we get into, frankly.

Operator

And the next question comes from Tim Willi from Wells Fargo.

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

First question, just sort of, I guess, housekeeping maybe around the Network Services. Those transactions were a bit stronger than we would have thought. I'm just curious about sort of your downstream efforts there, any momentum you're seeing as you try to take that product down more to midsized Petroleum retailers?

Robert O. Carr

I'm not sure that Samir or I have any color on that one. We have added -- some of our customers have added locations and a lot of locations, in some cases. Bob, do you have any specifics on that?

Robert H. B. Baldwin

We don't have a lot of specifics, but that's really what's going on is, as merchants -- large merchants that we have a relationship with, they're always seemingly either adding or selling outlets. Generally, though, we've had positive results in -- those merchants have had positive results in terms of their net adds and so that's helpful to our efforts. We are absolutely targeting the midsized merchants as well and, over time, that is helping us as well.

Robert O. Carr

Also, I think, and maybe the biggest factor is, without naming the brands, one of our customers picked up a lot of debit-only c-stores in California. And you probably know who that is, but that's part of it too. That's being converted over now.

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

Okay, great. And the second question was just going to the topic that you hit on, Bob, around all the different technologies and stuff that's emerging in payments. So over the last 2 years, you guys have built partnerships, invested money in LevelUp, Tabbedout, Leaf. I'm curious about 2 things. Number one is the conversations and the new customers being acquired or signing up with Heartland. To what degree can you quantify or do you feel like those types of products and maybe that kind of image of Heartland has been instrumental, sales force feedback or actual merchants signing up with one of these partners as a key to the customer acquisition? And then second is, just sort of curious about your appetite or the likelihood of seeing additional monetary investments in other emerging technology or payment-type plays?

Robert O. Carr

Yes, that is really -- that's a good and tough question. The answer is that we haven't seen a lot of uptake in terms of new revenues from these investments, but we have made a lot of investments and we're continuing to do that. And we believe, because of EMV and pretty much the force change in the point-of-sale hardware, as a result of needing an EMV reader, we think that's going to drive an awful lot of merchants to the newer technologies because the change for legacy POS is a significant change. And when you can make the change and go to mobile applications at the same time without any additional hardware costs, it's really a compelling reason to really consider the new technologies available. So I would say that we're in the bottom of the second inning in this game. Over the next few years, you're going to see Heartland do a significant amount of investing into this and tying the technology into the security solution. And I like where we sit, I think we're in a very good position. Our sales organization is energized by this because the discussion points, that merchants want to understand loyalty applications and mobile applications, online ordering applications, and they're getting it. And we have been able to gain some very nice merchants because they know that we're on top of this and that we're developing things that are going to be interesting to them. So you can see, you're going to see Heartland take a leadership position in this whole technology world.

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

Can I just ask a quick follow-up and then I'll hop off. But in terms of the sales force, the training and understanding this sale process and sort of the conversation that has to be had with the merchants, how do you feel about where they're at in sort of that curve? Do you feel like it's -- I mean, you've mentioned productivity, but that could be somewhat of a separate measure versus how good they are at understanding everything that you're trying to build and communicate that to merchants? So how do you feel about that aspect of the sales force and where they're at with this?

Robert O. Carr

A very insightful question. One of the things that we've done that I think is probably one of the smartest things that's happened and that was brought to us by our Chief Sales Officer, Tony Capucille, is Tony came up with this idea of SPA, which is a special product advisor, that works at the division level. And this is really the expert in the core technology. And this person, the SPA, is a salesperson, out selling herself and also being a reference point for the sales reps in the division. And so we share the override commissions of our managers with these SPAs, and the economics are really advantageous because the rep can go to the expert and not lose anything in terms of their compensation. And the manager's compensation is shared between the manager of the division and the SPA. And everybody wins. And we think that this gives us a special leg up. There's a lot of folks that think that you can just make merchants go online and make all of their buying decisions online without the help of an expert. We think that our feet on the street model is going to be even more valuable with this SPA program. And the payroll SPA program has proven itself very nicely, and we're moving into other SPA models and we will be doing that for the mobile technologies. In terms of the security part of it, our sales reps get that really well already.

Operator

And the next question comes from Ramsey El-Assal from Jefferies.

Ramsey El-Assal - Jefferies LLC, Research Division

A question on the MCS acquisition, how much revenue and EPS contribution is contemplated in your annual guidance for MCS?

Robert O. Carr

I'll let Samir take a crack at that one.

Samir Zabaneh

In terms of total revenue, I think it's around $6 million, but maybe I'll ask Joe or Bob to confirm this number?

Robert H. B. Baldwin

Yes, it's $6 million in terms of the annual revenue contribution and pretty modest, very modest accretion this year, given some of the costs of consolidation, as well as some deal costs that have to be expensed immediately. But relative to its size, nicely accretive next year.

Ramsey El-Assal - Jefferies LLC, Research Division

A question just sort of on your broader business mix going forward. Given you just purchased another kind of K-12 processing asset, where do you see the mix of your business in terms of sort of merchant processing versus all other business lines in, let's say, 3 years or 5 years? At some point, do we conceive of Heartland as more of a broader business services company and less of a merchant processor or do those 2 things, are you -- how should we think about that mix kind of going forward?

Robert O. Carr

I think you're going to see Heartland becoming more and more of a business services company. The lion's share of our revenue does come from payment processing, and it will continue to be that way, but I think you'll see us move from 30% to 50% over the next few years in terms of the amount of revenue coming directly from payment processing.

Robert H. B. Baldwin

With a caveat, just to throw it in there, that an important element in the economics of many of these other business lines, obviously, payroll is payroll processing, not card processing. But if you look at, particularly, the School Solutions and our MicroPayments world, a big piece of their business economics is built around the payment as well. So it's going to remain as central even to these other business lines, which do have some other dynamics added into the pure payment processing.

Operator

And the next question comes from Smittipon Srethapramote from Morgan Stanley.

Vasundhara Govil - Morgan Stanley, Research Division

This is Vasu Govil for Smitti. First, I just wanted to confirm if you guys disclosed the SME net revenue growth for the quarter? I think last quarter, you said it was 5%. I'm not sure if you disclosed that for this quarter yet.

Robert H. B. Baldwin

It was approximately in the same ballpark as last quarter.

Vasundhara Govil - Morgan Stanley, Research Division

Okay, great. And then, just wanted to get an update on the Mercury lawsuit? Since it's been public, have you guys seen any increase in inbound calls from Mercury merchants that maybe want to switch? I mean, has it been any kind of catalyst for you to win new business in any way?

Robert O. Carr

Our attorneys have advised us to not answer questions like that while we're in the litigation process.

Vasundhara Govil - Morgan Stanley, Research Division

Okay, understood. And then just the payroll business. Can you share with us any thoughts about competition from SaaS-based providers like Paylocity within payroll? Are you seeing any impact from those businesses?

Robert H. B. Baldwin

Let me take a shot at that, Bob. Those are good business models that tend to focus on larger merchants than has been our traditional strength. We are very much building the SaaS capabilities to address larger merchants, but ours is a relatively modern, new platform and so we have to layer on those additional capabilities. I think the biggest thing, though, is that we are in the business of competing -- all of us are really competing with the 2 big guys in the business, which with respect to the small and midsized merchants, remain paychecks and ADP, and it would -- certainly, from time to time and on a regular basis, we lose deals to one of those guys or the smaller regional players that are out there. But day in and day out, the reference point is the larger players that still dominate the business.

Operator

The next question comes from Matt Lipton from Autonomous Research.

Matthew Lipton - Autonomous Research LLP

Just one quick question on the weather, not to beat a dead horse but, and you give good segment data in the in the segment, but anything, geographically speaking, that might have impacted Heartland from the weather more so than from the data processor this quarter?

Robert O. Carr

We -- our business is spread across the country, the 4 biggest states are the 4 states you'd expect it to be: California, New York, Texas and Florida. But to be honest, we do not try to examine same-store sales trends by geography. So we just don't have an idea on that.

Matthew Lipton - Autonomous Research LLP

No problem. And then the School business, 35% share sounds like a really great number. Just curious how that compares to your market share in the Campus business? And then when you think about the school lunch program, do you worry about hitting an upper bound for market share? And I know in the past, you've maybe discussed some tangential businesses that you can add to the School business, so how are you thinking about that?

Robert O. Carr

Well, our penetration of K-12 is 35% per campus. We are in about half of the campuses. However, it's with limited services. Our loan servicing payment processing business is in a couple of thousand universities. But in terms of the core payment processing for the university, we are very small single-digits there, lots of opportunity for growth and we're working on that. I think, though, in K-12, we have a lot of wind in our back in K-12 because of the penetration of the parents. We think we can increase that significantly and, more importantly, make the school lunch program into a lunch and activities program, which makes it even more beneficial to the parent to load money on to the accounts to pay for the tickets and for the uniforms and the trips and all the other monetary transactions between parent and school. Bob, do you have anything to add to that?

Robert H. B. Baldwin

No, that's -- that's exactly -- I think that's right. That's really where the opportunity is, and we will be aware of and opportunistically look for other acquisitions. It's really an acquisition game to get a higher share, but the bigger opportunity is getting the payments, electronic payments, to be a bigger share of the total cash flows going -- the very substantial cash flows going to the public schools.

Matthew Lipton - Autonomous Research LLP

Perfect. And then, lastly, just want to confirm that the guidance does not include any share repurchase expectations. And then in the past, you have been opportunistic from time to time. So just curious how you're thinking about the buyback program, given where the stock's at right now.

Samir Zabaneh

So the guidance does not include further buybacks but we will -- we do plan, as I mentioned, we have completed the program that we have. So I mentioned the numbers that we bought in the first quarter. When the program ends, and which it has ended in April, we have been buying more shares in April, we do plan to start a new program subject to the board approval. So we will continue to be active in the market.

Operator

And the last question comes from Tulu Yunus from Nomura.

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

I just wanted to get updated thoughts on the margin trajectory for the course of the year, and whether there's been any change at all in your expectations there?

Samir Zabaneh

No. So we do expect our margins to increase from this quarter. And they will be in line with the margins that we had last year.

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

And you're saying increase on a sequential basis or on a year-over-year basis?

Samir Zabaneh

They will increase on a sequential basis, too. Q2 and Q4 will be higher than Q1.

Robert H. B. Baldwin

First quarter is always our weakest margin quarter.

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

Right, because of the seasonality. Yes, that's clear. And then just to make sure on the guidance, so this $6 million or so from MCS that's coming in, but you left the revenue guidance unchanged. Just curious, what was the thought process? It sounds like your same-store sales assumptions haven't changed. Is it just some conservatism baked in or did something else change in the organic revenue?

Samir Zabaneh

We feel that the contribution from the MCS revenue will make up for the impact of same-store sales that we saw in Q1.

Operator

And at this time, I would like to turn the call back over to the company for any closing comments.

Robert O. Carr

Thanks, everyone. As you heard, we've had some travel difficulties today, so if anybody's interested in some follow-up questions, you can please contact us through the information to contact us, that's available on the website. There's both a phone number and an e-mail address there. Just please contact us through that vehicle, and we will make every effort to get back to you as quickly as possible. We appreciate your time this morning, and have a great day.

Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!