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Heartland Payment Systems (NYSE:HPY)

Q1 2012 Earnings Call

May 01, 2012 8:30 am ET

Executives

Maria Rueda - Chief Financial Officer

Robert O. Carr - Executive Chairman and Chief Executive Officer

Robert H. B. Baldwin - President

Analysts

Roman Leal - Goldman Sachs Group Inc., Research Division

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

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

Brett Huff - Stephens Inc., Research Division

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

Jeremy Frazer

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

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

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

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

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

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

Operator

Good day, ladies and gentlemen. Welcome to today's Heartland Payment Systems First Quarter 2012 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Maria Rueda, Chief Financial Officer. Please go ahead.

Maria Rueda

Thank you, Nicole. Thank you, and good morning, everyone. I'd like to welcome you to our first quarter 2012 earnings call. Joining me this morning are Bob Carr, Chairman and Chief Executive Officer; and Bob Baldwin, President. Today, Bob Carr will begin our discussion with an overview of the quarter, and then I'll return to go through some of the financial detail before opening the call to take your questions.

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 beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions that are based on information currently available to us. Actual results may differ materially from those expressed in the forward-looking statements due to many factors. Information concerning these factors is contained in the report of our financial results we released earlier this morning and in the company’s 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

Thank you, Maria, and good morning, everyone. I'd like to thank you all for joining us today and for your interest in Heartland. As you saw in our financial results for the first quarter, we reported adjusted net income of $15.7 million, or $0.39 per share, both increases of 70% compared to the comparable figures in the same quarter last year. For the quarter, we achieved record operating income and what has typically been our weakest quarter, and while absorbing $1 million in Summit expense. Our performance in the quarter was driven by a combination of a strong execution of our strategy to improve growth and achieve greater cost efficiencies as well as an economic backdrop that is as good as we have seen since the onset of the recession. This combination led to an 8.3% improvement in our card processing volume in the quarter, a slight acceleration from our growth rate last quarter aided by lower volume attrition and better same-store sales performance. Volume attrition in the quarter was actually the best we've seen since 2007.

From a competitive standpoint, the pricing umbrella provided by competitors, who don't pass through the Durbin reductions, extended into the first quarter as we enjoyed strong margins on new business.

In the quarter, gross margin installed was up over 15% compared to the first quarter of last year, growing at the fastest rate in several years and reaching at the highest absolute level in 3 years. The annual margin per installed contracts surpassed the record levels achieved in last year's fourth quarter, hitting nearly $1,300 per card payment merchant installed. The nearly $150 million of Durbin savings that we've passed through to our merchants is providing our relationship managers with the tangible measure of the savings they can show their prospects, but more importantly, is proving to be a powerful marketing tool by demonstrating Heartland's transparent pricing philosophy. Delivering this message to the market on a consistent basis will win over the longer term as we build strong enduring relationships with merchants who want to do business with a company they can trust.

Performance in our non-card businesses was equally impressive. Our payroll, equipment and SmartLink revenues continue to grow nicely.

In addition, the integration of our various K-12 school acquisitions is going well. Plans are underway to leverage the growth financial of the K-12 platform as a channel to introduce new convenient services to the parents of the 12 million schoolchildren and to whom we are now connected. Both card and non-card growth continues to be driven by the increased productivity of our sales organization. Their efforts were recently recognized with the Silver Stevie Award in the sales department of the year category, earned at the Sixth Annual Stevie Awards for sales and customer service.

Relationship manager comp ended the quarter up 76 from the June 30 of low. That's a better than 10% increase. While existing relationship managers keep producing at record levels, it is encouraging to see the contribution from our new hires increasing. New margin installed by new relationship managers was a record in the first quarter and up almost 300% compared to the first quarter of last year. Our ability to add highly productive new relationship managers is crucial to our continued growth. This is an area getting a lot of management retention as we work to improve the productivity and reduce the turnover of our new hires.

For the quarter, we achieved our best operating margins since the first quarter of 2008. The decision to move forward with the consolidation of our data centers is being rewarded with improved operating efficiency. We remain committed to maintaining a balance between the need to invest in our business to sustain our growth while still driving operating margins toward the 20% level. We've become increasingly strategic in our investments, committing our resources to develop new products and services that most effectively leverage our technology to meet the evolving demands of a market that is at an important inflection point.

And let me mention a few recent examples. We recently added an Apple iOS mobile app to our mobile technology, enabling merchants to take credit, debit and gift card payments on the iPhone, iPad and iPod Touch. Merchants simply download the free retail app from Apple's App Store, purchase a mobile and encrypting card reader from Heartland and plug the reader into an Apple mobile device audio jack and begin swiping cards and processing fully encrypted transactions from anywhere in the U.S.

Campus Solutions has launched 3 of their own mobile applications for higher ed institutions and students including the first-ever mobile payment application and virtual campus ID card for both Android and Apple iOS. These new apps enable students and administrators to use their smartphones or mobile devices for on-campus purchases and to access information related to our Campus OneCard System. One feature, I think, you are going to be hearing more about is the ability for students to send their payment information to the POS terminal while waiting in a checkout line, allowing cashiers to simply press a button to complete a transaction.

And in the first quarter, we installed our 10,000th SmartLink network and subsequently surpassed 11,000 implementations as this advanced technology finds a warm reception in the petroleum market. In fact, thanks in part to our advanced technology, Heartland was able to sign a 3-year contract extension with CITGO Petroleum Corporation to continue authorizing debit and credit card transactions in approximately 6,000 CITGO-branded locations nationwide.

All of these new products are still too new to have any meaningful impact on our current financial performance. However, they do provide us with the opportunity to reap the immediate intangible benefit of a deeper multiproduct relationship with our merchants while laying the groundwork for meaningful growth over the long term.

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

Maria Rueda

Thanks, Bob. Heartland reported GAAP net income of $13.8 million, or $0.34 per share, in the first quarter of 2012. Excluding approximately $0.05 per share of primarily stock compensation expense, net income would've been $15.7 million, or $0.39 per share, both increases of 70% compared to $9.2 million, or $0.23 per share, calculated on the same adjusted basis in the first quarter of fiscal 2011. We present our results on both a GAAP and adjusted basis because we believe our adjusted measures of net income and earnings per share provide investors greater transparency into the information used by management for financial and operational decision making.

Small and mid-sized merchant card processing volume through the quarter was up 8.3% from a year ago as a result of new margin installed over the past few quarters, 3.4% increase in same-store sales and a significant reduction in the rate of volume attrition to 12.2% as well as 1 extra day in the quarter compared to last year.

In the quarter, we saw a very broad-based growth in same-store sales. You can refer to the statistical supplement on our website for more details on these metrics. As you know, same-store sales can be volatile and is a function of economic conditions. Consequently, we remain cautious in our expectations for both same-store sales and volume attrition for the year.

We continue to grow transactions processed at Network Services in the first quarter. However, this transaction growth was concentrated in our most competitively priced accounts, reducing the benefit of this growth. The consolidation of our data centers and the migration to cloud-based information technology is reducing Network Services' processing costs, offsetting the effect of any pricing impact and enabling NWS to contribute to our bottom line.

As Bob mentioned, our non-card businesses also grew nicely this quarter with payroll revenues up 10% and equipment-related revenues, thanks in part to a one-time sale, up nearly 20%. In K-12 School Solutions, revenues were up $4.6 million from the first quarter of last year, when we had only 1 of the 4 acquisitions we consolidated into K-12 School Solutions for the full quarter. In aggregate, strong non-card revenue growth, notably K-12, represented over 20% of our net revenue for the quarter and so made a significant contribution to our 14.2% growth in total net revenue.

On the expense side, we held the increase in our 2 largest costs, processing and servicing and general and administrative expense, well below the rate of revenue growth. Combined, these 2 expenses were up just 8.5% compared to a 14.2% growth in net revenue. This led to a 60% jump in operating income to a quarterly record of $23.2 million as well as our best operating margin in over 3 years of 18.1%.

As we have previously noted, there's high operating leverage in our business model as the incremental revenues in this quarter generated the significant increase in operating margin. I should note that as we consolidate our data centers and migrate to a cloud-based information technology strategy, we are refining the allocation of certain costs between the processing and servicing and general and administrative categories. The refinements has resulted in an increased in cost allocated to processing and servicing this quarter. To account for any shifts between classifications, we would point to the 8.5% increase in the aggregated cost as the best means to evaluate overall expense control. Importantly, general and administrative expenses in the first quarter are up only marginally over last year after excluding the costs of the Heartland Summit and the increase in stock compensation expense this quarter compared to last year's first quarter.

We are generating significant cash flow. For the quarter, our GAAP operating cash flow is $25.2 million. However, our strongly held view is that the measure we have defined provides a more accurate measure of our true cash flows. Our measure takes the traditional sources of operating cash starting with net income and, in fact, the noncash items such as stock compensation expense, depreciation and amortization and then reduces that figure by signing bonuses and buyouts paid, which are 2 cash outflows. On this basis, the management's measure of operating cash flow in the first quarter is $29.3 million, or $0.72 per share, up 32% from $22.1 million last year. After capital expenditures of $7.3 million, our free cash generation amounted to $22 million, up 57.5% from last year's first quarter.

During the quarter, we used $10.7 million of that cash to repurchase approximately 419,000 shares under our board-approved share repurchase plan and paid $2.3 million in cash dividends, a 50% increase over the year-ago quarter.

Let me wrap up with our guidance for 2012. For the full year of 2012, we continue to expect net revenue of between $530 million and $540 million. We are raising our fiscal 2012 adjusted EPS expectation by $0.07 per share to between $1.59 and $1.63 per share. We still expect after-tax stock compensation expense to be $0.19 per share for the year.

Back to you, Bob.

Robert O. Carr

Thank you, Maria. We are very pleased to have started the new year with record quarterly operating income and the expectation of further growth throughout the remainder of 2012. In light of what we still see as a great deal of economic uncertainty, however, we believe a lot of work remains to be done to achieve our goals. We are well prepared and ready to undertake that challenge. Our industry is on the verge of unprecedented change, but regardless of the direction the industry takes, one thing won't change. Merchants will want a fair deal from a leading technology provider. Because of the strong relationships we have built, we believe small and mid-sized merchants will confidently choose Heartland as the partner they can trust to help them grow their businesses.

Before closing today's call and opening up to questions, I am pleased to announce that the board of directors has declared a quarterly dividend of $0.06 per share, payable June 15 to holders of record on May 24. And finally, I would like to thank the nearly 3,000 team members of Heartland for making these powerful results possible today.

We are now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Roman Leal from Goldman Sachs.

Roman Leal - Goldman Sachs Group Inc., Research Division

You had great installed margins, same-store sales were good, low attrition, but you maintained your top line guidance -- and I know you alluded to the economic concern in there. But is there -- do you see sort of a risk or perhaps concerning onetime on your term items that you feel unsustainable or are you just being conservative in your top line guidance?

Robert H. B. Baldwin

That's, I think, the driver there. The installed were very strong but, of course, that really doesn't drive this year's revenue that much. And so you have to be cautious with that. And we're maintaining, fundamentally, our cautious stance on same-store sales and so volume attrition as the drivers there. We feel very good about the prospects for hitting those numbers, but I want to make sure we do that.

Roman Leal - Goldman Sachs Group Inc., Research Division

And as you think about how to respond or your strategy around the newly implemented network fees on both the MasterCard and Visa side, what's the strategy there? Or what's the update that you can provide us? I guess if you could give us any color on whether you expect that to be a neutral or modest positive or negative event, that would be helpful.

Robert O. Carr

Yes, Roman, we're going to continue to do what we've always done, and that is pass through those fees in an expense and revenue neutral way. We're going to collect back the fees that we have to pay through the card brands, but we're not -- we're going to do it as accurately as we possibly can, so that they're not paying anymore or any less than exactly what those fees costs. That's easier to do with some than others because some of the new fees for the first time ever are not transaction or merchant-based, and so it's a little bit more difficult this time but we were working hard to make that an accurate to pass-through.

Operator

We'll take our next question from Tim Willi, Fargo.

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

I had 3 questions. First was on the network and services business, the revenue per transaction actually was not under as much pressure as we had thought. And actually, I think, probably a more modest decline if you just apply the simple math that we've seen a while. Could you maybe go back to your commentary around the outlook or what happened in the quarter? I missed a bit of it, but I'm sort of curious if you're seeing anything in terms of positive impact around expansion of product sales into some of those bigger customers and sort of how you think about simple revenue per transaction metric in that division on a go-forward basis?

Robert H. B. Baldwin

I admit that we haven't studied that as much as you have at this point, but we have gone down-market a little bit. It was our NWS business. We're opening it up to mid-market. Petroleum folks and we are able to attain better margins there. And so that's one of the answers. I'm not sure that's the complete answer. We'll look into that, Tim, though and put some more information out there for you.

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

And then the other 2 questions. Well, one was -- could you give us the quantification of the acquisitions and revenue this quarter? That's just sort of -- have an organic revenue number, was it -- or was it around the $4.5 million you referenced in the press release so that be the acquired revenue?

Maria Rueda

Yes. This is Maria. Thanks for that question. And yes, as we referenced, Tim, it was $4.6 million for our School Solutions in the first quarter of 2012.

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

And then my last one, and I'll hop off is -- I'm just curious as the quarter went on, where you might have seen surprises relative to how you thought it would play out because if I remember on the 4Q call, you talked a lot about 1Q margins being under sequential pressure and the impact of the sales, conference et cetera. Obviously, it was a very strong performance. Was it in the equipment sales? Was it just the better same-store number than that you have been budgeting for that really drove the margin upside? I just would like to get a better feel for the variation versus how you thought the quarter will go when you talked to us a couple of months ago.

Robert H. B. Baldwin

The biggest impact was just sort of the lack of that -- of negative surprises and some positive surprises. We mentioned the one-time equipment sale that was -- could have happened at any point. It's a special situation that ends up happening in the first quarter. Yesterday, in the very good weather, we just got that incremental dollars of revenue that, as we've talked before, really drive a lot to the bottom line. That's particularly impactful in the first quarter because it's typically our lowest quarter -- revenue quarter from a seasonal perspective, January being 2 of our 4 worst months typically. And so you have those relatively fixed costs of our business, and then the incremental dollar revenue really helps. So the lack of negative surprises, a couple of positive surprises in terms of revenue and then in terms of one-timers and then just good basic business for the quarter, which we've seen across a number of players in the industry as well.

Operator

We'll take our next question from Tom McCrohan from Janney.

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

I had a question on the K-12 platform. And I think you said previously that you had about 20% market share, about 20,000 schools, I'm just kind of trying to model this out and figure out where it could go if you just do take a current quarter of revenues to annualize it divide by 20,000 schools. It seems kind of low, like only about $1,000 of revenue per school so I'm just trying to figure out what the right metric is on how we should be modeling that where that revenue number could go?

Robert O. Carr

Well, Tom, and I think your own calculations are right. There's a quite a few schools that came with the acquisitions that we made that are not active on payments. And many of them -- the penetration of the parent population is quite low and that's really what we're quite excited about is the opportunity there is really tremendous. To increase the penetration of the parents, to make the program more attractive to the parents and we're moving into the activities area as well as the lunch program. So we think there's a real upside there. We were trying to be conservative in our forecasting there because it's not easy to get the parents to become more interested in using the system, but we're working hard to do that. I think your metrics are proper.

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

[indiscernible] for a school that was kind of fully engaged with parents, using a system, adopting the system, what would be a reasonable revenue contribution from that school?

Robert O. Carr

It so varies so much, Tom, because you have the very wealthy school districts surrounding Washington, D.C., and then you have the very poor school systems in Cleveland and in some of the metro parts of New York where there are many, many students on free and reduced lunch programs that will never use our system. So it varies a lot by school and it's not just easy -- it's not an easy answer to give you because it depends on the profile of the individual school.

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

And could you just comment on the bank sponsorships, Wells Fargo has recently signed as a bank sponsor and what are the plans regarding KeyBanc and Wells Fargo going forward? And that's all I have.

Robert H. B. Baldwin

Well, our focus is on maintaining a really broad support from the powerful financial institutions. We're very pleased to add Wells Fargo into the mix this year as well as Barclays late last year. That's a vital aspect of our access to the systems. And so as I say we're very pleased with where we stand today. And I don't think we're probably looking at any further expansion in the sponsorship group from this point. So that really is one of the things we're glad to have, sort of, put behind us in the last couple of quarters.

Operator

We'll take our next question from Brett Huff from Stephens.

Brett Huff - Stephens Inc., Research Division

A couple of questions. Can you give us a little more detail and -- Maria, maybe this is a question for you, about the shifting of the cost from G&A to the processing and servicing? My goal is to try and understand what kind of leverage that processing and servicing line is getting? Is there any color you could give us so that I can get sort of a better apples-to-apples, year-over-year number?

Maria Rueda

I guess the one thing I'll refer you to again is, despite the fact that we've been looking into more where our cost really belong, whether it's in processing and servicing or in G&A, we've still been able to hold both of those costs in aggregation to 8.5%, while we've grown our net revenue to 14.2%. But what we strive to do internally and externally is match expense [indiscernible] to those line items where we think they belong. And we continue to do this study. And we believe we will get a lot of leverage out of our processing and servicing cost.

Robert O. Carr

Right. And let me answer that, Brett. We -- the legacy was in the olden days dial costs were really, really significant relative to the fixed operating cost of running a platform. And so originally when we started our accounting system, we built a dial cost in its variable cost of processing and we tended to put the fixed costs such as rental of the data centers and leases of hardware and software licenses into the G&A line. But as the business has transformed moving away from high dial costs as the ratio of the overall cost of processing, we've -- we want to move those up into the processing line to more accurately reflect the business. It just isn't right to put a data center expense into a G&A line, for example. And that was sort of happening because that's the way we set the system up. We didn't want to go through this pain of having a full-year hard-to-compare figures. But this will annualize and next year, we'll have more apples-and-apples. But we want -- we basically want all of the cost of processing and servicing to be up in the processing and servicing line, take them out of G&A to more accurately reflect our results. So that's really what's driving this. I think Maria's point about comparing the comp -- combining change for the next 4 quarters is really appropriate here.

Brett Huff - Stephens Inc., Research Division

And maybe just one other way to come at that, does the -- are most of the costs that are going, I guess, up in the processing and servicing line, are most of them fixed or most of them variable or is it a mix?

Maria Rueda

Brett, most of those are fixed costs.

Brett Huff - Stephens Inc., Research Division

And then April same-store sales trends, any thoughts on that?

Robert H. B. Baldwin

No. It's something that the business was neither stood out as being extraordinarily strong nor out of line weak about meeting that, it's very hard to predict where things are relative to the first quarter.

Brett Huff - Stephens Inc., Research Division

And then on pricing, can you give us an update on pricing and how that's rolling through the model and how producers or relationship managers are handling that going forward?

Robert O. Carr

Yes, there is so much confusion in the marketplaces with all of these new fees in Durbin. It's really a zoo out there. And I think, I think the bottom line is that we do have this pricing umbrella because we're the ones giving back the Durbin dollars, most of our competitors are not. So I think there's probably less pricing pressure right now than there ever has been in my career, at least, in this industry.

Operator

The next question comes from Dave Koning from Baird.

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

I guess, I'm wondering -- Q1 margins were 18%, that's about what you're guiding for the full year. Historically, the last 3 quarters are usually a few percent better or maybe more even than what Q1 is. So I guess I'm wondering maybe what pressure you're expecting in the second half or the remaining quarters? And I guess the second part of margins is incremental margins have been around 35%. Is there any reason, I guess, we can expect over a very long period of time, that, that to kind of be more where they go?

Robert H. B. Baldwin

Well, to take your first -- your second question first, yes, the incremental margins are high but we're not going to 35%. I mean -- unless your definition of long term is [indiscernible] and in terms of the seasonality, we have consistently seen the first quarter VC's only worse than usual, but it really gets accentuated by the core relative revenue performance that we see typically in the quarter. And so implicitly by sticking to our view on same-store sales, we're saying that, that relative revenue comparison is not going to be as significant as it usually is. If same-store sales was to be as strong and attrition, which is really the driver, is going to be a strong in the remainder of the year as it is in -- was in the first quarter, then that would suggest a more typical pattern. But we're not relying on that. And so therefore, the typical seasonality that we've seen, we're saying, is sort of not as much in our explicit views.

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

And then on the pricing side, you've migrated up just a bit historically, kind of, 53 basis points. It's been more like 56 the last couple of quarters, which is obviously very fair in the context of a lot of your competitors raising prices a lot. Is that just slightly higher level, do you think, sustainable over time or is that competed away a little bit?

Robert O. Carr

We think that's sustainable, at least, through this year and to be sane, merchants are so confused. It's so difficult to explain the pricing that's been imposed upon us to the merchants. I think we have some clear sailing for a few quarters, and we'll just have to see what the market brings us as we get closer to the end of the year and the anniversary of the Durbin change on October 1.

Operator

Our next question comes from Jeremy Frazer from William Blair.

Jeremy Frazer

I just have kind of one concessional question and a couple housekeeping. You mentioned that your views for the remainder of the year remain somewhat conservative and the first quarter benefited from favorable weather, do you think some of that volume that you might have seen in the second quarter got pulled into the first quarter? Or just so, you're [indiscernible] see the economy maintain the level of this?

Robert O. Carr

We didn't have winner in a lot of country, right? So that's a good question. What do you think? I mean, it's just -- we don't know any better than you would now, for example, on that part of it.

Robert H. B. Baldwin

And it's hard -- I mean, let's not lose sight of the fact that we and everybody in our business relies on the consumer. It's hard to see the 2012 being a consumer-led further recovery with unemployment remaining persistently high, with housing remaining as challenged as it is. It could happen. We're not economists. And -- but it's certainly a possibility that people ended up spending for their spring stuff in the -- during the winter. I mean, because that's their thoughts. There was awful spring life for most of the winter. It's possible, we just don't know and prefer not to bake in expectations that ends up proving unrealistic.

Maria Rueda

And in terms of volume also, we did have the benefit in this first quarter of the leap day so we have 1 additional day for consumers to be out there in the lovely weather, spending their dollars.

Jeremy Frazer

And then just for the housekeeping, did you guys quantify the one-time equipment sale?

Robert O. Carr

Low 7 figures.

Jeremy Frazer

And then, do you guys, by chance, have the number of payroll customers?

Robert H. B. Baldwin

It's around 12,000.

Maria Rueda

It's around -- yes, between 12,000 and 13,000.

Operator

Our next question comes from Chris Brendler from Stifel, Nicolaus.

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

I'll just sort of follow up on some of the comments you made this morning regarding Durbin and the merchant sale. What do you think -- like, give us your sense of the pulse of the merchant today. Do you think that they've actually feel like they've benefited from Durbin initially? Your customers should feel that benefit immediately, but do you think there's a general level of satisfaction with the Durbin Amendment in the lower debit card fees? Or are you still looking in a pretty contingent situation especially with all the new fee structures that Visa and MasterCard are introducing?

Robert H. B. Baldwin

Well, first of all, we think that the merchants who are really up on their things, who are merchants of Heartland, yes, absolutely are happy with what they're seeing, there are some very demonstrable savings that they're achieving. It's improving their cost structure, which is good for them. There is so much confusion out there, however. It's hard for everybody to really lay out what they're getting. Obviously, it's clear to the number of competitors have passed it through to their merchants. But whether they're doing it in a really transparent way is unclear. And then you get cross-currents like the small ticket where our merchants maybe -- may have a smaller than average ticket, and their costs have actually gone up in some cases. So I think that there's tremendous confusion. It's driven by the fundamental complexity of interchange structure. It's not being helped by the introduction of the FANF fee, which is just going to be different and create noncomparability. It's not a dramatic cost driver for most of our merchants, but it is different. And so it's hard for somebody to really put a stake in the stand and say, yes, this is my true cost and, yes, I've gotten the benefit of Durbin given the cross-turns that are out there.

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

Do you see any interest from your merchants in steering payments or trying to get more debit volume through your discounting or incentivizing debit volumes since there are so much cheaper than credit now or is it still not at all true in the merchant's thinking in your line of business?

Robert O. Carr

I would say, in the SME space, there's not any thinking along those lines. We've heard with some of our bigger merchants depends on their average ticket. It's difficult to do that steering and I haven't seen much reaction -- much way of trying to do that myself. Maria or Bob, have you seen anything there?

Maria Rueda

No. And I so will defer to Bob.

Robert H. B. Baldwin

Well remember that most of our merchants don't even have PIN pads. So when a card is pulled out, they're going to take it. If it's a debit card, it's going to be debit. If it's a credit card, they're going to take credit. And the only steering they can do is if that merchant has a PIN pad or buys one, but the economics of buying one or not, there's no differential between PIN and signature debit. So the merchant -- if it happens to be a debit card, it is going to be using signature debit and there's nothing to steer.

Robert H. B. Baldwin

Yes, and let me refer you to the Walmart settlement when merchants, for the first time, have the right to take debit only or credit only. Now one merchant in our portfolio chose to accept that because they want to take the cards that their consumers wanted to use and I think that continues to be the driver and always will. I think that speaks well for some alternative payments because more and more consumers are being attracted to other ways to pay. So the consumer is the king, and they're the one to decide how they want to pay and stores are going to respond to that. That's what we believe, anyway. So that's where we're headed with our planning long-term.

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

One last question, can you just give us your thoughts -- what are your thoughts on Square and the potential for more merchants to use mobile technology at the point-of-sale to accept cards? I don't think it's really a meaningful threat today, but I just wanted to hear your thoughts.

Robert O. Carr

Well, my view of the Square is -- there are very -- there are competitors for the small merchants. Their losses are literally unbelievable as presented to us. We just don't see how you can take on merchants and open up the payments world to every criminal on the planet without doing significant underwriting and not have high losses. So we'll see how sustainable it is. Their model is not a technology model, it's an underwriting model. And we'll see how it -- successful it is long term. We don't know a business they're taking away from us. We have a very similar product technically called mobile. We're selling a lot of it and our customers love it. It can be used for line busting, and it can be used to stop having to rewire every time point-of-sale and counters are moved around, so it's a very valuable technology to use the smartphone for payments. And the technology is relatively easy. Square is bringing to the marketplace a new concept of opening up to marketplace to people who can enroll online and we welcome and the industry is just waiting for -- to be educated on how they -- are so much smarter than the rest of us in their underwriting and methodologies.

Operator

And we'll take our next question from Greg Smith from Sterne Agee.

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

Are you guys getting routing incentives at this point from Visa or MasterCard? Is there anything material, routing for PIN debit, obviously.

Robert H. B. Baldwin

As we've mentioned, Greg, the PIN debit volume that we do, except for Network Services, is quite modest. And Network Services is driven by some very large customers where the incentives are focused from the brands on the customer themselves rather than on the acquirer. So there's nothing meaningful to report there.

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

And then what kind of margins do you get on your equipment sales overall?

Robert O. Carr

Terrible.

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

Yes, I mean, it's not a significant source of profit for you, is that correct?

Robert O. Carr

Correct. It's the razor -- we're trying to sell razor blades and these razors are necessary and we try to make a little bit of money, but that's not our focus.

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

And then the extra day in the quarter, any way to quantify, I mean -- and I think it's pretty simple to quantify the revenue, is there anything else we should think about in trying to quantify that?

Robert O. Carr

No.

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

And then Bob Carr, I think you said -- you talked about the pricing umbrella, so it's fair to say you talked about it last quarter, you continue to be able to sign new merchants at incrementally higher pricing than your traditional pricing, is that a fair comment to make?

Robert O. Carr

Yes, I think that is a fair comment. Bob, do you want to add to that?

Robert H. B. Baldwin

Yes, we had $1,300 per SME merchant that we signed up. That's the only estimated margin in the first year. That's an all-time record and it was up for a little bit from the fourth quarter of last year. So yes, it remains a very powerful thing. And again, our sales force is out there, talking about the philosophy of fair dealing and explicitness about the -- what the costs are going to be. That does not mean our salespeople are supposed to give the product away. In fact, we have always given them a strong incentive to maximize the margin that's available and obviously, they're getting great success in doing that in the market right now.

Operator

Our next question comes from Steven Kwok from KBW.

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

I just have 2 quick questions. One was on the data center consolidation, I just wanted to see how far along you are with that and how much of the savings have been realized?

Maria Rueda

Our data center consolidation projects are moving along as planned, and we anticipate we will see them nearing completion this year. And we have said that our savings related to those consolidations will be in the 7-figure area, and we stand by that.

Robert O. Carr

And I'd like to add that we're a little bit unique in this industry in terms of the way we deal with the acquisitions. I mean, we really work hard to consolidate our technology platforms, and we've taken some hits to do that. You have to make an investment upfront, and we've made those investments in the last couple of years and they're really paying off for us now. And I think the companies that don't combine their platforms in this day and age are just -- they're deferring, they're kicking maintenance costs down across down the road with all these updates to the rules and the pricing and everything. We need to do that on multiple platforms. It is just really -- it hurts your potential for sustainable operating growth.

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

And then a follow-up on the -- you guys recently released an Apple app, I was just wondering how successful has that been and I just want to see what your takes are on that?

Robert H. B. Baldwin

It's pretty small numbers in absolute terms because we're really not focusing on those micromerchants at all. We are going to established merchants, established relationships. We have new ones more towards the contractors and plumbers in trying to be cautious. With that said, we are about even in terms of Android versus iOS, in terms of the merchants that we have. In aggregate, about 1,000 right now.

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

Has there been any appetite from your existing clients in switching over to perhaps similar type of apps or something like that?

Robert H. B. Baldwin

It's not a switchover, it's an add-on. It's taking someone who might want to use it, for example, for a backup processing capability or, as Bob mentioned, line busting. There's -- some people are experimenting with things like curbside with -- when you're having take-out, rather than having a person come in, they can still deliver it out to the curb which is a convenience to the consumer. So I'd describe it as feeling their way on it, but a lot of interest -- a lot of interest at the recent Summit, a lot of discussion with our sales force about it. We've gotten into a little bit of a problem because we have a lot of salespeople who wanted to get the fob for themselves, and we have a lot of customers who wanted to get the fob, but we don't have enough fobs in the moment. Of course, we fixed that. It's a supplies thing. But it's where people are feeling their way. But the core market for the Squares and the Intuit Solutions and their ilk, which is really an adjacent market to the Heartland market, is that large, large number of very micro merchants. That's not an audience we're trying to attract. It's going to grow the acceptance of electronic payments, which is great. And as Bob mentioned, we'll see on the underwriting side. That's a separate risk. But our focus is really on how does this technology play out for the larger established retailers whether restaurants or whatever, and how they incorporate this new technology into their business. They will be incorporating it. It's a question of how and working with them to demonstrate the ways -- the best way to do that.

Operator

Our next question comes from Tien-Tsin Huang from JPMorgan.

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

Just -- Bob Carr, I heard the comments around the pricing. I just wanted to clarify the -- you've been able to pass through FANF fee also the MasterCard licensing fee and I'm curious if I think which is coming up, are we going to also see a step-up in costs to get your systems EMV ready as well? I'm just trying to think about the potential changes [indiscernible] beyond what we've discussed in the coming quarters.

Robert O. Carr

The FANF fee and the MasterCard are just now being built out for the first time because they became effective in April, right? So we don't have any impact on that one yet. We don't expect really to have any impact to our operating results. In terms of the EMV and so on, we are working on that and it's an important and significant project. Our due date for that is [indiscernible] April 1 of next year. We don't expect that to have a big hit to our operating expenses. It's basically technology investments that are not all that much different, frankly from a lot of the development costs that we've had to incur for compliance issues over the last few years. So it's not really an incremental cost of the significance that one would think. It's not as hard as it sounds. I mean, it's not -- I would not minimize it, but it's not a big cost factor in our -- in the future.

Robert H. B. Baldwin

If I could add 2 things. One is, go back a few years when Visa and MasterCard both took the core transaction fee that has been about $0.005 per transaction up to $0.0185 for MasterCard and $0.0195 for Visa. That was actually a much more dramatic change in the merchants cost than what's going on with the FANF fee now or the MasterCard fees is not even hitting until July. So -- and that we saw no impact. And we didn't discuss that with you, frankly, because the state of the world was less focused on those fees than it is today. So I don't expect any meaningful impact, as I mentioned, the impact on an individual merchant of ours as we pro forma it is literally dollars per month difference, if any difference. So it's really not a big driver. And on the EMV, it's really a question of allocation of resources and we wish we didn't have to dedicate the resources to this that we are because we could be doing other great things with those resources but compliance mandates -- our compliance mandates and you go ahead and you do it and try to build new fun stuff around that, that requires expenditure.

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

Just 2 quick ones and I'll jump off, just pipeline to acquire more share in schools, I don't know if you talked about that or not. And then the second one was, and it was probably a sensitive subject, but

Global Payments in the breach, any sort of change in the selling environment as it relates to that?

Maria Rueda

Tien-Tsin, I'll take your first question in terms of whether or not we are looking to acquire other schools for -- under our School Solutions offering. We've said in the past that we hope to -- in fact, that we were always looking but we would not do anything unless it was at the right multiple or the likes. But we see a lot of opportunity in the organic growth in the school, the School Solutions entities that we've already acquired and we're really focused on maximizing the value of those acquisitions now if we can successfully integrate them into our operations.

Robert O. Carr

Yes, and, Tien-Tsin Huang, in terms of the global breach, our hearts go out to Global, we know what they're going through, it's tough. They'll come through it fine. In terms of the merchant community, it seems like the thinking is well there, there we have another one. I don't think it's impacted the marketplace in terms of their -- the desire to stay away from Global and come to Heartland. It just like it didn't happen 4 years ago when we were experiencing the same thing.

Operator

We'll take our next question from Meghna Ladha from Susquehanna.

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

So just going back into this EMV question, what kind of revenue opportunity -- do you see some EMV, I mean, especially for your terminal business?

Robert O. Carr

We don't see it as -- it's a defensive measure in terms of the marketplace. We do think that -- I need to be careful with that answer, but the specific answer I'll stick with that -- by itself, EMV is not going to drive a lot of revenue. However, the fact that NFC is coupled with EMV requires merchants to be able to accept contact-less transactions, that opens up the smartphone marketplace. And we do think because of the complexity of all the new payment methodologies and alternative payments that we need to be reactive, and we see it as a huge driver of our business over the next 3 to 5 years.

Operator

[Operator Instructions] Andrew Jeffrey from SunTrust has our next question.

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

First, it's helpful to hear about the color on the pricing environment. And your net revenue yields, SME processing yield, has been pretty consistent for a long time. And in the fourth quarter of '11, it ticked up. In the first quarter of '12, it ticked up. Is that indicative of what we're seeing, kind of, on a macro or competitive front? And is that sustainable, in your mind, at least in 2012 until the environment kind of settles down a little bit?

Robert O. Carr

I think the answer is, it is sustainable. And we don't know for how long, but we think it's sustainable in the near term.

Operator

And we'll take our next question from Tim Willi from Wells Fargo.

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

Just a follow-up, Bob, I'm intrigued by your comments around productivity of new sales hires -- I was wondering if you could just go back into that comment and if there's any catalysts in terms of training or a tools that had been introduced into the sales force. I think you rolled out some mobile or tablet-based apps for sales with your sales conference. And again, just sort of what the pipeline looks like around the hiring, on how you would think about the headcount as we move through '12?

Robert O. Carr

Yes, you put your finger on a really significant issue for the management team. We're really focused on bringing in new hires. Our hiring has been good. We brought on a new team a while back towards the end of last year. In terms of recruiting for us, it's -- they've been very effective. And we continue to be challenged with the new hires getting them onboard. It's a very difficult thing. The new tools that we have are iPad-focused. They're very well received by the sales organization but we have a heck of a lot more work to do to get them to the level that we want them to get. So we're working very hard. This is sort of the keys to the kingdom that you're bringing up for Heartland sales model and stay tuned. We're eager to see what kind of progress we can continue to make here. It's a very tough thing to accomplish what we're trying to accomplish with our model, but we're making some progress.

Operator

And we have no further questions in the queue. I would like to turn the call back over to Ms. Maria Rueda.

Maria Rueda

Thank you very much, Nicole. As there are no more questions, I'd like to thank all of you for joining us this morning, and have a great day.

Operator

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.

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