Heartland Payment Systems Q4 2007 Earnings Call Transcript

| About: Heartland Payment (HPY)

Heartland Payment Systems (NYSE:HPY)

Q4 2007 Earnings Call

February 13, 2008 5:00 pm ET

Executives

Robert Baldwin - President and Chief Financial Officer

Robert Carr - Chairman and Chief Executive Officer

Analysts

Bob Napoli - Piper Jaffray

Kartik Mehta - FTN Midwest Securities

Liz Grausam - Goldman Sachs

Dave Koning - Robert W. Baird

Analyst For Tien-Tsin Huang – JP Morgan

Andrew Jeffrey - SunTrust Robinson Humphrey

Tony Wible - Citigroup Investment Research

Tom McCrohan - Janney Montgomery Scott

Robert Dodd - Morgan Keegan

Franco Turrinelli - William Blair

Operator

I would like to welcome everyone to the Heartland Payment Systems fourth quarter 2007 earnings conference call. (Operator Instructions) Mr. Baldwin, you may begin your conference.

Robert Baldwin

Thank you and good evening everyone. I’d like to welcome you to our fourth quarter earnings conference call. With me today is Bob Carr, our Chairman and CEO. Today Bob will begin our discussion with an overview of the quarter and then I will return to go through some of the financials in detail. We will conclude with some time for Q&A.

Before we begin, I would like to remind you that some of our discussions may contain statements of a forward-looking nature, which represents our 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 company’s Securities and Exchange Commission filings. We undertake no obligation to update any forward-looking statements to reflect events or circumstances that may arise after this call.

Now I would like to turn the call over to Bob Carr, our Chairman and CEO.

Robert Carr

Thanks, Bob, and evening everyone. I’d like to thank you all for joining us today and for your interest in Heartland. As you read in this afternoon’s release, 2007 was a year in which Heartland Payment Systems achieved new records in virtually all of our key metrics and reported record earnings despite a tougher retail environment and a temporary spike in overhead spending which dampened fourth quarter results.

Let me get into a few of the highlights illustrating many of our accomplishments both for the year and for the quarter. For the year, we had record earnings of $35.9 million, up 26% from fiscal ‘06 and excluding the non-operating items, we were up 32%.

We had record diluted earnings of $0.90 per share, an increase of 27% from fiscal ‘06 and again excluding the non-operating items, we were up 32% at $0.96 per share.

We had record Visa, MasterCard processing volume of nearly $52 billion, up 20%, and record net revenues of $303 million, up 20.1%. Our new installed margin was up 22% over last year and we had a nearly 200 basis point expansion in the operating margin from 17.8% to 19.7%.

For the fourth quarter, we processed $13.4 billion in card transaction volume, up 17.6%. Net revenues were up 19.6% with payroll revenue increasing 58%. New margin installed for the quarter increased 20.6%.

At December 31, we had approximately 161,000 active card and payroll merchants, an increase of over 17% from a year ago. Card merchant relationships grew to nearly 155,000 while payroll customers now total over 6,200, an increase of over 47% from a year ago. At December 31, we had a total of 1,117 relationship managers, so the sales force grew by over 17% in the year.

Quite clearly from a fundamental perspective it was another quarter of across the board growth, launching us into 2008 with very strong momentum. Bottom line for the quarter, however, net income and fully diluted earnings per share fell short of expectations at $8.57 million or $0.22 per fully diluted share excluding the non-operating items.

Bob will go through the detail but the main culprits were a decline in same-store sales during December, combined with the confluence of events that unfavorably tipped the normally balanced positive and negative spending variances in the quarter.

Obviously, the current economic slowdown is having an impact on processing growth. Same-store sales growth at 2.1% for the quarter was the lowest level in six years. That weakness really came out in December when same-store sales actually declined by 1.3%, primarily due to significant weakness in retailers.

Restaurant same-store sales have also been weak and were also modestly negative in December. We have seen a rebound in January same-store sales to the 2.5% area but continue to see softness in retail and restaurants. We’re certainly factoring a slowing economy into our 2008 plans.

While the economic backdrop has had an impact, our growth will continue to be driven by our sales force’s ability to successfully sign new profitable contracts. In fact, we are aggressively marketing our Merchant Bill of Rights and transparent pricing to merchants.

And while competition remains intense, we’re pricing our product for the value we deliver as is clear in the stability of our margins. In the quarter, we added over 15,500 new merchants, raising our base of active clients to 161,000.

But more importantly new margin installed, our best measure of our sales success, grew by 20.6% in the fourth quarter and grew by a total of 22.2% for the year. Both measures of course are bolstered by our continuing success in growing our sales organization. At year-end, we had 1,117 relationship managers in the field representing 17% growth since year-end ‘06 and solid progress toward our goal of 2000 RMs in four to five years.

A key to the increasing productivity of our sales force and its ability to rapidly grow the new margin installed is the innovative new tools and products we have introduced. You may have seen our announcement that we processed the food and beverage business for the Super Bowl game in Phoenix, as an example.

For the second consecutive quarter, we set a record for the highest margin per merchant installed as our proprietary technology platforms enable us to profitably grow our market. We also set a record for the highest margin installed per sales representative, a good indication that our sales team is getting even more productive.

I have talked about some of our products that go beyond card processing; for instance, our payroll product and our remote deposit capture product called Express Funds. Each of these products is developed to leverage our competitive advantages; our powerful nationwide direct sales force; our brand recognition in the small and mid-size business community, as well as our feature rich proprietary technology.

In addition, products like payroll and remote check capture open new markets, the vast and growing service sector and non-retail business, which historically have not accepted cards. Though still a small part of our business these products are growing rapidly.

Payroll revenues for instance were up nearly 60% for both the year and the quarter as our installed base of payroll clients climbed nearly 50%. Importantly, the profitability of these newer businesses is as powerful as our core card business and most generate predictable recurring revenues as with cards.

Over the past couple of years we have both developed and acquired interesting new technologies that complement our core transaction processing technology. There is always the risk that leading-edge payment technologies will turn into bleeding edge technology so our goal is always to minimize our financial exposure.

Unfortunately the very promising approach that Parcxmart had to on-street parking systems has taken longer than anticipated to achieve profitability. Given the growth prospects offered by some of our other initiatives, we declined to invest additional funding into Parcxmart and took a non-operating charge to dispose of our investment this quarter.

On the other hand, last fall Heartland was the first company to bring payment by cell phone tag to the U.S. when we launched the contactless payment solution on the campus of Slippery Rock University.

By replacing the traditional school ID card with our revolutionary one card and using a special contactless cell phone tag, students, faculty and staff are able to make payments at on-campus locations as well as participating merchants in the surrounding community. Purchasers enjoy a new level of flexibility and convenience and Heartland merchants enjoy an increased volume of business and loyalty.

In an initiative with similar benefits to both consumers and merchants, we plan to launch a Community One card this spring for residents and merchants of our hometown here in Princeton, New Jersey, will be outfitted with the contactless technology to make and accept payments out of a fully functional prepaid account.

We believe the value proposition of offering the cardholder convenience and the opportunity to either get cash back or to fund local charities will drive widespread acceptance and usage.

We have only begun to develop the full capabilities of these products, for example, that will allow a very powerful community-based loyalty program. And we expect to use them as a way to not only drive processing activity on the card, but also to position Heartland to gain and retain the core Visa MasterCard processing of the participating merchants.

The opportunity and benefits for Heartland, our merchants and consumers will continue to grow as we expand these campus and community networks nationwide.

Our technology investments not only offer us the opportunity to enter new markets but to improve our efficiency as well. In ‘07, our operating margins were up nearly 200 basis points to 19.7% despite the added expense of developing these new products.

Efficiency gains resulted primarily from the increasing proportion of merchants processing at our front-end and from a full-year benefit of our Passport implementation.

As recently as 2004, margins were just a little north of 11%. In the fourth quarter the margin did fall, but as Bob will explain in a minute, the underlying margins in our business remain quite healthy.

However, this quarter our operating margin was impacted by our decision to strengthen our disaster recovery and business continuity systems to support our growth plans. The new leadership in our IT group convinced me and our senior staff to make this investment now.

We were also impacted by expenses in a few other areas including legal, marketing and the rollout of our Express Funds product which ran ahead of expectations. Obviously I am disappointed about this and you can be sure that we will be deeply focused on managing these and all costs in the future.

I would like now to turn the call over to Bob, who go through some more of the detail on the financial results before I return with some concluding remarks.

Robert Baldwin

Thanks Bob. To reiterate some of the key points we’ve made, Heartland enjoyed a record year across virtually all of our key performance metrics including processing volume, new margin installed, operating margins and net income and earnings per share.

In the fourth quarter, we sustained our momentum in these key measures of growth with only our earnings growth temporarily derailed by some circumstances we have the resources and experience to remedy.

For the quarter, total revenues were up 18.6% to $342 million, driven primarily by continued strong processing volume growth. Net revenues were up 19.6%, a little better than our overall revenue growth rate due to the faster growth of our payroll operations.

Quarterly processing volume was up 17.6% to $13.4 billion on the strength of a 16.2% year-over-year increase in our installed base of active card processing merchants. Same-store sales in the quarter were up only 2.1%, the lowest quarterly increase since the December ‘01 quarter six years ago.

After increasing 4.4% in October and 3.4% in November, same-store sales actually declined 1.3% in December.

Looking a little deeper, in the fourth quarter same-store sales in our retail vertical grew 3.5% less than our overall same-store sales growth rate. At about 20% of our overall transaction volume this was the driver of the weakness in same-store sales.

We also saw some weakness in the restaurant segment although there the same-store sales were positive in the fourth quarter and came in a little over 1 percentage point below our overall average.

Overall, we’re pleased with our transaction volume and revenue growth in a tough environment. While a slow economy may weigh on same-store sales, this hasn’t slowed the growth in new margin installed, our key measure of growth.

For the fourth quarter, new margin installed was up 20.6% which is a strong leading indicator of future revenues.

Processing and servicing costs for the quarter were $35.4 million, up 19.2% from a year ago on a 19.6% increase in net revenue. We continue to gain economies in our processing cost.

However, in the quarter these were largely offset by added costs from our service center transition and start-up cost in our Express Funds product. For the full year, we are pleased that we held the increase in this line item to just 14.2%.

Customer acquisition costs for the quarter were $10.9 million, up 6.7% from the $10.2 million in the fourth quarter of 2006. Relative to revenues, customer acquisition costs fell to just 3.2% this quarter compared to 3.5% in the fourth quarter of 2006.

Customer acquisition costs this quarter reflect the slowdown in same-store sales growth. Remember that we accrued the buyout liability based on margin generated by existing merchants and with December’s weakness this accrual came in low.

G&A expenses rose 37% this quarter, much higher than the more moderate growth we consistently achieved over the last few years. The increases were primarily driven by IT expenditures required to bolster our internal security and disaster recovery capabilities.

In addition, as Bob mentioned, we had a host of what I call one-timers in everything from legal to marketing this quarter.

For the quarter, operating income was an $13.5 million, an increase of 14.7% from $11.7 million in the fourth quarter of 2006, and the operating margin was 17.2% down 70 basis points compared to 17.9% in 2006, both reflecting the impact of the increase in G&A expenses.

Card processing net revenue, as a percentage of transaction volume, essentially our gross margin, was 52.14 basis points, an improvement from last year’s level and thus illustrating that our pricing is holding firm and we’re getting consistent margin on the larger merchants we’re now signing.

In the fourth quarter, 86% of new card merchants installed and 79% of total transactions processed were on HPS Exchange, and virtually all of our margins are already on Passport.

In 2008, we will continue building scale and efficiency in our processing platform and customer servicing function to improve operating leverage. We then plan to take some of these incremental dollars and invest them in our new product initiatives and in strengthening our technology platform, particularly with respect to disaster recovery and data warehousing.

On balance, we should see operating income growth track modestly ahead of our growth in net revenue in 2008, before seeing our operating margins resume their course toward 25% objective again in 2009.

The effective tax rate for the quarter is 37.2%, unchanged from the tax rate a year ago. Net income for the quarter was $6.8 million, up 3.9% compared to $6.6 million a year ago, and fully diluted earnings per share for the quarter were $0.17, up 6.3% compared to $0.16 in the fourth quarter of 2006.

Net income in the fourth quarter was impacted by the aggregate $2.9 million pre-tax charge to write-off the carrying costs of the Parcxmart investment and for the costs associated with the opening and relocation to our new Jeffersonville, Indiana customer service center.

These non-operating items had a negative nickel per share impact on the fourth quarter. Excluding these non-operating items, fourth quarter net income and fully diluted earnings per share would have been up 15% and 16% respectively to $8.7 million or $0.22.

Net income for the fourth quarter of 2006 reflects a $1.5 million pre-tax charge to write-off purchased software.

Looking at the cash flow and balance sheet, our operations continue to generate solid cash flows to fund our strong growth. In 2007, our cash flow funded a quintupling of our dividend payments, our aggressive stock repurchase program and $24.5 million of onetime capital expenditures associated with the construction of our new service center.

Our GAAP operating cash flow for 2007 was $72.6 million, a substantial improvement from the almost $4 million operating cash flow deficit of 2006.

For better comparison, we have traditionally reviewed on this call is to look at cash generated from operations, which includes net income of $35.9 million, and then adjustments including depreciation and amortization of $53.8 million; provisions for losses of $4.3 million and other items of $5.7 million, which include the 123R option expense − all totaling $99.7 million of sources for the year.

We have signing bonuses of $44.7 million, which pay for future growth, and commission buyouts of $8.8 million. So cash payments totaled $46.2 million, and then other working capital items totaled cash inflow of $10.8 million for the year.

Capital expenditures for the year were $34.2 million, of which $24.5 million was for the new service center. Repurchases consumed another $18.9 million and dividends consumed $9.4 million.

Consequently, total outflows to shareholders of $28.3 million significantly exceeded the $10 million inflow generated through the exercise of options.

Our repurchases and increasing dividends clearly demonstrate our commitment to use our cash to improve shareholder value. Even with those investments, bottom line cash increased over $19 million in 2007.

Given the company’s growth prospects and excellent cash flow, our Board has encouraged us to aggressively use the balance of our repurchase authorization, so long as Heartland stock remains at a level that they strongly feel is significantly below our intrinsic value.

Our financial position remained strong. As December 31, 2007, we had $36.6 million in cash and investments and $166 million in stockholders equity. All of our key metrics continue to improve.

Now, I would like to provide some guidance leading into fiscal year 2008. Our underlying assumption in this guidance is that the economy will remain challenging as we’re currently experiencing.

For 2008, we expect to achieve net revenue growth of approximately 16% to 18%; operating income as a percentage of net revenue to be approximately 20% to 21%, and consequently, we’re initiating our GAAP 2008 earnings per share guidance at $1.13 to $1.17, the midpoint of which is an increase of 20% from 2007 comparable operating earnings per share of $0.96.

Now I would like to turn it back to Bob Carr.

Robert Carr

Thanks, Bob. In 2008, we’re committed to the number of initiatives that we believe can be strong growth drivers in the years ahead. To make this happen, we need to make a variety of investments now.

For instance, while our new American Express relationship is very exciting and we believe an opportunity for significant growth beginning in ‘09, it’s going to require a commitment of considerable time and resources this year with very little incremental revenue in ‘08.

Our campus and community card initiatives have a similar financial profile. And we have planned some major upgrades to our core information technology, to sustain our position as one of the most robust leading end-to-end processing platforms for the core bricks and mortar merchant community.

Our guidance reflects the expensing in ‘08 of most of the costs associated with these major growth initiatives. And even with these costs, we expect to achieve some operating leverage this year and remain committed over the long-term to achieving our 25% operating margin target.

As Bob mentioned, our Board of Directors has authorized the 20% increase in our quarterly dividend from $0.075 to $0.09 per share and has encouraged us to use our share repurchase authorization to aggressively repurchase shares as long as those repurchases are accretive.

The dividend increase will be effective with our March 15 payments, and we will begin to exercise our repurchase authority as soon as we’re cleared to do so.

Throughout our prepared remarks today, we hope we are able to convey to our shareholders our strong fundamental performance and extremely bright future. And before opening the call to questions, I would just like to thank the many dedicated employees and the thousands of loyal customers who have contributed to Heartland’s growth and success.

And with that, we’d like to now open the call to questions.

Question-and-Answer Session

Operator

Your first question comes from Bob Napoli - Piper Jaffray.

Bob Napoli - Piper Jaffray

A question on the attrition rate; how many customers are traded during the quarter?

Robert Carr

Bob, we are not going to focus on that number. It’s not accurate. In general, we have seen in terms of merchant account attrition the quarter was really very consistent with where we’ve been recently.

Bob Napoli - Piper Jaffray

And then let me ask, you mentioned that your retail same-store sales are 3.5% below the average for the company during the quarter. What percentage of your business do you put in that retail category and maybe give a feel for some of the other larger categories?

Robert Baldwin

The retail is about 20% of our business. Restaurant is around 40% and for the quarter was 1.2% below the 2.1% for the quarter. So restaurants brought down the average and are a big part of the average.

But the real driver was the strong weakness in retail, especially in December. As I mentioned, we were going along fine in October and November same-store sales growth very consistent with the 3 and 4% we have been. And all of a sudden to be overall the company down 1.3% hit us pretty hard.

Bob Napoli - Piper Jaffray

Thanks. Just last question on the payroll business if I could. What revenue did you generate in the fourth quarter and over the next three to five years what kind of growth do you think you can get out of that business?

Robert Baldwin

Payroll revenues were $2.7 million in the fourth quarter, and for the year around $10.2 million and you do get a pickup in the first quarter as you issue W-2s. We’re very excited by the uptake of payroll both at the customer level and in our sales force.

One of our challenges is getting more and more of our sales force to spend time on payroll and that’s really taken over off over the last couple of years. So, we have some targets that are really to keep that growth rate which is been in the 40% and 50% area. We want to keep that going for a while because we’re still quite small in that business and feel we’ve got a long ways to go.

Operator

Your next question is from Kartik Mehta - FTN Midwest Securities.

Kartik Mehta - FTN Midwest Securities

Bob, I wanted to ask you about the security spend you talked about or the IT spend. Was there a necessity for this? Did you see a particular flaw that made you do this or was this just as a result of somebody else taking over and they felt there was a need for spend?

Robert Carr

Good question Kartik. Thank you. We were surprised frankly with some of the inadequacies in our disaster recovery, in our business continuity model. We have moved to a data warehousing approach and just in the process of doing our planning for ‘08 we discovered a couple of things that we felt made us more vulnerable than we wanted to be.

And we decided to go ahead and bite the bullet and do what we thought was the right thing and spend the money in the fourth quarter so that we felt we could in good conscience say that we have a very, very secure system, and to the extent that we know how to make it secure.

So it was a negative surprise, and it came as a result of us getting new information about some of what we had developed in the past.

Kartik Mehta - FTN Midwest Securities

Then Bob, as you look at the purchasing merchant contracts from your salespeople I know the contracts already stipulate the price. How would that price compare currently to what the market is? Would you say it’s at, above or below where the market is?

Robert Baldwin

Kartik, it’s really hard to judge what the market is. There are companies out there that buy residual streams from ISOs and individual producers. They advertise they pay up to 36 times. I suspect that most of the time it’s well below that and probably below where we are.

We do have an advantage as we own three quarters of the cash flow associated with those same contracts. So we have an information advantage over those third-party buyers that are in the business.

So I would say that it’s probably higher than what the market would have, but on the other hand our information is superior to the market. We think we get a fair return on that while also giving our salespeople who are selling a way to cash out attractively if they need to.

We’re focusing more and more of the buyouts on existing people who are good producers for Heartland who have a cash need, and are cutting back on our buyouts of departed people really driven by the fact that we don’t want to spend a lot more money on those things.

In a tougher economic environment, we’re not convinced that the IRR, which is good, is going to be quite as good. And so we are going to focus it on our successful producers who have a cash need.

Robert Carr

And Kartik, I would add that our compensation model basically has been intact since ‘94 − long time − and I think the market has moved out to us in terms of what they pay upfront for a contract as this free equipment program has taken off and the leasing has gone down.

I think that our competition is now dealing with the cost of adding a new merchant that we have been living with and built into our model. I think it’s very significant that the Heartland sales organization was more productive last quarter − that means margin installed per sales rep − than any other quarter in its history. Our model is working better and better in terms of our new merchant installs and growth of our sales organization.

Kartik Mehta - FTN Midwest Securities

Perfect. Bob, you might have mentioned this in your prepared remarks. What would your CapEx expectations for ‘08 be? I know ‘07 was somewhat of an anomaly.

Robert Baldwin

So, there are two pieces to it. We have the continued build of the service center. We are moving up a few spend there on the fit out and so that’s going to run around $15 million I think for the year.

Then we have other what I call ordinary core CapEx, and we have said we’re going to be in the $8 million to $10 million area. I think we’re going to be at the high end of that area, but in the same ballpark as we have been over the years.

Operator

Your next question is from Liz Grausam - Goldman Sachs.

Liz Grausam - Goldman Sachs

I would like to understand what you’re seeing in your gross margin trends. Obviously, over the course of the last year, saw a big lift from moving into your internal processing platforms.

But as you know the margin outlook into 2008 is a little bit weaker and if you could help us understand − or weaker than we expected − what your gross margin outlook looks like in the context of slower same-store sales versus what we might be seeing in the G&A line flow through from the fourth quarter into 2008?

Robert Baldwin

As we look out in the year Liz, we are looking for the ongoing benefits in terms of our cost of sales which is in the processing and servicing line. In other words, that we are going to get operating leverage out of that.

However, as we look at the investments in some of the new cost initiatives, a good amount of that money is going to be consumed on the G&A side. That’s why we are suggesting that the operating margin as a whole will be in the 20%-21% area, which is a modest improvement. We were at 19.7% for the full year.

So, we are looking at the range there is 30 to 130 basis points improvement and that’s more modest improvement than we have had in recent years. It’s really not coming from any challenges on what I call the gross margin which is the cost of the processing and servicing. It’s more being consumed on the G&A side.

Robert Carr

And I think a lot of it too is that we are really building out our core platforms. The work that we are doing in the campus card, in the community card program is really building out our core processing; true for American Express and Discover as well.

And if we could capitalize the millions of dollars that we’re spending on these things, we would look a lot better this year. But because we’re adding to our core platforms, we have to expense these things, and that’s really going to impact ‘08. We think we’re going to see the fruit of that in ‘09 and beyond.

Liz Grausam - Goldman Sachs

Great. Another question on your merchant growth. I know it was about 17% year-over-year. But the sequential growth in your merchant base is only about 2%, which is slower than what we have seen, and I know there’s some seasonality as you move quarter-to-quarter.

If you could explain what you are seeing in your merchant growth and what your merchant growth expectations are given where your sales force is going into 2008. So we can get some assumptions of how you’re getting to 16% to 18% revenue growth balance between a view on merchant growth and a view on same-store sales?

Robert Baldwin

The sequential is really in my view very misleading for us. We count a merchant only when they actually have processed a transaction for us within the last two weeks. That’s a very conservative way to count a merchant. So we get merchants constantly that are “trading” and then “reinstalling.”

In the fall as you get a decline in active outlets as people suck down for example terminals that are outside bars and things like that. There is a whole host of things. So sequential is pretty dangerous. The right thing in my view to look at is the year-over-year growth rate.

But the second thing that’s got to be factored in is the growth in our average merchant and that is a noticeable effect. We are going up market; it’s not dramatic, but I think our average merchant in our portfolio grew about $10,000 in the last year, about from 335 to 350 or so. And it was more noticeable in the average size of our merchants that are being installed today.

And as we indicated, if you look at the overall card processing net revenue margin, which is the core economics that we’re getting out of the card business, that net revenue margin improved fourth quarter this year over fourth quarter last year.

So the overall portfolio yield if you will is staying in there even while we’re growing the average merchant. And so what you expect is that the number of merchants installed is not going to grow that fast. But you’re getting better margin and net revenue from those merchants that are installed.

And then the other thing is, as we get more successful in our non-card products, that generates good revenues for us and good earnings growth for us, but doesn’t translate into the card business, of course, with payroll as we look at Express Funds, and as we look at the micro payments and campus solutions – they have only tangential impact on our card processing volumes.

Liz Grausam - Goldman Sachs

Okay. And just one accounting question, the uptick quarter to quarter in your inventory on your balance sheet?

Robert Baldwin

That’s the acquisition of General Meters in October. They end up with a lot of inventory associated with their campus processing. And I think that that was about $1 million or more of inventory that came onto our balance sheet in October.

Operator

Our next question is from Dave Koning - Robert W. Baird.

Dave Koning - Robert W. Baird

I think the most surprising thing to me was just a few months ago you mentioned a 21% margin for ‘07 and now for ‘08 we’re looking at a 20% to 21% margin. And I think you explained it pretty well that there is some new costs that come on with the investments in some of the General Meter’s technology and the AMEX account.

I’m just wondering, you talked about not being able to capitalize those. How big are those and maybe what would margins have been in ‘08, excluding some of those costs that you really didn’t expect in the past?

Robert Baldwin

That is really hard to quantify Dave. It’s a range of IT expenditures…

Robert Carr

It’s IT and it’s also personnel, media and the marketing, and the rollout of these community and campus programs. And it is millions of dollars, but we haven’t really…

Robert Baldwin

We haven’t tried to break that out. We do our budgeting from a bottoms-up approach and obviously focus on, okay, what do we need to do in these things, but we haven’t broken it out that way.

I characterize it as that we definitely are still going to be getting leverage out of some line items of the income statement. But then in essence, it’s getting soaked up by the G&A, which as we’ve mentioned before really has always been dominated by IT in particular.

Now, we’re anticipating a pretty substantial increase in marketing and also some sales overhead for the first time is reaching some meaningful numbers in this line which has to do with training and recruiting initiatives that we’re launching. So it’s really hard to break that out on the fly.

Dave Koning - Robert W. Baird

Okay, secondly in this market given it is a little slower than it has been, the retailers and restaurants that you go to, are they looking to cut costs a little more looking at Heartland as a good option to do then also maybe having more time to sit down and look at their costs and talk to you than they maybe had in the past when they were growing faster?

Robert Carr

Yes, I think, Dave, that’s partly the reason we’ve had more productivity in our sales organization of late. I think merchants are more willing to sit down and talk to us about our overall product line as well. That’s why we’re selling more payroll. So I think the negative economy does help our new installs, but obviously it hurts our same-store sales growth.

Dave Koning - Robert W. Baird

Okay. Finally, what’s your same-store sales assumption within guidance? And then you talked little bit about buybacks, what’s your capacity right now, and where would you be pretty aggressive buying back stock?

Robert Baldwin

I’ll take a pass on the last one. I think the implicit same-store sales growth is in the area of zero in our expectations; 0 or 1%, something like that. And remember, the same-store sales number is an inherently upward bias number, because it’s calculated only on those merchants that are with us a year ago and are still with us in the same month this year.

So it has a survivor bias that helps it. And it also benefits from what is still an ongoing shift toward plastic from other forms of payment. So I think that it reflects a reasonably tough economy. But you now it looks like that’s what we’re going to have, so we felt it was realistic.

The other question was our authority, which is approximately 1.3 million shares that we have available to us.

Operator

Our next question is from Tien-Tsin Huang – JP Morgan.

Analyst for Tien-Tsin Huang – JP Morgan

It’s actually Reggie dialing in for Tien-Tsin. He’s in India listening in. Looking at your loss reserves on the cash-flow statement, it looks like there was a small uptick there. Just wondering what’s driving that and then where does that show up in your income statement? Is that a processing cost? Is that G&A? Where can we find the impact of that on the income statement?

Robert Baldwin

It continues to grow; the losses are growing and we run that through the processing and servicing line item. We also grew the reserves. And as we get into a tougher economy our portfolio is very, very heavily weighted toward merchants where the product or service is provided at the time of use of the card and where the card is present.

That is the lowest risk category in our business. And we think we are almost off the charts compared to most other processors in having a low percentage of card not present and a low percentage of future delivery of service.

However, that doesn’t mean we don’t have stores like furniture stores in our portfolio. And when a furniture store goes bad, they’ve accepted a deposit for a sofa or something, and then aren’t going to fulfill it, that will be coming back as a chargeback, and there is not much we can do about it. So we’re taking a slightly more cautious stance on what the losses might be looking forward.

Analyst for Tien-Tsin Huang – JP Morgan

Okay. And then on your hiring plans. Does the softer environment change your appetite for new sales folks? And then an extension of that would be, what are you seeing as far as competition margin-wise for retailers? So are your competitors just as hungry for growth and are they tightening the spread that they charge for processing?

Robert Carr

We’re focusing very much on retaining the new hires that we bring on. So we’re focusing less on bringing on new folks and spending more time training the ones that we are bringing into the company.

I think that the market is good for hiring good people. We seem to have attracted a lot of really great people recently. And our retention of our experienced reps continues to be in the low 90s, 92% last for the ‘06 retention of our experienced people.

In terms of the competition, it’s as vigorous as ever. There are a lot of companies out there trying to take business away from us everyday, and we are out there trying to take business away from them. Competition is robust, but it has been for a very long time.

Analyst for Tien-Tsin Huang – JP Morgan

And if I could sneak two more questions in, just equipment revenues for the quarter. And then you talked about the makeup of the existing portfolio. I think you said 40% restaurant 20% retail. I’m just curious what the mix looks like for new adds? So is it a similar mix or is it more weighted to retail? Any color there would be helpful.

Robert Baldwin

Our equipment related revenues were $5.7 million for the quarter, up from $5.5 million in the fourth quarter of 2006. In terms of the new adds, I don’t have that number exactly, but we have come down a little bit in the percentage of our volume that’s coming from restaurants. And I think also our merchant count has declined as a percentage of our portfolio.

So in terms of merchant count around 31%-32%; we’re coming down more toward 30% suggesting that restaurants are slightly smaller percentage of our new installs than they used to be. I don’t think there is any particular trends that I can mention.

Retail has come down some as well where we are getting a higher percentage of liquor stores, a higher percentage of automotive. Hotels has been pretty much steady and I would say also good growth in both what we call professional services and other which really often represents emerging areas where people didn’t used to use cards but now are using them more and whether that’s in payment to schools or governments or doctors’ offices that kind of thing.

Operator

Your next question is from Andrew Jeffrey - SunTrust Robinson Humphrey.

Andrew Jeffrey - SunTrust Robinson Humphrey

Since coming public you have talked about the operating leverage in the business and I think intuitively given what you do and given the shift to your own proprietary front-end and back-end processing technology, it seems like the business should ramp yet. And I hear you talking about investments, but it seems like this operating leverage has been somewhat illusory.

I’m wondering if you could give us some meat on the bone that as we get off this call increases our conviction that in ‘09 and 2010 and 2011 you’re marching back toward 25% because it seems like there is always something that’s cropping up that’s derailing the supposedly intrinsic operating leverage in this model.

Robert Carr

Andrew I don’t think that’s exactly accurate. For year-over-year, our operating leverage improved 190 basis points.

Andrew Jeffrey - SunTrust Robinson Humphrey

Right, off of an artificially depressed starting point.

Robert Carr

No, that year was also an increase from the prior year. I think part of it is that we set a long-term goal of 25% which is a substantial improvement from where we were. Not many years ago it was down. In 2004, I think it was at 11%. So we’ve had a long ways to go.

We set a goal because we’re confident that we can get there. And I think however you want to cut the numbers we have shown improvement in every year of our recent years anyway. I’d have to go back and look at ‘01 and ‘02. The key driver is going to be on the processing and servicing line.

The real question is should we be investing in initiatives that can drive that top line growth to maintain at the high teens when we get to a better economy and perhaps even improve. And that’s what we are trying to do, is build on opportunities so that we can keep that top line growth going very, very strong and then after a year of hiatus and improvement in that operating leverage, or not a total hiatus because we do expect to improvement it next year, but get it back going.

So I hear you on it. There are always costs that you are incurring to build that growth engine but I think our record is actually pretty decent in terms of improving the leverage while still generating almost exclusively internal growth.

And internal growth has great advantages. It allows you to do things the way you want to do them and there are no surprises or very fewer surprises. But financially it’s a harder thing to do than to go and acquire something and you know that’s been the path we have taken.

We continue to look at acquisitions and if we can find things attractively priced that can bolt on we will do that. But for now and at least in our planning we are assuming that we are substantially staying with internal growth and achieving substantial high teens growth while also expanding our operating margins is not simple and what we’re saying is that in order to do that for the long-term growth opportunities that we see, we really need to step back a little bit for ‘08.

Andrew Jeffrey - SunTrust Robinson Humphrey

I understand the macro-economy is challenging and that I think is well appreciated. That creates this dynamic in which you talk about good sustainable organic revenue growth yet it’s decelerating as the margin comes down.

When you look at the ROI on some of the new initiatives in which you’re investing, how confident are you that it’s as high as it is in that core merchant acquiring business?

Robert Carr

Andrew, the realities of the marketplace are that for us to continue our growth, in my view, we have to have a much more differentiated product line. There is tough competition out there selling the same old vanilla processing to merchants and we have excelled at growing that part of the business.

But for us to be able to continue growing at a high level, we have to continue to differentiate our products. The great news is, from my point of view, is we have the sales organization to deliver the products and we have the ability to develop them because we have made the investments we have made in our front-end and our back-end and this prepaid stored value system that we’re rolling out to the campus and community merchants, it allows us to build our core business because merchants want to play in the game we’ve created for them.

We’re in a very unique position here to do something very significant that’s going to help our growth in ‘09 and ‘10 in the earnings area. If you look at our processing costs we are getting the leverage we said we would get. What’s a little bit different is the realities of the marketplace have caused us to make additional investments that are showing up in the G&A line and we think those investments are worth it to help us sustain our growth in the out years.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. If I could just ask you one more question recognizing that nobody’s crystal ball is particularly efficient here. If we go back to say in 2009 low-single digit same-store sales growth, is Heartland Payments, given the investments that you’re planning to make this year and given the widening services offering, is it a 20% net revenue grower?

Robert Baldwin

Yes.

Operator

Your next question is from Tony Wible - Citigroup Investment Research.

Tony Wible - Citigroup Investment Research

I was hoping we can go back into the disaster recovery investment. Can you just tell us a little bit more about what prompted the review of the disaster recovery? Was there a specific incident or was it a proactive review that triggered that thinking?

Robert Carr

There were a couple of things that we learned as we reassigned responsibilities. We learned that there were some significant vulnerabilities that thank goodness we didn’t suffer any results from those vulnerabilities but we could have. And I think this is true of a lot of IT shops frankly; sometimes it’s good to have new blood come in and take a look at the firewalls that are developed and the internal controls of the existing people.

And we just found that the veteran team had gotten comfortable with the systems that they set up years ago and they weren’t effective anymore. And so it’s a combination of a number of things.

We also decided to kill a contract for a datacenter that we were going to set up in the Southeast and we’re keeping all that in Texas. And that’s caused us to have to do a write-off of a space that we never occupied and we think for the long-term we made the right decision there as well.

Tony Wible - Citigroup Investment Research

Just to be clear there was never any action? It was just a fresh look at it through some new personnel and you were able to identify an area that should have been highlighted?

Robert Carr

I wouldn’t say it’s new personnel. It’s new facts that became evident to senior management about some of the weaknesses in the firewalls and in the internal controls of our people.

Tony Wible - Citigroup Investment Research

But was there any particular incident that triggered that?

Robert Carr

The incident was that new people came in and looked at our systems and found a number of things which were just not acceptable.

Robert Baldwin

We did have one, what I call, minor incident in terms of our spam aspect of our firewalls so we did have one two-day period when our e-mails were overwhelmed with offers to do all kinds of different things.

But there was no other incident and that by the way burned out our firewall and we had to do some emergency preventative things on that. But it was nothing in terms of a data security external intrusion. It was revaluation.

Robert Baldwin

We did learn that there was an unnecessary linkage between our payroll business and our card processing business that folks who were looking at payroll data were able to also look at card data and that was something that hadn’t been planned on and we were surprised to learn and that really caused us to invest some money to fix that right away as well.

Tony Wible - Citigroup Investment Research

So what was the total incremental cost for the disaster recovery investments for the fourth quarter if you had to quantify it?

Robert Baldwin

Certainly a seven-digit number and as you know if you looked at the G&A was up about $3 million from where we had been running, more than half of that was one way or another IT related.

Tony Wible - Citigroup Investment Research

Okay. And with regards to legal and marketing what led to the higher marketing expenditures and what specifically is that or are we saying that there’s a higher payment going to a third-party or is there just advertising promotion? Can you go into a little bit more detail with that?

Robert Baldwin

I think it’s a little bit of fourth quarter blues. We didn’t spend as much in the marketing. The cash didn’t go out so much in the first three quarters and we spent it in the fourth quarter. And we’re spending a lot of money in the campus and community program and I think we just didn’t do a very good job frankly of budgeting that in the proper quarters.

Tony Wible - Citigroup Investment Research

And legal, was that significant? Because it was mentioned in your remarks.

Robert Baldwin

It was significant. It wasn’t seven figure but the surprise was non-trivial and it had to do with unfortunately as a larger company, we have had employment related stuff that’s gone on and those things hit at various times. We had a couple of settlements that we made. We’ve been very proud of our professionalism and the success we’ve had but the fact is we’ve got 2,500 people around and sometimes people do or say dumb things.

We also, of course, had the cost of undertaking the lawsuit against MICROS which is non-trivial and some other things, nothing notable and in fact, I don’t think we haven’t got our 10-K written in terms of legal disclosure but there won’t be anything material to discuss or anything like that.

Tony Wible - Citigroup Investment Research

Okay. Last question here, is the gross margin installed for the quarter, what was that number?

Robert Baldwin

15.5%.

Operator

Your next question is from Tom McCrohan - Janney Montgomery Scott.

Tom McCrohan - Janney Montgomery Scott

Can you give me a sense as to how the volume attrition held up for the quarter? You talked about it ranging about 10% to 12%. What was it this quarter? In connection with your outlook, what are you baking into your guidance in connection with volume attrition for ‘08?

Robert Baldwin

With the same-store sales growth that low, volume attrition is part and parcel of same-store sales and we were above the top end of that 12% high-end that we have had over the years. For the year, we stayed right at the top end and so we baked in the possibility of somewhat worse than the 12% number for our assumptions for 2008.

Tom McCrohan - Janney Montgomery Scott

Okay. Was 15% volume attrition equate to 0% same-store sales growth for ‘08 or is that too…?

Robert Baldwin

That’s too high. There isn’t a linear relationship between same-store sales and volume attrition. There are other factors that come into play, but I would say that historically when we were in the 7% to 8% same-store sales area, we were in the area of 10%. When we were in the 3% to 4% same-store sales growth area, we were at the high end around 12%. So, as I said, we are baking in something like 0 to 1% same-store sales for ‘08.

Tom McCrohan - Janney Montgomery Scott

Okay. I know you don’t disclose transactions but when you’re looking at same-store sales, are you seeing smaller average tickets with the same number of activity per merchant or just general lower activity, lower transactions and lower dollar amount per transaction?

Robert Baldwin

Our average ticket − and we don’t go out of our way to conceal it, frankly; we just don’t talk about it very much, because it tends to be very stable just under $50 a ticket now. To give you a sense, back in 2000 when I joined, I think our average was around $57 and that’s come down primarily not only fast food but also because of debit, which is a lot bigger in the portfolio and average ticket on debit is $33 or $34.

This year in fact our average ticket increased just a hair. So, the slower growth we saw in volume was reflected almost exactly with the same growth in transactions.

Tom McCrohan - Janney Montgomery Scott

Okay. And in the past, Bob, you’ve disclosed the dollar processing volume. This quarter you just disclosed the growth rate and I am assuming when you talk about transaction processing volumes being up 17 some odd percent, (inaudible)?

Robert Baldwin

If we didn’t say it, we should’ve said; it was $13.4 billion.

Tom McCrohan - Janney Montgomery Scott

Okay. So, that’s the number you’re still going to disclose going forward?

Robert Baldwin

Absolutely. And it totals just under $52 billion for the year up from $43.3 billion in 2006.

Tom McCrohan - Janney Montgomery Scott

Okay. Just want to be clear, when you’re adding new merchants for the quarter, are you saying that the net revenue spread for the marginal merchants that you are adding during the quarter is 52 basis points or higher?

Robert Baldwin

There’s a lot of other stuff that goes into that Tom. That’s a dangerous assumption to make because the existing merchants and different mix of business from those merchants and such like.

Just to be clear, I was talking about the card processing, so not anything related to payroll or anything. But in the card processing business, the fact that the margin grew a little bit is indicative that some combination of the new merchants we’re getting have a very solid net revenue and/or the merchants we’re losing are not unduly weighted toward higher net revenue merchants.

So, I think the best way to put it is it’s all good but it’s hard to describe what part of the stew we’re talking about here.

Tom McCrohan - Janney Montgomery Scott

Sure, but conceptually over time and I think it’s probably consistent with what you have said in the past, as you go after the larger merchants now that you’ve got the infrastructure, the new service center in Indiana, you would expect pricing for the larger merchants some could be like 10 million of processing volume a year.

It’s going to be lower on a net revenue spread basis than historically, right? But that’s not a bad thing because you’re going to be adding higher gross margin installed over time.

Robert Baldwin

Yes, that’s correct but we just haven’t had a dramatic impact from those large merchants so far. We have mentioned that the Centerplate deal as a significant one. Those take longer than I think we anticipated and we’re not driving business towards those. What we’re experiencing is that our average merchant is definitely the larger, but it’s more merchants that are doing 1 million and 1.5 million and 2 million of annual volume not the 100 or 200 million merchants, at least so far.

Tom McCrohan - Janney Montgomery Scott

Do you have a specific sales force at Heartland that’s going after the bigger merchants today?

Robert Baldwin

No. That’s something we are considering having someone who when you get to the larger merchants, you start pulling on corporate resources for responding to RFPs and things and so we are considering a position that will facilitate that and be paid out of the commissions that would be generated by the people who are actually servicing the opportunities. But we do not have a separate sales force doing this right now.

Operator

Your next question is from Robert Dodd - Morgan Keegan.

Robert Dodd - Morgan Keegan

Just a couple of quick questions. On seasonality of customer acquisition costs we saw a relatively low growth rate in Q4 because the same-store comp was lower. Are we going to see any odd seasonality or are you modeling in any seasonality in ‘08? Maybe a low growth in customer acquisition costs in Q1 or same-store comps remain low and then a somewhat difficult comp say in Q4. Is there anything we should be looking for in that?

Robert Baldwin

Robert, I wish I was able to be more successful at predicting the quarterly swings. We feel like we’ve settled into a pretty good band as a percentage of revenue in the low threes. But it’s bouncing around and behind the quarterly jumps the monthly variance is challenging.

So, I wish I could be helpful on that number, but within that band that we’ve been running the last few years, I don’t see any particular trend on that line item and I can’t really help you on how that’s going to move seasonally in 2008, I’m afraid.

Robert Dodd - Morgan Keegan

Okay. Worth a shot. On the same-store comp number you said it was 2.1% in Q4, down in December, but I think you said up 2.5% in January, yet you’re talking about 0 to 1% for the year, is that right?

Robert Carr

Yes.

Robert Dodd - Morgan Keegan

Okay. And then one final question. I think you answered this already. What’s the capacity left on your buyback facility?

Robert Carr

1.3 million shares.

Operator

Your next question is from Franco Turrinelli - William Blair.

Franco Turrinelli - William Blair

I want to go back a little bit to Andrew Jeffery’s question, because I must admit, I’m really struggling with this too. Obviously, the G&A expense, as you pointed out was significantly higher than it’s been in the fourth quarter.

I think you characterized, Bob, as being about $3 million above what you had been running at, but the first half of the year did include the expenses related to your sales force meetings, but let’s take that $3 million. What I’m struggling with is, there’s a lot of things in that $3 million that are or that you’re suggesting to us are more onetime effects, legal upgrades to the security and those things.

But if we exclude some of these onetime things, we’re back up to a margin for the year, which is about 20.5%. And so the guidance for next year really isn’t showing any expansion. You told us why, because you’re doing upgrades to the core IT platform, AMEX, campus cards, etcetera.

But I’m struggling with understanding the breakdown between what was really onetime about this increase in the G&A expense in the fourth quarter and what is really a new level of expense that we need to factor in for future.

And if it all relates to investments in ‘08, again going back to Andrew’s question, these are big numbers that we’re talking about. I think you can help us a little bit more in just understanding where the payback of these is going to be and why you have a fair level of confidence in the payback to make expenses of this order of magnitude?

Robert Baldwin

Again it’s hard to break them apart, but I think that the added expenditures that we are making are on a quarterly basis. You have normal growth, but I’d say incremental to that I’m throwing out a number of $0.5 million a quarter or something that is not getting a return in 2008, or if we get it so far back ended that is not worth speaking of.

And so it’s not small numbers, but it’s not huge numbers either. If I had to take a guess between the AMEX and other card processing things, that alone is probably half of that aggregate increase. I don’t have a specific payback on that.

It is driven by our belief that these initiatives will create for us a more differentiated product set for our sales force to sell, and that we will therefore be able to maintain customer margin acquisition and customer relationships that are just stronger than they have been and longer lived as well.

One of the major goals of the things we’re doing is to try to be selling multiple products more and more successfully to a merchant on the belief that that can do some things to stop the merchant from responding knee-jerk to a low-ball teaser rate coming in for example.

If you have the payroll, you’re more likely to do that. If you have the community card project is successful, what it will do is not only give all the merchants in a particular community, just as Slippery Rocks did, the incentive to sign up, but also they will be able to answer that sales person who comes in with the low rate, and they will be saying ‘well, can I participate in the one card program?’ and at best their answer will be well not very easily.

And so nailing down what the specifics of the returns are is somewhat difficult to do right now. If we don’t see the returns coming over time during the course of 2008, we’ll make our decisions on that but we’re very positive about them right now.

The overarching intention is to drive this company to a higher level of margins than it has today, because the intrinsic margins in the businesses that we’re in are good and are above that 25% target we have set.

Really it’s just a question of what are we expending to keep the aggregate growth going, which we think is in the best interest of the shareholders while we’re also developing the operating margins.

Franco Turrinelli - William Blair

That is helpful. Obviously we don’t want to compare your guidance with consensus estimates because those were not endorsed by you. But certainly if you look at it relative to our expectations, everything that you reported in the quarter and in terms of your guidance was at or above our expectations in terms of revenue, in terms of gross margin, in terms of merchant additions and all that stuff.

So everything seems to be going great except for this huge variance in the G&A cost. And I’m struggling with reconciling what I’m seeing as the fundamentals of the company that you yourself had said were so good, and seem to be sustained if not even accelerating in some respects. I’m just really struggling with that decision to go ahead and spend several million dollars worth at this time.

Robert Carr

Let me give a couple of comments, Franco. With IT security you’re either pregnant or you’re not. And I think it would be irresponsible for us to know that we have vulnerabilities in our system where we could have something really bad happen that would put the company in a TJ Maxx position.

Now fortunately we never had anything close to that happen, but we could see a scenario where that could have happened. We don’t see that anymore. Should we have spent that million plus dollars to fix the problem? I think we would have been irresponsible not to do that and we knew this wouldn’t be a fun call as a result of that decision.

Also, we’re moving up market and we have a vendor that’s really now allowing us to compete in a level playing field. Do we just take it? Do we just wipe out a huge percentage of our potential marketplace in the restaurant, the hotel business and just forever give it up and not spend the money and pay the price to get in the litigation that we feel very confident that we’re going to win and have a good outcome in?

I think again we are looking at the long-term shareholder value and it’s difficult to have this phone call. But our fundamental economics are very solid in the company. Our growth is in good position; our sales productivity; our processing margins. We’ve decided to spend some money to do the right thing for the long-term and hopefully our investors will thank us for that as we get the results we’re contemplating over the next few years.

Robert Baldwin

And the other thing I would just throw in. I hesitate, but if really was in most quarters you have some positive surprises and some negative surprises. And as we were going through the end of the quarter, it was just stunning how few positive surprises of any kind there were and it was lots of little things that added into the costs.

The big things we have gone through here, but there were a lot of little things that also hit as us and as I say we didn’t have any help, obviously, from our net revenue − pleasant surprises − and it was just on the expense side there were no pleasant surprises as well.

I will also say that this pushes us to a position where we have to be that much more aggressive about managing those costs and being in front of those costs. And as we have had and will continue to have a lot of discussions internally about how we avoid that kind of issue in the future. So, that’s another perspective as well.

Franco Turrinelli - William Blair

That is helpful. And, Bob, I agree with you on the necessity to make those expenses. And to be clear, we were actually frankly pleasantly surprised by your top line, by your gross margin and by the guidance for next year on the top line. So I want to be absolutely clear about that.

One final question if I may to help me think about this more clearly, it does sound, Bob Baldwin, really what you’re saying is that the higher level of G&A expense that you expect to incur next year and the higher level of G&A expense that you did incur in this quarter are not related.

So these are two separate sets of decisions and events causing these higher level of G&A expenses in the two period. Is that a fair statement?

Robert Baldwin

You’re not totally accurate, but very fair; that is correct.

Operator

Your next question is from Bob Napoli - Piper Jaffray.

Bob Napoli - Piper Jaffray

Maybe dig in a little more on the American Express. If I heard you correctly, I would just like a little more color on what you think that means to you. But it sounded to me like it was going to cost you about a nickel a share in 2008 to implement the American Express program. Did I hear that correct?

Robert Baldwin

No, it’s going to be much less than that. There is the development cost and that allocation of resources that we have to do, but nowhere near nickel a share. But if basing on that is we expect very modest benefit this year. But if things go well and this is a new program for American Express, we’re very pleased to be one of the initial participants. It has some elements of trial in it. If it goes well that it’s going to be a significant plus in 2009 and beyond.

Bob Napoli - Piper Jaffray

How are you adding that to your program? Can you talk a little bit about what makes the implementation of the American Express more unique to…

Robert Carr

It’s an expansion of Passport and we should really mention Discover as well. We’re going to have a much deeper relationship with both Discover and American Express with respect to our merchants and we’re going to also have a greater revenue opportunity with those. But we will see virtually none of it in ‘08 but if things go well will have a significant impact in ‘09 and beyond.

Bob Napoli - Piper Jaffray

Would that mean 10% of an increase in transaction volume or something of that magnitude?

Robert Baldwin

It won’t increase our transactions. It will affect our revenue per transaction which right now is very thin on American Express and Discover and it will become less thin in ‘09 and beyond if this is successful.

Bob Napoli - Piper Jaffray

Okay. Just one thing on your cash flow statement the signing bonuses and you probably talked about this before, but I don’t remember this. The signing bonuses are up 32% in the cash flow versus revenue growth of 20% or merchant growth of 18%. I just wondered is there relationship between the signing bonuses and those items seemed a bit out of line.

Robert Baldwin

It’s the margin installed that would drive the signing bonuses. As we mentioned, that’s the major difference. And also we have some programs where we pay more upfront and less on ongoing that has an impact as well.

Bob Napoli - Piper Jaffray

And last question quickly, the campus card, when would you expect that to be material? Are there any metrics that we can track on that business at this point?

Robert Carr

No because our model is to add more merchants doing our core processing and so the impact of that will be seen and hopefully be sustained and increasing perhaps even top line growth.

Robert Baldwin

But we will keep you informed on aggregate number of campuses or some other metrics as we get something worth reporting which really won’t happen until early as this summer.

Operator

And your final question comes from Tien-Tsin Huang – JP Morgan.

Analyst for Tien-Tsin Huang – JP Morgan

Just be clear you said that you are assuming zero same-store sales for ‘08 and January was running at like 2.5%?

Robert Baldwin

Zero to 1%, slightly positive, maybe, same-store sales (inaudible) and January was 2.5% positive overall. That’s correct.

Analyst for Tien-Tsin Huang – JP Morgan

And did you offer an outlook on total processing volume growth for ‘08?

Robert Baldwin

No, we didn’t. I think the net revenue is going to be probably in line with the net revenue 16% to 18% growth.

Robert Carr

Thank you all for joining us. And look forward to the next quarter call. Thank you.

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