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Executives

Maria Rueda - Chief Financial Officer

Robert O. Carr - Executive Chairman and Chief Executive Officer

Robert H. B. Baldwin - Vice Chairman

Analysts

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

Roman Leal - Goldman Sachs Group Inc., Research Division

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

John Campbell - Stephens Inc., Research Division

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

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

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

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

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

Michael Grondahl

Gaston F. Ceron - Morningstar Inc., Research Division

Heartland Payment Systems (HPY) Q2 2012 Earnings Call July 31, 2012 8:30 AM ET

Operator

Good day, everyone, and welcome to the Heartland Payment Systems Second Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Maria Rueda, Chief Financial Officer. Please go ahead, ma'am.

Maria Rueda

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

Before we begin, I'd like to mention that both Bobs are calling in from different locations this morning, so we appreciate your patience and cooperation during Q&A in advance. I also want to remind you that some of our discussions may contain statements of a forward-looking nature, which represent management's beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions that are based on information currently available to us. Actual results may differ materially from those expressed in the forward-looking statements due to many factors. Information concerning these factors is contained in the report of 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 on our financial results for the second quarter, we reported record quarterly earnings with adjusted net income of $20.3 million, or $0.50 per share, increases of 50% and 49%, respectively, over the comparable figures for the same quarter last year. Results reflect continued strong net revenue growth and a significant improvement in our operating margin, which was 22% for the quarter, 200 basis points above our 20% near-term goal.

Among the more notable highlights for the quarter, we achieved record quarterly transaction processing volume, as we continue to increase new margin installed and experience same-store sales growth. The new margin installed was up 21% in the quarter, to the best level in 3 years, as both our established and new relationship managers' productivity reached all-time highs. Led by Heartland School Solutions, payroll, Heartland loyalty marketing and SmartLink, we also delivered strong growth in our adjacent non-card businesses. In Heartland School Solutions, we acquired Lunch Byte, our 5th and one of our largest acquisitions, expanding our market-leading position in the K-12 school nutrition and POS technology industry. Heartland School Solutions now services more than 29,000 K-12 schools across the U.S., representing a nearly 30% market share.

Operating margins were the best in over 4 years at 22%, and indicative of the significant operating leverage we've been steadily building into this business. This was clearly an outstanding quarter. Today's results are the product of the strong platforms we have built in the card processing and adjacent businesses that leveraged our core processing competencies and unique sales organization. Our progress and success has been a joint effort of many loyal and dedicated team members. As our revenue staff and market penetration have grown, our management structure has been effective at adapting to our most pressing needs. Nevertheless, considering the significant opportunities in front of us, we have been reevaluating how we can expand, strengthen and better organize our leadership to capitalize on the growth opportunities we see emerging in our core and adjacent markets.

As we looked at our organizational structure, it became clear, that to capitalize on these opportunities and to continue our success in the payments arena, we needed to add to a senior management team that has become stretched to its limits. We started a process to look at our organization and what we needed to do to best position ourselves to expand our presence and increase our market share, both horizontally and vertically, within this expanding and evermore complex industry.

In recent years, we have promoted Bob Baldwin to President, added Maria Rueda, as our Chief Financial Officer, and Heidi Goff, as our Chief Marketing Officer. This past quarter, we've bolstered our executive leadership team with 4 new positions, designed to further expand Heartland's portfolio of merchants, products and services within key industries, and to extend the company's growth track record. We are committed to driving greater growth and profitability, and these executives will play extremely important roles in the company's future success. Each brings a breadth of skills and vast experiences that will help lead Heartland through the next stage of our development, so that we can become a multi-billion dollar company.

From within this organization, Bob Baldwin has been named Vice Chairman. In this new role, Bob will continue to work closely with me, with responsibilities for key industry relationships, Investor Relations, information security and customer service operations. He'll also remain an essential collaborator with the business group leaders in the planning and execution of Heartland's growth strategies. Mike Lawler has similarly been promoted to President of the Strategic Markets Group. Mike will lead Heartland's growth in key markets, including services, our payments portals and education, including Heartland School Solutions and as well as health care, government, utility and micro payments. Mike will now apply the skills he honed building Heartland School Solutions and Heartland's payment portals to a broader charter in the host of vertical markets we believe present attractive growth opportunities. In this capacity, Mike will focus on building multi-faceted payment solutions for markets that remain significantly underpenetrated with electronic payments. This is an exciting opportunity to tap Heartland's deep payments resources to interface with emerging new technologies that can create tremendous growth potential in very large markets.

Adding his skills and talent to Heartland's executive leadership team is David Gilbert. David started with us yesterday and comes to us from the National Restaurant Association, where he was Chief Operating Officer. David has assumed the newly created position of President of the Hospitality Group, where he will have responsibility for Heartland's growth in restaurants, lodging, travel and related markets. In this role, David will be responsible for leveraging our success achieved in restaurants, our largest single-industry vertical, and hotels, as well as adjacent markets, such as travel-related service industry. The hospitality sector is likely to be the focal point of the emergence of new loyalty customer acquisition and payment solutions at the point-of-sale. David's deep experience working with, and as an operator in the hospitality arena, will provide unique insights that will be critical to maintaining and expanding Heartland's leadership position in these markets.

Finally, Ian Drysdale has joined Heartland as President of the Network Solutions Group. Ian most recently served at WorldPay, where he was Senior Vice President of Product and Industry Relations, and before that, played important roles at First Data Corporation. In his new role, Ian will be responsible for Heartland's growth in retail, including multi-link supermarket and petroleum and e-commerce. Ian is a seasoned senior executive with more than 20 years of success in electronic payments, e-commerce and POS payment solutions, with a track record of recognizing and exploiting revenue-generating opportunities based on customer needs, industry trends and competitive positioning. Ian will leverage our leading position in large petroleum accounts to develop new products, technologies and strategies that will enable us to move upmarket into larger accounts and other verticals, especially multi-link supermarket. In addition, Ian will lead our efforts to build out our e-commerce offering, as well as get in on the ground floor of evolving new payment technologies.

Each of these leaders will report directly to me and have clear growth and profitability responsibility for their respective business lines. It is our firm belief that we have the infrastructure, the resources and the expanded leadership now to accelerate our growth, both in markets where we are already well established as well as in verticals, where we are underrepresented. In addition, the evolving payments landscape offers very interesting and dynamic and exciting opportunities to grow in new markets by leveraging our existing technology, as well as the intellectual property behind our state-of-the-art systems. This expanded leadership team will allow us to evaluate emerging opportunities with greater insight, and move rapidly to better Heartland's position in capitalizing on those opportunities.

While we are proud of the focused efforts that have built our organization and produced our excellent results to date, we are equally excited about the future of the payments industry and the opportunities provided to us to grow and build value for our shareholders into the future. And now, let me turn the call back to Maria.

Maria Rueda

Thanks, Bob. For the second quarter, we reported record GAAP net income of $18 million, or $0.44 per share. Excluding $0.06 of stock compensation expense and some incidental costs associated with the processing system intrusion, second quarter net income would have been $20.3 million, or $0.50 per share, increases of 50% and 49%, respectively, compared to $13.6 million, or $0.34 per share, calculated on the same basis in the second quarter of 2011. Stock compensation in the quarter was $0.01 higher than in the first quarter, and now is expected to be $0.03 higher than our original projection for the year, primarily as a result of an increase in the number of restricted stock units expected to be awarded, based on recent company financial performance. Results continue to be driven by double-digit card and non-card net revenue growth, as well as a significant improvement in operating margins. Small and mid-sized merchant card processing volume for the quarter was up 6.2% from a year ago, on the strength of 21% growth in new margin installed, a 2.2% increase in same-store sales and just 12.7% of volume attrition.

Same-store sales remain volatile, driven by uncertain economic conditions. The sequential deceleration in the second quarter was consistent with our cautious outlook of 1% to 2% full year same-store sales growth. Please refer to the statistical supplement on our website for more details on these metrics.

At the same time, we would attribute the roughly 100 basis-point year-over-year improvement in volume attrition, to the success of our Durbin Dollars campaign, which is improving retention among our largest merchants to benefit the most from our pass-through of all of the Durbin reduction in interchange rates. In our adjacent non-card businesses, payroll revenues were up 12%, while Heartland's School Solution revenues were up $4.2 million from the second quarter of last year. While the Lunch Byte acquisition closed on June 30 and didn't have any impact on the quarter, it increased Heartland's School Solutions' expected annualized revenue run rate to $40 million to $45 million. We continue to do a good job controlling costs.

Processing and servicing costs were up just 3.3% in the quarter, while general and administrative expenses increased to 10.9%. In concert with our consolidation of data centers and migration to a cloud-based information technology strategy, we are refining the allocation of certain costs between processing and servicing and general administrative expense, which impacts the year-over-year comparison of these 2 expense categories. The refinement has resulted in an increase in cost, allocated in processing and servicing this year. In the aggregate, expenses in these 2 categories increased only 5.9% for the second quarter, 3.4% excluding stock compensation. Furthermore, on an absolute basis, $2.2 million of the $3.2 million increase in G&A this quarter was attributable to stock compensation expense.

Operating income jumped over 37% to a quarterly record $29.7 million, as the operating margin expanded to 22%. The improvement in our operating margin reflects our intrinsic operating leverage as incremental revenues are yielding far greater incremental operating income. We are generating significant cash flow. For the quarter, our GAAP operating cash flow was $22 million. However, our strongly held view is that the cash flow measure we have defined, which can again be found in our statistical supplement, provides a more accurate measure of our true cash flows. On this basis, management's measure of operating cash flow in the second quarter was $29.4 million, or $0.73 per share, up 24% from $23.6 million last year. After capital expenditures of $9.1 million, our free cash generation amounted to $20.3 million, up 30% from last year's second quarter. During the quarter, we used $20.8 million of that cash to purchase approximately 738,000 shares under our Board-approved share repurchase plan, and paid $2.3 million in cash dividends. With this quarter's repurchases completing the $50 million plan authorized last November, the Board has authorized a new $50 million plan to continue deploying capital to our shareholders' benefit.

One final note, we showed $26 million of borrowings under our revolver at June 30, which were funds used for the Lunch Byte acquisition. That borrowing was repaid with cash from our monthly settlement within the 1st week of July.

Let me wrap up with our guidance for 2012. For the full year of 2012, we expect net revenue of between $540 million and $545 million. Our fiscal 2012 adjusted earnings per share are expected to be between $1.70 and $1.74, excluding after-tax, stock compensation expense of $0.22 per share for the year, which is $0.03 more stock compensation expense than we anticipated at the end of the first quarter. Back to you, Bob.

Robert O. Carr

Thank you, Maria. While results achieved over the first half of 2012 are a rewarding conclusion to 6 months of hard work, they equally represent the foundation from which we expect to generate exciting new growth. Hopefully, today, we gave you a good sense of our strategy to capitalize on these opportunities, in both the established and emerging payments markets. We also hope you join us in welcoming our new leaders, and look forward to the new products, technologies and relationships that we will be creating for Heartland.

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 September 14 to holders of record on August 24. And finally, I would like to thank the over 2,700 team members of Heartland for making these powerful results possible today. April, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Tien-Tsin Huang of JPMorgan.

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

I just wanted to, I guess, ask on the cost side. Obviously, the margins were better than what we had expected. Where was the upside versus your expectations, Maria, on the cost front?

Maria Rueda

Well, on the cost side, Tien-Tsin, we are continuing to action our focus on our expenses, and by the end of the year, we anticipate completion of our data center consolidation program, so that was a help to us. And also, if you looked at our -- as we noted in our call, if you looked at our combined expenses of processing and G&A, we were up 5.9%, but that was more than offset by the increase in our net revenue growth in double digits.

Robert H. B. Baldwin

The only other thing I'd add, Tien-Tsin, is that it really -- it is -- we've introduced a number of processes to keep people very focused on their expenses, and I think that we're seeing, across the board, benefits so that, for example, we're seeing very good saves in our service center, where there's a strong and successful focus on keeping their costs well under control.

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

Great. That's all great. Just as my last follow-up, just 2 sort of housekeeping questions. Relationship managers, I know it's flat sequentially, where do you see that going by year end? And then also, the payouts of the accrued liabilities stepped up. I'm just curious if that's just seasonality, or if there's something different going on there?

Robert H. B. Baldwin

The -- on the terms of the numbers, as we've discussed, this is a very strong focus of ours. We've made some moves within the senior leadership and the sales organization in order to focus on development and training activities of our managers, which we think is critical to helping them succeed at hiring and retaining people. And we would like to -- I mean, we have very high aspirations, but on a rolling basis, we'd like to be achieving growth of somewhere at least in the order of 100 people. Obviously, in the last 12 months, we have not quite hit that number, but that remains an objective, and frankly, better than that, remains our objective. And we think with some of the moves we've made, we can accomplish that. I'd also suggest that we're going to be -- I think this is an area where the change-up with adding the new presidents is really going to add some focus to where can we add people who -- some people to go after mid-market, merchants, perhaps larger merchants, and broaden the sales force in that way. So I think there could be a number of initiatives that will bolster that effort. And your second question was?

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

Interest to payouts on the accrued liabilities?

Robert H. B. Baldwin

Yes, that just bounces around actually year-to-date. We're very consistent with last year's and expect it to stay in that area. There's a host of things that go into why we have buyouts of people, whether they get their accounts receivable -- or our accounts receivable from them, through the true-ups, or other adjustments may have gotten high, so -- but there's nothing dramatic going to happen there.

Operator

Next, we'll hear from Roman Leal of Goldman Sachs.

Roman Leal - Goldman Sachs Group Inc., Research Division

First, I guess, on attrition. What are your -- in your opinion, is driving the low attrition, and how low can that go? I mean, how low has that been, maybe, historically?

Robert H. B. Baldwin

Well, the -- how low can it go, is an interesting question. Back in the '02 to '07 period , we had many periods when it was single digits. And that was in an era when card usage, in particular debit cards, was growing dramatically. And we had, obviously, an economy that was quite strong and perhaps overcharged. So that was definitely a help there. But we do think it continued to get better. It's an interesting phenomenon, Roman, that as we look at what we're seeing in our attrition, our same-store sales, which is an element in attrition, are pretty consistent with where we were last year. Yet, our actual attrition rate was down by a full percentage point. And we're ascribing that difference to a higher sensitivity to the Durbin benefits that our larger merchants are getting. So better attrition, better retention of our larger merchants, sort of an indirect benefit from our pass-through of the Durbin results. But -- and we think that, that makes sense, that those are the people who will be most focused on that issue, and so we think that sets us up very well for ongoing improvements in the -- or at least, retention of strong attrition results going forward.

Roman Leal - Goldman Sachs Group Inc., Research Division

Interesting. And when we last talked on the margins, I think the commentary was that you expected at least 100 basis points or so of expansion. You're running well ahead of that. What's the outlook on the margin expansion given the first 2 quarters?

Robert O. Carr

Well, I'll jump in on that one. I think, we have added these leaders in our organization who are going to be needing resources to build up their various areas, and so I think our margin expansion's been significant to this point, but we have goals to get it higher over time. But we're not expecting to have a lot of increase in margin expansion over the next short-time -- short-term period.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay, so the second half, maybe a little less than the first half. And just curious on -- in guidance, do you -- did you use too many of the new buyback authorization used in the second half of the year?

Robert H. B. Baldwin

We do expect it to make some, it's not going to be -- I think, we're planning right now on pursuing the buyback in a measured way, as we think we did in the -- the last time through, so it's not going to have a dramatic impact in any -- in the quarter. We're not going to do something very near-term aggressive that will change the results. And we do have options that are besting, that are going the other way, obviously adding to the share count. So in -- we expect it to improve, but not dramatically.

Operator

Next, we'll hear from Steven Kwok of KBW.

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

Just had a quick follow-up on the operating margin. I mean, if I looked back in time, it seems that the third quarter, historically, tends to be the highest quarter of operating margin, followed by a step-down in the fourth quarter. Should this be something that we should look for towards this year?

Robert H. B. Baldwin

That's certainly been the pattern, Steven. And as Bob mentioned, we have some new costs that are in there. On the other hand, it is seasonally our strongest quarter, and it'll come down to the balancing out of those 2 effects. But -- and then you would definitely expect your fourth quarter to be softer.

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

Sure. And then in terms of the revenue guidance, I believe this quarter came in a little bit lighter than our expectations, but the guidance was raised on that side. Can you break out what's contributing to that? Is that just seasonality-wise that the second half is stronger?

Robert H. B. Baldwin

Second half is stronger than the first half, particularly -- the third quarter is a little bit better than the second, and the fourth is better than the first. Of course, we've got the Lunch Byte acquisition, NUTRIKIDS, that will add revenue starting in the third quarter, and that was a portion of it. And we are seeing still continued good growth in our installed margin, which we're looking to continue. And that also has, on a cumulative basis, an impact as well. So it really is those factors combined that led to that revenue guidance.

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

Got it. And is it possible to break out how much of a revenue benefit the Lunch Byte Systems will be?

Maria Rueda

The revenue -- the revenue from Lunch Byte will be about $4 million in the fourth quarter, and around $3 million in the third quarter.

Robert H. B. Baldwin

We do expect, overall, some seasonal effects with the K-12 School Solutions, where the fourth quarter, we're going to have the full benefits of all those acquisitions. Plus, in addition, looking for -- working really hard to get the new school year off with a bang in terms of the adoption of electronic payments. So we'll see how that goes, but that could also be a help and add a little bit of more seasonality to the fourth quarter than we've had historically.

Operator

Next, we'll hear from Brett Huff of Stephens Incorporated.

John Campbell - Stephens Inc., Research Division

This is John Campbell, in for Brett Huff. So if you guys could just talk a little bit about the selling environment, post the GPN breach. So mainly, has security become a key sticking point with accounts? And if so, if you can just provide us a brief update on actual measures you guys are taking to avoid a similar situation?

Robert O. Carr

Well, in terms of our -- the sales environment for the small and mid-sized merchants, I think there's been so many breaches and so much in the news and so much discussion with PCI, that merchants are sort of exhausted with the topic. Those who are focused on it have -- are focused on it, but I don't think that there's any move away from Global. I don't think that's impacting our sales, whatsoever. Just like it didn't -- right after our breach, we were not impacted greatly with small merchants leaving because of that. So I think there's not been a lot of focus for a lot of the small and mid-sized merchants. The larger merchants, of course, are all much more knowledgeable and focused on this. And we are getting some really good visibility because of our end-to-end solutions with merchants that are really paying attention to this subject, and that's benefiting us quite a little bit. And we think it will continue to benefit us a lot because end-to-end encryption is really the best solution out there, and we're in the best position to implement that and offer that to small and large merchants as well.

Robert H. B. Baldwin

And just to elaborate, about 3 out of 4 terminals that we're selling right now are our E3 solution. So that's -- it continues to go well. And consistent with what Bob said, there really is a growing focus, overall, on the need to, one way or another, get the data out of the merchant's hands. There are just too many points of vulnerability and too much focus from the bad guys on it. And so we think that our E3 solution -- there are others that we think this is better than, but the overall trend, we think, is going to continue to be, get that data out of the merchant's hands, and E3 is a fantastic way to do that.

Operator

And next, we'll hear from Chris Brendler of Stifel, Nicolaus.

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

I want to ask a question on the installed margin, the 20% -- the 21% growth this quarter. Can you talk about just how the drivers of that growth -- we get data on active merchants, we get data on relationship managers, but are you seeing a benefit in the, be it the margins that are at the merchant level, as you make that calculation that you're actually booking higher margin business? Or is it more of a volume effect, you're booking more merchants that's driving that 21% growth. If you just could break that down or provide any color, that would be helpful.

Robert O. Carr

I think our average merchant has been increasing in terms of the size of the merchant, as well as the margin going along with that. But the big impact of our increase is that we have a much higher percentage of effective salespeople. And we don't have the number of salespeople that we had a year or 2 ago, who just weren't delivering the results that they needed to. And so it's really the big improvement. And the headline for our model is that we have made tremendous progress in making the sales position a much higher chance of success, for the people who are willing to use our model. And so that's where it's coming from, primarily. And in order to be successful in this business with our model, the salespeople do need to go after the larger merchants. And so I think that's a by-product of our focus on improving the earnings of our sales organization, which we've been very effective at.

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

And I noticed in that answer, there's no reference to regulation and lower interchange rates on debit cards. Is that still a major selling point today for your sales force as they go into -- and knock on doors? Or is it becoming less of a factor at this point?

Robert O. Carr

No, I think the Durbin -- we're approaching the 1-year anniversary of Durbin, and we're approaching giving back $0.25 billion to our merchant portfolio. And we continue to be the only player in the industry that has given 100 cents of every dollar back to every merchant. And that's a story that our people hold high. They're proud of the fact that we've done that, that was the intention of the act when it was passed by Congress. And we are living -- we are walking the talk. And none of our competitors are doing that, and I think that's helped us to retrain -- retain and attract some really great people on our sales organization, and it helps us drive things forward, and it's going to, as long as there is continued discussion about things like the proposed settlement that was announced a couple of weeks ago. That's going to continue to help us because when the 10 basis points, if that goes through, the 10 basis-point reduction in credit card interchange for 8 months, we're going to give every penny of that back, too, and I suspect we'll be the only ones doing that to every merchant, as well.

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

Okay, and then, a final question -- I appreciate that color. As you talk to your sales force and relationship managers with existing and new accounts, are you seeing any impact or any sort of concern at this point from mobile technology and the players like Square? I mean, they get a lot of press, but is there actually any fundamental impact at this point from some of the mobile offerings out there today?

Robert O. Carr

Well, we -- Heartland is right in the forefront here of this technology. We don't do a good job of getting the press that other companies do, but we have a product called mobile, which is a Square-like reader that fits into a smartphone, and we're selling these things like hotcakes to our existing customer base, so that they can use mobile technology in their stores. So we're right there with a product competitive to square. We're not going after the Tier 5 and Tier 6 merchants right now, because we don't have the automated enrollment process and we're not really sure how to do that business effectively in terms of fraud. We're investigating it really hard. But we have a mobile product. Our salespeople are selling it. It's going very, very well, and we don't feel like we're losing any ground whatsoever to Square. We do -- we are evaluating whether we want to be in the Tier 5 and Tier 6 merchant business. If we -- we're trying to figure out if we can make money doing that, and how we would control the fraud. And so far it's -- we're discussing it and we'll make some decisions here, over the next few months, about what to do.

Robert H. B. Baldwin

And just to give you a sense, I think our average user of our mobile product has not used -- is almost never a standalone product. It's an adjunct to their other processing. Their average annual volume is somewhere, I think last I looked, around 300,000 a year, obviously, dramatically different from the profile of the merchants that, whether it's in Twitter or Square, or whoever it is going after, we think that there is going to be a continued and growing appetite for that solution, as merchants look to make payments more flexible for their customers. And so it's a great place to be. And that will be one kind of business. A second kind, as Bob laid out, is going after that very small merchant, typically without a sales force. You do that distribution in other ways. And we'll look at that as -- and evaluate it on its own merits.

Operator

Next, we'll hear from Andrew Jeffrey of SunTrust.

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

When you take a look at some of the non-card businesses, in which it sounds like you're going to be investing more aggressively, how big do you think these markets can be? I'm thinking about K-12 and Campus Card in particular, can they be, in aggregate, north of 20% of revenue over time, perhaps? And is more of the growth going to be acquisition-driven? Or do you see a shift to more of an organic focus?

Robert O. Carr

Well, we think the organic opportunities are very strong in the K-12 market, but also in our SmartLink product line where we're getting nice growth there. I think that can go very well into the future, into new vertical markets that we're already developing. And we think the payroll business has some -- we're going to be able to become a much bigger player in payroll. So those products, plus our Fresh Text, which is something that we're really -- just beginning to really integrate into our restaurant business, we think that these businesses, which are under 15% now, we think they can get to be 25% of our business over the next few years. And more importantly than that though, is that by having multiple products that solve multiple problems for our customers, we think that makes us a much more attractive company to do their core processing well. So this is all part of our view of the marketplace, that we need to have integrated products that solve multiple solutions for our customers. And that's our focus, and I think that's going to really drive us forward for the next few years.

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

Okay. And taking a step back, I know you addressed some of the near-term puts and takes to your EBIT margin. Bob, I know the target has been 20%. It looks like you're trending above. Is there any reason to think that, as we get booked to '13 and '14 and future periods, that you can get profitability meaningfully above that 20% target? Or as you look to the long-term investments and the diversification of the business, is 20% still the right way to think about Heartland's structural profitability?

Robert O. Carr

Well, my view of that is we needed to get back to 20% after dealing with a couple of really tough years, where we had to really build out our infrastructure and add a lot of operating costs. We had to recover past that. I think we've done that very effectively. It's certainly not the end game, however. So we're looking to get into the mid-20s, sometime over the next few years. By focusing though on our growth, like we are, and spending the money that we are spending to really position ourselves into new verticals, it's going to be tough to get there. And that's our challenge, as Bob mentioned, we have to balance the additional expense we are taking on to build new markets, with our goal to get to the mid-20s in operating margin. But we're certainly not satisfied with 20%, to answer that part of your question, Andrew.

Operator

Next, we'll hear from Wayne Johnson of Raymond James.

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

My question is related to the education market. And could you give us any color? Have any of the wins in the higher education been at the expense of Higher One? And can you just talk a little bit about the organic growth plans there?

Robert H. B. Baldwin

Well, the answer is certainly, Higher One has a very major presence in the business, and so I don't know specifically, but I'm confident that some of them, they were in the mix there. And we feel very good about our progress and prospects in that disbursement business. Against that, is sort of some of the environmental uncertainty. We feel we've built our product in a way that is very student-friendly, and we'll maintain that focus. But it is clearly, an overall industry that's in a little bit of turmoil right now, in terms of what products should look like. And that had something of an impact on what schools are considering. So it's -- we think it's a good product for the students, and for the -- it's a great product for the schools, and are hopeful that the environment will settle down with appropriate products that is cost-effective for the students, and that we can go forward with putting out cards throughout the country.

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

I appreciate that color. And if I can just have a follow-up, if I may? Earlier, there were questions about the lower-end micro retailers and the Heartland payment's, kind of mobile solution. What about going the other way for any of your solutions, do you expect the size of your targeted merchants to remain roughly the same, or do you see Heartland payments swimming upstream? Or are you comfortable playing in the sandbox that you are in now?

Robert O. Carr

We're comfortable in the sandbox that we're in, but we think we have the opportunity to move upstream quite a little bit. And I think, David Gilbert and Ian Drysdale and Mike Lawler, all 3 of them, feel like we can make some substantial progress, not going after the very largest, not going in for the Walmarts of the world or the Home Depots of the world, but there are many, many merchants that are right in our sweet spot as we've developed out our platforms and consolidated into one data center. It's really positioned us nicely to move upstream. So if we're going to average merchants together, I suspect you're going to see our average merchant grow a little bit, in terms of volume and also dollars of margin. On the other hand, if we decide to move into the Square-type market, into the Tier 5 and Tier 6, which we might very well do, then that would tend to bring it down. The one thing is for sure, we're focusing on building our portfolio and the net revenue from that portfolio, and we're working on -- we're definitely moving upstream and thinking hard about moving downstream at the same time.

Operator

Next, we'll hear from David Koning of Robert W. Baird.

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

Yes, I guess, first of all, the yield actions that you did, I guess, starting November 1, 2011, that obviously anniversarys pretty soon and I guess, just one, I guess I'm wondering, are there any plans to do anything like that again this year? And then secondly, separate from that, is there anything else that biases the yield up or down over time, whether it's signing bigger merchants or smaller merchants, or whatever the mix might be? I'm just wondering, kind of how we think about that yield over time?

Robert H. B. Baldwin

Well, David, there isn't any particular plan on that, that was in response to accumulation of expenses that we had to foot. But at the same time, the very substantial cost of the EMV implementation was not particularly factored into that, and so we'll be watching those costs carefully, and we'll make moves if and as appropriate. But there's no particular timing that will be tied to that. And we have no particular plans on it. In terms of other things that are impacting the yield, there's no question that we've discussed the cover provided by the others not passing through the Durbin benefit, has allowed us the highest margin for install that we've ever had. As Bob indicated, it's probably a slightly larger merchant, but it's also helping on the yield side. So how long that's going to persist, is hard to predict. But I would surmise that while many merchants have gotten some of the benefit, I'm not sure that there is a lot of people who are going back now and further adding to the benefit. So I think there will be a good runway for us to maintain that somewhat higher margin per deal that we've maintained since October 1.

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

Okay, good. And then secondly, I guess, 2 smaller questions. I don't think you've given the monthly same-store sales through the quarter and maybe into July. And then also, the School-Link revenues in Q2, just so we could get back into organic?

Robert H. B. Baldwin

Maria, if you could get -- do have the School-Link revenues? I don't have those separately. On the -- I'm sorry, the other question was?

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

Same-store sales.

Robert O. Carr

Same-store sales.

Robert H. B. Baldwin

Same-store. Yes, we don't have July at this point. And I think I previously said that May was pretty strong in same-store sales. Obviously, the overall average was not that strong. So fair to surmise that June was not at the higher end of the range. It's more towards the lower end of the range that we've been bouncing back for the last couple of years, and we just don't have July. So I think it's fair. To what's the best of our knowledge, we are still in an inconsistent consumer period, and that's been continuing for quite some time. And I don't see much in the environment that's going to change it one way or the other.

Maria Rueda

Okay, and getting to the School Solutions question, our revenues were $5.4 million for the quarter.

Operator

Our next question will come from Greg Smith of Sterne Agee.

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

Bob Carr, you mentioned -- you kind of teased us with something on the payroll business that you thought could grow that. Can you expand upon that potentially?

Robert O. Carr

We've made a change in our leadership of the payroll business and we think we're in a nice place to expand our product offering. We're coming out with some new products this fall in payroll and we're looking at just doing some things that are going to expand our business. We think there's a long, long runway with all the new Obamacare regulations that are coming out, especially in the hospitality industry. We think we're positioned to capitalize on that extremely well. So stay tuned. There's not much more I can say than that, but we expect to be a much bigger player in payroll over the coming years.

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

Okay. And then as we just think about gross revenues, we know MasterCard's got a new fee coming in, a new acquirer fee coming in. I think it started on July 1, are there any other -- we've got the FANF fee now in there, are there any other fee changes you guys are aware of, out of Visa and MasterCard, that could be significant in any way?

Robert O. Carr

Not yet. Well, MasterCard's fee isn't insignificant. It's a new fee, and that's something that is difficult to pass on to merchants because it's a flat fee charge to us. But the challenge with these new fees that are coming to us, we have to decide whether to pass them through or not, and with the FANF fee, we are passing that through. But those are the 2 that are on the current horizon, and who knows what's going to happen with the settlement that has been announced, whether it's going to even go through or not. But if it does go through, that's going to have a pretty big impact on what we do, to be determined, however, the devil's in the details that we don't know yet.

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

Did you say the new MasterCard fee is insignificant?

Robert O. Carr

I said it's not as -- it's not significant compared to the FANF fee. Bob, do you want to comment on that further?

Robert H. B. Baldwin

The MasterCard fee was for a half of a year, also. And it will be a lumpier treatment because they're doing it, imposing it periodically. So that was July, not one-time, but a point in time, and then next year, we'll get hit again. But it's not nearly as impactful, in terms of our financials, as the FANF.

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

Yes, okay. And then just anything interesting going on up in Canada for you guys?

Robert O. Carr

They're doing a nice job at collecting POS, growing nicely. And -- but nothing dramatic, in terms of their business right now.

Operator

Next, we'll hear from Mike Grondahl of Piper Jaffray.

Michael Grondahl

In terms of your Durbin Dollars strategy, any thoughts of tweaking that in any way, whether it's the marketing message or any way you can just get even more mileage out of that?

Robert O. Carr

Well, we are going to talk a lot about the $0.25 billion. And when we get a little bit closer to that figure and a little bit closer to the anniversary, and we will be capitalizing on those milestones. So I think we'll definitely push that a lot more than we have in the recent months.

Michael Grondahl

Okay. And then growing relationship managers, what's been the biggest hurdle to doing that? I mean, is there anyway we can kind of understand that better?

Robert O. Carr

It's one of our supreme challenges, with our model, is to grow that group of folks. We've focused so much on improving the earnings and the margin that's installed per rep and growing the number of reps. We've done a pretty good job of developing our recruiting standards, and we continue to work on that. But the balance for our managers in the field is, okay, do I spend my time working with our -- people who are with us today, or do I try to go out and bring new people in? And it's a tough balancing act for manager, and we're evaluating our managers more now on, we call them winners, winning sales reps, that's where they -- our focus is in building the percentage of sales reps who are winning and the amount of production for the territory or the division. So it's just a challenge. It's a commission-only job. It's a tough job. And I think everybody in our industry struggles with this aspect of the business. I think we do as good a job as anybody else out there, but we're trying hard to do even a better job than we've done in the last couple of years, in bringing on and expanding the number of winners on our team, but we're working hard to do it.

Operator

Our last question will come from Gaston Ceron, Morningstar Equity Research.

Gaston F. Ceron - Morningstar Inc., Research Division

Just had a quick follow-up on something that -- I'm sorry, I missed exactly which -- when you said it, but somebody was talking about how we're in this uncertain kind of consumer environment. And there are signs, obviously, that the economy is softening. I think it still feels a little bit mixed, not really clear where things are going to go, with the fiscal cliff and other issues hanging over the economy right now. But I am curious, how you see sort of the uncertain -- the softening economic environment, kind of playing out across your existing accounts, how it's affecting, if at all, sort of your drive to acquire new accounts? And I know you -- I think you guys have said that your guidance for same-store sales is relatively conservative, but curious if that kind of incorporates the effects of this, kind of softening environment?

Robert H. B. Baldwin

Well, we don't really think of ourselves as being financial forecasters. We went into the year thinking we needed to maintain a cautious stance with regard to the consumer. I don't see anything that -- nothing in the first quarter, which was surprisingly strong, made us change that stance, and frankly, nothing in the second quarter, which was closer to where we build our expectations, changes our mind either. It is softer. On the other hand, we don't see any signs of a real drop-off in the consumer. We've been -- I don't know how many months, but for the last couple of years, we've had numerous times when we've been very low but still positive same-store sales, and we have not had negative same-store sales in 2.5 years or something, in a month. So I don't see anything in the economy that's going to drive it toward that. If it happens, it's outside of our control. I think that, frankly, in terms of our business, the more important thing is the volume attrition and we are very pleased with how that is tracking relative to same-store sales. As I mentioned, it really seems like we have -- the larger merchants are staying with us, so that's a very good thing for our overall revenues and profitability. But I don't expect that to fall off. In terms of new merchants acquired, we went through the recession. Definitely took some hits in terms of the -- it's very hard to evaluate our soft sales. For example, in '09, a tough part of the recession, but also a tough time for Heartland with the breach. So really hard to evaluate, but I don't know any reason why a somewhat softer consumer economy would impact our new installs, either.

Operator

And Ms. Rueda, I'll turn the conference back over to you for any additional or closing comments.

Maria Rueda

Thank you very much, April. Before concluding today's call, I'd like to mention that we had scheduled our first Analyst Day to be held at the New York Stock Exchange in the morning of October 8. A more formal announcement will be forthcoming shortly. With that, I'd like to thank all of you for joining us this morning. I look forward to seeing you in New York. And have a great day.

Operator

That does concludes today's conference. Thank you all for your participation.

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