Merchant-services provider Heartland Payment Systems (UNKNOWN:HPY.DL) boasts its status as the nation's fifth largest payments processor, and coming into Friday morning's announcement of its fourth-quarter results, the company had seen its stock climb to all-time record highs on the strength of its recent success in the merchant-services arena. With ambitious growth targets, though, Heartland has had to keep executing well on its strategic plans, and the results and guidance it gave in its financial report show that Heartland sees the need to suffer some losses in the short run in the hopes of generating a faster pace of longer-term profit growth in the future. Let's take a closer look at the latest from Heartland Payment Systems and what it means for the company's future.
Charging off Heartland's profits
On the revenue front, Heartland Payment Systems kept looking strong. Revenue rose 26% to a new quarterly record of $188.3 million, easily topping the $182 million that investors had expected to see. But the company's bottom line suffered, with Heartland posting an unexpected adjusted loss of $0.42 per share. The payment processor cited asset impairment charges as pulling down its quarterly earnings by more than $1 per share, but even after adding that back in, the $0.60 in earnings per share was less than the consensus figure among analysts of $0.68. The asset impairment charges came as a result of Heartland reassessing the prospects of its Leaf unit, its point-of-sale software platform Prosper, and its investment in mobile-payments provider TabbedOut.
Looking at the details, though, gives a more favorable picture of Heartland's recent experience. Same-store sales rose at a 3.9% rate, and volume attrition declined to 10.7%, both of which represented new five-year records for the company. Heartland also continued its focus on small and mid-sized customers, with processing volume from its small and mid-sized enterprise segment climbing 10.1% from the year-ago quarter. Indicators of new business activity also climbed to record levels during the quarter.
CEO Robert Carr once again praised the work of his sales team, noting that "transparent pricing, innovative products, and uncompromised security delivered by our trusted employee relationship managers" were largely responsible for the company's favorable results. At the same time, though, Carr acknowledged both rising processing volume from its organic business growth as well as the impact of strategic acquisitions both within and outside the card-processing realm.
How Heartland expects to grow even faster
As has become almost routine, Heartland also announced more acquisitions along with its earnings release. On Heartland's menu Friday morning were two point-of-sale solutions companies focusing on the restaurant and retail segments. Dinerware is a hospitality industry specialist, with its platforms helping everyone from fast-casual restaurants to upscale restaurants and hotels and casinos with its restaurant software. Meanwhile, pcAmerica has a platform that helps streamline all aspects of daily operations, going beyond customer transactions to help users track inventory and marketing.
To help coordinate the efforts of its various point-of-sale businesses, Heartland created its Heartland Commerce segment, which will bring together more than 90,000 customer locations using its solutions. Heartland will boast 15% market share in the restaurant arena, and with endorsements from the National Restaurant Association and dozens of locally based restaurant groups, the payment processor hopes to take advantage of advances in technology to promote and develop its capabilities even further. Carr commented, "The demand for robust cloud-based [point-of-sale] solutions is accelerating, and these acquisitions are helping us achieve our goal of becoming a leader in this segment of the market."
Nevertheless, some investors won't be satisfied with Heartland's guidance for 2015. Expectations for net revenue to grow 15% to 17% are at the low end of what many investors expected, and adjusted earnings per share of $2.75 to $2.85 would be a shortfall of between $0.15 and $0.25 per share from the current consensus figure among those following the stock.
Even a dividend boost might not be enough to stoke short-term excitement about the stock. Heartland increased its quarterly payout to $0.10 per share, but that still gives Heartland a yield well below 1%.
Heartland Payment Systems is counting on its acquisitions giving it enough growth potential to make up for its near-term disappointments. How well the company does at executing on its long-term strategy will be instrumental in determining whether Heartland can keep its stock price moving higher throughout 2015 and beyond.