Tuesday, July 3, 2007

HPY Introduction

Heartland Payment Systems (HPY)


Last Trade Time: 7/5/2007 10:30
Market Cap: $1.09B
Insider Ownership 44.81%
Current Price: $28.90
Yahoo P/E Ratio: 37.23


Introduction

(From Heartland's investor relations page...)
Heartland Payment Systems provides credit and debit card, payroll and related processing services to restaurant, hotel, and retail merchants throughout the United States. HPS provides services to over 137,000 merchants with 1,379 sales and servicing representatives and more than 600 employees in operations, information technology, marketing, administration and management positions.

Heartland processed its first card transaction on July 15, 1997 with a business investment of $1 million. Today, Heartland has become the sixth largest payment processor, with over $45 billion of annual processing volume from current merchants.

Heartland's success is the result of the combination of a superior long-term customer relationship sales model and its internally-developed, client-server based transaction processing platform. Heartland delivers tailored solutions to even the most demanding markets such as retail, restaurant, hospitality and community banks. In addition, Heartland has been effective in servicing auto repair facilities, convenience and liquor stores and professional service providers.

With its corporate headquarters in Princeton, New Jersey and satellite offices in North Olmsted, Ohio; Frisco, Texas; and Phoenix, Arizona; and its Service Center in Jeffersonville, Indiana providing customers with 24-hour support and technical service, Heartland is well positioned geographically to support its national sales organization of W-2 employed sales professionals.

While Heartland is the 6th largest payment processor, it only has around 3% of the market. With plenty of room to grow and an ongoing dedication to improving all aspects of itself and it's industry, I am proud to own a piece of Heartland Payment Systems. As you will see, this is a company which genuinely cares about it's clients, employees and community.


Making Things Better

The above text briefly mention they have an internally-developed, or proprietary, "platform". This platform includes both software and hardware development. I believe this gives Heartland an edge on margins and application flexibility over the competition.

Heartland recently updated to a better version, which they say is more flexible for them as they grow (expandability). They released this to around 100,000 merchants. I'm in a technical field myself and I know how hard it can be to roll out new technology. To me this says they have a competent tech group in command which also has the ear of management. This is an important synergy to note and one that is rarely true at non-tech companies (Think how long it took your bank to get color touch-screens on ATMs). They had the internal knowledge and foresight to re-engineer their software. This should benefit both Heartland and it's customers.

I should note that the guy responsible for these technologies, Brooks Terrell, has just stepping down as Chief Technology Officer to "pursue other interests". I don't think this is a sign of anything. He put in 10 years and things have been running smoothly, and without downtime, for well over a year. I'm sure his team and procedures will hold up just fine.

Heartland isn't just re-organizing their technology, they are also improving operational efficiency. As I write this, they should be completing work on a new facility. Here is some additional info from a press release:

...The 120,000-square-foot facility is scheduled for completion in the first quarter of 2007 with additional expansion plans for construction of a second building (date yet to be determined)....

...Heartland Payment Systems will expand in Jeffersonville with the support and assistance of the State of Indiana through the IEDC and the City of Jeffersonville. The economic development incentives offered by the IEDC include:

  • Approximately $295,000 in training grants from the Skills Enhancement Fund (SEF) to train Indiana resident employees;
  • Up to $50,000 in training grants for technology professionals through the Technology Enhancement Certifications for Hoosiers (TECH) fund; and
  • Up to $1.8 million over 10 years in Economic Development for a Growing Economy tax credits (EDGE).

The Heartland Service Center is responsible for supporting all merchant servicing requirements including enrollment, installation, equipment supply, repair and downloading, fraud monitoring and chargeback dispute resolution assistance, and handles 98,000 Heartland sales and customer calls a month in the 24/7 facility.

This facility can house up to 1,000 employees, nearly 2x what they will move in with. They are the 3rd largest employer in the area and claim to have a very high retention rate. The new facility will help by offering some nice amenities, such as a cafeteria and exercise facilities.

The Heartland Service Center is unique. Many competitors outsource. Heartland is extremely focused on it's customer service and sales force. They want a customer to get right in to a customer service rep and get the issue handled without a transfer. The sales force is driven by an interesting profit sharing structure. Longer a rep is with HPY, and the more clients they have, the more they share in their client-created profits. So, they are encouraged to be a partner for their clients. The better the clients do, the better the sales person does.


Leadership and Company Background

Robert O. Carr has served as Chairman of the board and CEO since he co-founded the company. Heartland was formed on March 27, 1997 as a 50-50 limited liability corporation between Heartland Bank and Triad, a group of industry veterans comprised of Robert Carr, Don Lassiter and Alan Atkins. Larry Schiffer, Chairman of Heartland Bank, and Robert Carr negotiated the arrangement to form and operate Heartland Card Services, LLC, the predecessor company to Heartland Payment Systems, Inc. Mr. Carr joined after selling his interest in Credit Card Software Systems, Inc., an Independent Sales Organization he founded in 1987, specializing in the travel and entertainment industry. The company officially became Heartland Payment Systems, LLC in October 2000. HPY went public on August 11,2005 with an offer price of $18/share. The shares closed the day at $24.51.

Most of the executives at HPY have been around since inception in 2000 including Robert H.B. Baldwin, Jr., the Chief Financial Officer.

I get the feeling that these guys embody the blend we are looking for in management teams. The have been with the company a long time, and in the industry longer still. They own a good sized stake in the company, and on conference calls they come across as genuine. Heartland is their baby, and they are raising the best they can. Of course I don't know these guys nor do I have any insider information, so this is all based on filtered reading materials and a gut feeling. Do we ever really know our management teams though?


The Merchant Bill Of Rights

The Merchant Bill Of Rights is similar to BestBuy's Geek Squad. From what I can gather, the Bill of Rights is a genuine crusade to protect customers, and create clean branding. It is a carry over from Heartland's passion for creating a positive customer relationship. Needless to say it adds to Heartland's moat.

The Merchant Bill of Rights Home Page explains it better than I can...
The Merchant Bill of Rights promotes fair credit and debit card processing practices on behalf of small and mid-sized business owners. Proposed as an industry standard, it calls for the clear and straightforward presentation of card processing costs.

Its purpose: to enable merchants who don't have the resources of large purchasing organizations to effectively manage their costs, determine which processor best meets their needs and realize significant savings.

Click on each right to learn more.

1. The right to know the fee for every card transaction – and who’s charging it.
2. The right to know the markup of Visa and MasterCard fee increases.
3. The right to know all Visa and MasterCard fee reductions.
4. The right to know all transaction middlemen.
5. The right to know all surcharges and bill-backs.
6. The right to a dedicated local service representative.
7. The right to encrypted card numbers and secure transactions.
8. The right to real-time fraud and transaction monitoring.
9. The right to reasonable equipment costs.
10. The right to live customer support 24/7/365.

According to this Heartland sponsored survey,

Many small and mid-sized business owners don't understand credit/debit/prepaid card processing costs, the fees and surcharges they pay, and how these charges impact their bottom line.

That's according to a recent survey conducted by supporters of The Merchant Bill of Rights. The Merchant Bill of Rights is proposed as an industry standard to inform and educate business owners about card processing costs and drive savings for small and mid-sized businesses.

Nearly 400 merchants nationwide voluntarily responded to the survey. Findings indicate:

  • Only 26 percent of participants believe they are being treated fairly by the debit/ credit/prepaid card processing industry.
  • Only 32 percent understand unfair card processing practices and how they impact their business.
  • Only 21 percent understand the rates, fees and surcharges the pay.
  • Only 15 percent believe they are charged the same as larger businesses.

"It's clear that many owners of small and mid-sized businesses don't understand the complexities of card acceptance," says Robert O. Carr, chairman and CEO of Heartland Payment Systems, one of the nation's leading providers of credit/debit/prepaid card and payroll processing services and the founding supporter of The Merchant Bill of Rights. "Yet, card acceptance is often one of the three largest expenses they incur. Business owners need to educate themselves so they can manage these costs. What they don't know may be hurting their bottom line."


Company FAQ Highlights:

Q: Most successful companies have a philosophy of doing business that differentiates them from their competitors. Describe the Heartland philosophy and what sets it apart from others. How do you instill that philosophy in your employees?
A: Heartland's unique philosophy is based upon a national organization of sales professionals who provide local sales and servicing in a specific geographical area. All of Heartland's sales professionals must operate in the best interests of merchants and Heartland at all times. Heartland has provided a platform for hundreds of sales professionals to earn a good living while building wealth for their families working as respected professionals in their local communities. Heartland also believes in employee ownership and now boasts hundreds of employee owners and option holders who are providing value for over 100,000 merchants, as they build value for their own personal future

Q: From a financial perspective, what is Heartland's business model and how has it held up under the competitive environment of the last five years?
A:
Heartland's model is complex and extremely difficult and costly to get started. The model has been under constant development for more than 15 years by the company's founders. Because it is so expensive to establish a national organization of sales professionals as employees with full benefits, we believe Heartland's model is unique in today's marketplace and will remain so unless someone chooses to make a substantial investment in unrecoverable expenses to duplicate Heartland's achievement. Heartland's model is a culture and a way of doing business that is inconsistent with the business philosophies of all of its major competitors except for the few remaining "pure bank" players.

Q: What is HPS Exchange, why is it important and what does it deliver that your customers couldn't get elsewhere?
A:
Heartland's transaction authorization and data capture center, HPS Exchange, is an internally-developed, client-server based transaction processing platform. We believe it is one of the fastest and least expensive platforms to operate in the industry today.

Q: Restaurants and the hospitality industry seem to be your key vertical markets. What expertise do you bring to these markets and what do you provide those industries that is different from your competitors?
A:
We have learned a tremendous amount of information from our restaurant customers and have tailored specific products and services that our customers have helped us to develop. Many of our competitors do not understand the restaurant industry as well as we understand it. There are lots of complications, especially with tip reporting and payroll.

Q: What sets your customer service and support groups apart from your competitors?
A:
We have organized our call center into teams of focused experts at technical and back-end support providing pro-active service 24/7. We are continually developing tools that help teach our call center representatives how problems have been solved effectively in the past by others. Our focus is on "one call resolution" which means our customers have their issues resolved with one contact.

Q: Leveraging technology to improve productivity and service (for both customers and employees) seems to be a Heartland strong point. What plans are there for future technological initiatives?
A: Our founders' background is technology and there are numerous projects competing for resources at all times. Robust authorization platforms, comprehensive organizational and servicing tools for our sales organization and improved tools for merchant service are the major categories of new development work.