Despite a fourth quarter net loss Heartland Payment Systems Inc. attributes largely to breach-related expenses, the Princeton, N.J.-based payment processor sees “encouraging progress” in small and midsize merchant transaction-processing volume and same-store sales, Robert Carr, Heartland chairman and CEO, told analysts during a conference call this morning.

“After more than a year of tremendous legal and related distractions, we are optimistic that we are close to returning to more normalized operations,” he said.

The processor posted a net loss of $9.6 million for the three months ended Dec. 31; the company reported net income of $8 million for the same period a year earlier. Net revenue totaled $105.1 million, up 5% from $100.1 million. Expenses related to the well-publicized 2008 network data breach totaled $23.7 million, including charges related to settlement offers Heartland made in attempts to resolve intrusion-related claims.

“Heartland is making progress, but part of the progress is having big expenses” related to the breach, says David J. Koning, a senior research analyst at Milwaukee-based Robert W. Baird & Co.

Heartland disclosed on Jan. 20, 2009, that its payment network had been attacked and an undisclosed amount of transaction data was stolen (see story).

Heartland reached a settlement agreement with Visa Inc. this past January and agreed to pay $60 million to issuers of Visa cards for expenses caused by the breach (see story).

The processor also settled with American Express Co. for $3.6 million in December (see story). Also in December, Heartland reached a $2.4 million settlement agreement with cardholders (see story).

“While we have certainly made progress in resolving claims related to the processing intrusion, several matters have yet to be fully resolved,” said Carr. “We remain fully engaged in the ongoing investigations and resolutions of claims that have arisen from the processing system intrusion.”

Despite the fallout from the network intrusion, Heartland has not experienced significant merchant attrition or a loss of sales representatives, notes Robert W. Baird’s Koning. “The breach represents a headwind, but some of the metrics around it haven’t been that bad,” he tells PaymentsSource. “Sales agents and clients are not leaving en masse.”

Client attrition grew 0.1% in 2009 from 2008, said Carr. The processor in 2009 also retained 98 of its top 100 sales representatives, which is “one of the best sales-retention rates among top producers in our history,” he said.

“They’ve done a good job of maintaining their most-productive sales people,” agrees Wayne Johnson, managing director at St. Petersburg, Fla.-based Raymond James Financial Inc.

Indeed, Heartland remains a “strong performer” despite “dealing with the breach settlement and a rough year from an economic perspective,” says Adil Moussa, an analyst with Boston-based consulting firm Aite Group LLC.

It is a “good sign” that revenues continue to progress, Johnson agrees.

During the fourth quarter, Heartland also launched a new sales strategy focused on selling into merchant verticals, the first of which is the restaurant industry, said Carr. “We’ve identified 13 different industry verticals into which we intend to introduce this strategy,” including medical, pharmacy and lodging, he said.

The processor in January announced a processing and services agreement with the National Restaurant Association (see story).

Small and midsize merchant-processing volume reached $14.8 billion during the quarter, a 5% increase from roughly $14.1 billion in 2008 and “a nice improvement from 1% growth in the third quarter,” Bob Baldwin, Heartland president and chief operating officer, said during the conference call.

Though same-store sales decreased 5.2% during the quarter, they improved 340 basis points sequentially from the third quarter of 2009. It is “the second consecutive quarter of sequential improvement,” Baldwin said. A basis point is one hundredth of a percentage point.

The processor continues to see a decline in the overall value of transactions, and more consumers are transacting using signature debit, said Baldwin. “Credit card (sales) volume and transactions were down about 5%, while signature-debit (sales) volume and transactions in the quarter were up about 8%,” he said. Heartland did not provide specific totals for comparison.

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