Eye on Earnings: Heartland vs. VeriFone; MasterCard Is Cautious

Heartland Payment Systems Inc. is accusing VeriFone Holdings Inc. of “tampering” with Heartland customers after the San Jose, Calif.-based terminal company said it will terminate its support relationships with Heartland customers, effective Dec. 31. VeriFone says it will offer complete alternative support at no cost to affected merchants. Heartland merchants must register with VeriFone before Dec. 15 to receive free technical support. VeriFone made the announcement on Tuesday morning, shortly before Princeton, N.J.-based Heartland held its third-quarter earnings call with analysts. VeriFone said it is acting to prevent any disruption of service to Heartland merchants using VeriFone payment solutions pending resolution of litigation between Heartland and VeriFone over what VeriFone says is “continual infringement of a VeriFone patent.” VeriFone contends the litigation “is likely to impact Heartland's ability to maintain service levels with its customers.” “It is imperative that VeriFone merchants continue to receive support to accept card payments without any disruption,” VeriFone chief executive Douglas Bergeron said in a prepared statement. VeriFone estimates that 75% of Heartland customers in the retail, restaurant, and petroleum markets use VeriFone systems. In responding to the announcement, Heartland said that VeriFone's claim the payments processor can't support customers using VeriFone terminals is false. “Heartland is fully capable?and will continue to be fully capable?of servicing all of its customers,” Heartland chairman and chief executive Robert O. Carr said late today in a prepared statement. “In fact, VeriFone is not able to support our customers … because our customers operate on our proprietary payments-processing platforms.” In pending litigation against VeriFone, Heartland has claimed the terminal maker charges merchants unnecessary recurring expenses. “VeriFone is attempting to tamper with our customers in an irresponsible way,” Carr said. “With these fraudulent claims, VeriFone is pursuing its own agenda of creating recurring revenue at the expense of merchants and consumers.” Meanwhile, Heartland today reported a net loss of $13.6 million for the third quarter, compared with net income of $13.4 million a year earlier. Same-store sales among merchants with Heartland at least a year declined for the sixth straight quarter, dropping by 8.6%. The processor also posted a $35.6 million charge for costs related to its data breach, which it disclosed in January. Net revenue from transaction processing increased to $15.8 million in the third quarter, up 1.1% from a year earlier. However, transactions processed totaled 757 million, down 2% from 771 million in the year-ago quarter. “In many respects, our financial performance in the third quarter closely resembled the second quarter as economic conditions for our small and mid-sized merchants were little changed,” Carr said. “However, performance within the third quarter showed some signs of improvement that we did not see in the second quarter.” For example, while same-store sales were negative, they improved by 110 basis points from the second quarter and September, he said. Carr also said Heartland's new E3 end-to-end encryption technology is expected to launch later this year, and be rolled out more fully in the first quarter of 2010. “At a time when economic conditions have stalled overall market growth, we believe E3 will provide a competitive advantage as security becomes a processing priority,” he said. MasterCard Inc. also held its third-quarter earnings call today, reporting that an increase in transactions and higher fees charged to banks helped the card company post higher-than-expected earnings in the third quarter. But the economic downturn continued to depress consumer and business spending, Robert W. Selander, MasterCard president and chief executive, said. Although there are encouraging signs in recent economic data, “we don't expect any global economic improvement until some time in 2010,” Selander said. “We continue to have concerns about the health of the consumer as reflected in spending trends.” MasterCard's U.S. debit and credit and charge card purchase volume for the third quarter totaled $204 billion, down 6.5% from $218 billion in 2008's third quarter. U.S. purchase transactions totaled 3.67 billion, a 5.5% increase from 3.48 billion a year earlier. While U.S. credit card spending continued to decline, debit card spending increased. U.S. debit card purchase volume rose 6.9% to $83 billion from $78 billion a year earlier. Debit purchase transactions were up 15% to 2.17 billion from 1.88 billion in last year's third quarter. In contrast, the 1.51 billion U.S. credit and charge card purchase transactions represented a 5.5% drop from 1.6 billion in last year's third quarter. U.S. credit and charge card volume fell 13.9% to $121 billion in the quarter, down from $141 billion a year earlier. MasterCard's U.S. credit and charge card base fell 20% to 211 million from 265 million last year. The U.S. debit card base increased 4.8% to 130 million from 124 million in 2008. Net income for the quarter totaled $452 billion, compared to a net loss of $193.6 million in last year's third quarter. MasterCard attributed the increase to a 6 percentage point increase in fees charged to banks and a 7.6% increase in the number of transactions processed worldwide. The company also cut general and administrative expenses by 7.9% and advertising and marketing expenses by 29.4%.