易速傳真 (EFX) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Equifax second-quarter earnings release.

At this time, all lines are in a listen-only mode.

Later there will be a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded.

At this time I'd like to turn the conference over to Mr. Jeff Dodge with Investor Relations.

Please go ahead, sir.

Good morning.

Welcome to today's conference call.

I'm Jeff Dodge, Investor Relations, and with me today are Rick Smith, our Chief Executive Officer;

Don Heroman, our Chief Financial Officer; and Nuala King, our Corporate Controller.

The financial information that will be discussed during this call and reconciling information relating to certain non-GAAP financial measures is included in a press release that we issued this morning and filed in a Form 8-K.

The press release and the GAAP reconciliation information may also be found in the investor center on our website at www.equifax.com.

During this call, we will be making certain forward-looking statements to help you understand Equifax and its business environment.

These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations.

Certain risk factors inherent in our business are set forth in the filings with the SEC, including our 2005 Form 10-K and the subsequent filings.

Today's call is being recorded in addition to being webcast live over the Internet and the replay will be available on our website at www.equifax.com.

Now I'd like to turn it over to Rick.

Thanks, Jeff.

Good morning, everyone and thank you for joining us this morning.

Our second-quarter performance was solid, and it was broad-based across most of our businesses and even though the U.S. economy, as we all know, became more challenging throughout the quarter with interest rate rises and the increase in oil prices.

For the quarter, revenue was a record 388 million, up 7% in North American Information Services.

Marketing Services, Latin America and Europe all made important contributions.

Personal Solutions, which we talked about a lot in the first-quarter release improved, that's on the first quarter and it's continuing its momentum towards its performance targets for the total year.

Net income was 70 million, up 11% and our EPS was up 13% to $0.53 a share.

The leadership team that surrounds me continues to leverage the diversity of our businesses and the strength of our businesses to deliver on our commitments.

On our North American Information Services segment, they grew revenue by 3% on the top line, a strong performance versus last year's record performance for us.

And again, in light of the fact that the U.S. economy is starting to feel some headwind.

They continue to leverage great customer franchisees.

These customers have great respect for our ability to provide innovative solutions that are integral to their business success.

I've spent a lot of time over the past few quarters out with our North American team, Dan Adams and his group, with CEOs of large financial institutions talking about our analytical capability, predictive sciences and it's really starting to have a profound impact.

Recently, we have begun to provide valuable thought leadership to senior executives, again the CEOs, Chief Risks Officers, CFOs, of some very large customers really exploiting what Predictive Sciences can do for these clients.

Through some very unique and powerful analyses, we have quantified potential lost opportunities for these customers, who have purchased products from them but also from competing institutions shortly after opening a new account with our client.

In some cases, we show them that up to 70% of all the consumers that they had business with have established the relationship with a competing financial institution within months of opening a new account.

For example, one large U.S. credit card portfolio, we identified over $2 billion of missed opportunities -- missed cross selling opportunities with our customers that established an account with a competitor.

For a large national finance institution over $60 billion of outstanding balances were opened at a competitor within three months of opening a new account with over 80% of their customers having only one product relationship, we demonstrated a TargetPoint acquisition and decision power could be used to maximize their cross selling opportunities.

We've talked a lot to you guys about TargetPoint acquisition, the impact it's having, decision power, InterConnect and it's really starting to take hold and make a big difference to get the attention of a lot of these major financial institutions in the U.S.

Our enabling technologies along with other core products, such as [Triggering] and TargetPoint acquisitions clearly provide the solutions our customers need to capture those missed opportunities, giving our customers the ability to broaden and deepen their relationships with consumers and continue to drive revenue growth for our core business.

I can tell you when we talk to these leaders, these financial institutions, it gets their attention and the response is no one that they're dealing with has shown the capability that we have with predictive sciences and enabling technologies.

So great momentum in the core of our North American Information Service business that bodes well for the future.

Mortgage reporting met a difficult challenge of the rising rate environment in the second quarter.

It outperformed the overall market and continues to have good opportunity for revenue growth.

For the quarter, I think you all know the Mortgage Banker Association index was down 22%.

Our mortgage business revenue was down 12%.

The decline was largely driven by AmeriQuest, one of our large clients, change in their retail business model, resulting in the closure of some 220 plus retail branches this year.

In fact, 10% of that 12% revenue decline for us in the quarter was driven by AmeriQuest.

So overall, a very solid core mortgage performance in light of a very difficult environment.

Our settlement service venture with ATM that we talked to you about over the last few quarters for bundled mortgage services is on schedule and expected to deliver its first revenue in the third quarter, which secured our first few clients.

It's off and running.

It's staffed up now and we feel good about the ATM venture for the mortgage service business.

We're also aggressively marketing Vantage Score; you've heard us talk about that.

The market's receptivity has been outstanding.

All of our top national accounts have agreed to evaluate Vantage Score for their various loan portfolios.

Validations are currently underway and will continue throughout the third quarter.

I am as bullish now as I've ever been on Vantage Score.

We anticipate that these large customers will begin to make their decisions sometime in late third quarter, early fourth quarter and revenues start to build late this year and into 2007.

For the smaller and regional financial institutions, we held Webinars to educate them on Vantage Score and broadened our reach for their sales effort.

Marketing services had double-digit growth momentum.

It's continued.

We talked about a great first quarter; we talked about a good 2005.

That's continued into the second quarter.

Revenue was up 10% and operating margins up 35%, up significantly from the prior year.

TargetPoint acquisition, you've heard us talk about that.

It's really driving a lot of growth; it's a differentiator here in our Marketing Services business.

To date, on a year-to-date basis, core product growth with our top 20 customers exceeded 15% over 2005.

So great broad-based growth there.

Our pipeline continues to build and we expand the addressable customer base by introducing now a TargetPoint Light version for the smaller financial institutions and regional banks.

Direct Marketing, which has had some difficult times in the past.

Direct Marketing service has delivered a 17% revenue growth and improved its operating margin while building a strong market position with its database management services.

Just outstanding performance for them in the second quarter.

Their small business service contributed significantly to the revenue growth and Database Management Services closed in the third quarter -- the contracts they closed in the second quarter, I'm sorry, equal the total number of database deals we closed in all of 2005.

That was the BeNow acquisition.

So in the second quarter, they closed contracts that equaled all of our contracts closed in 2005.

So we're really getting really good traction from the BeNow acquisition, supporting Direct Marketing Services.

As I mentioned in the introduction, we've made good progress in Personal Solutions.

Revenue was up 7% for the quarter versus a prior I think 3% in the first quarter, while growth and margin are still improving, I am optimistic.

I've told you before that this business, I am convinced, once we get through some tough comparables in the first and second quarter is a double-digit growth business and I am as committed today that that position, that it's double-digit growth with good operating margins going forward.

The subscription revenue, personal solutions, that mix has improved from 45% subscription in the first quarter to 49% in the second quarter.

Really ramping up in the subscription base, which is a lot more predictable, as you know.

And this was also up from some 33% in the second quarter 2005.

So significant improvement year over year.

In our Personal Solutions business, we had a partnership with SunTrust.

It was a new demand deposit customer.

We're offered free subscriptions to our Credit Watch Silver product.

This was launched in the second quarter.

I tell you, the results exceeded both their expectations and ours.

We believe this powerful demand deposit account acquisition tool will expand the opportunities for our products and services with other banking institutions and we plan to leverage the success of SunTrust with other institutions going forward.

And the work continues on simplifying our product mix there in Personal Solutions, redesigning our Internet Website, developing more contemporary metrics to manage the business, repositioning our products.

A lot of work going on which makes me confident this business is a double-digit growth business going forward.

Europe.

Europe delivered record revenues, up 7% in the quarter, with our high-value products driving most of the new revenue growth.

UK Consumer Information business was up primarily through increased volume with our banking financial services, mortgage and government customers.

Revenue from our top 10 customers is up 24% year-to-date, primarily driven by our account management scores in ID verification services.

UK Commercial Services drove revenue growth with new products and market share gains and personal solutions in the UK was up significantly as a result of price increases and a shift to higher value credit monitoring services.

Finally, Latin America they continued the strong performance they have had over the last year or so, delivering 26% revenue growth and improved operating margins.

Their intense focus on the four-part strategy we talked to you about in the past, which is the further penetration of our enabling technologies into our accounts continuing to leverage the pricing strategy to maximize revenue growth and profitability.

Three, the rapid deployment of marketing services really taking the marketing services platform and concept in the U.S. and deploying it broadly across Latin America.

And last, continuing to build our consumer franchise in Brazil.

During the quarter, in local currency, four of the six countries in Latin America increased their operating margin.

And five of the six delivered double-digit revenue growth.

Now performance this quarter underscores a commitment to meet challenges head on and not make excuses.

There's no doubt there was some headwind in the U.S. core business unit, which shows you the breadth, the balance that this organization has to deliver yet another great quarter.

And I'm bullish as we sit here and look at the balance of the year.

So let me turn it over to Don; he will give you some of the financial details for the quarter.

Thanks, Rick, and good morning, everyone.

I will be presenting all financial information on a GAAP basis except where otherwise noted.

I would also refer you to the Q&A, which is attached to our press release for additional financial information.

In the second quarter, all of our business units made important contributions to our strong performance.

For the quarter, consolidated revenue was $388 million up 7%.

Net income was $70 million, up 11%.

On a non-GAAP basis, adjusted for certain litigation matters, an incremental impact of FAS 123(R) in the second quarter, net income was up $67 million or 6%.

Earnings per share was $0.53, up 13%.

On a non-GAAP basis, as adjusted for the incremental impact of 123(R) and the litigation matters, earnings per share was $0.51, up 8%.

In North America, U.S. consumer and commercial Information Services revenue was $162 million, up 4% compared with the same quarter last year.

Online U.S. volume was up 4%, driven primarily by Financial Services, which offset some declines in telco, accounts and resellers.

During the second quarter, 27% of U.S. online transaction were processed through one of our enabling technology platforms.

That's up from the 23% for the same time last year.

Our commercial business reporting volume was $5 million, up 53% from the second quarter of 2005, showing the continued traction that we're seeing in that business.

The transaction base revenue in commercial business now also represents 60% of the total commercial revenue.

Mortgage Reporting Services revenue of $19 million was down 12% and Rick has already highlighted that one account drove the bulk of that decline.

Canada's revenue was $30 million, up 7% in U.S. dollars and down 3% in local currency.

Marketing Services delivered total revenue of $69 million, up 10% and operating margins were 35%, up 32%.

That continues to show the countercyclical trend that we have seen in our Marketing Services business as it relates to our mortgage business.

Credit Marketing revenue of $41 million represents a gain of 6% and Direct Marketing revenue was $29 million, up 17% compared to the second quarter of 2005.

In Personal Solutions, revenue grew 7% to $31 million.

And Europe delivered record revenues of $38 million, up 7% in U.S. dollars, but up 9% in local currency.

The operating margin continued at its healthy pace at 25% in the quarter.

And Latin America continues to deliver its outstanding performance with record revenues of $39 million, up 26% in U.S. dollars and 17% in local currency.

Operating margin was a very healthy 29%, up from 26% in the second quarter of 2005.

For the Corporation as a whole, the operating margin was 25%.

However, on a non-GAAP basis, the operating margin, excluding certain litigation matters, was 28% as compared with 29% in 2005 and in line with our expectations.

Cash from operations was $91 million for the quarter.

Free cash flow, a non-GAAP measure was $75 million for the quarter.

And during the quarter, we repurchased 1.4 million shares of our stock on the open market for a total of $52 million and have $248 million remaining under the current authorization from our Board.

Total debt outstanding is down $27 million from the fourth quarter of 2005 to $529 million.

We are also renegotiating our bank credit facility, which will provide access to capital markets at lower cost.

The amended five-year agreement includes the ability to double the $500 million facility to $1 billion, subject to certain conditions, the so-called accordion feature.

The fees and interest rate margins will be reduced from the prior agreement substantially and there will be more favorable financial covenants in the agreement.

In summary, the second-quarter performance continued our record-setting trends and gives us great momentum for the remaining of the year.

Now I'll turn it back over to Rick.

Thanks, Don.

Hopefully, that gave you some sense for the great pride we take in the performance of this organization.

Some difficulties, some headwinds in North America, but continue to deliver across all businesses, resulting in yet another record performance for Equifax.

Before I go to questions and answers, I just want to remind everyone I think you've received from Jeff Dodge some information regarding our Analyst Day that is scheduled for September 8th at the New York Stock Exchange.

You have heard me talk and I've met with many of you individually about the importance of strategy and growth.

And we have just completed our strategic planning process.

Our senior leadership team and I will be there in New York to present the key elements of this growth strategy, looking out over the next four years and the financial representation of that strategy.

These sessions will include obviously some open Q&A and plenty of time to interchange and mingle and discuss where we want to take Equifax in the future.

So I hope you will be able to join us there for that very informative session on the 8th of September in New York.

Thanks for listening, let me stop there now and we would like to take any questions you might have.

(OPERATOR INSTRUCTIONS).

Brad Eichler, Stephens.

Good morning, guys.

I've been hopping back and forth doing your call and another one, but could you spend a little more time talking about the Personal Solutions business?

What exactly is going on there and what the outlook will be for that business, please?

Sure, as I mentioned last time, Brad, the first half of the year has some pretty tough comparables.

We told you that before and I've said that is in fact the case for a lot of different reasons.

I won't go through all the rationale we talked about last time but some tough first half comparables.

There were 3% be in the first quarter, 7% improvement in the second quarter of '06 over '05.

So it's gaining momentum.

We have done a lot of work here to revamp product offering, pricing strategy, just the homepage itself, which was far too cumbersome; the ability to navigate through the system to get the products.

Really in the spirit of simplification, making it easier for when individuals come to our site to research or buy a product, the ability to convert them into a paying customer is far easier.

So I am on the -- I told you all along I see this business as a double-digit growth business with attractive margins. and I feel very strongly that that in fact will come true very shortly.

When you talk about margins, Rick, what do you think is a reasonable kind of expectation to think about this business generating?

I think you can get this thing over 20% -- sustainable 20% and double digit growth.

Turning to the tax rate for a second, Don, that was an area that I'm still a little confused about.

I realize that a proportion of your gains were not taxable items, but can you kind of walk through, if you strip out all the gains and onetime items, the effective tax rate on the business, please?

This is Nuala King.

The biggest driver of the reduction in the tax rate is the fact that the settlement with certain of the sellers of Naviant was nontaxable.

So that was $14 million coming in that was not taxable.

Other than that, we had a million plus in discreet items related to state and local taxes.

And you saw the same thing happening last year as well.

(indiscernible) effective tax rate is the right question.

These are adjusted for Naviant as well.

The effective tax rate adjusted for Naviant was about 36 -- about 37%.

It's going to be right in in the 37, 38% range, Brad.

Okay, so, but it's going to continue to run in that range?

Yes, on an ongoing basis, that is where we see it.

Now there will be discrete items that come up from time to time, as you know, and that will altar it.

Okay.

I guess the final question I've got is one that deals with something that you're no longer disclosing, which is the factor recovery fee.

Yes.

Sitting in our shoes looking at North America's business, what is the best way to think about you know FACTA and the potential impact that -- the recovery fee and the impact that is having on that business in that?

Is that going to be a fee that is going to be relatively - is it a safe assumption to think it's relatively stable over 2006?

Yes, Brad.

In 2006 doesn't [sound right].

It's just a part of our ongoing revenue and cost stream now.

Michael Meltz, Bear Stearns.

Just one follow-up on Brad's question.

The cap one impact in the quarter, was that a couple million bucks again or can you just quantify that?

Well I don't have that off the top of my head, Michael.

Tell you what we can do.

If you get back to Jeff offline, he'll get that for you.

We knew it for the first quarter;

I just don't have that memorized for the second quarter.

We can get it to you, just call Jeff.

Two minor questions.

What was the volume -- I'm sorry, you gave us the volume.

What was pricing in the quarter?

And then, Don, can you give us the mortgage percentage that you typically give us and then I have one --

Pricing was about flat, Michael; didn't see much change in it.

And then the mortgage was 14% of total revenue.

Okay.

And secondly or I guess most importantly, Rick, you mentioned you have a headwind in North America but you are bullish on the second half.

There is the disconnect I think between those comments.

Can you just kind of talk about in core Information Services what you are seeing currently and what we should expect to see?

Let me be very clear here.

My bullishness is, lies in two areas.

I want to get complete confidence and belief in the North American team.

They have amazingly embedded value, trust in all their top customers.

They're doing all the right things.

They're comparables, much like Personal Solutions, were the toughest in the second, for them second and third quarter.

Mortgage was very strong last year in the second quarter.

Auto was very strong in the third quarter.

They're doing all the right things; they are embedding.

You got the statistics from Don on the enabling technologies being embedded.

So they will gain momentum as they exit this year.

But my comments specifically on being bullish with the second half of the year, Michael, was the breadth of Equifax, the diversity of Equifax.

You're seeing great strength in so many of our businesses now.

Latin America is strong;

Europe is rebounding;

Personal Solutions on the rebound;

Marketing Services is strong double-digit.

So you get all those other cylinders operating at strong, strong double-digit.

They can help offset some pressure that we're getting in the core North American business.

Great, and I'm going to take that to mean so you are not expecting broad deterioration.

Absolutely not.

I don't expect deterioration.

Michael, as you have seen before too, the comparables from second and third quarter of last for NAIS were the highest we have ever seen in the history of the Company or at least certainly in recent history.

So we feel good about it on an ongoing basis.

And on that note, Don, in the press release, you didn't mention guidance and you didn't talk about it in your comments?

We gave you a number at the beginning of the year, I believe.

And that's still your guidance?

That is still our number.

Drew Chopra, Morgan Stanley.

Rick, I was just wondering, I know you have completed the strategic review and you have had some time to look at all your businesses.

Is there a sense that you can give us on some of the strategic directions that you could be taking Equifax?

Yes, I would say this.

The sense, the take away is I was extremely impressed with the depth of knowledge, the data, the thinking that we have around areas of just driving core organic growth, new initiatives getting smarter in the deployment of technology.

The team truly believes, as do I, that this core business, pre-acquisition, pre-M&A, has a sustainable, looking at the next four years, good growth rate.

As far as the details, Drew, please come to September 8th.

We will overwhelm you, probably give you more information than you need.

Great, okay.

And then just in NAIS, I know obviously mortgage is a little bit of a challenge in this environment but can you sort of give us some of the industries where you are seeing strength and others where it's potentially challenging?

Yes, in Financial Services sector, it's just continuing to go gangbusters for us.

It's very, very strong.

Our regional accounts are growing very, very strong.

The commercial business we talked about that before, we launched 18 months to go, is unbelievable strength and gaining momentum.

So there are definitely pockets of strength.

And I can tell you, which is really starting to make a difference in Financial Services and regional right now is the deployment of enabling technologies.

And Don gave you the numbers versus last year.

So a lot of room for growth there still -- what did you say 20%?

Twenty some odd percent penetration.

So there's still some significant room for growth.

But Financial Services, regional are two areas that are going real strong for us.

Okay great.

And then just the last question, Don.

It looks like there's significant increase in corporate overheads.

Can you just give us a sense of what is in there this quarter?

Sure can.

There's really two items and we have identified them both. 123(R) is in that number and that is about a $3.5 million.

Some of that is not tax deductible by the way.

And then the departure of one of our executives was 1.3 million.

So if you adjust for those two items, I think it's is very favorable comparable actually.

Mark Bacurin, Robert W. Baird.

Good morning, everyone.

A couple questions.

I guess first, Rick, you talked about the opportunities you're seeing with Predictive Sciences enabling technologies.

And just wondering what from your perspective are the impediments to you guys gaining more traction there.

And as you're looking at the landscape, are there embedded competitors that you're trying to displace or is it more that you are trying to replace internally --?

No, Mark, I think the only hurdle we have is time.

I can tell you, every CEO -- I've gone and personally with Dan Adams who leads NIS and met with a number of CEOs of the top financial institutions in the U.S. and we talk about our ability to -- we have all the data.

We've got supercomputing capabilities, which are very, very unique.

We've got a product called TRIGGERS and you put that altogether.

You show these CEOs how instantly I can tell them that they are about to lose a customer to a competitor, it gets their attention, they want the products.

Almost in every single session we have had, it has resulted in a demand from the CEO saying I would like your team back in here with all my business leaders in the next few weeks and let's find a way to operationalize this quickly.

So it's there.

I mean we just launched our supercomputer technology a year or so ago called Excel.

All things are coming together now, that and the TRIGGERS, and the attention and the demand from the customers, I'm bullish that that's going to change the game for those guys going forward.

It's just a matter of time.

So you don't feel like you are constrained at all in terms of sales force or distribution --

Not sales force, not capital and I don't see any competitor that can replicate what we do.

Great.

This may be a better question for Don, but on the credit marketing business, I've noticed at least in my own mailbox over the last couple of years, a noticeable shift from credit card solicitations to more of the mortgage refinancing.

So I'm a little bit curious as to the continued strength in that business and whether or not you could strip out for us in any way what percentage of credit marketing is more mortgage refinancing related versus credit card and whether or not you see that as a big headwind over the next 12 to 18 months?

We don't strip it out, Mark, I can't give you that data.

We do see a mix from different kinds of areas and unique kinds of preapprovals.

So we are seeing mortgage continue in CMS but we are also seeing other areas improve.

Any sense as to -- I mean would you imagine that mortgage is a bigger part of the CMS business at this point or is it --?

No, not at all.

It's growing at a nice rate but, no, it's not a significant part of marketing at this juncture.

Just for clarification, do you include any estimate of mortgage from CMS in your overall 14% total mortgage exposure number?

Yes, we do.

And then I guess just finally if you go back to the Personal Solutions question a little bit, you indicated, you know, you think you could be a double-digit growth business.

And I guess I'm just curious with some of the free giveaways that you have had in the past, you have had fairly low acceptance rates and now it sounds like maybe with the SunTrust offer, you're seeing a little bit better response.

So are there specific action items or data points that you are looking at that give you that confidence?

That's a great question, Mark.

I would say this, it's not the free giveaways.

If I think about what gives me confidence, that [P solves the] double-digit growth business is three things.

One, historically, it's grown strong double-digit.

We talked about the first half of this year being tough comparable versus last year; it's fact that kind of rolled in.

That is now behind us.

Number two, I talked about the redesign of products, pricing, Internet, the whole look and feel to make that navigation easier.

That is now starting to take hold.

We just launched it at the very end of the second quarter.

You'll see that momentum going forward.

Number three, we are really ramping up our off-line or indirect we call it, efforts.

SunTrust is one example of an indirect client.

There are many more that we have already closed.

They are already in the hopper to be closed, that give me great confidence that will fuel growth going forward.

I'm sorry, I had one more actually follow-up.

This is probably best for Don.

On the gross margin line, after I guess several quarters of solid year-over-year margin improvement, this quarter you actually had cost of sales outpace your revenue growth.

Were there any --

I'm sorry, had what?

Your cost of sales number or your expenses outpaced revenue growth for the first time in several quarters and caused your gross margin to decline.

I'm curious if there were any onetime items or other things inside the cost of sales line that caused that margin --

No, I don't think we read anything into it, quite honestly right now.

We did have some incentive comp pickup in some of our areas because some of our sales folks are doing very well.

Also though there is one significant item and that is -- and it's in our footnotes.

That in some of the accruals that we made in the litigation arena, 2.5 million of it was put in cost of sales.

So that's probably the single biggest item.

Andrew Jeffrey, Robinson Humphrey.

Could you talk a little bit about any sort of countercyclical benefits you might be seeing in mortgage from risk management perspective.

Is that measurable at this point?

How would you encourage us to think about that?

I'm not sure I can really comment, is it measurable.

Let me give it some thought, Andrew.

I don't have a good, clear answer for you at this time.

Okay.

So it sounds like the cyclical trends in the mortgage industry are still the most important as far as what is driving that business?

Yes and no -- but what I am saying at the same time as I opened up, which makes it a little difficult to answer your question, the index, the mortgage banking index was down 22% and we are down 12 and 10 of the 12 was driven by one customer closing its retail shops.

We found a way through enabling technologies, maybe through ATM now coming on board, some ways to perform at a better rate than the index itself.

And then in terms of Latin America, can you talk about the sustainability of pricing in that market?

It's obviously been a particularly bright spot for Equifax.

Can you just comment a little bit on the price versus volume relationship there and how you see that playing out over time?

I will give you a broad-brushed answer, Andrew, is really small Latin America, because every country might have a bit of a nuance here are there.

But I was just there a couple weeks ago and did a deep [fab] review with the team; we talked about pricing; had some consultants coming in that we're working with on pricing.

While volume is still strong, I am bullish that there's a lot of pricing room left in most of the countries in Latin America at this juncture.

And it's not just taking the same product that we sell you today and sell it tomorrow at a higher price.

The team is continually churning through new products, modifications to existing products, that deliver value to our customers in a different way than the old product did, hence, deriving a greater price margin for us.

So, as I think about Latin America, Andrew, I think there's a lot of runway left in both volume and price for quite some time to come.

Brandon Dobell, Credit Suisse.

A couple ones.

Maybe if you could kind of step back and look at where you started with APPRO a year ago and what you have done with it?

You know, what are the people your customers are saying, what are the APPRO employees saying?

I mean, what surprised you after you take a look at the last year?

And then secondly, kind of a broader question, Rick, as you look at the growth opportunities and you kind of touched on this earlier, but growth opportunities from the bigger segments do you think you need to make the investments in sales or technology that would be either material enough to kind of change how we think about some of the leverage in the business or do you think there's any [holes] that you need to catch up quickly?

I'm just trying to get a better feel for what the business might look as if you (multiple speakers) take your core growth and expand it.

Brandon, it's a two-way question [on] APPRO;

I'm thrilled with it.

It was a great acquisition for us.

It had broad capabilities that allows us to succeed in the middle market, but more importantly than that, it's brought a capability, a skill set, a methodology, some talent that enables us to manage the deployment of enabling technology platforms far more efficiently, effectively, faster than we could ever have done in the past.

Matt Semrad and the Baton Rouge team have done just a phenomenal job of streamlining the process to get things like Decision Power, InterConnect, our new APPRO, we used to call LC3, but our APPRO product for mid market, out the door quicker and more efficiently.

So that pipeline, Brandon, as I look across -- in fact, we just did a review yesterday, if I look across the company, that pipeline has never been stronger than it is today.

And the encouraging thing is when I look at that, I say we're only mid-20s or upper 20s percent penetrated and that is in the U.S.

So we've got a lot of growth here in the U.S. and even more growth in Latin America and Europe.

So again, skill set capability and a platform that enabled us to get into the middle market, which is fantastic.

As far as investments in the capital structure of the company as it relates to investments going forward, you should think about it this way.

I think the major areas for investment for us are going to be new products and technology and those are intertwined oftentimes.

We have underspent our CapEx forecast now at least in '05 and the first part of '06.

A lot of the planning process around the growth playbook, our strategic plan, we're really talking about smartly, effectively, more quickly deploying investments into technology, which allow us to launch new products to customers faster.

So if anything, you are going to see an increase in the use of capital for technology and new products.

And then for a different direction, as you think about the European opportunity, two questions here.

One, is it with your existing customers in the U.S. that are over there in Europe or is it a different customer set?

And do you think you have got the right mix of products and services there?

Obviously Europe is tough for everybody these days, it seems like any kind of database or services.

Are you happy with where you are kind of competitively or do you think you need to have a different positioning or should it be smaller or bigger than that --?

Let me answer your first question first, Brandon, as far as the customer base.

There are some [overwrap] of clients who are U.S. clients who are also European customers or European customers who are Latin American customers.

But by and large, the vast majority of the business in Europe is with European based companies.

So where there is overlap, we try to leverage the heck out of that, where that makes sense.

But you should think about it by and large being regional clients, or clients domiciled in that part of the world.

As far as am I happy, I think the team has done a great job of repositioning, taking costs out, driving margins up.

Now the whole thing is about getting new products to the market faster.

The two areas I want to see us move quicker in Europe are the areas of predictive sciences and enabling technologies.

So we're going to continue to invest.

We have got to invest in our technology platform, enable us to deploy new products faster in Europe, we will do that.

But if I were to just give you a broad-brushed thought on where I want to see more improvement faster, it's in the penetration of technology and the penetration of predictive sciences.

I'd like to see Europe at the same parity, if you will, with the U.S. at some point in time, as it relates to the use and deployment of those two areas.

Do you think that the companies there are structurally or culturally ready for that kind of -- that level of technology?

It seems like some companies in the space (multiple speakers)

Absolutely.

Again, I spend a lot of time with clients when I go all over the world.

I was just in Europe, I think it was last week.

And enough clients there and they are as eager -- we spent hours talking about what predictive sciences can do and what we're doing in the U.S.

There's definitely a demand and a need for our capabilities in both of those areas in Europe.

Operator, we have time for one more question.

Megan Talbott, Lehman Brothers.

Just a couple of really quick questions.

The quick follow-up to the Europe question, you mentioned that you are going to increase your investment a little bit more in predictive science, enabling technologies.

Does that mean you are willing to sacrifice a little of these increased margins to drive top-line growth going forward?

That's a great question, Meg, and maybe I'll make sure I'm clear.

When I talk about investment in Europe, if we're going to make an investment in Europe, we'll consciously make an investment in the infrastructure, the platforms in which we operate.

That will then enable us to have a more contemporary platform, which allows you to deploy new products and technologies to customers faster.

Just a point of clarification.

So the question is, am I willing short-term to take a slight margin compression in Europe, which has done a great job, as you know, going from the teens now to the mid-20s; the answer is yes.

Because it's not just to propel short-term growth.

It's to do what is right long-term for that business.

And I think you should view it is if we do this, maybe a short-term pressure on margin but long-term, you get a much better business model in Europe.

And then the Direct Marketing business, I think last quarter you had stated that you were looking for sort of mid single digit organic growth in that business.

Given the outperformance this quarter, do you think you could come in ahead of that for the next couple of quarters?

What are you thinking about that business now?

I think about direct marketing in the CMS -- CMS, first of all, has had maybe now a year and a half of just great performance.

They're heading full stride, doing a great job.

Direct marketing, we put a new team in there, new leadership, new strategy.

Is there -- what did we report, 17% growth this year, this quarter?

I don't think you should think about that as being a sustainable long-term growth.

But I would like to see the combination of direct marketing and CMS as being a double-digit growth business.

Just a quick follow-up on Latin America.

You talked about the four areas that you're concentrating on to drive top-line growth in that business.

Any way to kind of rank order those for us in terms of what drove the growth this quarter?

Yes, again, for the quarter, pricing was strong but so was volume.

So if they're specific to the quarter, [they] will contribute to the quarter.

Marketing Services, pricing and volume are probably three of the biggest ones for the second quarter itself.

Okay, we will be around this afternoon.

So if anybody has any follow-up questions, feel free to give us a call and we will try to get back to you promptly.

Thanks, operator, and at this point we will terminate the call.

Great, thank you very much.

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