易速傳真 (EFX) 2008 Q2 法說會逐字稿

Good day, and welcome to the Equifax second-quarter earnings release conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr.

Jeff Dodge.

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 Chairman and Chief Executive Officer and Lee Adrean, Chief Financial Officer.

Today's call is being recorded.

An archive of the recording will be available later today in the Investor Center of our website at www.equifax.com.

During this call, we'll 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 2007 Form 10-K and subsequent filings.

In this call, we will refer to several non-GAAP financial measures.

For Equifax consolidated in the second quarter of 2008, these measures include adjusted net income, adjusted diluted EPS, adjusted operating margin, and adjusted operating income.

These measures determine net income, EPS, operating income, and operating margin before deducting acquisition-related amortization expense.

We also refer to EBITDA, defined as operating income before depreciation and amortization.

TALX's adjusted operating margin excludes the incremental impact of amortization expense from our acquisition of TALX.

Please see the section of our earnings release entitled "Reconciliation to Non-GAAP Financial Measures to the Comparable GAAP Financial Measures" for further details and the non-GAAP reconciliations posted in the Investor Center on our website.

Now, I would like to turn it over to Rick.

Thanks, Jeff.

Good morning, everyone.

Thanks for joining us this morning.

Obviously in the current environment, it is a challenging environment and our increasingly diversified business model has enabled us to deliver yet another quarter of solid performance as a Company.

Double-digit revenue growth in international, TALX, North American Commercial Solutions, combined with improved operating performance in US consumer information and North American Personal Solutions were all important contributors, given this challenge we faced during the quarter.

Our expense reduction initiatives that we talked about in the past are contributing to improved operating performance and we continue to find attractive internally driven investment opportunities to drive future growth.

During the quarter, we added operations in Russia and resources in India in addition to some strategic investments in Latin America, which will further strengthen our global business.

We have now launched 42 new products since the beginning of the year and our pipeline is stronger than ever.

And two of our more promising initiatives will fuel the pipeline of new product innovation and revenue in coming quarters.

I will talk about a few of these now.

In the asset-backed securities market, we have already signed some impressive deals and the go-to-market team has developed a very robust pipeline of opportunities which we should monetize over the coming few quarters.

Our revenue synergy initiatives with TALX continue to have very strong customer interest and are now closing deals to help banks in their underwriting and collection processes.

We have a significant pipeline of opportunities which promise to fuel growth in the work number from the second half of the year.

The challenge of delivering solid financial performance in today's business climate, I think you'll agree, is not an easy one.

But our business leaders are focused on making the top choices to do just that.

For the quarter, total revenue was just under $502 million at $501.9 million, up 10%.

TALX contributed 9 points of that growth.

Equifax, excluding TALX, grew 1%.

Operating income was $127.7 million, up 7% and adjusted operating income increased 11%.

EBITDA grew to $165.7 million, up 11%.

Diluted EPS was $0.54, up 6% while adjusted EPS was $0.64, up 12%.

Now, let's take a look at each of the business units in some level of detail.

The US Consumer Information Solutions business made solid progress in key areas of growth while making the necessary decisions to reposition itself for improved operating performance in a slower growth economy with a reduced level of consumer lending activity.

Settlement Services continued to gain transaction and penetrate the market, enabling our mortgage reporting business to outperform the market.

We have tripled our customer base and average daily transaction volumes compared with second quarter of 2007.

I have said all along that this is a growth business for US Consumer Information business and it is doing just that, and the future is bright for that business.

In Enabling Technologies, 30% of our online transactions were delivered through one of our platforms during the quarter, and that's up slightly from second quarter of 2007.

Equifax models and analytics continue to have strong customer interest and support.

19% of our US online transaction volume for the second quarter 2008 included scores from models built by Equifax.

In credit marketing, over 50% of names listed include a score from an Equifax model.

You may have seen we've also signed a seven-year exclusive contract with NCTUE, which is now our telco exchange, which will add positive data to the database and expand the potential for new products and services.

To date, we have closed 42 cross-sell deals with TALX and have a robust pipeline that includes many of our strategic accounts, as well as multiple projects for individual clients.

The slowing US economy weighed heavily on our marketing services business units as both units were down for the quarter, while Direct Marketing Services' decline was broad-based, Credit Marketing Services' was primarily the result of declining volume from large banks and monolines.

Despite the economic challenges, we continue with our commitment to deliver improved operating performance through aggressive management of our cost base.

Through the quarter, we have identified and/or eliminated approximately $25 million of infrastructure and other costs on an annualized basis.

And we will continue, as I've committed in the past, to manage our expenses prudently in a difficult environment in the US.

TALX delivered another strong performance during the quarter and continued to leverage Data Solutions with US Consumer Information Solutions to further differentiate and add value to our core products initiatives.

The unique value of the Work Number Database continues to strengthen.

During the quarter, the Database grew to 179.2 million, up 18% when compared to the second quarter of 2007.

The Work Number revenue continues to grow nicely, even though it was negatively impacted by the decline in the mortgage activity.

All other non-mortgage activities grew double digits, with the growth in collections picking up significantly.

Our collections-oriented revenue should offset the mortgage-related revenue decline over the coming quarters.

Our technology and product development teams are working hard to bring revenue synergies initiatives to the market, and we're having successes.

The mortgage one-stop project, where we deliver income and employment verification through our mortgage reporting platform is scheduled for implementation the fourth quarter of this year.

Enhanced decisioning, a service where employment and income verification information is integrated into our eID authentication product and InterConnect platform and offered as a single product is also scheduled for the fourth quarter of this year.

We are fully integrating the employment and income verification data into our corporate data hub and repository platforms.

And this allows us to accelerate future product development and implementation efforts.

Also, just after the second quarter ended, TALX's talent assessment business was awarded an eight-year contract for the hiring of TSA agents.

When signed, this will represent a very important long-term continuation of our current relationship with the TSA, and represent somewhere between $80 million and $120 million in revenue during that contract period.

During the quarter, our North American Personal Solutions business delivered solid performance and improved operating margins while positioning itself for future growth.

Subscription customers were 1.4 million in the second quarter 2008.

Subscription-based revenue grew 20% in the quarter and now represents 74% of the revenue, up from 69% second quarter of last year.

In the second quarter, we provided services for over the 80 data breaches, which is up from last year.

However, with lower response rates and smaller sized breaches, revenue from this product line declined 10% year on year.

Last week, Personal Solutions introduced ID Patrol.

It's the most comprehensive identity protection product for consumers.

With ID Patrol, consumers can lock and unlock their credit file, receive e-mails alerts if their Social Security or credit card numbers show up on Internet identity trading websites, receive credit monitoring alerts on key changes to their Equifax, TransUnion and Experian reports and have 24 by 7 access to a trained ID theft solutions specialist.

We're very, very optimistic with for the launch of this product.

Finally, as one of the founding members of the iCard Foundation, Equifax is taking a market leading position in what we believe will become a significant change in how consumers conduct business.

Information cards or iCards, as they are called, will empower consumers to conduct their business online with greater ease, security, and confidence.

With our deep data expertise, we are uniquely positioned to be the trusted provider of critical information necessary for this process to operate effectively.

We're working with some of the most prominent industry leaders in this space, which provide additional expertise while underscoring our commitment to developing innovative solutions with tangible benefits for consumers.

North American Commercial Solutions again delivered double-digit revenue growth and improved operating margins.

Our focus on increasing share of wallet continues to gain traction and we increasingly provide portfolio reviews to assist our customers' risk management and product marketing decisions.

We're making a significant investment to add nonfinancial trade lines to the database.

At the end of the quarter, our general industry trade lines were up 36% from a year ago.

As the depth and breadth of our database increases, risk management solutions and products, which provide real-time insights for risk managers, are dramatically improved.

Finally, in June, we launched our newest product, Account Advantage, which will address the new market's need for a robust, real-time decisioning solution.

The product streamlines the entire application and workflow process, enables rigorous risk decisioning across multiple sales channels, and improves operational efficiency.

The breadth and diversity of our international business enabled it to drive strong organic growth and improved operating margins.

Key to the growth in operating margin improvement are the increased sale of value-added services.

Our customers in these markets increasingly utilize these services to improve their marketing and operational effectiveness.

Marketing Services grew almost 23% in local currency enabling.

Enabling Technologies, which we talked about in the last call, of bringing InterConnect, for example, to Canada, grew 8% in local currency and analytical services.

Local currency revenue grew over 49% in Latin America during the quarter while UK and Canada declined primarily due to the market conditions and business mix.

Latin America's revenues were $61.1 million, up 38% with strong double-digit growth in all countries.

Brazil continues to drive double-digit revenue growth with large customers in the banking, telecommunications and insurance sectors, leveraging its high-value service offerings in Marketing Services and analytics.

And our partnership with ACSP in Brazil continues to enhance our data completeness and market position with large customers.

Europe's revenues were up 3% to $46.4 million.

As anticipated, during the quarter, the UK consumer market weakened.

We don't anticipate much improvement for the remainder of the year and into 2009.

As in the US, the mortgage lending sector was a primary factor causing the slowdown.

For the total market, mortgage approvals in the UK for May were down 20% from April of this year and 56% from May of 2007.

Many large vendors, including Citi Financial, Preferred Mortgages, Mortgage Works, and the Yorkshire Building Society withdrew from the mortgage markets completely during the second quarter.

However, Iberia has delivered strong double-digit growth by leveraging pricing, contract terms, numerous new customer wins, new product innovation, and we see that as a continued growth business for us throughout the balance of the year.

Canada consumer performed well with its new product offerings, continuing to attract strong customer interest.

For the quarter, revenue was up 15% to $30 million.

We've completed the InterConnect installation with a large credit card bank and have a full pipeline of prospects who are currently evaluating the service.

We remain very optimistic about the future of InterConnect in Canada.

Our newest product launch in Canada, Citadel, is a unique application fraud prevention and management tool.

It represents our largest product transfer initiative to date.

Citadel is based on SIRAN, a very successful leading-edge fraud product in the UK.

As a result of our experience in the UK, we're able to accelerate the development and implementation of the product in Canada by about one-third the time.

I was just in Canada with Rudy and his team meeting with large banks.

This is getting a lot of excitement and take-up in Canada.

Although the economy remains sluggish, the strength of our business model is reflected in our ability to deliver solid performance while investing in the future.

I will now turn it over to Lee for some financial details.

Lee?

Thanks, Rick, and good morning, everyone.

This morning, all financial information I will be discussing will be presented on a GAAP basis except as otherwise noted.

You should also refer to the Q&A and non-GAAP reconciliations attached to our earnings press release for additional financial information.

For the quarter, consolidated revenue of $501.9 million was up 10%, benefited from a full quarter of TALX revenue this year compared to last year when TALX was acquired midway through the second quarter.

EBITDA, a non-GAAP measure, was $165.7 million, up 11% for the quarter.

Operating income was $127.7 million, up 7% from 2007.

Adjusted operating income, a non-GAAP measure, which adds by acquisition-related amortization, increased 11% year over year.

Operating margin was 25.4% in the quarter, up from 25.1% in the first quarter of 2008 though down from 26.4% a year ago, due to acquisition-related amortization expense.

On a non-GAAP basis, adjusted for acquisition related amortization, operating margin was 29.8% in Q2 of '08 compared to 29.6% in Q2 of '07.

Interest expense increased $6.9 million year over year as a result of increased borrowing from our acquisition of TALX and subsequent share repurchase.

We experienced a favorable tax rate of 35.3% in the second quarter, which added roughly $0.02 per share to our fully diluted earnings per share.

This resulted from the reorganization of our international legal entity structure and an associated tax benefit.

For the full year, we expect a tax rate of approximately 37%.

Net income was $70.8 million, up 1% from 2007.

On a non-GAAP basis, adjusted net income increased 7%.

Year to date, cash provided by operating activities was up 22% to $187 million, a strong indicator of the quality of our earnings, particularly given the current economic climate.

Diluted earnings per share for the quarter was $0.54, up from $0.51 in 2007, reflecting a decrease in average shares outstanding as a result of our share repurchase activity since acquiring TALX.

Adjusted diluted earnings per share, a non-GAAP measure, was $0.64 per share, up 12% from $0.57 in the second quarter a year ago.

We repurchased 1.1 million shares during the quarter for $44 million, bringing year-to-date repurchase activity to $81 million or 2.2 million shares.

Since acquiring TALX, we have now repurchased over 20 million shares for approximately $800 million.

We intend to continue to engage in significant share repurchase and in the third quarter, intend to apply most or all of free cash flow after dividends, capital expenditures and any acquisition activity to share repurchase.

Outstanding debt was $1.3 billion, down slightly when compared to year end 2007.

In US Consumer Information Solutions, online consumer information solutions revenue was $151.4 million, down 9% when compared to the same quarter last year.

For our core product, online transaction volume was down 5% compared to last year, with all sectors experiencing slower performance.

Mortgage Reporting Solutions revenue of $17.9 million was down 6% when compared to the second quarter of 2007.

Strong growth in our Settlement Services business and a small acquisition of a mortgage reseller largely, but could not fully, offset a decline in traditional Trimerge mortgage credit reporting revenue, which resulted from a 25% market decline in mortgage originations and a decline in the number of mortgage reports per closed loan.

Credit Marketing Services revenue of $35.7 million was down 10% for the quarter.

Our prescreening revenue, which is primarily directed toward new account acquisition, was down 42%, as financial institutions have cut back significantly on new marketing and extension of credit.

While revenue of our portfolio review products, which are used to manage and sustain existing customer accounts, was up 8%.

Direct Marketing Services revenue was $23.6 million, down 9% compared to the second quarter of 2007, reflecting an overall sluggish market for consumer marketing.

The operating margin for our US Consumer Information Solutions business was 38%, down slightly from 38.6% in Q1 of 2008 and down from 40.4% in the second quarter of 2007.

The actions we undertook to improve the operating margin continue to benefit us despite a challenging market environment.

TALX revenue was $76.7 million for the quarter.

On a pro forma basis compared to a full quarter a year ago and adjusted for acquisition accounting, revenue was up 8% from the second quarter of 2007.

The Work Number's revenue was $31.7 million, up 4% from the full quarter in 2007.

Work Number mortgage-related revenue was down 21%, reflecting the market decline in new mortgage activity while all other Work Number revenue grew a healthy 12%.

We added 4.9 million records to the database during the quarter, bringing the total to 47.7 million active records and 179.2 million total records in the database.

The total is up to 18% from the second quarter a year ago.

And, we currently have 6.9 million total records in backlog.

The value of this data asset is reflected in the fact that revenue continues to grow despite the negative impact of the mortgage market.

In Q2 of 2008, the mortgage sector represented 20% of Work Number revenue compared to 26% in the second quarter of 2007.

The Tax and Talent Management Services unit delivered $45 million in revenue during the quarter.

Organic growth in the Tax Management Services area has been particularly strong, exceeding 12% for the quarter.

And TALX's operating margin was 17.7%.

On a non-GAAP basis, the adjusted operating margin is over 30%.

In North America Personal Solutions, revenue grew 8% to $41.5 million as year-over-year declines in breach and transaction revenues partly offset 20% growth in subscription revenue.

Operating margin was 25.1% for the quarter compared to 19% in the same period last year.

North America Commercial Solutions revenue was $17.6 million, up 15% from Q2 of 2007.

Excluding the foreign exchange benefit related to our Canadian commercial business, revenue grew 12%.

US commercial transaction volume was $1.3 million, up 8% from a year ago.

Transaction based revenue in the US commercial business now represents 57% of total commercial revenue in the US.

Operating margin was 16% compared to 6.4% a year ago.

Our international business grew revenue by 19% in the quarter to $137.5 million.

In local currency, revenue grew 10%.

Latin America revenue grew 38% in US dollars to $61.1 million while local currency revenue growth was 23%.

All Latin American geographies delivered double-digit growth in local currency.

Europe delivered revenue of $46.4 million, up 3% in US dollars and 1% in local currency.

After several quarters of significant outperformance in Europe compared to the market, market conditions have reduced transaction volumes, causing us to expect little growth over the next few quarters in the UK, while we continue to expect healthy growth in Iberia.

Canada consumer revenue was $30 million, up 15% in US dollars and 6% in local currency.

We're starting to realize benefits from our strategic pricing initiatives, as transaction volume was up 2% for the quarter and average price increased.

Customer penetration is improving as we continue to add incremental revenue from sales of our value-added services, such as Fraud Flags, Consumer Risk Predictor Scores and the Bankruptcy Navigator Index.

Overall, operating margin for international business was 30.6%, up from 29% in 2007.

For the quarter, our performance was solid during a difficult economic environment in two of our markets.

We continue to focus on aggressively managing our costs so that we can adjust quickly to changing economic circumstances, while continuing to invest for growth.

Now, let me turn it back to Rick.

Thanks, Lee.

I think we all know just how challenging the US and UK markets are.

In this market environment, I'm very proud of what this team has delivered.

We have an increasingly diversified business model and we continue to make investments in new product innovation, global expansion, analytics, and enabling technology, and we are strengthening our franchise to deliver long-term value to our shareholders, customers, and employees.

As we announced in our press release, despite the fact that the economy has weakened since we last gave guidance, we're still confident in our original range.

However, for the full year, we're likely to be in the middle to lower half of that range; and again, that assumes the economic conditions remain similar to what we've been experiencing in the second quarter.

So, with that, we'd love to take any questions you might have.

Operator?

(Operator Instructions).

Dhruv Chopra, Morgan Stanley.

Quick question, Rick.

Last quarter, you mentioned that the consumer was still relatively resilient, particularly in terms of looking for new financial products, but the problem was lenders were unwilling to grant credit.

What are you seen now with the consumer?

Has there been any change in that dynamic?

I'm not an economist, but we see a lot of different trends, Dhruv.

And I would say what you have at this juncture is both a supply-side and a demand-side issue in the US.

I don't see a lot of liquidity from the banks yet.

Their standards are still very, very tight until they find the bottom of the mortgage-backed securities.

Another one, lending instruments, delinquencies as they rise.

And number two, with oil at $130 a barrel and commodity prices in general high, the consumer is feeling the pressure.

So, it's demand and supply side.

Then, just sort of a conceptual question about the business model.

For US CIS, what level of growth do you need to see positive operating leverage?

I mean excluding any of the cost-containment initiatives.

Just the organic business model.

Dhruv, you cut out.

I missed the back end of your question there.

I was asking for the US CIS business, what level of growth do you need to see, positive operating leverage, excluding any of the cost-containment initiatives?

Yes, I think we're into the 38%, 38%-plus range.

At this revenue level, we probably need to see at least a couple of points of growth.

But somewhere in the 2% or 3% growth range, I think we see the potential to move that -- start moving that back up.

The caveat there that was sort of -- or maybe the add on, Dhruv, is we're going to just sit back and wait for the economy to turn.

We're initiating a lot of different activities across the US business model to be smarter, more efficient, while still investing in the future for growth.

That got us in the 36.6% you saw at the end of 2007 to the 38%-something in the first and second quarters.

So we'll continue to expand those initiatives throughout this difficult environment.

Kyle Evans, Stephens.

You talked a little bit about some of the mix shift that you're seeing in the Work Number business down, mortgage and some of that offset by collections.

But you've also talked about 2 to 3 times the $7.5 million in revenue synergies that you laid out for TALX when the deal closed.

And we're looking at that growth rate specifically for the Work Number going the other way.

Could you give us a little more detail around --?

Absolutely, Kyle.

And I'll start with this.

I am as optimistic as ever about the product offerings we have in the pipeline, the customer interest we have right now around the Work Number.

And I mean that sincerely.

I've spent a lot of time out with clients talking about the power of the employment income verification.

So that's a backdrop, number one.

Number two is, it takes us time.

When we bought TALX, we knew this, that the way their data was housed and stored and formatted was for the purposes of which they used it.

As we are now trying to build new products for different customers, i.e.

the financial institutions, two things had to happen.

We had to one, format it differently, so our customers could make decisions from it.

Number two, we had to move it to our data repository.

That takes time.

It sounds like a pretty simple process, but it takes time.

You can't just turn that key overnight.

So, having said that, a product that is out there right now that is about to really take off is collections right now.

We talked about 43 cross-sells.

Those are real.

But the collections market, helping our customers who are underwriting risks, locate people, collect money that is owed from delinquent loans, be it a mortgage or a home equity loan or bankcard or auto, is on the forefront of every bank's mind right now, and our pipeline is extremely strong.

We talked about mortgage-backed security, and enhancing that product offering with employment and income verification.

So, it is extremely strong, and I remain bullish.

I mean don't lose sight of the fact, you know, mortgage index is down 25% or 26%.

TALX's Work Number as it relates to the mortgage was down 21%, but everything else was up strong double-digit.

And I said in my opening comments, Kyle, I see in the future quarters here where the collections business is so strong, it offsets the decline in the mortgage business.

And that collections business has a higher average selling price than the mortgage piece of the business?

Yes, absolutely.

You talked about double-digit growth in Brazil.

Could you give us a little bit more on a country by country basis to give us some better see-through into that very strong Latin American growth?

We don't break that out.

But I did say I think in my notes or in Lee's notes, all the countries in Latin America delivered double-digit growth once again.

And I've said in the past, as you know in 2006 and early 2007, maybe mid-'07, Brazil was the laggard in our Latin American operation.

And I told you that with the things we're doing down there from new leadership, product development, product innovation, ACSP partnership, that we'd get that country to double-digit growth, and we've done that now.

Great.

But one last question and I will get back in the queue.

The North American Commercial Services business was 15% this quarter growth, off 20% last quarter and that's a piece of the business that was kind of growing in the mid-20% range before you did the Austin-Tetra deal.

How should we be looking at that to grow in the second half of this year and into next year?

I've always said this should be a double-digit growth business, and it will be.

We're moving rapidly to get the nonfinancial trade tapes into our database.

We had great success there in the second quarter.

As that continues to accelerate, Kyle, that will facilitate faster top-line growth.

And, the growth there, will that come at the expense of competitors or is that new business being generated in the market?

No, we're taking share.

Mark Bacurin, Robert W.

Baird.

A few items.

First, I guess maybe Lee, on the US Consumer Information Services business, margins did kind of trend backwards from 38.6% I think to 38% in Q2.

And I think you guys have indicated some of the cost-containment efforts, you were comfortable with your ability to get back more in the 39% to 40% range.

So, just wondering what your comfort level is still with that, with your ability to move the margins back to that level, and has the softening I guess economic environment changed your opinion there?

Yes, it has become more challenging.

Interestingly, if you look at the absolute numbers for operating expense, we had the best performance we've had -- had very strong performance.

We were down $7 million year over year.

Compared to last quarter, we were down $2.0 million.

We were down $1.6 million from Q1 to Q2 in spite of having our annual salary increase cycle towards the latter part of March.

So we had a full quarter of salary increases and yet we still drove operating expenses down.

So we're doing a tremendous job on that front.

But revenue was down $4.5 million from the first quarter to second quarter.

We thought we would be down slightly but not that much.

So, it's been very challenging.

We do expect some further continued improvement in operating expense but I think we are going also -- going to have to see the market turn just a little bit in order to move back up to the 39% to 40% range.

So, still our objective over a period of time, hopefully not too long a period.

But, it's going to be challenging to get there until we see at least a little bit of sequential revenue growth.

Mark, we don't see any downward pressure beyond that 38% unless there was a significant further deterioration poised on the second quarter of the market itself.

So we feel very comparable with the 38% to 39% range.

The other thing I always point to, which is Lee's kind of opening comments, that the overall operating margin for the Company was, we try to manage, it was up in the first and the second quarter of 2008 from the first quarter of 2008.

So, it's gone from 25.1% to 25.4% in spite of the fact there was a little pressure in the US CIS.

On the commercial side, I think you indicated there are some trade lines that are coming that you expect to drive more robust growth.

I'm just curious, you said double-digit growth for that business but given how early the business is in its life, I guess I was expecting the growth there to be a little bit more robust.

Could you talked about things maybe sales strategies, go-to-market strategies, that might, just those straight lines that can help kind of reinvigorate growth?

Has the economy really had an impact here near term?

There's a couple of good questions baked in.

Let me start with the latter part of your question, which is if you think about commercial, our core piece of that business is the US; and the US grew 20% in the second quarter.

So, strong growth there.

As far as go-to-market strategy, we've made some changes there.

Michael Shannon has done a good job.

We have revamped the structure of the organization.

We've kind of silo'ed product approach.

We've now gone to geography approach.

We've revamped the compensation scheme.

So, we're doing all the right things there.

It's a long-term investment for us.

And double-digit, I still feel very comfortable to deliver double-digit top-line growth.

I guess finally on the Credit and Direct Marketing businesses, obviously, tough year-over-year trends, but it seems like at least sequentially from Q1 to Q2, things flattened out a little bit.

So just curious, are using signs of stabilization?

You know, banks hopefully are starting to get their arms around the write-downs.

Any hope for some sort of uptick terms of spend going into the back half of the year?

Yes, we've seen it stabilize, albeit at lower levels than we would like to see it stabilize.

So, no real changes throughout the first six months of the year.

The banks eventually as you know, Mark, are going to have to get back in the acquisition mode of finding new qualified risks.

And so, that will eventually have to turn.

In the meantime, we talked I think in Lee's notes, that the portfolio management part of CMS is growing -- grew at 8% in the second quarter of 2008.

And Dan and his team are continuing to find ways to integrate and leverage the DMS database with our DBS capabilities and CMS to enhance the product offering.

So, to be very candid, I think the prescreening business itself is going to be difficult probably for the balance of this year.

Portfolio management will continue to grow, but eventually these banks will have to start acquiring so prescreening will pick back up.

I would note, because of the timing of some particular customer projects we did in Q2, we could see Q3 revenue decline from the Q2 level before we see that flatten or really increase.

On an absolute dollar basis?

On an absolute dollar basis.

Andrew Jeffrey, SunTrust.

Rick, I'm just trying to get my arms around sort of the trajectory of the business in US CIS.

You've done a great job of cutting costs but to a certain level, as you pointed out, it's hard to take more expenses out.

And we're looking at the pace of the decline in volume and then the adverse mix implied by lower origination activity and, hence, the decline in pricing.

And it seems to be accelerating a little bit.

How do you view sort of the trend here?

Because if you extrapolate it out, the implication is that business is getting worse with no real indication of a bottoming.

How do we get a feel for that?

And what are you seen internally that makes you feel like we're not at the edge of a precipice rather than in a sort of a more manageable kind of downtrend environment?

I would say this.

I would say I don't view it as an accelerating decline.

Yes, the second quarter was down further in US CIS than the first quarter.

However, I look at the trends throughout the second quarter.

I see nothing that leads me to believe they are on the edge of a precipice and this is going to continue to decline at an accelerated rate going forward.

However, the economic environment could change.

I don't see that they are right now.

In the meantime, we're doing everything we should do, which is to manage expenses prudently and to continue to innovate to try to solve problems for our customers and monetize that each and every day.

If you were to guess, and I realize this would be somewhat speculative at this point in the cycle, but if you look at the sort of from the outside, the aggressiveness with which some of the big banks have tried to at least apparently write off some of their trouble loans and shore up their loss reserves, how far along in that process do you think we are vis-a-vis their desire, as you point out eventually, to come back into the market?

Do you think this is an '08 kind of cycle or do you think it extends out beyond this year?

There are many out there who were better equipped than I to give you their view, but I will give you my opinion since you asked for it.

I think we're close to the bottom of the banks as it relates to mortgage-backed securities, home loans of finding the bottom, writing them off, finding the proper values.

The issue some of the banks now have to face into, and you saw I think American Express announced last night, is credit card delinquencies and home equity delinquencies and then commercial loan delinquencies.

Those are on the horizon for many of the banks.

But they are much smaller, obviously, in size and issue than the mortgage issue.

So specific to the mortgage write-downs, it's my view that they are closer to the bottom and it's probably a late '08, early '09 till that's completely behind them.

Okay.

And that would be the timing at which you think they would look to move back into the market a little more aggressively?

Yes.

I would think that the prescreening business should see some uptick in 2000.

Absolutely.

Then, looking at PSOL and the lower level for example of the data breach revenue, do you think that the second quarter represents a pretty good run rate for that business?

Should that be the sort of baseline?

I think in this economic environment, Andrew, yes.

That's a good -- kind of a good baseline.

What you saw there was again subscription up strong; transaction, kind of the discretionary spend on a monthly basis down a little bit.

On the breach side, what you saw was numbers were up but the actual take rate was down a little bit.

And what the companies who had data breaches were doing oftentimes were purchasing less expensive products than they had in the past.

So the revenue stream from breach was down.

I will go back to one last thought.

And that is that this whole concept of innovation applies to every business including PSOL.

They are doing some really neat things out there.

That ID Patrol, which we just launched last week, I'm hopeful will be a contributor to revenue to get them beyond what you saw in the second quarter.

But a safe range for PSOL for the rest of this year is probably that second-quarter run rate.

Thanks.

Nice job navigating this environment.

Michael Meltz, JPMorgan.

I think I have three questions.

Can you talk a little bit about on the guidance side, you painted a pretty -- perhaps it's just a realistic picture -- of the top-line environment.

However, you're not really nudging much on guidance, which is interesting, given the environment and your commentary.

And it might just have to do with diversification of the business.

But can you talk about how much conviction you actually have and what you're talking about in terms of visibility into the second half?

And then I have a follow-up.

I will jump in -- Lee, you can add to it, if you'd like.

We don't take commentary on guidance lightly.

So, you termed it as conviction.

Obviously, we're always looking externally to the macroeconomic environment.

But, trust me, when we give you that kind of guidance, it was with a lot of thought.

We do have very good visibility into our metrics in every operating segment around the world.

So, it was with a lot of thought.

So, as I sit here today, as Lee sits here today, in this economic environment, I remain convicted to that range.

The cost cuts, Lee, that you talked about, the $25 million, those costs have been pretty tight here for a while.

Where are you surfacing these savings?

That's specific to US CIS.

And whether you -- there are a couple ways to look at it.

But the way I've looked at it is from the fourth quarter to the second quarter, looking at our actual implemented run rate, excluding the mortgage business.

Because the growth ESS -- the effects of shrinking mortgage, reporting the growth of ESS has much higher rate of variable cost.

Washing that out, we're down between $6 million and $7 million per quarter.

And interestingly, as I said before, that's actually after a salary increase that went into effect in between.

So, the real rate of spend is actually down even more.

But that's literally taking an actual Q4 to Q2 expense growth rate and annualizing the difference.

I guess my question is, where are you getting the cost savings?

What areas, what functional groups are you pruning back on?

It's -- in an environment like this, it's some of everything.

I will note we have aggressively looked at our back office operations in particular and applied lean and workout techniques with an end to end process view that has introduced some very good streamlining and benefits.

We're increasing our use of outsourcing in some selected areas, particularly software development and call centers.

With revenue down some, we have selectively trimmed the sales force to ensure that that remains in line with revenue and not kind of have overcapacity if you will.

You know, just any form of discretionary expense we're being very, very careful of while still investing in new products.

So it really is an effort across the board to make sure that our costs stay in line with or even ahead of our revenue.

The only thing I'll add to that, Michael, is, and Lee mentioned, we have deployed lean.

And this is a sustainable cost out effort.

This is not a onetime squeeze and hoping it will come back in two months and three months.

It is redesigning processes so they are more efficient and hence need less investment.

One last question for me.

This is kind of a lay-up, but I think it's important.

It's been about a year since your investor day and I know you're not doing one this year.

But given what's going on in the financial services industry, any change on your thinking on your intermediate-term growth prospects?

No, I still believe in this business model.

I still believe in long term, this business can grow at the rate we talked about.

I still believe today that we can deliver the productivity to get EPS at a little higher growth rate.

It is no doubt, it is tough out there right now, Michael.

And while my growth projections I gave at the last Investor Day are over a period of time, we're going to have to have some improvements in the economic environment for us to be at the upper end of that range going forward.

Chitra Sundaram, Cardinal Capital.

Couple.

Does foreign exchange benefit or hurt operating income growth internationally?

Was the question is, what was it?

No, I mean, the foreign exchange trend, do they in any manner have an impact at the operating income level?

Essentially, it is pro rata to the effect on revenue.

The margins in that business are about 30%.

We actually disclose in the tables to our release the FX effect on both revenue and operating profit.

Yes, I'm sorry.

I missed that.

You said that the operating margin for TALX was in excess of 30%.

If we added back the amortization, can you be a little bit more specific?

Has there been an improvement over Q1, which I think was close to 30%?

If there's been a change in language, I don't know that it's been particularly conscious.

As we anniversary that deal, we will really focus on reporting the normal GAAP operating margins.

And the GAAP margin has increased over the last year, and we would expect it to continue to trend up.

So my guess -- I haven't looked specifically at it -- my guess is the pre-amortization margin is also ticking up in parallel.

Okay.

And then in Latin America, the obviously strong revenue growth and even excluding foreign exchange -- is some acquisition activity that's flowing through that revenue line?

This is Rick.

We've had some very, very small, de minimis tuck-in acquisitions in Latin America.

By and large, the vast majority of the Latin American growth continues to be through organic growth, new products, product transfers, so on and so forth and not acquisitions.

And lastly, on pricing, can you give us an idea -- you do typically comment on how pricing has looked.

If you didn't comment (multiple speakers)

Yes, we continue to invest heavily in our pricing initiative.

We're raising -- I think you saw in one of our commentary that Canada price continues to rise.

Pricing is increasing in most of our Latin American countries.

Pricing continues to improve in Iberia.

Even some of our products in the UK and some of our products in the US.

We continue to make sure we understand the value of the products we're offering to our customers.

And where there is significant value or increased value, we raise price.

And core product, I think typically you all have talked about it being a, I want to say, like a very low single-digit decline; and that's sort of remained within historical margins.

If you are talking about the US CIS, what we mentioned was you had total product revenue was down -- volume was down 4%.

Total revenue was down -- I'm sorry, total volume was down 5%; revenue was down 9%.

That 4% decline or delta -- 3 points of the was due to mix; 1 point was due to true price decline, which is (multiple speakers)

Thank you so much.

Andrew Ripper, Merrill Lynch.

A few of mine have been answered but I've got a couple left.

Just in relation to the last question at the end and the mix -- the price decline of 1%, are you concerned that you could be going into an environment now where the large or better capitalized banks mop up some of the weaker players, and that consolidation in the industry puts pressure on average selling prices?

Do you see that as a significant risk over the next couple of years?

No.

We've had consolidation of the banking industry, telco industry for years in the US and around the world, and I don't think that will stop.

And we have managed as a company to maintain high margins in spite of that.

Our challenge, Andrew, is to continue to find ways to innovate, add new projects products, leverage the TALX data, as an example, to differentiate versus our competitors, and maintain those high margins.

Secondly, in terms of your comments about prescreening being down 42%, when you experience all about prescreening credit marketing mix and talk about the same thing.

Obviously you guys disclosed credit marketing separately.

It was down 10% to the quarter.

Could you just sort of clarify, if you, in terms of prescreen, how significant it is for the consumer information side?

Credit marketing and prescreening, are you talking about two different product lines, or --?

Let me put it in perspective.

You've got the US CIS business and you have the financials for how big they are.

We have CMS, which we break out for you as well, and the size of that revenue base; I can't remember the exact size of it, and that's for the quarter.

$35.7 million for the quarter.

So you could do the math there.

And if you think about CMS then, there's really two -- I'm oversimplifying it; there's two main product lines within that.

There's a prescreen, which is trying to find new candidates for lending credit to.

And there's a portfolio management, which is analyzing.

So those are the two.

You had prescreening down 42% and you had portfolio management up 8%.

Yes, I'm with you.

Okay.

So I can work it out how significant they are.

And then finally on the Personal Solutions side, you haven't made many comments today.

I mean it obviously is a very strong profit performance.

But on the sales, you've seen quite a big slowdown over the last couple of quarters after a very strong year last year and certain experienced business seems to be keeping going at sort of 20% plus.

Have you sort of consciously pulled back on the marketing?

No, not at all.

We're still advertising heavily.

We've got MPI that we are investing in.

I've talked about ID Patrol.

I think when you look and compare experienced consumer business to ours, make sure you have transparency into their interactive business and peel that out and look truly at their comparable business to ours, because we don't have that interactive business model and have chosen not to.

So I've always said that I think this business is a double-digit growth business over time and it's proven to be that.

Yes, it was 8% this year but this quarter, but it's in a difficult economic environment, which is not that bad in a difficult economic environment, and I said it's going to be 20% margins and they have proven to do just that.

Yes, okay.

Just in terms of the new products that you talked about, you mentioned one or two sort of joined your initial commentary.

Is it possible to sort of give a sense of what the aggregate benefit could be?

We don't break that out.

Do we?

Do we give them our 2010 number?

Is that public?

I think we did.

No, you are saying for Personal Solutions, Andrew, or is this for total?

No, for group.

Yes, yes, we have said publicly that our new product innovation revenue will generate $200 million of incremental revenue in the year 2010 from products we build and launch in '07, '08, and '09.

Yes, okay.

Okay, any more color, in terms of what that could be, in the shorter term?

We don't break out.

It's -- I can promise you this.

It is not a ramp that picks up in 2010.

It is a kind of a linear track.

We are well on our way.

We launched this initiative, Andrew, back in late 2006.

So, we're about 1.5 years into it, almost two.

Operator, we have time for one more question.

Our final question comes from Jaime Brandwood, UBS.

Practically all of my questions have been answered, but I will throw just a couple in.

Just very quickly, can you give us a little bit more granularity, Rick, on what's going on in the UK?

Is the step-down in your UK growth rate purely related to what's happening with mortgages?

Or are you seem slightly broader-based weakness?

No, it gets broader-based than just mortgage.

Mortgage obviously is at the center of that issue.

And we had, as I mentioned in my opening comments, we had a number of customers -- mortgage customers who just literally closed up shop and said no more mortgage.

And they were generating some sizable dollars or pounds of revenue with us and just evaporated in the second quarter.

So, you feel and see that I think every day and you know what the UK environment is like.

So it's more broad-based than just mortgage, and we're facing into it.

I think that we've got to believe that that environment is not going to improve, much like the US, for quite some time -- through '08 and maybe in '09.

Was the slowdown there partly also due to the annualization of some contract wins that you had just over a year ago?

Yes, that was part of it as well.

Then just on the US and looking at the volume decline in our OCIS, which I think you said was around 5%, is there much difference there across different areas, you know, origination versus other parts?

Or was it basically 5% broad-based?

Broad-based.

I will turn the call back over to Mr.

Jeff Dodge for any additional or closing remarks.

I would like to thank everybody for participating in the call today, and we'll obviously be around to answer any other questions.

Thanks again.

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(Operator Instructions).

That concludes today's teleconference.

Thank you for your participation.

Have a good day.