First Advantage Corp (FA) 2004 Q4 法說會逐字稿

Thank you all for holding and welcome to First Advantage Corporation's fourth quarter conference call.

All participants will be on a listen-only mode until the question and answer session of today's call. This call is being recorded and will be available for replay from the Company's investor relations' pages on their web site at www.fadv.com and through February 22 by calling 866-461-2745.

A copy of today's press release is also available at the Company's at www.fadv.com.

We will now turn the call over to Ms. Renee Svec, Director of Corporate Communications, to make a brief introductory statement. Thank you, ma'am, you may begin.

Thank you and good afternoon, everyone.

At this time we would like to remind listeners that management's commentary and responses to your questions may contain forward-looking statements, including statements regarding future earnings per share guidance, annual revenue growth, impact of consolidation on future earnings, the development of a cross-selling strategy, execution of future acquisitions, and other statements that do not relate strictly to historical or current facts.

The forward-looking statements speak only as to the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include - general volatility of the capital market and the market price of the Company's Class A common stock, the Company's ability to successfully raise capital, the Company's ability to identify and complete acquisitions and successfully integrate businesses it acquires, changes in applicable government regulations, the degree and nature of the Company's competition, increases in the Company's expenses, continued consolidation among the Company's competitors and customers, unanticipated technological changes and requirements, the Company's ability to identify suppliers of quality and cost-effective data, and other risks identified from time-to-time in the Company's SEC filings.

Investors are advised to consult the Company's filings with the SEC, including its 2003 Annual Report on Form 10-K, for a further discussion of these and other risks.

We will begin our conference call this afternoon with our Chief Financial Officer and Executive Vice President, John Lamson who will provide an overview of our financial performance for the fourth quarter of 2004.

Following John we'll hear from John Long, Chief Executive Officer and President, who will briefly update us on First Advantage's strategies and operations.

Mr. Lamson?

Thank you, Renee, and good afternoon everyone.

First Advantage reported net income of $2.7 million for the quarter ended December 31, 2004. This compared favorably to a loss of $1 million in the fourth quarter of 2003. If you recall, the 2003 results included an impairment charge of $1.7 million before tax.

Net income was $4.2 million in the third quarter of 2004.

Both primary and diluted earnings per share were 12 cents in the current quarter compared to 19 cents in the quarter ended in September 2004.

Total revenue was $68.3 million in the fourth quarter of this year compared to $49.9 million in the same quarter of 2003 and $71.9 million in the third quarter of 2004.

Service fee revenue, which excludes reimbursed government fees, was $57.2 million in the fourth quarter of 2004 compared to $41 million in the fourth quarter of 2003 and $60.7 million in the quarter ended September 2004.

For the year ended December 31, 2004, First Advantage reported net income of $10.7 million. Our net income for the year ended December 31, 2003 was $2.8 million. Diluted earnings per share was 48 cents in the current year, 2004, compared to 14 cents in 2003.

Total revenue was $266.5 million in 2004 compared to $166.5 million in 2003. Service revenue was $221.9 million in 2004 compared to $134.9 million in 2003.

Service revenue grew at an organic growth rate of 10.5% on a consolidated basis.

Our operating margin, which we define as income before taxes divided by service fee revenue, was 8.1% in the quarter ended December 2004. For the year of 2004, our operating margin was 8.3%. Our margin was 3.6% in 2003.

We exclude reimbursed government fees in calculating our operating margins, as they are costs that are passed on to our customers on a dollar-per-dollar basis.

Earnings before interest, taxes, depreciation, and amortization, our EBITDA, was $9 million for the fourth quarter of 2004, $11.1 million for the third quarter of 2004, and $796,000 for the quarter ended December 2003. For the year ended December 31, 2004, EBITDA was $33.3 million compared to $13.4 million in 2003.

A reconciliation of EBITDA to net income is included in our earnings release.

We'll now talk about some of our segment information that's included in the earnings release.

As most of you know, we report our financial results in 3 segments. The first segment, enterprise screening, includes resident screening, employment screening, occupational health services, and tax credits and incentives. The risk mitigation segment includes motor vehicle records and investigative services. Our third segment is consumer direct, which is our people search business known as US SEARCH.com.

Enterprise screening reported service revenue of $44.1 million for the fourth quarter 2004 as compared to $29.4 million for the same quarter in 2003 and $47.5 million for the September 2004 quarter.

Service revenue was $170.1 million for the year ended December 31, 2004 as compared to $107.6 million in 2003. This is an organic growth rate of 9.7% over last year.

The enterprise screening segment reporting operating income of $6.5 million for the fourth quarter of 2004, a loss of $1.3 million for the same quarter in 2003, which included the impairment charge of $1.7 million, and income of $8.3 million for the third quarter of 2004.

Operating income was $23.3 million for the year 2004 compared to $4.8 million for the 2003 year. The operating margin for the enterprise-screening segment was 14.8% for the fourth quarter 2004 compared to 17.5% in the third quarter of 2004. The operating margin was 13.7% for the entire year of 2004.

When you compare 2004 to 2003, earnings and margin improvement in this segment is attributable to the continued operating efficiencies derived from the consolidation of the screening businesses, the acquisition of the tax credit and incentive business in May of 2004, and organic growth due to preliminary cross-sell initiatives, which commenced in 2004.

Revenue and earnings declined in the fourth quarter compared to the third quarter due to seasonal declines in the employment and resident screening businesses. The decline was partly offset by organic growth in the tax incentive business.

Our second segment, risk mitigation, reported service revenues of $11.3 million for the fourth quarter 2004 compared to $8.1 million for the same quarter in 2003 and $10.7 million for the quarter ended September 2004.

Service revenue was $41.4 million for the full year 2004 compared to $18.3 million in 2003.

Risk mitigation's organic growth rate was 13.3% in 2004.

The risk mitigation derived reported operating income of $2.2 million for the fourth quarter 2004, $1.4 million for the same quarter in 2003, and $2.1 million in the third quarter of 2004.

Operating income was $7.4 million for the year 2004 compared to $5.7 million in 2003.

Our operating margins for the risk mitigation segment was 19.3% for the fourth quarter 2004 compared to 17.8% in the fourth quarter of 2003 and 19.5% for the third quarter of 2004. The operating margin was 18% for the year ended December 31, 2004 compared to 31.3% in 2003.

I would point out that prior to September 2003, this segment was comprised of only the motor vehicle reporting business, which has historically high operating margins.

Consumer direct is our last segment and that reported service revenue of $2.9 million for the fourth quarter compared to $4 million in the same quarter in 2003 and $2.8 million in our third quarter 2004.

Service revenue was $12.9 million for the year compared to $10.5 million for the 7 months ended December 31, 2003. The consumer direct segment operating results for 2003 are from the period June 2003 to December due to the acquisition of this new business line in June 2003.

The decrease in revenue from the fourth quarter of 2004 is due to reduction in distribution channels, which occurred in May of 2004. This reduction of revenue was offset by corresponding decrease in expenditures for channel and advertising and operational improvements in this segment.

The segment reported a loss of $132,000 for the fourth quarter as compared to a loss of $75,000 in the comparable period in 2003, an income of $137,000 in the third quarter of this year.

Moving on to corporate expenses, they were $3.9 million for the fourth quarter of 2004 compared to $1.8 million in the fourth quarter of 2003 and $3.4 million in our third quarter of 2004.

The primary increase in corporate costs from 2003 is related to interest, compensation and benefits, and professional fees. Our expenses at the corporate level increased by $562,000 when comparing the fourth quarter to the third quarter in 2004 primarily due to an increase in interest expense of $345,000 and professional fees.

At year-end, December 31, 2004, total debt was $105.8 million and shareholders equity was $290.2 million.

For the year ended December 31, 2004, cash flow from operations was $24 million and our capital expenditures were $8.2 million.

John Long, our President and CEO, will now discuss the status of our current operations and our corporate strategy. John?

Thanks, John.

The fourth quarter turned out as expected with a strong October and early November. From Thanksgiving through the end of December, quarter counts and revenue dropped approximately 20% due to seasonality in our enterprise-screening segment. This has been typical to prior years and was not a surprise to us.

Void accounts dropped were particularly steep in the last 7 to 10 days of December. Overall, we were pleased with our year-over-year improvement.

Highlights of the quarter included our acquisition of CompuNet credit services, which provides proprietary credit information on trucking industry brokers and shippers.

We are excited about the prospect of selling of many of our other services such as background checks, drug screening, physical events, and motor vehicle record searches to their 3,400 clients.

This is our first effort targeted at particular market verticals.

We are pleased that our year-over-year improvements in the enterprise screening segment, where we saw improved margins and good organic growth of 9.7%. While we will never be able to eliminate seasonality in these businesses, we are confident that we will see continued revenue and earnings growth on a year-over-year basis.

Consolidation continues in all of our business lines with varying degrees of materiality. We anticipate continued progress in 2005, which should contribute to earnings and margin growth throughout the year.

First Advantage completed 14 acquisitions in 2004 for a total purchase price of $141 million. These purchases headed 9-company target price screening segment and 5 of our risk mitigation segment.

Half of the acquisitions represented new, complimentary services for First Advantage, while the remainder added scale to existing business lines.

Our total head count is now 1,780 employees.

We have had a 3-month hiatus in doing acquisitions, which we anticipate ending by mid March. We continue to see great opportunities for additional acquisitions for our enterprise-screening segment and will focus on this segment early on.

As we look at the balance of 2005 and beyond, we believe the key to our ongoing success will be unlocking the potential of our cross-sell strategy. This will be accomplished through the re-branding of our various business lines and development of a cross-Company sales marketing team to assist with this effort.

We are initiating earnings per share guidance for the first quarter of 2005 at 12 to 15 cents per share compared with 3 cents per share in the first quarter of 2004. This will be our weakest quarter in 2005.

January typically starts slow and February is a short month. We expect a significant uptick in March.

This should propel us to our strongest quarters, the second and third.

Our 2005 earnings per share guidance remains unchanged at 85 to 95 cents per share.

Two thousand four was our first full calendar year as a public company, and we look forward to true year-over-year comparables in 2005.

With that, we would like to open it up for questions from our callers.

Thank you.

[OPERATOR INSTRUCTIONS]

Brad Eichler, your line is open from Stephens Incorporated.

Good afternoon, John and John.

Hey, Brad, how are you?

Brad, how are you doing?

Good. A couple of questions, one, could you talk a little bit more about the success or where you are in the cross-selling initiative?

We've recently, as you know we added Rick Mansfield to head up the marketing. And he's part of our, he's set up the re-branding initiative for us. So Rick the developing and marketing team internally in St. Pete to do that.

We are also in the process of adding sales people on a corporate level that will help assist with bringing the companies together.

Cross-sell initiatives have been ongoing throughout the year as primarily in our enterprise-screening segment. Where a lot of the companies are under common management, the sales teams.

We're trying to broaden it now by putting together more of a corporate initiative in 2005.

And have you already made some changes to the compensation structure of your existing sales people to incentivize more cross selling?

There are some programs in place today. The gist, the true meat of it is going to be in the first and second quarters of '05 as we start to bring in some more people to help with this.

But yes, we are putting together comp programs.

Okay. And then turning to margins, the obviously you guys are having some very nice organic growth. But when you look at where margins are today, around 8% this year, and you look at where you think you could be, let's say, by mid 2006 at closer to 20%. What are the couple of things that are going to cause margins to more than double over that time period?

I'll take that.

Hey, Brad, there's still a lot of upside with our businesses in terms of the consolidations. There's a combination of things going on here.

What is - we clearly have, I think, good organic growth numbers in our enterprise-screening segment. And the number of our businesses like the tenant screening business, have really started to develop really strong margins. Also our tax incentive business has strong margins.

The one, the area where we think we're really going to pick up some steam this year is in our background screening area, which has really made a lot of improvements this past year. But really in '05 and '06 we think we're going to start to really see that business break out in terms of margin growth.

So we see it, certainly we see improved margins there. We see improved margins in risk mitigation.

Remember, we talk about our business as being the acquisitions or consolidations being materially complete. But that doesn't mean there's not a lot of opportunity to continue to cut costs in these areas. And we think we'll have those opportunities in '05 and '06 to continue to trim down costs while we grow market share.

And combined with the cross-sell initiatives that we're developing and just general good signs on organic growth, I think, we've talked about getting to a 20% margin rate by the third, on a run rate basis, by the third quarter of 2006.

And we're still very confident we can do that.

What quarters are - it's hard to ever get excited about what happens in the fourth quarter because we just have such a tough December here. But I think you'll start to really see that the growth in the margins in the second and third quarter of '05.

Okay. Thanks. There's just one numbers question for John Lamson. The risk mitigation organic growth you gave, the 13.3, was that for the entire year?

Yes, that's '03, yes, '04 compared to '03.

What was just the fourth quarter? Do you have that?

Fourth quarter to fourth quarter was organically we were down about 5%.

Okay. Is there any reason that was down in that division?

No. It just kind of general business, sometimes you get the fourth quarter going down.

Okay. Thanks, John.

And Omega was down a little on the surveillance side.

Okay. Thank you.

Brad, just kind of an add-on to that. I think one of the things we were hoping for, which really didn't happen, was that maybe we'd get a lift from some of the investigative services in December to offset some of the declines that we get in enterprise screening historically.

And the truth is a lot of those businesses were weak in December and like our core pack business does a lot of, Right to Tell (ph) does a lot business with lawyers and I think we were at a lot Christmas parties.

So it was a little slower than we would have liked, but I think that may be typical. And we're, as we head into those businesses year-over-year for a couple more years I think we'll have a better handle on what to expect.

Is that bouncing back a little bit in the first quarter?

It's a little early. I think our organic rates are good in general, so far. I was actually looking at some of them earlier today. And we only have January so far but I've also been looking at some of the projections for February and they look decent. It's not earth shattering but I think it is bouncing back.

January started off through the first couple of weeks of January we're, we're just slower from just the year-end it's tough to get started. But as we saw the third and the fourth week of January things picked up and business looks good now.

It's just there's not a lot of days in February and it's - when you lose the first couple of weeks it's a little tough to or really tight in the quarter.

Thank you.

Nat Otis from KBW, your line is open.

Good evening, gentlemen.

Just wanted to check with you. In the past you've talked about moving into the public sector, segment whether on a federal level or state level. Is there any way you can elaborate more on what your thoughts are going into '05 and '06 on what you might do with respect to any type of public sector?

Nat, you're referring to government business?

Correct.

Yes, okay, yes. We're almost ready to announce the next couple of weeks. We're setting that up. As a matter of fact, I'm going to DC next week to meet with the folks that are working on that.

So the answer we're almost there. And I think we'll be able to tell you what we're going to do there.

Okay, great. Next question, everyone needs a crystal ball, but any thoughts on what the '05 operating environment or what your expectations are for '05 just in your business lines?

Operating environment?

Yes, just what your expectations are for the overall macro economy and how it might impact you guys.

I mean, business seems good. I mean, it's hard, again, it's hard to say but the employment looks good from our perspective. The general pickup, there seems to be some pickup in employment numbers for us year-over-year. At least for January and certainly in December we saw improvements. And it was actually our businesses did a lot better in November and December than they did year before.

So I think speaking for our business, I feel comfortable with this. We talked about an 8 to 10% growth rate in that segment. And I feel good about that. I don't see any reason to feel otherwise.

So I mean overall, speaking on the enterprise screening, absolutely. And even tenant screening, that business, multifamily housing that whole area. We've been traditionally very strong growth there organically. And it looks like another good year there.

The investigative businesses are smaller businesses for us. And we have less experience with those. So it's harder to comment on what that growth is going to be.

But even the, to be honest, the motor vehicle record business has picked up some. We like the general trend of the business. We don't, there's no real red flags, per se, that I would, that I could point out.

Thank you. Brian Ruttenbur from Morgan Keegan, your line is open.

Great. A couple of questions, on the gross margin you had a really strong gross margins in this fourth quarter. Can we expect that level at 64%, around that, going forward?

Yes, hi, Brian. This is John Lamson. Yes, we do have a good fourth quarter in those margins. And I think you'll find that that's going to indicative of the margins going forward.

It was we're getting to see the higher margin businesses kick in, specifically the tax incentive business, which helped our margins in the fourth quarter.

And then what happens in the, as we go forward in the second or third quarter, you're going to get some of the warmer weather businesses kicking in such as the resident screening business.

So we shouldn't see a dip in, let's say, the first quarter from that high gross margin?

Not that will have any significance one-way or the other.

Okay. And then operating expenses, they were up in the fourth quarter to 19.3% but on the year at 17%. What should we expect in kind of the operating expense going forward for first quarter and for the year?

I think you'll find that the more like the 17% versus the 19%. We got hit with a few - Sarbanes cost us a little more money that we thought it was going to. Probably like a few other public companies out there. And a lot of that hit in the fourth quarter.

Okay. And then last quarter you gave revenue guidance of 310 to 325, I believe. You talked about earnings per share guidance only in your press release. And in your comments I assume that the revenue guidance is still okay from last quarter?

Yes. The revenue guidance remains and first quarter thinking 71 to 73 million right now.

Great, 71 to 73 million in revenue?

Yes. I was looking at that earlier and I think that that's, that's a good range.

But for the year we're still with that the original range we gave for the year.

Okay. What are the plans with the debt? You're now over $100 million in debt. How much higher can you go and are there any plans near term to - I saw you file a Shelf and some other things like that too? What are the plans?

Yes, our debt to capital is about 27% now. And we're comfortable with that. We do have the Shelf out there. And a 2 million share Shelf that our present plans are to utilize the Shelf as we need it for - it's a pretty generic Shelf. So we can use it for almost anything we want to, essentially. Acquisitions, working capital, and we'll dip into that as needed.

But we feel real good with the current debt levels. And based upon our cash forecasts and the debt service we see into '05, we can probably bump that 27% up to 35 to 40 range, depending on what type of debt we can get.

Okay. And then internal growth going forward, I know that you've already mentioned this, it should be at the 8, 11%. Is that the right range?

Yes, we've been saying around 8 to 10%.

Okay.

In kind of a range. And we've obviously look at that at least every quarter by segment to see if anything's changed. But that's kind of our best guess at the moment.

Okay I've got 2 more housekeeping and then a macro. Tax rate, '05 around 42%, staying kind of flat with where you are?

Yes. It's looking like we're right around 42 to maybe 42.2, .3. It's really close to 42%. And I don't know of anything that's going to significantly change that going forward.

Okay. Share account shouldn't change dramatically, barring the Shelf? You're issuing more shares, but -

Yes. We have 2, well really we've got 2 sources, I guess you can say, of a possible stock issuance. One is the Shelf we just talked about, the 2-million share Shelf. And then we do have an acquisition Shelf out there that's got about a million 7 shares remaining on it.

So and then the normal exercise of options.

Okay. And then your cash position at the end of the year?

Cash position, we're at about $8 million in cash and $15 million on our line.

Okay.

Untapped that we haven't used.

Okay, great. And then here's a macro question for you. On the competitive front with Kroll part of Marsh McLennan, and ChoicePoint being a big monster, what are you guys seeing out there in terms of competition for acquisitions and in terms of competition for new business? What's going on out there?

Well, I mean, the new business we're all there competing. We win some. We lose some. The Kroll and ChoicePoint are always out there competing on some of the bigger proposals that are out there.

Of course this is a huge market and some of the landscapes we sometimes travel untouched. So it's - that's one of the beauties of the business is it's such a big market.

We don't, we definitely don't compete on everything and actually some of the small and the mid size clients that we gained, we traditionally got the higher prices. So there's some advantages to that.

Let's see ...

Acquisitions.

As far as acquisitions go, as you know we haven't been able to be real active in this space the last few months, much to my chagrin I want to point out.

But now that we're getting back into the space, we haven't really competed with ChoicePoint on acquisitions except for 1, well 2 in the last 18 months. We think that we hang in different directions on deals.

So ChoicePoint really has not seemed to be heading in our direction. So they're not that much of a factor.

Kroll, I'm not quite sure what Kroll's doing today. I think they were very active for a while and then they seemed to step out with some of the problems that's appearing there.

So the general rule of thumb, we seem to be able execute on our plans without too much trouble or interference from the competitors. And then remember it's not ChoicePoint and Kroll out there, but targets are, there's no problem finding targets.

We're, there's plenty of business out there to acquire.

Great. Thank you very much.

Okay, Brian.

Okay, thanks.

Dave Koning from Robert W. Baird, your line is open.

Good afternoon, John, John, and Renee.

How are you?

Hi.

Good, thanks. I'm just wondering on the tax incentive business I know recently there was the legislation that came through. And I'm wondering in Q4 and maybe in Q1 as well, if there's any non-recurring type revenue or kind of an overage amount of revenue that you might not expect to come through in subsequent quarters?

We do. It's a little bit of a boost. Remember, these tax incentives take a - they're long-term. I think 18 months most of these pay out over.

And even during the hiatus period that we had at the beginning of the year, we were still receiving revenue at that space from incentives that were placed back in '03 and early parts of '04.

So we saw a little bit of a spike up. There'll be a little bit, probably extra million bucks in revenue we might see in the first period of, first quarter on a catch up basis.

Although I haven't really seen it yet so I'm not sure if that's even coming.

But not, I would not say materially going to change our numbers in any meaningful fashion. I wouldn't expect that.

You get this is John Lamson. You get, a lot of this gets just because the legislation got passed in October, it takes a while for it to sift through the states and get their approvals on it, et cetera, et cetera.

So I don't think you're really going to, I don't think it materially going to really impact the fourth quarter of '04 or first or second quarter in '05.

Okay. And then just secondly, I'm wondering if you could give the enterprise screening organic growth in the fourth quarter?

Fourth quarter from the last year?

Yes.

From Q4 to Q4?

Yes.

It grew 10%.

Okay. So it looks like a little bit of acceleration. I think last quarter you mentioned that 8%.

From Q3 to Q3?

Yes.

Yes. That's probably right. I don't have that information in front of me, but that's sounds about right.

From fourth quarter to fourth quarter the enterprise screening organically grew 10%, 9.7 for the year.

Is that acceleration from Q3 to Q4, and I guess there's 3 basically that come from pre-employment screening, tenant screening, or the tax incentive business, is it disproportionately from any one of those 3 or pretty even across?

Actually it was pretty even. A little more in residence screening but pretty even.

And remember, tax incentive is not included in organic growth numbers for us.

Yes. There's none in it last year.

Right. All right, well thank you.

Okay. You're welcome.

Colin Gillis from Adams Harkness, your line is open.

Yes, hi, John.

Hey, Colin, how are you?

Dynamite. Hey, just quickly, I wondered if you could talk a little bit about we saw 14 deals in '04. How many do you think we might see in 2005?

Well, I wish I knew that number.

We're certainly getting a slower start in '05 than '04. We, as you know, we had this aggregation problem from last year that didn't allow us to really do anymore deals as the year went towards the end. So we had to kind of cut back.

So now we're into a period that's going to come up where we can start to do deals again. We've targeted some companies that we think will make interesting acquisition targets. And we'll go from there.

The capital is certainly always an issue for us. But right at the moment we think we can execute on our plan in the near term with some of the capital we have and quite possibly the Shelf, a lot to see.

I don't want to go out with a number ...

Sure, yes.

... this year. But I think let's put it this way, I do think that it will probably progress as the year goes on. We'll start to be much more active. And I don't think we'll have some of those exhibitions this year as we get later in the year. We shouldn't have to stop for any reasons, other than perhaps we don't have the money. So, but we'll see.

Do you have any of these deals factored in into the 85 to 95 cents?

No.

No. That's without any new acquisitions.

Is there a share count number that you could share with us that you've got that 85 to 95 range based on?

Outstanding shares for EPS? Yes, it was 23.

I mean going forward for the '05 guidance.

Yes, 23.5.

Okay, beautiful. And then I guess a little bit on the seasonality. You think we might see that starting to smooth out a bit in the Q4 of '05 of this year?

Well I think '05 will be a - I think we'll make progress every year in the fourth quarter. And I think '05 will be a better quarter, clearly, than '04.

The real issue we have is that two-thirds of our revenue, at least today, comes out of the enterprise screening segment. And that's the area that traditionally is very seasonal.

So I have no reason to believe that either of that's going to change unless we make some changes in the mix to the business that we have today. And it's hard to project that.

So I would assume that at least for the '05 period that you could look forward to another crazy quarter.

I hate giving such a wide range of numbers like we did last quarter from 9 to 15. But you really don't know because December is a tough month.

The weather plays a big factor to that as well in terms of -?

Oh, weather and everything. I watched, I guess, I did have better things to do. But I actually looked at the daily employment screening numbers during that week between Christmas and New Year's. I mean nobody works.

It's pretty funny but they really do drop drastically. But you know what? By the end of the second week of January everything's picking right back up.

So I think it's just something, an area at least until our mix of business changes. I think it's an area that everyone should just expect that December will be a tough month and do your projections accordingly.

Should we be thinking about any seasonality on the tax incentive side? Or is that pretty consistent throughout the year?

No. That's really doesn't have the seasonality. The big seasonality plays are really the employment and the resident screening business. Resident screening has a lot of seasonality too.

Sure, sure, right.

In terms of ...

Nobody's looking for an apartment in the cold weather, right?

Yes. It's been that way for about five years.

Any color on where headcount might wind up at the end of the year, end of this year?

Pardon me?

Headcount at the end of '05?

Yes it's 680.

You mean the end of '04 or '05?

At the end of '05. So assuming no acquisitions you think headcount's going to stay relatively flat or it might be able to decline?

I think if we did no deals I would say it would decline.

Okay. Beautiful. Thank you.

Yes, you're welcome.

Rob Hoffman from Candlewood Capital Management, your line is open.

Good afternoon.

Hi, Rob.

Could you guys spend a little time in a little part of a different business segment and give us your sense of how big the market is and what kind of share you think you have of it?

I read somewhere and they were talking about enterprise screening with a statistic that sounded fairly high in terms of how many companies actually are doing employment screening. And that may be on the Fortune 100 side, but overall.

So I figured we'll start with that and then and go to the different businesses and try to see, what areas you think you're going to grow in market share or which areas the market is going to grow as well?

Well, that's a lot of information. But let me try to give you our best instinct. And actually there's a lot of studies out on of the size of these markets and I respect a lot of people that put them out but I - we see in terms of how those markets impact a company like us, I'm not sure it's relevant.

I'll give you a good example. If you just look at background checks in say employment screening while it might be easy to identify that piece of a number of hires, but the truth is we're starting to do a lot of other types of work in that space, including a lot of charitable work now, whereas people are checking everybody.

So when you start to try to identify a market and market share it's gets tougher and tougher. And this is also true of the drug screening area to some extent.

The tenant screening market is - you can't even go by the number of new rentals anymore because the truth is that the number of products being offered into that market are expanding rapidly also.

So you've got a lot of product dynamic going on at the same time you've got some growth in these markets. And I think different companies are affected differently.

I mean I think we've got, when I look at our tenant screening business I think we've just got a lot more product to sell. And our growth, organic growth rates in that business have been very strong and they're probably much stronger than the rest of the market but mostly because we're selling more products into the space.

Again, we try to constantly expand our products and in the employment-based businesses we have I don't get too excited about what the market is. I just see - I almost see unlimited markets for us.

And as far as the competitors go, there's lots of competitors. We went to one convention last year and there were 100 competitors selling. Let's see, there were 100 competitors selling background and flash drug screenings in just the human resources convention that we went to last June.

So I mean that's 100 that could afford glutes. And we think there's several hundred that can't.

So we're always looking to have a lot of competitors.

But let me just make one quick comment because like I said this is a - you're asking kind of a very broad question. And maybe a good thing would be to do is contact us and we can get into this separately and go through the markets.

But let me just tell you where I think we are in terms of market share compared to competitors.

Rather than screaming we're absolutely number one by probably a 2 or 3 multiple, maybe larger. In drug screening I think we're number 2, employment screening we think we're number 3. It could be number 4 in that space. And the tax incentive business we think we're number 3. Motor vehicles we think we're number 2 in terms of our 4 key businesses at this point.

So give us a call. We'll try to go through it. But the reports that I've seen I think don't truly identify the total markets that these products have.

Just want to clarify. You said you're getting into the charitable business. That means that you're not giving it away, right?

No.

Okay. Just wanted to clarify.

No. We charge charities.

We're charging the not-for-profits.

Okay.

What's interesting about that business, though, is that people who tend to donate their time tend to be active in multiple organizations. And sometimes we find ourselves doing a search for the same person in a rather short order a few times.

So there's more of a market there than I think people realize.

Great. Thanks.

Jeff Kessler from Lehman Brothers, your line is open.

Thank you. Most of my questions have been answered. But I should ask, excuse me, in your strategy as to looking at the candidates after realizing the candidates don't necessarily come up on a consistent basis, are there geographic holes that you still like to fill?

Most of our, that's a good question actually. Most of our businesses I would say no. The heavy transaction businesses like tenant screening and I would say the employment screening businesses, I wouldn't need to.

We do certainly have - well one area I would say that we're missing today is probably international. And that's a big gap and an opportunity. But domestically, I feel pretty good about our overall domestic presence in our markets.

I do think you'll see the acquisitions. We'll selectively buy market share when we see a good opportunity or a good client. But not so much based on geographic.

Yes. I think it would be driven more by this is John Lamson. I think it'll in the major businesses other than the international presence that John mentioned. I think it would be driven more by customers that that target company may have. Especially if it's in the background and tenant screening business rather than geographic.

Jeff, we did see, getting back to international for a second, see a big opportunity there. There's only really one main international company that's playing in that space today. And we think there's room for another one. So we might do something there.

All right. Kroll's had a fairly substantial success in its electronic litigation business. The demands for Sarbanes-Oxley and other types of businesses basically have left them with not being able to hire enough people.

Are you in your risk mitigation area taking a look at electronic litigation, electronic discovery, and things like that?

Yes, we are. Those seem like certainly prime acquisition candidates for us. It is an area that we have interest in.

Right now we're primarily in computer forensics in that space and surveillance. But, yes, the electronic discovery is an area I think we'd like to increase our presence in.

Is there an overlap? Is there enough synergy between electronic discovery and the forensics area you're in right now to sort of tie them together?

Yes. We think so. Yes.

As a matter of fact we outsource a lot of that work right now because we don't have some of the electronic capabilities. So I think it would be an area that it would be helpful for us to do an acquisition in.

And I know Kroll's business is a good one. That's been a big home run for them. They've had that for a few years. And they definitely have it at the right time.

I think if we can get in, we'll try and get in. It's just a question of what's going to be the cost to enter that market in terms of competing for capital.

And I realize that multiples vary between the eye of the beholder and depending on what sector you're buying into, but can you make some general categorization since both you and ChoicePoint were fairly active in the acquisition market this past year? Have those multiples changed? And obviously would they be changing by going up?

I'm going to carefully answer that.

Every deal is different and I think the other thing, Jeff, I would say is as we get into businesses in a larger way, our reasons for doing deals change. In some cases we are buying that market share.

So I would tell you that if we were going to do a deal in a just traditional background screening space, we would still be looking to buy at the same multiples that we always have. And I think we would have some success in the smaller companies.

But some other areas where we might be gaining some particular technological edge, where some relationships, something that's different we would be willing to pay more.

We'll probably will wind up paying more in general I think just because we are, we have specific needs that we're looking for and there are companies out there that can fill them.

So I don't think you'll be seeing us necessarily looking to shop in the basement like we have in the past. I think we're looking for quality companies that can add. We need a real technology, real sales teams, really good quality customers that we can build overall relationships with. And if we get them, we're going to be willing to spend some more money.

Right, and a final point in this line of questioning. That is could you give us some parameters with regard to maybe how much you're willing to spend? You've got a few million shares Shelved. You've got a 1.6 or something like that for acquisition. You've also got, you've also said that you are willing to up from about 27% on a total debt to cap to maybe 35 or 40 plus you'll have some operating cash flow.

Can you give us some idea of what your internally generated capacity to acquire would be next year without having to go to a - obviously the, without having to go to the public market?

You're talking '06?

Yes.

Oh five or '06? You said next year?

Yes.

I'm sorry I didn't hear that.

Your internally generated capacity to acquire and expand the business.

Yes, which year, '05 or '06?

I'm sorry. I misspoke, '05.

Oh five. Well we've given rough estimates for the year on a range, which you can translate somewhat to cash flow. So we'll have some internally generated cash for sure that could be contributed to the Shelf, the 2 Shelves that we have out there in our debt capacity.

But we haven't targeted a number, per se. I think we're looking at the business particular opportunities in the different areas and trying to manage the organization accordingly.

We haven't thought out to what we're going to do on longer term in terms of capital needs and if we wanted to do a larger transaction. I think right now we've clearly identified how to pawn what we want to do near term.

Okay, finally, one last question. That is milestones with regard to your margins. Is there any area specifically that you feel you're going to be able to integrate more quickly and therefore affect operating margins a little more quicker than you'll be able to point to by mid-year?

I realize that you're looking for a full, a much better integration by the end of the year. But maybe over the course of the year getting there we want to see some type of milestone, some type of success in a given area.

Well we're looking for in the enterprise screening segment continues to be the area where we see that sort of rapid improvement. Tenant screening has always been that way. We see background as an area that that can start to happen this year.

So those are the areas that on first flush I would say is we could probably make some decent progress.

Okay. Great. Thank you very much.

Thanks, Jeff.

Artie Hufkin (ph) from Polymer Capital, you may ask your question.

Hello, gentlemen. I was just wondering relative to your other lines of business, your consumer direct segment that appears wanting. And I was just wondering what your plans are this coming year to possibly turn things around there?

Yes. The consumer direct segment is essentially operates at the break even level and with positive cash flow. Our plans for that segment in '05 and going forward is to really - we get about 4 million eyeballs a month at that site. And what our plans are to put additional products and services there to really to enhance the product line that it has.

Currently it's just essentially a people search business. And we'd like to see what we could do with that business if we had more products and services that are offered to those 4 million eyeballs.

So that's kind of our strategy going forward. It's a business that we, you know the history that we acquired in connection with the US Search acquisition, which was our vehicle to go public in June of 2003.

So that's why we own it. And that's our plans really to kind of turn that around.

Thank you.

Okay.

You have one final question. Our last question comes from Nat Otis of KBW. Your line is open.

Sorry. Don't want to keep you any longer than you have to, gentlemen, just one last quick question.

Following an article today on one of our competitors, I just want to see if you can very briefly elaborate on the process by which you guys confirm a company's authenticity when it deals with First Advantage.

I'm happy to do that. I've been waiting for this question for the last hour.

That was well said. That article this morning was quite a hoot.

First of all, let me tell you, Nat, we have a lot of respect for ChoicePoint and I think the truth is I'm sure that they follow proper procedures. So I'm not going to - when people are set on committing fraud sometimes it's very hard to stop them.

So I mean that's just a general comment.

I can tell you what we do here is in our background screening area and all of our businesses really that involve the Fair Credit Reporting Act. We obviously have contracts with those companies but we also, we get copies of their business certificates and then we do site inspections. We actually pay pros to do site inspections to make sure they are a legitimate business operating in legitimate environments.

Now having said that, and I don't know exactly what happened. They were kind of vague in the releases what's happened. But it seemed like it was pretty large-scale fraud that was committed. And I don't know what they could have done or why the, what the reason was.

So I'm very comfortable that we're very diligent with our process. And I'd be real interested to find out the details of what happened to them because it may be something that we all need to look out for.

All right. Thank you, gentlemen.

Okay. Thank you.

Well thanks everyone. We appreciate the time.

Thank you. That is all the time we have for questions today. This concludes this afternoon's call.

We'd like to remind listeners that this call is available for replay by dialing 866-461-2745 through February 22 or via the web by visiting First Advantage's investor relations' pages on their web site at www.fadv.com.

First Advantage would like to thank you for your participation. This concludes today's conference call. You may disconnect.