First Advantage Corp (FA) 2005 Q3 法說會逐字稿

Thank you all for holding, and welcome to First Advantage Corporation's Third Quarter Conference Call. (Operator Instructions). We will now turn the call over to Ms. Cindy Williams, Investor Relations Manager, 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 commentary and responses to your questions may contain forward-looking statements, including certain statements made in this presentation including those released to the execution of the company's growth strategies, product expansion, fourth quarter earnings, margin growth in the background screen business, and improved operating (audio gap) and litigation (audio gap) and other statements that do not relate strictly to historical or current facts. (Audio gaps prevent accurate transcription of the forward-looking statements made here)

We will now begin our conference call this afternoon with our Chief Financial Officer and Executive Vice-President, John Lamson, who will provide an overview of our (inaudible) performance for this quarter of 2005. Following John, we'll hear from Mr. John Long, our Chief Executive Officer, who will provide us with (inaudible) and strategy and operations.

At this time it is my pleasure to turn the call over to Mr. John Lamson.

Thank you, Cindy, and good afternoon, everyone. First Advantage reported a net income of $16 million or $0.30 per diluted share for the quarter ended September 30, 2005. Net income was $13 million or $0.26 per share for the quarter ended September 30, 2004 and $12.5 million or $0.24 per diluted share for the quarter ended June 30, 2005.

The results for the quarter ended June 30 include merger, relocation, and branding costs previously announced, which reduced net income by $5.1 million, and primary and diluted earnings per share by $0.10. Revenues for the company were $169.9 million and $134.1 million for the quarters ended September 30, 2005 and 2004. Revenue was $163.4 million for the quarter ended June 30, 2005.

Service fee revenue, which excludes reimbursed government fees, was $157.7 million in the current quarter, compared to $122.9 million in the third quarter of 2004, and $151.2 million in the second quarter of this year. Service revenue for the nine months ended September 30, 2005 was $437 million, compared to $356.5 million in the same period in 2004. Net income was $42.7 million and $32.8 million for the nine months period ended September 30, 2005 and 2004.

Diluted earnings per share was $0.81 in 2005 compared to $0.66 in 2004, an increase of 22.7%. Results for the nine months ended September 30 includes the previously mentioned one-time charges in the second quarter that reduced net income by $5.1 million or approximately $0.10 per share.

Earnings Before Interest, Taxes, Depreciation and Amortization was $35.1 million and $28.7 million for the current quarter and the quarter ended September 30, 2004. EBITDA was $98.1 million and $74.7 million for the nine months ended September 30, 2004 and 2005 -2005 and 2004. A reconciliation of EBITDA to net income is included in our earnings release.

In September, we announced our new financial reporting segments following the acquisition of the Credit Information Group. I will now provide a brief summary of the operating results for each segment. The lenders' services segment offers nationwide lenders credit-reporting solutions for mortgage and home equity needs.

This quarter, lenders' services reported service revenue of $43.9 million and operating income of $13 million. Revenue was $33.9 million and operating income was $9.1 million in the third quarter of 2004. The operating margin was 29.5% in the current quarter, compared to 26.9% in the third quarter of last year. Revenue increased by approximately $10 million, of which $5 million was due to an acquisition resulting in an organic growth rate of approximately 15%. Total volumes increased by the same percentage during the period, excluding acquisitions.

Service revenue was $45.9 million and operating income was $12.8 million in the second quarter of 2005.

Our second segment, data services, includes business lines that provide transportation credit reporting, motor vehicle record reporting, criminal records reselling, subprime credit reporting, and consumer credit reporting and location services. The data service segment reported service revenue of $22.1 million and operating income of $7.2 million for the current quarter. Service revenue in the third quarter of 2004 was $16.7 million and operating income was $5.1 million.

Of the $5.4 million increase in service revenue, $2.6 million is due to acquisitions and $2.8 million or 16.6% is organic growth. The operating margin was 32.6% in the current quarter and 30.6% in the third quarter of 2004. Organic growth is principally in subprime credit and the consumer businesses. Service revenue was $20.9 million in the second quarter of this year, resulting in operating income of $7.5 million.

Dealer services is our next segment and includes credit reports, credit automation software, and redevelopment services to support automobile dealerships nationwide. The dealer services segment reported service revenue of $29.2 million and operating income of $4 million in the current quarter. Service revenue was $18.4 million and operating income was $2.1 million in the third quarter of last year.

Approximately $7.7 million of the $10.8 million increase in revenue was due to acquisitions with the balance of the increase, $3.1 million due to organic growth. This represents an organic growth rate of about 17%. Volumes increased by a comparable percentage for transactions produced from the third quarter of last year to the current quarter of this year. The increase in volumes is a result of expanded market share and dealer incentives prevalent in the market place in 2005. The segment's operating margin increased from 11.6% to 13.6% in the current quarter. Revenue was $23.5 million and operating income was $3.2 million in the second quarter of this year.

Our next segment is employer services, which is comprised of our employment backdown verifications, occupational health services, and tax consulting services businesses. Employer services reported a service revenue of $37.7 million and operating income of $3.6 million in the current quarter. Service revenue was $32 million and operating earnings were $3.8 million in the third quarter of 2004.

The segment's operating margin was 9.5% in the current quarter and 12% in the third quarter of 2004. The decrease in the operating margin is due primarily to reduced margins in the background screenings businesses due to consolidation of operating systems. The organic growth rate was 5.3% for this segment. Service revenue was $36.9 million and operating income was $4.3 million in the second quarter of 2005.

Multi-family services, which include resident screening, property management, and renter's insurance services, reported service revenue of $17.5 million and operating income of $4.8 million for the current quarter. Revenue was $15.7 million and operating income was $4.5 million in the third quarter of 2004. The operating margin was 28.6% in 2004 and 27.5% in 2005. The organic growth rate was approximately 10%. Service revenue was $17.1 million and operating income was $5.7 million in the second quarter of this year.

Our last segment is the investigative and litigation support services segment, consists upon insurance fraud investigation, surveillance, computer forensics, electronic discovery, data recovery, and due-diligence reporting. This segment reported service revenue of $8.2 million and an operating income of $353,000 for the current quarter. Service revenue was $6.7 million and operating income was $612,000 for the third quarter of 2004.

Operating margins were 4.3 percent in 2005, compared to 9% in the comparable period in 2004. Substantiality (ph) increase (ph) in revenue was the result of acquisitions. Service revenue was $7.9 million and operating income was $494,000 in the second quarter of this year.

Corporate expenses were $4.7 million in the current quarter, compared to $3 million in the third quarter of 2004 and $9.2 million in the quarter ended June 30, 2005. The second quarter includes the $6 million charge for -- primarily for CIG transaction costs and consolidation of offices. The increase in corporate costs is due to increased staffing and information systems in finance and accounting, as well as an increase in professional fees, facilities, and marketing costs.

Interest expense was $1.6 million in the current quarter, compared to $600,000 in the third quarter of 2004 and $1.5 million in the second quarter of this year. The increase from 2004 is primarily due to higher debt levels and higher interest rates in order to finance acquisitions. Related average interest was approximately 5.1% in the current quarter compared to 3.2% in the comparable period of 2004.

At September 30, 2005, total debt outstanding was approximately $126.9 million and shareholders' equity was $515 million. I'm now going to turn the discussion over to John Long, our CEO, who will discuss the operations of the company further. John.

Thank you, John. This is the first quarter reporting since the acquisition of CIG, and as a result, many things have changed in how we look, report, and operate the company. First, we pulled (ph)this transaction and have restated our last three year's operating results, as if we had been one company during that time. One major benefit of this is that we will not be advertising any acquisition intangibles as we typically do. Also, it will make it easier and more relevant as we report quarter-over-quarter comparisons going forward.

Secondly, we have doubled the operating segments that we report from 3 to 6. This further division makes it easier to describe our company and creates better transference when reporting our operating results. Third, we have increased our technology spending in the employer services segment as we further invest in new products and systems to create greater operating efficiencies.

Finally, we continue to invest in our corporate infrastructure necessary to support the much larger company created by the acquisition of CIG. Our quarter came in at $0.30 per share, which is at the lower end of our guidance. Overall, we are pleased with the quarter, especially with the results of our lender, dealer, data, and multi-family services segments, which all show good year-over-year sales and earnings growth.

The quarter was offset by low operating margins in our employer services segment and continued underperformance in our investigative segment. In our employer services segment, we have stepped up our technology investment to assist us with our long-term margin growth, primarily in our background screening businesses. We have also increased our spending in sales and marketing to help facilitate our cross-sell and branding strategies.

These decisions have had some near-term impacts on our results, but should pay for themselves by second quarter 2006. Our 2007 target margin for this segment is 15%.

During the quarter we acquired Recruiternet (ph) and added applicant tracking as key, new products to our employer services offering. We continue to believe that new product additions will enhance our cross-sell potential in employer services as technological improvements will assist in overall performance.

In our investigative and litigation support services segment, we are encouraged with the recent acquisition of True Data Partners, a rapidly growing electronic discovery firm. This is highly complimentary to First Advantage CoreFacts and the combination of the two businesses should lead to much better operating performance in this segment in 2006.

We also added Jenark Business Systems to our Multi-family Services segment. This acquisition bolsters the property management software side of our business and adds and additional channel to sell our tenant screening services.

On the international front, we continue to invest and expand globally with the opening of our Manila Employment Screening Operations that are later this month. Our new international background screening system CFCI will begin rolling out across Asia early in 2006. Also, we are seeing increasing interest in our Recruiternet (ph) applicant tracking software in Asia.

Business remains strong in October with normal, feasible downturns expected during the last six weeks of the year. We expect earnings for the fourth quarter to be between $0.22 and $0.26 per share. First Advantage will continue to invest in all of our business segments. We remain very excited about the breadth of services we provide and the associated growth opportunities created with each new door we open.

We will be providing full-year 2006 sales and earnings guidance at our investors' conference on November 9. This conference will be Webcast and the December earning's guidance release will be issued.

I would now like to open up the call for questions. By the way, Anand Nallathambi is on the call, and he is available for any questions.

Okay, our first question comes from Brad Eichler with Stephens.com. Your line is open.

Hey guys, good afternoon. A couple of questions for you. First, just a numbers question. What was the organic growth for the investigative business?

It was flat from last year, Brad.

And then, you went through it so fast, John Lamson, on the expense trends, were you trying to say basically that there were some added expenses this quarter that were a little bit higher than normal that will go down over time or what were you trying to say there?

I think you were referring to comments at corporate where we have incurred a lot of expenses in this third quarter. Some will remain, I don't think they'll be bunched in so much in a quarter, but for example on professional fees and (inaudible) fees, with the CIG acquisition that really as you can imagine essentially doubled the fees that we paid for those. And we need to get those caught up, but I don't think they'll be too much reduction on an annualized basis.

Okay, maybe a question for Anand on the credit business. I think there is a fair amount of concern out there about a slow down in mortgage activity and the impact on the business. I know you guys are taking addition market share, but could you talk a little bit about the sensitivity of the credit business to the mortgage cycle both from a revenue and margin perspective please.

Sure, Brad. This is An. I think the question was about the mortgage cyclicality and how do we feel about the prospects going forward. This has been going on for a long time; I've been with CREDCO for 15 years. We've focused singularly on our ability to grow market share in an up market and the resiliency to retain shares in a down market.

If you look at what we've done over the last year, especially from 2004 to 2005, a couple of times there are shares from up volume in the mortgage industry has grown about 7%. Our organic growth has been about 12.85% in this market. The acquisition obviously added about another 31% so we are enthused and encouraged about our ability to run through the cycle as we go through the last quarter.

In addition, I'd like to point out that the National Association of Realtors came out a couple of weeks ago and talked about the post Katrina housing starts seem to be up as opposed to being low going into 2006. That also shows us that the market maybe could be down a bit, but not as much as one would expect coming off a high cycle that we have had the last couple of years.

And then, in terms of margin, that business if I'm correct is running a low 30% type EBITDA margin. In a more trying time, what could you foresee managing that business to?

It all depends upon market share. If we are very resilient in retaining share, we could see the margins going not too far down. Obviously, close in (inaudible) margins in our business is pretty high, but I would say that we could probably manage it within a 3% to 5% drop from where are current margin levels are.

Thanks very much, Anand.

Okay, our next question comes from David Lynn, your line is open. David Lynn is with Robert W. Baird. Okay, our next question comes from Josh Elving with Piper Jaffray, your line is open.

Hi, good evening. Thanks for taking my call. Obviously the business has changed quite a bit after the big acquisition and with regard to the new business lines, I was wondering, you did give us data on organic growth rates of some of these different business lines here in the past quarter year-over-year. I was wondering if you could give an outlook over the longer term, what you might expect as far as organic growth rates are concerned?

And second of all, you did mention that you have a continued appetite for acquisitions, I wanted to get a sense for what the acquisition pipeline looked like and where you saw most of your opportunities.

Okay, let's take them one at a time. Margin growth, I think we've talked about lender a little bit. Depending on where interest rates go will determine that next year, but I think it should be within 3% or so of where it is. But our data services area -- and John you have the margin --

Well not necessarily the margins, but more just organic growth revenues.

Okay.

This is John Lamson. As I mentioned in my presentation, year-over-year revenue growths have been company-wide actually it was like 11% from the third quarter of this year to the third quarter of next year. We would expect to see pretty high organic growth rates in the data services and the employer side, for sure. Lender, I think Anand spoke to in terms of organic rates and the investigative services, which this quarter has been flat, we expect really to get that up into the 10% range as we continue on with the data acquisitions and they have a pretty big sales force that we're going to leverage that quite frankly we really haven't had in the past in that particular segment.

One comment I would make on talking about growth next year is when we have our investor date on November 9, we plan on detailing out our sales and earnings for 2006 and included in that would probably be a better evaluation of where we think our organic growth will come from and where we think our acquisition growth will be. So I think we'll be better prepared for it when we speak that day.

Just on acquisitions in general, we've always been a very acquisitive company and with the bank line that we recently had approved of $225 million its kind of given us more leverage than we've had in the past to do some deals, so we have been pretty busy since the CIG deal closed and we anticipate being busy the rest of the year with a number of transactions. We have a very aggressive business plan in terms of trying to diversify our revenue and earnings for 2006 and beyond.

And so, in general terms is there any place in particular where you see significant opportunities?

We are investing in pretty much every segment that you see.

Great. Thank you very much.

We have opportunities everywhere.

Thank you.

Our next question comes from Colin Gillis with Adams Harkness. Your line is open.

Hi John and John. I wonder if you could give us a sense as to what you're seeing internationally? And I know it's still a very small percentage, but if you could just give us a sense as to the revenue that's coming from overseas as well as an update on where we stand on the $225 million line of credit, in terms of what's used?

In terms of foreign revenue, which is principally in the employer services group, we had about $2.8 million in revenue out of there for the quarter. It was basically from Quest on the foreign side.

Just commenting on that, it continues to be an area that we have extreme interest in. We mentioned that we're opening in Manila and that operation is opening at the request of customers, so we start out with enough business there to make money out of the gate.

There's this really, rapidly increasing demand for the (inaudible) services overseas. We believe we're at the early point in the international job market so to speak where people move between companies that need information about people form country to country. This is really the birth of an industry as far as we're concerned, so we have a lot of interest. We're going to invest heavily in the next year in this space.

One of the things we're doing is we've been investing in a new international background screening system that is multilingual and will allow us to service all of our different offices in Asia and ultimately as we expand around the globe. That's a real positive. I think it's a big upside for us going forward when you look out 3 or 4 years, we think we're going to be very pleased with the earnings that come out of that part of the world.

I think the second part of your question was the debt facility. The amount as $225 million, the original amount, then we had about $70 million that refinanced out of that we owed a (inaudible). We borrowed a few million bucks on it, so we've got an available line on September 30 of $150 million.

Okay. John Long, could you talk a little bit about as you focus in on the international opportunities somewhat, the need to get some of these multinational customers into the fold. Could you just discuss where that process is, are you getting inquiries?

Oh, wow. We're doing better than that. First of all, about half of the customers of Quest overseas are U.S. multinational companies using the services abroad. Most of those companies we do not have domestically and that's part of our long-term strategy is really to get this business internationally and then used that as leverage domestically.

We're still working these deals domestically as it is, but what's happened now is that customers that for whatever reason we haven't had, or haven't been able to get in to domestically, we already have a lock on their business in Asia. So this is a real positive for the company going long term again as we believe that the market for these types of services becomes more international. We think we've become the vendor of choice, just by the presence that we have in these countries.

We have a number of customers internationally that we would love to have domestically and I think we have a much better shot of getting them now.

And just the last one. Any update on the federal side? Any activity happening there yet?

Yes we're bidding contracts. Federal contracts are never quite like the way you do business every day, so you have to modify the way that you do business. We're trying to make sure that we don't put offers in there that bankrupt the company in the process, loaning capital on the federal government side.

We've got full-time folks working on that. As a matter of fact, we're going to start reporting that next year as part of our investigative segment, the government services piece. We're hopeful that we'll win a contract or two in the next few months and actually have some revenue to report. But we're being careful because some people have gone into this too fast without having an operation in place to adjust to some of the changes you have to do to service a government properly.

Okay, understood. Thank you.

Thank you.

Our next question comes from Jeffrey Kessler with Lehman Brothers. Your line is open.

Thank you. First, could you describe on the investigations side, give some more color on what it's going to take to improve the profitability of that division? Inherently the investigations business should have some very, very high profit margins to it and obviously you've just put it together. Nevertheless, it has not performed in the last quarter. One quarter doesn't a trend make, but what I'm more interested in is what are you going to do to get it more profitable and where are those profits going to come from?

Jeff, let's divide the investigative area into 2 segments. For us, there's there surveillance segment which is about half the revenue and the other half is coming from the computer forensics, our due-diligence area, and our data recovery piece.

The surveillance business is a hard business and we've not done very well in it to date. We really do need to grow market share so on that portion of the business, I wouldn't view that as a high-margin business. That's a business that I think we would like to see get into the 10 to 15% range in the next year or so and we'll work real hard to do that next year.

The higher-margin businesses that you're talking about, really are in the area of this computer forensics and electronic discovery. This is the area that I think Croll has done very well in. When we entered the computer forensics business, we chose to go with a relatively small purchase in terms of revenue and earnings. We thought that we could grow that organically quicker than we have. One of the problems we had was we didn't have an electronic discovery company so we didn't have a complete solution. That's one of the reasons why we've gone out and purchased True Data.

Whenever we do deals where the start-up company is a smaller company, it's pretty hard to grow it without trashing the earnings because as you know, sales people are very expensive and it takes time to get the whole thing working. With True Data we purchased a company that's further along in the process, that's a fair amount more profitable, and has a bigger sales organization. Merging that together with the computer forensic business of CoreFacts should give us benefits not just in the complete product offering, but the advantages we're going to have with having more sales people available to sell both products.

We're actually pretty upbeat about the prospect for that business turning around next year and think it will be much better. But this year, it's been tough because the truth is to invest $1 million into a sales organization there's only one place to take it from and that's profitability right now and the business was just a little to small to absorb that.

Okay, second question. A new line item of facilities and telecom, what is that?

Facilities?

Facilities and telecommunication.

That's all the buildings, rent, telephones, data transmission costs.

Right. That's understood. Are there any remaining integration costs that we should be expecting with the CIG acquisition? What type of tail on the acquisition cost do we have to see maybe for the fourth quarter?

I don't think there's really any acquisition cost. Our bankers fees and things of that.

I'm thinking more of the integration cost. I'm sorry.

Yes, integration costs? No. I think the fourth quarter will probably higher than I hope it is going forward with respect to professional fees and things like that, principally because of Sarbanes. But I don't think there's really any more what I would call integration costs left on the CIG deal.

I guess for a full-year guidance of it, I would expect that you're going to get into more granularities at your investor day? And also for your 1Q EPS numbers restated?

First quarter of this year?

Yes.

Yes, yes we will.

Okay, you wouldn't want to impart some wisdom now?

First quarter of 2006?

Yes.

No, we'll talk about that at the investor.

Jeff, you know we've been working our budgets and our business plan and tweaking it and we're not done yet. We'll be done on November 9 and happy to report that.

Okay, and one final question. With regard to the, we'll call it the national generic trends, in terms of employment, which have slowed a little bit in the last couple of quarters, have you seen any of that commensurate slow down hitting your business employment screening business? And are you building up your current and post-employment segments in that area?

The employment screening area you really have to divide into 2 areas for us. I think we grew in about 5% of the segment, but the truth is drug screening was flat and our background screening business grew at what, 10 or 11%?

Yes.

So our core background screening business, where we've put a lot of emphasis on our sales is still growing about 10%, so we're not seeing a slow down at all right now in that business.

Whereas drug screening, we just don't sell as much drug screening in general as we used to. So to some extent there's some run-off there, but it's lower-margin business too, by the way. I think when you're looking at the segment going forward you have to think of it differently than the way the old segment was because drug screening is about 35 to 40% of this segments revenue today.

Thinking towards post-employment, we do some post-employment background checks, but that's not a big part of our business or for that matter anybody else's. Where we really are focused within that segment itself now is having more services on the pre-employment screening side so that applicant tracking system is a key product for us. We've got a couple of different deals in the pipeline right now that would add 2 new services into the segment, so we've got other opportunities to add services.

I think we really want to stay focused on the pre-employment side for now. That's an area where we've invested a lot in sales organization, in technology. I guess without getting into entirely new products, I don't know what we could invest in, other than our tax incentive business which is post-employment and we have continued to invest in that.

Okay, thank you very much.

Thanks Jeff.

Our next question comes from Nat Otis with KBW. Your line is open.

Good evening guys.

Hi Nat.

First question, with all the acquisitions you did in this quarter, were there any of them having large clients or customers that you can talk about?

Well first of all, in the third quarter, we only did three acquisitions. Some of it closed recently in the quarter.

The Credit Information Group is really at the end the day the one with the mega clients. Some of the mortgage banking customers of the Credit Group are enormous and there are great cross-sell opportunities for our employer services business. One of the big focuses that we've got as a company-wide initiative, employer services, that whole division crosses over into every business in America. What we want to do is use that leverage we have with some of the clients in the CIG deal is to potentially sell them employer services deals.

Recruiternet is smaller and there's big upside potential with that business, but it's got some good name clients, but it's not as big. The real story here I think is the mortgage clients, also the dealer clients that they've got in the dealerships around the country and even some of the different types of lenders that we service through the (inaudible) also.

So I think that's your, big, big -- your big customers are in that business.

Okay. You've definitely spoken highly and very positively about the international business, more of what you guys have been doing, can you provide any color on competition you're seeing out there.

You know Pulse (ph), always been there. But I'm not sure they have an office in India. I don't know. I've not seen it. We have 5 offices in India and 500 people now within that country. I have not seen where any of our U.S. competitors have stepped up and said, "I'm going international," in a meaningful way. In fact, I've not heard it at all.

Recently, I just came back from a trip to India, Hong Kong, and Manila. Everywhere I went, I was the only one there, except for our own people. We're aggressively pursuing the Asia market today. We have other plans internationally. I don't know that anyone else is doing this. It's a long term process. It's not great returns for anyone to do this today. But if look at that business 5 years from now I see a huge business with very big margins.

I never underestimate competitors. I'm sure that they're all listening today and plotting their strategies against us, but I think we do have first mover advantage in every country that we're in today in Asia. I like our position, I like our management team. I like our commitment to the strategy.

All right, great. Last thing is just kind of a clean-up item. It looked like your tax rate went down a little bit in the quarter, is that something we can see going forward or is it going to go back the 42 range that we've seen in the past?

I think it's going to fluctuate between -- 41's probably a good one to use. I think it will be a little below 42, but maybe a little bit above what we had in this quarter.

Okay, great. Thank you.

You're welcome.

Our next question comes from Brian Ruttenberg with Morgan Keegan. Your line is open.

I'm going to make it simple. The guidance that you gave for this quarter that you just reported was $0.30 to $0.32 cents. You report $0.30, you obviously report that it was at the low-end of your guidance range. What would you have had to do to hit the higher end of the guidance range? Was it a cost-control issue? Was it a revenue issue? What caused you not to hit the high end of the guidance?

I would say it's cost. I think the revenue was there. We had good revenue growth in most of our businesses. One thing to keep in mind, we've been planning to be a bigger company for some time, so we've been building the infrastructure to do that. So some of this was expected to us.

The actual down turn in the employer services group was a disappointment for us in the fact that up to now we haven't made any progress on investigative, probably the principal reason why we didn't hit the higher end of the range. But I think we're making the right moves to correct that.

I really do think we're going to have a good year in the investigative next year and I think that in terms of the employer piece, we've done a lot of deals that last couple of years, we're also starting now to add products. There's investment every step of the way. We've got to do whatever it takes to satisfy that customer base. Our expenses have been higher than I would like, but we think we've gone through this internally and we think that we can turn this around and get into more of historical margins that you've seen on the business next year and actually start to improve them as we get into the second and third quarter.

If I had to say where I was disappointed it was probably in those two areas. I thought we'd probably get closer to the $0.32, but all in all I think the business is in good shape. We are very focused on improving the margins in those businesses that are underperforming to date.

Okay, thank you very much.

Our next question comes from Mark Markham (ph), from Robert W. Baird. Your line is open.

Good afternoon.

Hi Mark.

Just wondering, with regards to when you opened up with the $5.1 million in integration costs. Where did those fall in, is it with some of the segments that we would see that, is it concentrated in there, or which line items --?

We booked that, it's the after tax effect of the $6 million I referred to. It's all with corporate.

That's also in the second quarter.

It's in the second quarter.

Not in this quarter.

Oh it's all in the second quarter?

It's all in the second quarter and I referred to it now because it's obviously in the nine months, too.

Got it, okay.

But then the after tax effect is $5.1 million because some of those costs, mostly banker fees and things related to the CIG acquisition are tax deductible. We've got a little higher YTD tax rate.

And then, in terms of, you talked about employer services. In terms of the margins getting back to where you would expect them to be, what would it take to get them back into the 12% range?

I think first of all we're talking a quarter or two. We're spending some money to consolidate businesses and we're fixing some bugs in some systems. We're doing some things that we need to do to improve productivity there. It's prioritized based on the highest return. The big thing with a strategy like ours is you have to have customer retention and sometimes in order to do that you have to spend more money and that's what we've been doing.

But the fixes that we're working on I think will start to improve the margins and it could come pretty quickly. I'm saying for this call's purposes that I'm expecting it in the second quarter, it might come sooner, but we're very, very focused on those margins for that segment going forward. I think you'll see that we can pick that back up and get even. Our historical has been around 12, but I'm thinking we're going to do higher than that next year and then our target for 2007 would be 15. Recognizing the fact that drug screening business is a really low-margin business.

Is drug screening just not as popular among employers today or is there something else that's happening?

No, drug screening is very popular. It's just historically never been a very high-margin business. It's an area that we feel it's important for us to be in because a lot of the people who buy drug screening also buy background screening business, so we think it's a good cross-sell combination. Doing it of course you take some shots at your overall margins but we think it's worth it.

It's not our area of biggest focus, though, in the sales process. We're more likely to try to sell a higher-margin background screening and tax incentive business services to our drug screening clients and vice versa. It's not an area that we're putting huge amount of focus on the new sales side, but it's a big piece of business for us.

Also by the way, we don't plan on doing any additional acquisitions in that space, but it's an important product. The other thing about it that you have a very high amount of cost of goods with your lab fees and your collection sites fees, so you don't really have the margin opportunities that you have in some of the other businesses.

But all in all it's a good business for us to be in strategically and we just don't plan on spending any of our investment dollars in there.

Okay, and this next question basically presumes that there hasn't been a change to the second quarter numbers as represented by the AK as it relates to the second quarter numbers, but in terms of seasonal trends, based on the numbers off the AK, it looks like the operating margins declined sequentially in data services and multifamily services although the revenues in data actually went up sequentially and were essentially flat in multifamily. I was wondering if you could explain what would drive that?

Multifamily, just a quick on that. What was it, $350,000? Yeah, there was a $350,000 legal settlement fee that just hit this quarter, so we're trying not to literally press released with these work-type charges, but the truth is on an operating basis they were probably better quarter over quarter. But historically the best quarter for that business over the years has been the second quarter, followed by the third. So if you wanted to sequence out that business it would be probably second, third, first, and fourth.

Now the data services margins.

Yes, the data services margins, if you look at them each quarter. First quarter of this year they were 33.3%. They went to 35.8 and then 32.6, so a lot of that you're going to get a different revenue mix in there because there's about 5 or 6 different businesses in that group, but I think you're going to find it consistently right around that low-to-mid-30s range.

So is it just kind of a seasonal variation within the various businesses that compose data services that would drive those sorts of changes? It was obviously up on a year-over-year basis.

Well, year-over-year it's up a lot. But I don't think that generally speaking that data services segment really isn't that seasonal.

Yes, I don't think so.

There's always going to be some fluctuations a couple percentages here and there and margins, but it's really not seasonal like employer is, for example.

Okay, so was there any pick up in expenses or investment in data services in this quarter relative to the second quarter?

No, not really. It's an area that interests us going forward a lot. I think you'll see some deals in that space, depending on the margins of the transactions that we acquire may change the overall margins. We like the margin profile for that business going forward. There maybe a little bit of a fluctuation a point or two here or there, but this business I think within a point or two will be pretty dependable on the margin side.

Okay, and then can you give us a little more color in terms of the assumptions that underlie the top end versus the bottom end of the guidance for the fourth quarter?

It all comes down to December. December for a lot of our businesses can be pretty tough. This is very much a new company. All of a sudden we're twice the size of what we were and October is always a strong month. We're having a strong October.

Historically in our employer services we start to slow down around the Thanksgiving time. You get a couple of weeks of pick up in December and then the last two weeks, that last 10 days of the year, you could be down 30 to 35% on revenue, even higher sometimes. It's just not been an easy month to call for us and we always put out guidance on the fourth quarter, it's probably our most nervous quarter to do it because we're never quite sure where it's going to come in.

We feel pretty good about the range, we've been very careful in selecting this range. We think it's going to be within the range and so far we've not been able to either beat or go below our ranges for better or for worse. We've been pretty much staying within our ranges and more than likely we'll be within that range in the fourth quarter.

Is there a general revenue range that would be associated with that $0.22 to $0.26 cents?

It's too hard right now because there's a lot of deals so we haven't given revenue guidance.

Okay, but you're not including deals in the $0.22 to $0.26 cents are you?

No, this is what we think we'll do with what we know. If a deal comes in and depending on where it's at in the cycle and whether or not it's accretive immediately or not that will either hurt or not.

But I think the truth is, if we don't know about the deals now, the chance of it closing in the fourth quarter and having any significant impact would be pretty remote.

Okay. Let me ask the question in a different way. What would be the segments that would drop off seasonally in the fourth quarter besides employer services -- ?

Multifamily, you'll see some drop off in the lender services. Dealer, I don't know, dealer might be okay, because you have a lot of incentives at year-end.

It's tough to predict this year, but there is usually softness in the fourth quarter. You're talking about incentives in the end of the year and the new year type promotions that they do, but generally fourth quarter is a low quarter.

Plus, you have to keep in mind, too, there were a lot of cars sold in the third quarter. But I would think generally speaking that you'll see some declines across all the segments in the fourth quarter.

So if we just look at the year ago pattern in terms of going from Q3 to Q4 in terms of sequential perspective, that may be a decent guide.

Yes, that might give you some light. Yes.

I think so. We do expect declines in most of the segments, but we feel pretty good about the number, so it's not going to be a huge drop. It's just going to be the normal seasonal problems that we have, mostly in the month of December.

Okay, and then can you give us a sense for what the balance sheet looks like beyond -- you gave us at least the bank debt, but any other data items you can give us on the balance sheet?

Just very briefly I can tell you that working capital I believe is just going to be about neutral and cash was approximately $17 million at the end of the quarter.

Any change in terms of DSOs?

I don't have that information.

Thank you very much.

You're welcome.

Bruce Simpson of William Blair, your line is open.

Good afternoon.

Hi, Bruce.

I have a couple of just kind of clean up things before I get into anything more substantive. Did you give us a consolidated organic growth rate for the whole company in the quarter?

I didn't, but I can. 11%.

I'm not sure that you have given us an EPS for the fourth quarter of 2004. I know you've given us an operating income number in the AK, but I don't think we have information below that to judge on the EPS in the year ago period.

Yes, it's $0.21 cents.

Do you have a share count there as well.

No, I'm sorry. I don't have the exact share count in front of me. But it's going to be, and I hate to give you these estimates, but it's around about 50 million shares.

And then, also in this quarter and for YTD, do you have either an operating cash flow or a free cash flow number?

I have a cash from operations number of approximately $59 million for the 9 months.

Okay, and in the quarter do you have that number?

I do not.

Turning towards a little bit more qualitative stuff, when you think forward, either John or John, about where you think a sustainable level of organic growth on a consolidated basis is when you look out to 2006, is where we are now kind of high single, low double digits? Is that realistic and sustainable?

Boy, that's a tough question today. I would never want to say that we're going to do 11% a year every year. But I certainly think upper-single digits is certainly doable next year. Again, we haven't finalized our forecast for next year and I would anticipated that we'll probably give a good estimate of what we think organic growth rates will be and some businesses will be higher than others, definitely.

So I wouldn't want to think about 11% next year, I think that might be a little bit tough, but I certainly think as a company we should try to be at least in the 7,8,9 range.

Okay. Similarly but for a longer term, when you think about operating margin, it looks to me as if, I believe consolidated operating margin on the quarter was just under 18%, when you think about where this business is likely to go as you gain scale and so forth but continue to do acquisitions, should we be thinking about that as a key part of the investment thesis that there are still hundreds of basis points for operating margin improvement that you can layer on here over the next couple of years? Or have you come so far with the CIG group that we're already in the seventh or eighth inning of that process?

God, I hope not. Bruce, let me answer this. It's a hard question in once sense because as you know we do a lot of deals. Sometimes when we're adding products we maybe adding a (inaudible) business but by the time we're done with acquisition amortization, the margins aren't the margins we bought. And if we do any investment at all into combining sales into trying to grow the business, we might have short-term margin erosion, so I would tell you this. I think that talking about CIG in general, I think that's an extremely well-run and mature business that's got good, strong margins and I think it's hard to expect much more out of them.

On the other hand, there's a lot to be gained in the employer business, there's a ton to be gained in the investigative. I think the dealer business could see margin growth over the next couple of years. But it will be tricky and I think we'll certainly be above 20 over time, I'm not going to sit here today and say that's next year because it will depend to some extent on what deals we do, how strategic they are versus how immediately they are accretive to margins. It's a tricky balancing act we have here.

Longer term, I think sure, we'll be over 20. I think there's great upside in some of our businesses and other businesses I think are just very well run today. Our Multifamily housing business is a very well run business today with 28% business lenders. Almost 30 right now. It's hard to improve on some of those results when they're really run as well as they are.

If you look at investigative and you look at employer and I think dealer and even some of the data stuff we do might even grow. I think there's plenty of upside to the business overall going forward.

Okay, and my last question is for Anand and it has to do with the dealer segment. It seems as if we're seeing pretty precipitous drop-offs in at least domestic car sales, did you see any of that reflected in the September quarter or is that too late in the quarter? And help set the stage for how you think that's going to impact that segment in the fourth quarter.

I think we saw that pretty late in the third quarter. I think we would see some drop off in the fourth quarter, but I just don't see it as a precipitous drop.

Okay, so it sounds in terms of its negative leverage on that business, you think that as you indicated earlier with a mortgage, that that's controllable, we shouldn't see a quarter-to-quarter steep decline or drop off?

Yes, I would say that. I'm not sure that it's because of necessarily the mortgage side. I'm just saying because of our distribution channels and our market share growth, I think we're pretty well diversified in the dealer space that our drop off in the fourth quarter wouldn't be so precipitous, but there would be a softening of the market which we're seeing now.

How would that diversification help? Are you going to be hurt, for example, more with manufacturers and less with the independent dealers or captive dealers? Give us a sense of the granularity in there.

Our market share basically through strategic relationships with the franchise dealer markets, the new car dealer, so to speak. But they also sell a ton of old cars and they are not necessarily in any particular market like captive dealers or independent dealers, they go across the board.

So we feel like our diversification will help us. In other words, there's no heavier concentration of the big three auto makers dealerships that we have as our clients. If that was the case you'd see a much more precipitous drop.

Okay. Thank you everybody for all of your answers.

Okay, thank you Bruce.

We have time for two more questions. Our next question comes from Kevane Wong with JMP Securities.

How are you doing guys? Most of the questions have been taken, but just a couple sort of clean-ups here. On Multifamily was there any Jenark moves in the quarter that hit.

Yes, there was, and we're going to tell you what that is.

Okay, good. I was just trying to back out the organic growth that you gave and it doesn't leave a whole lot of revenues in there.

There was about $260,000 revenue from Jenark.

Okay, is Jenark just very small or was it for whatever reason closing very late?

It's just one month. We're buying smaller systems.

Gotcha. Also, just with (inaudible) looking at the five acquisitions that you had or the three in the quarter and then the two right afterwards, can you give us a little sense as far as sizing, possibility, just so we can sort of figure out how those fit in in our models.

Well I can tell you that the three that we closed in the quarter, the aggregate purchase price was about $24.8 million and of course Recruiternet is in the appointment employer services segment. Jenark is in the multifamily and the third one, Phoenix, is in the Investigative.

And can you give us a sense as far as revenues?

I'm going to say about $9 million.

In total?

$9 million to $10 million.

And everything else has been taken, so I do appreciate it.

Okay, thank you.

Our final question comes from Brad Eichler with Stephens.com, your line is open.

I didn't realize we'd added a .com to our name, but --

You know that shows up on our screen, too, Brad. You're just high tech, Brad.

Two questions. Somebody asked you cash flow from operations and a free cash flow question. You gave them the cash flow from operations at $59 million YTD, what was CapEx?

CapEx is going to be approximately $13 million.

YTD?

Nine months, yes.

Okay, the second question and the last question is just more of a strategic thought. Historically, your business has not really generated a significant amount of free cash flow and with CIG, now you're going to be in a position where you are going to generate a much more significant amount of free cash flow. If you think about the historical way that you've done deals, a lot of it has been dependent on, because you haven't had a whole lot of cash, seller financing and stock.

Now you're in a position where if you, let's say, financed a third, a third, a third -- a third cash, a third stock, and a third debt on deals, you know, it's very easy to see where you could do a quarter of a billion dollars worth of M&A a year. Do you kind of agree with those numbers and is there enough opportunity out there for you to facilitate that level of transactions?

Well Brad, let me start with question two. If I had a billion dollars I'd go bezerk. The deals are everywhere in every one of our businesses, so our opportunities have always been incredible, it's just always been an issue of capital. If somebody really wants to give me a boatload of money, let me at em'.

In terms of the business itself, you're right. There's a lot more free cash flow. The mortgage business, especially, the lender business generates a ton of cash and that cash is one of the things that we want to emphasize with everyone is that cash is going to be used to grow our other businesses. We've always been a very acquisitive company, we've got a lot of interest in taking advantage of the cash flow. We really are not the type who typically puts a lot of money in the bank. We like to invest it, reinvest it into the business.

I don't know if that translates into a quarter of a billion or not, I think we utilize the cash and try to use some of the disciplines that we had when we didn't have any cash at all, which until a month ago was every month of our public life. I'm thrilled to have cash flow, it's really going to help us with our strategy going forward and we're very excited about the prospects for all of our businesses.

Hardly a day goes by that John, Anand, and I aren't on the phone talking about different deals we can do in the different segments that will enhance EPS and cash flow going forward. Yes, I think you'll see a lot of deals. What the number is, time will tell.

Okay, thank you.

Thanks Brad.

Thanks.

And that concludes today's call. Thank you for participating.