First Advantage Corp (FA) 2005 Q4 法說會逐字稿

Thank you for holding and welcome to First Advantage Corporation's Fourth Quarter and Full Year Earnings Conference Call. All participants will be in 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 22nd, by dialing toll-free within the United States, 800-331-1949, or 402-220-0191 outside the U.S.. A copy of today's press release is also available on the company's Web site at www.fadv.com. 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 morning everyone. At this time we would like to remind listeners that management's commentary and response to your questions may contain forward-looking statements, including certain statements made in this presentation including those relating to increase in market share in the dealer services segment, additional product offerings in the dealer services segment, growth in the multifamily services segment, execution of acquisition strategy in the employer services segment, improved profitability in the investigative and litigation support services segment, issuance of additional class B common shares in connection with dealer track's initial public offering, earnings per share guidance for first quarter 2006 and full year 2006, impact of expensing of stock based incentive compensation on first quarter EPS, EBITDA guidance for the first quarter 2006 and full year 2006 and other statements that do not relate strictly to historical or current facts.

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 certain 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, 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 2004 annual report on Form 10-K for further discussion of these and other risks.

We will now begin our conference call this morning with our Chief Financial Officer and Executive Vice President, John Lamson, who will provide an overview of our financial performance for the fourth quarter and full year, 2005. Following John we will hear from Mr. John Long, Chief Executive Officer, who will provide us with an overview of First Advantage's strategy in operations. At this time it is my pleasure to turn the call over to Mr. John Lamson.

Thank you, Cindy, and good morning everyone. First Advantage reported net income of $16.7 million for the fourth quarter of 2005, compared to $10.2 million for the fourth quarter of 2004, representing an increase of $6.5 million or 64%. Net income for the third quarter of 2005 was $16 million. Both basic and diluted earnings per share were $0.30 in the current quarter compared to $0.20 in the fourth quarter of 2004.

In the fourth quarter of 2005 we recorded a pre tax gain of $9.5 million, or $5.6 million after tax equal to $0.10 a share as a result of Dealer Track's sale of 6.7 million shares of its common stock in an initial public offering. We owned 20% prior to the offering of Dealer Track stock and thus accounted for it on the equity method of accounting. The sale of the stock was at a price per share in excess of our caring value per share. As a result of the issuance of the shares our ownership interest in Dealer Track decreased from 20% to 16%. Total revenue for the company was $170.1 million in the current quarter compared to $126.6 million for the same quarter last year, representing an increase of $43.5 million or 34%.

Service revenue, which excludes reimbursed government fees, was $159.1 million in the current quarter compared to $115.6 million in the same quarter of last year, representing an increase of $43.5 million or 38%.

Operating income was $22 million in the current quarter, compared to $17.5 million in the fourth quarter of 2004. This is a 26% increase in operating income. Operating income increased in all segments except for multifamily, where costs primarily associated with product expansion, reduced margins and operating profits.

Operating margins increased in the lender services, dealer services and investigative services segments with slightly decreased margins in the data and employer segments. Both the employer and investigator segments had record revenue and earnings in the fourth quarter. Product expansion, key acquisitions and progress in cross selling initiatives contributed to the fourth quarter success in these two segments.

Corporate expenses were $3.3 million in the fourth quarter of 2004 compared to $7.7 million in the current quarter, fourth quarter 2005. The increase in corporate costs is primarily due to an increase in technology staffing and other support services to manage acquisition growth, which occurred in the latter half of 2005 and for future growth. In addition, fourth quarter costs, primarily compensation and professional fees, were abnormally high as a result of increased regulatory compliance and security costs associated with the CIG acquisition, principally related to Sarbanes-Oxley compliance and professional auditing fees.

Corporate costs were 4.8% of service revenue in the fourth quarter and 3.1% for the year, excluding $6 million of non-recurring costs, which we recorded in the second quarter of 2005.

We expect corporate costs to average approximately 3.5% of service revenue, per quarter, in 2006. The company wide organic growth rate for service revenue was 8.3% quarter-over-quarter. Lendor services organic rate was 5.7%, data 19.3%, dealer 8.6%, employer 5.1%, multifamily was 9.7% while investigative was flat. High organic - the high organic growth rate in the data segment is principally due to growth and direct to consumer credit, sub prime credit and the U.S. search division.

For the year ending December 31st, 2005, First Advantage reported net income of $59.4 million, net income for the year ended December 31st, 2004 was $43.1 million. Diluted earnings per share for the current year was $1.11 compared to $0.86 for the previous year, a 29% increase.

Results for the year ended December 31st, 2005 includes the previously mentioned one-time charges we recorded in the second quarter of 2005 that reduced net income by $5.1 million or $0.10 a share and it was essentially offset by the investment gain on Dealer Track, which we recorded in the fourth quarter of 2005, that increased net income by $5.6 million or $0.10.

Total revenue for the current year was $643.7 million compared to $516.7 million for the previous year, represented an increase of $127 million or 25%. Service revenue for the full year was $596.1 million, compared to $472.1 million for 2004, representing an increase of $124 million or 26%.

The operating margin was 16.7% overall in 2005 compared to 15.6% in 2004. This includes an increase in corporate costs of $13.8 million, including the $6 million of merger costs recorded in the second quarter. Each segment's operating income and margins increased from 2004. Interest expense increased from $2 million in 2004 to $6.5 million in 2005 due to higher debt levels, which was as a result of increased acquisitions and an increase in average interest rates of approximately 150 basis points from last year.

The overall organic growth rate for service revenue was 8.7% year-over-year. Lender services organic growth rate was 12.5%, date 1%, dealer 14.4%, employer 4.3%, multifamily 15% and investigative was down 12%.

Data's organic growth rate was negatively impacted by approximately 8 percentage points due to the termination of a specific project in the latter part of 2004 in the consumer credit division. The investigative segment's organic growth rate was down due to change in revenue mix from a lower margins surveillance business to higher margin electronic discovery and litigation support services.

Earnings before income taxes, depreciation and amortization, EBITDA, was $30.7 million and $24.5 million for the quarters ended December 31st, 2005 and 2004, respectively. EBITDA was $128.8 million and $99.2 million for the 12 months ended 2005 and 2004. A reconciliation of EBITDA to net income is included in our earnings release.

Cash provided from operations was $82.3 million for the current year, compared to $59 million in 2004. Capital expenditures including data base costs for 2005 were $22.5 million. At December 31st, 2005, First Advantage had total debt outstanding of $218.2 million, including fixed rate debt of $42.7 million with an average interest rate of 4.83% and variable rate debt of $175.5 million with an average interest rate of 5.9%. Our available and unused line of credit was $89.5 million at December 31st, 2005. We had $28.4 million on cash on hand at year-end.

John Long, our CEO, will now discuss the status of our current operations. John?

Thank you John. The businesses performed well last quarter with strong year-over year-gains in our lendor services, data services and dealer services segments. Our employer services segment had a good quarter and we were especially pleased with the improvement in our investigative and litigation support services segment.

Operating expenses were unusually high for the quarter as a combination of one-time and catch- up costs reduce our operating results below guidance. The quarter included a non-cash gain of $0.10 per share, which offsets the previous $0.10 charge we took related to the CIG deal. Consequently the reported 111 per share is a good baseline and representative of the year we had in 2005.

Our lendor services business recorded record fourth quarter volume as market share growth offset a weakening mortgage market. During the same quarter, we acquired additional market share with the purchase of Credit Data Services.

Volumes remained strong halfway through the first quarter of 2006 and we expect another good quarter from this segment. Our data services segment's performance was helped by continued growth in our Teletrax subsidiary and the addition of Lead Click Media in the fall.

The dealer services segment continued to successfully expand market share and automotive credit and we anticipate continued growth in 2006 as a result of new product offerings and intensified marketing of lead generation services through our automotive dealer customers.

Our multifamily services segment had a decent fourth quarter with typical seasonal decline. We added additional scale with the November purchase of the Info Center, a Massachusetts-based resident screening provider. Slow growth is expected in 2006 from this segment.

The employer services segment had a good fourth quarter in 2005 with strength in our tax incentive and recruiting software businesses offsetting seasonal weakness in our background and drug screening businesses.

During the quarter we added Road Manager Financial Services to our tax consulting services business and True Star Solutions, a recruiting solutions provider, to our portfolio of HR services. We see strong long-term growth opportunities in employer services and will continue to aggressively pursue deals in this space throughout 2006 both domestically and internationally.

Finishing out the segment, things are finally taking shape in our investigative and litigation support services segment. The acquisition of True Data Partners, an electronic services company combined with our existing computer forensics business is creating a dynamic offering that we expect will make 2006 a break out year for this group. We are expecting rapid growth in top line revenue and bottom line profitability throughout 2006.

In our press release we reference a pre-tax investment gain attributed to Dealer Track holdings, an automotive dealer management systems company in which we have an investment.

In December Dealer Track Holdings had its very successful IPO at $17 per share. Today it trades in excess of $20 per share. First Advantage owns 5.4 million shares of this stock as a result of the CIG deal. When we valued CIG there was no established market value of Dealer Track. After considerable discussion we placed an initial value of $50 million with the understanding that if an event took place within two years of close that better defined the value of Dealer Track, such as a sale or an IPO, we would pay First American an additional consideration for CIG, 50% of any additional value over $50 million created by such event. The payment is to be made in additional class B shares. We are estimating that this will lead to the issuance of approximately 1.5 million class B shares. The market value of our Dealer Track interest currently exceeds $110 million.

This leads us to a discussion of our 2006 guidance. Guidance has gotten tricky for us for three reasons. First we have the Dealer Track stock issuance, which increases our starting number of shares to approximately 58 million; second, the restatement of historical earnings as a result of the pooling of the CIG deal does not necessarily mirror the way we now run the company; third, the accounting for stock based incentive compensation expensing has complicated matters.

Not only do these combine to make guidance difficult, but they also make quarter over quarter comparables very tough in 2006. For example, we estimate that corporate expenses will be 3.5% of first quarter service revenues versus 2.4% last year. This represents about $0.03 per share difference.

As the year goes on this will smooth out and eventually reverse in the fourth quarter. As our sales grow we would anticipate corporate costs as a percentage of our service revenue to decline over time. We are confident that First Advantage remains on track with our 2006 objectives in all of our operating segments. Therefore we expect first quarter earnings of $0.24 to $0.27 per share before stock-based incentive compensation expensing which we estimate at $0.04 per share.

EBITDA should come in between $38 and 40 million. We have revised full year guidance to the range of 125 to 130 per share before stock-based incentive compensation and $170 to $180 million in EBITDA. We expect 2006 EBITDA to be in excess of $3 per share -- 2005 EBITDA was $2.40 per share.

At this time I would like to open the call up to questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Brad Eichler. You may ask your question and please state your company name.

Hi good morning John and John. Couple of questions, first, can you tell us what cash flow from operations was from the - for the fourth quarter as well as the year as well as CapEx please?

Brad, this is John. I do not have fourth quarter cash flow from operations -- I'm sorry. For the year it was $82 million and CapEx was 22 million.

And any guidance there for 2006 as it relates to CapEx?

It will probably be in that range, maybe a little lower in 2006 -

John, you mentioned a little bit over $3 a share in EBITDA in 2006 and I guess that's up from like $2.40 or something like that in '05. Does that include the minority interest?

We, yes - let me - we add back minority interest to get to EBITDA. Similar to what we did in the - if you look at the earnings release, the reconciliation.

Okay. So - so is the EBITDA number before - do you subtract EBITDA then - do you subtract the minority interest out of EBITDA then?

No.

You don't. Okay. What are your interest expense assumptions for your guidance in 2006?

We assumed that interest rates would go up 50 basis points in the first six months and then flatten out.

And then, I guess my final question for John Long, more of an M&A question, just maybe a comment on how the market looks right now and then absent any additional equity financing, how much M&A do you think you can do with internal generated cash and available resources in 2006?

The market in general is more competitive than I've seen for the first 2.5 years, we've been doing this - there's certainly more competition for deals today. Having said that, we continue to be very active in this space and are hoping to start releasing, or close some transactions that we can announce. But it's definitely more active. From a financing standpoint, of capital, we're still in good shape. Capital wise, we have a fair amount of - our line is 89 million that's available today and our shelf is, what, 4 to 5 million, yes, 4.6 million shares available in our shelf, so we're fine for the moment based on the size deals that we have. By the way, Anand is here and Akshaya Mehta also are available on this call if you have any questions for them.

Okay, thanks guys, I'll hop back in the queue.

Okay, thank you Brad.

Thank you. Brian Ruttenbur, you may ask your question and please state your company name. Brian Ruttenbur, your line is open.

We'll go on to the next question. Colin Gillis you may ask your question and please state your company name.

Great, it's Colin Gillis, Canaccord Adams. John, can you just talk a little bit about what you're seeing in terms of the market demand overseas and the traction that you're getting with Quest and additional opportunities for M&A activity in that region?

The -- overseas, we're targeting not just background screening business today but more in the way of recruiting software. Our recruit in that purchase, that company, the system itself is in 13 different languages, we're looking at getting into the skills assessment area overseas also. We have a lot of different opportunities -- we also are looking at some new countries to enter. We're very active at the moment in that space. We didn't talk about it much because we have some announcements to make in the next couple of months, but we're very busy in that space, not just in expanding the countries that we service, but also expanding the products that we serve into those markets.

For the most part, are these domestically orientated companies that you're targeting or are they U.S.-based multinationals?

Well, U.S.-based multinationals usually start out the demand for the products in various markets, but ultimately what we're seeing in the overseas market is that the local companies are starting to have the same demands. Especially now in the area of skills assessment, it's becoming an increasing demanding product overseas. So I think the market itself is much bigger than just the multinationals, especially the -- it's been proven for us in a country like India, where a lot of our business in India today is from Indian-based companies.

Can you update us on Manila operations and how that's going?

Manila is open. It's -- I think we have, what, 25 people in it today. Its going well, it started out with a few - I think three multinational clients, actually is how we got going in that space, but so far so good. We're just getting set up now and we've got new systems being put into place that will allow us to grow more effectively there. But it's been open about 60 days.

Okay, great. Thank you.

Thank you. Mark Marcon, you may ask your question and please state your company name.

Hi, it's Mark Marcon from RW Baird. Good morning John and John.

Hey Mark.

Good morning Mark.

Morning. Just wondering, on the employer services side, how much of your revenue now is international versus domestic at this point -- roughly speaking?

Oh it's - just let me think out loud a little bit on what our forecasts are for the year, but it's going to be less than 10% of our 2006 budget, I'm going to say 5 to 8% in that range for 2006. So we have a ways to go. Our domestic business, we keep adding products, we keep buying market share with existing products. So it's going to be hard for those numbers to change much with our gross domestically, but overseas, it's definitely still continuing to grow.

That sounds like it's growing a little bit faster overseas, although it sounds like you're growing fairly robustly across the board.

Yes. Well it's a - employer services is an area that we really don't see any limits. It's -- we've loved the space from the beginning. We really think in the long run that a lot of our earnings growth will come in that area over the next several years and a lot of the top line growth will happen for us as we take these products overseas and domestically the market is just so huge. I just, I can't see the end in sight of robust growth in that space.

Domestically, are you just gaining new clients who haven't used the services before or are you gaining share at the expense of some other providers in this space?

Wow, that's a hard question to answer. Our organic growth rates, especially in background screening, were very good this past quarter. I couldn't really tell you how much was taken away from other clients, but the cross-sell, the packaging of products together really does work and there certainly has to be a certain amount of market share take away as part of that process. But there's just more demand for these types of services in general, too. So if I had to guess, I would say it's probably equal -- equal some take away some new companies in.

It just looks like you're growing a little bit faster than some of the other public players in the space and so I was just trying to figure out -

Yes, our acquisition - our - we're very inquisitive in this space and our cross sell efforts today look to be very effective.

Okay great. And then, as a housekeeping item, could you please repeat the quarterly organic revenue growth rates? I didn't get dealer and investigation on litigation support?

Okay, give us one second to pull that up.

Yes, hang on a second. I'll - you wanted quarter, Mark?

Yes please.

Quarter-over-quarter, total company wide was 8.3%; lender was 5.7; data was 19.3; dealer services 8.6; employer 5.1; multifamily 9.7; and investigative was flat and I mentioned that the high organic growth rate in the data segment is principally due to growth in the direct-to-consumer sub prime credit in the U.S. search businesses.

Okay great. And then can you tell us within the quarter, how much revenue was added by the five acquisitions?

We don't -

I don't have that Mark. I'm sorry.

Okay. Or do you have a rough feel for what a 12-month impact would be?

Fourth quarter, Mark, revenue -- total revenue from acquisitions about 34 million.

34 million?

Yes.

Okay, great. And then -

-- we don't have the year. Sorry.

Okay, and that's for the five acquisitions or is that - is that for all acquisitions that [inaudible - cross talk]

That's for acquisitions that haven't been here for the full period.

Okay, so that would include acquisitions that were also made in the third quarter and the second quarter.

Correct.

Okay, great. And then with regards to Dealer Track, your EBITDA guidance is above what we were looking for. On the flip side, the earnings guidance even before the stock compensation is below what we were looking for and I'm assuming that a big part of that is due to Dealer Track. Can you enlighten us in terms of what you think the EPS impact is going to be of the issuance of the class B shares? Or how we should think about that?

The earnings per share?

Right.

Impact is -

It's $0.05 to 0.06.

Yes, it's about $0.05 to 0.06.

$0.05 to 0.06?

Yes.

And that will all happen in the - when will that exactly happen?

Well -

Spreads over the year.

The shares -- the shares will be - the shares will be issued probably some time at the end of March, okay? But for earnings per share purposes they're in there now, starting in the first quarter. Okay? In the [inaudible - background noise] so you're going to see the impact of that right away, even though they're not issued until the end of the quarter, because they're contingent shares.

Okay. Is there going to be some sort of a line item, I mean, besides the shares being issued?

No, it will just be included in the diluted shares.

Okay.

Yes.

All right great. I'll jump back in queue. Thanks.

Okay, thank you.

Thank you. Our next question comes from Kevane Wong. You may ask your question and please state your company name.

Hi, with JMP Securities, how you guys doing?

Good Kevane.

Good.

Good. First as sort of a quick thing, at your conference before you'd given service revenue guidance for the year of 740 to 760, is that still in force? Has that changed? Are you giving it for the quarter, but not for the year?

I think, I think it's good.

Okay.

Reports are good. As we do deals during the year that may go up but right now, based on what's closed through year-end, that's a good number.

Good. Also as far as lender services, obviously people are sort of watching the mortgage origination mark, I was just wondering if you can give us a little feel as far as operational, how that was going, are you seeing any sort of change as far as your competitor acting, are you seeing market share gain, just a little bit better feel as far as how that's running. Good numbers in that but just curious on the go forward.

Kevane, this is Anand Nallathambi, and I'll talk about the lender services. We've been extremely pleased with the performance of the lender services segment over the fourth quarter and also what we've seen in the first couple of months of the year. Usually our fourth quarter seasonally is a lot lower than the rest of the year, but last fourth quarter we held our own pretty well and just looking at the December to January transition, usually it's about a 15 to 20% gain on transactions. We've had about 27.5 this year so you can kind of see we're out pacing the market and it think it's because of our market share increases. We - if you remember we made a couple of acquisitions last year, which added bulk to us, especially in the lower end of the market, the broker market, and I asked the market -- there is a little bit of a softening in the market, a downturn, but we're seeing some market share increases that's giving us increased confidence.

And do you have any particularly large new wins as far as lenders that you're working with and the like, just trying to understand a little bit or [two].

We did some analysis to see where it's coming from. It's across the board. Like I said, the two acquisitions that we made were made in the broker segment, that's also kind of adding some share for us so -

Got you. And the - I'm sorry, just one more and I'll jump back into queue. As far as multifamily, you talked about that one as far as slower growth. I wonder if you could explain that a little bit? Is the market slowing, is there something else happening operationally or as far as pricing or the like, just trying to understand a little bit.

I'll take that up. The - what's happening really there is first of all we have pretty good market penetration today in the 35 to 40% range and a lot of the market is not that available in the, kind of the 1 to 4 family smaller houses, that's -- really you can't get to those folks. So it's just harder in general. What's fueled a lot of the growth for that company in the last couple of years has been new product development and a lot of the new products they've been able to bring into the market.

Right at the moment we don't have what I would call a new, a great new product to help fuel the sort of growth we've had in the past, although we are looking at an acquisition in particular that should help us bring some new products into the space. So I think my read on multifamily is - we'll be flat for probably the first couple of quarters this year and as we launch this new product that will be announced in hopefully the second quarter, then we'll start to pick back up on the organic growth later this year and probably next year really have another good year on the growth side as, again, as we add products.

Good. All right, thanks very much.

Okay.

Thank you, Bruce Simpson, you may ask your question and please state your company name.

William Blair and Company. Good morning guys.

Hey Bruce.

Hey Bruce.

I wanted to focus a little bit more on Dealer Track and get some understanding about the overall level of accretiveness of this holding. Following up on one of the earlier questions, if there isn't a specific line item breakout and now that you're down to below 20, I assume it's consolidated, we do see the incremental share count and we can figure out the dilution from that, but is this property as a whole accretive or dilutive to 2006 earnings?

Well, this is John Lamson, Bruce. First of all we - our ownership interest has gone from 20 to 16%, so we will continue to record their earnings on the equity method. So the results -- their results will be one-lined. I may have misspoke when Mark asked that question. Obviously the shares we're issuing to First American are generic class B shares so they will just be in our normal outstanding shares.

So, it will be broken out separately and I think the - now, how significant will their contribution be to earnings obviously just depends on what type of year Dealer Track has, but I think the key thing there is, as John alluded to in his comments, is that the market value of that stock is roughly in the $110 million range and we carry it on our books right now after we book this gain of about 45 million. So there's a -- an unrealized, if you will, gain if you mark-to-market of about $50, 55 million.

Okay, so beginning in the first quarter, we'll have some kind of a breakout as minority interest?

No, as a one-line equity in earnings. It's not consolidated, it's a one-line equity pick up.

Okay. So help me reconcile that with the wording in the press release about EPS guidance for 2006 being lowered because of the result of the incremental shares. Why isn't there an offset from the expected participation?

Okay, the real problem is when we did our projections for 2006, we projected the earnings but didn't have the obligation to issue more shares at the time. But when we did back our earnings forecast in November, this was pre IPO - there had been discussion of a potential sale of the company, or an IPO, but there was no way to really know if they were going to do that or not. So the bottom line of it all is our original guidance that we gave, the anticipated earnings from the Dealer Track were in those guidance, but the additional share count we've had to repay First American was not. So that's why there was no additional earnings anticipated from the transaction for us, yet we do have the share dilution.

Okay, so moving forward, it's all in there?

Yes.

That which we are aware of and -

Our best estimate at the time, which is now 1.5 million shares roughly.

But there - then there's this other aspect to it that you - John Lamson said earlier, there is still further gain between the market value and the holding value that's really not recognized on the balance sheet.

That is correct, and obviously that will fluctuate with the -- as Dealers Track stock fluctuates.

Okay. And then turning to the cost side for a minute, it seemed like there was a substantial step up sequentially in the DNA reported in the quarter. What's driving that?

Amortization, appreciation, depreciation, did you say depreciation and amortization?

Yes, is that simply acquisition related, D&A?

[inaudible - cross talk] fourth quarter acquisitions is a lot of it, Lead Click for example, probably, no doubt being the biggest one, that, the amortization on Lead Click is roughly $500,000 a month.

Okay.

So I think that's, that's probably most of it. You know, once an acquisition is in there the amortization is pretty consistent, it's straight line, so most of that has to do with Lead Click and a few other smaller acquisitions we did in the fourth quarter.

Okay.

2006 - in our budgeting for 2006, we're looking at that deal-related amortization to be about 40 million. So it's a pretty big number from the number of deals we've done, it's -- over the years, its - kind of cuts into the earnings per share, but it's real cash. I mean it's gotten fairly big. It's one of the reasons why we've kind of try and emphasize, at least for this year, the EBITDA thing, it's because it is a really - we've got strong growth on the EBITDA line it's just we have a lot of amortization of intangibles.

So then, given that, I wonder if you guys would venture a guidance on cash flow for 2006?

Bruce, we're not prepared to do that. We've given an estimate on EBITDA, but not prepared to do one on cash flow.

Okay. Why did the expected impact on reported EPS of the adoption of FAS 123 go up from your initial estimate of about $0.09 a share to now $0.13 to 0.15 for '06.

Yes, we did -- we initially estimated $0.09 and that was -- there's two reasons why. First of all, that was under the assumption that all of the expense associated with the stock based compensation would be fully deductible for tax purposes on our tax provision and that is not the case. Not to get into too much detail, but essentially the - it depends on your mix of non-qualified and incentive stock options. So our effective tax rate that we get the benefit on stock option expense went from 40% to 20% because our mix is roughly 50/50 on ISOs and non-quals. So that took that $0.09 that we originally did to about $0.11.

And then the revised guidance we've given you includes options we will be issuing this year. And when we did the original $0.09, if you recall, that was just based upon options that were outstanding already in 2005.

Okay.

So that's why -- that's why it went up.

Then let me just kind of take one step back and ask, I guess, John Long, more of a sort of a conceptual question as opposed to a specific line item. How should we think about this quarter? I mean, touching on what somebody said earlier, it's a little confusing in that the - you've taken down your EPS guidance for the year ahead, however the EBITDA number is quite strong, it looks like mixed but generally positive revenue growth. I mean when you look back at the fourth quarter, are you happy with the way the business is going? What do you feel about having missed the EPS number -- do you not care about EPS at this point?

[inaudible - cross talk] you're never going to get me to make that statement. Listen, the quarter - the quarter, the best way I would define the fourth quarter was a little bit sloppy from the standpoint of missing -- you never want to miss your own guidance. We underestimated some of the catch-up expenses related to Sarbanes, we have under accrued on a couple of things, a lot of working through the doubling of it -- basically when the CIG closed we doubled the size of the company. It has changed a lot of things and we were able to capture most of that along the way but we really had to play catch up on a few items in the fourth quarter and if you take out those items the quarter did pretty much turn out as expected, the businesses, which I think is the most important thing that we should be talking about, the businesses pretty much performed as expected if not a little bit better than expected for us. So I'm basically happy with the progress in the businesses, we could have done a little better job of forecasting some of the odds-and-end type of stuff that we had to book at the end of the year.

We are pretty much - we have a real good handle for '06 on what it takes to run this company going forward. So when we give you a number of 3.5 on corporate, with the probably declining of sales growth. We feel real strong on that and we feel that there will be a consistency in that number quarter-to-quarter that you'll be able to get comfortable with. So we look out to '06, we feel good about that.

The other thing, interest rates have been creeping up so -- and we do borrow a lot, so that's probably impacted things a little bit more than we would've liked so we've given ourselves, probably the best way to put it, a little bit of wiggle room on the earnings per share at this 125 to 130. But I got to tell you we feel real strong about the EBITDA numbers. And we do a lot of these deals depending on the deal and the make up, sometimes the amortization for some deals is greater than others. The cash flow is very strong from all of these transactions. I mean, I look at the sales growth, I look at the EBITDA growth, it's a tough year with the expensing options, I know, I mean we had a hard time writing the release and certainly the script today.

The bottom line overall I think the business is in fundamentally very strong shape. I like all of our businesses, I like the opportunities ahead of us. I think this will be a good year for us, but it will be difficult to measure it versus prior year for a lot of different reasons and I think everyone just needs to adjust to the new company that this year we'll do probably, in certainly on a straight top line revenue, in excess of $800 million, which is much larger than we've ever done before. So I feel great about the business going forward. I think we'll have a good year.

Okay, and then just following up on that. To put my finger on the specific catch ups and accruals and so forth that you think maybe you could've done a better job on forecasting or that caught you a little by surprise coming out of the CIG deal, you talked abut Sarbanes-Oxley. I think you talked a little bit about, oh, professional fees for accounting and so forth. Are there other specific things that you can attribute, say, this or that was higher in the quarter than we had projected it to be?

Yes, Bruce, I think most of it has to do with infrastructure costs that we had to take on because we have essentially doubled the size of our company and brought it up in the fourth quarter with a lot of that stuff. Plus the Sarbanes and the audit fees, all of a sudden we had to do complete Sarbanes on a company that's twice the size of what we thought it was going to be so a lot of that stuff, if you had regular purchase accounting you wouldn't have to do some of the stuff we had to do but because we had to restate, we had to do a lot of that Sarbanes for the full year, basically do it in the last three months of the year. So it just gets caught up. I think the important thing is, as John alluded to is that, going forward we shouldn't have those issues in 2006, but the other thing is the comps are going to be difficult, especially on the corporate side because, we - with restating everything, a lot of those corporate costs weren't there in the early stages of 2005 and they'll obviously be there in 2006. So -

Okay, that's really helpful. Thanks a lot.

Okay.

Thank you. Jeff Kessler, you may ask your question and please state your company name.

Hi this is actually [Manu] for Jeff from Lehman Brothers, how are you doing guys?

Good, good, how are you?

Hey, a couple of quick questions, I guess most of our questions have been answered. First, relative to your fourth quarter, the - I mean excluding that $0.10 gain, you sort of came in below your guidance, how much of that was related in terms of EPS to your -- the catch up expenses that you alluded to in terms of Sarbanes-Oxley and how much of it was effected by the increased share count from the Dealer Track?

Yes the - this is John Lamson, most of it had - probably $0.02 to $0.03 is rleated to the corporate side. The Dealer Track shares really didn't significantly impact the fourth quarter because they were only in there from the date of Dealer Track's IPO, which was December 13th.

Okay.

Okay? So that is obviously significant going forward into 2006 on our guidance, but that was not a major factor in fourth quarter 2005.

Okay. And then just, in the past you've given us the Quest revenue for the quarter and could you also just talk a little in general on the - some of the business trends you're seeing for Quest itself in India and Asia in genera?

Yes, [inaudible] why don't you talk to the -

Yes, Quest is about - let's pull it up, hold up.

70s?

Yes, revenues on Quest?

[inaudible - no microphone]

2. - 2.5 million for the quarter.

2.5 million for the quarter, okay?

Yes, 2.5 million for the fourth quarter.

Okay, the trends, we - well we've been doing with Quest is investing in technological infrastructure to kind of move it to the next level. That's been our big focus in the last quarter. So a lot of that technology is being rolled out in the first quarter of '06 throughout Asia and as this rolls out we'll get more efficient there and I think we'll be able to take on more market share.

The way we have dealt with market growth in the past is to add more bodies and as we all know that's not an optimal way to do it. So we expect market share growth to be quite a bit bigger in the second and third quarter of this year as we start to take advantage of the efficiencies that the technology will bring for us.

All right thanks, and I guess one final thing, could you just - I mean, for next year I guess, in terms of the seasonality per quarter, I mean, is that, is it still more or less the same or do you see some sort of smoothening out because of all the various acquisitions that you're making?

I think you're - I think it, probably within some segments you could say it's smoothing out a little but I think overall, I think it'll continue to be -- the second and third quarters will be our better quarters in terms of revenue and earnings, everything else being equal because some of these businesses are still some what seasonal, the multifamily business for example and the background side of the employer segment. So --

Yes, so employers just well as a lot -- December and January is a slower time for that group. But second and third, it will remain our strongest.

All right, awesome. Thanks a lot guys.

Okay, you're welcome.

Thank you. Our next question comes from Brian Ruttenbur. You may ask your question and please state your company name.

Brian Ruttenbur, Morgan Keegan, I hope I'm coming through this time.

We hear you now Brian.

Okay, great. First of all, can you just tell us about the tax rate assumptions that you have in 2006, you had a high tax rate in the fourth quarter and what those assumptions are in 2006. And then secondly, that'll - that should be a lay up question. The second is the competition, you mentioned more competition on the acquisition side. Tell me, if you can, who specifically you're seeing out there, is it domestic, the international, where's the competition coming from?

Yes, I'll take the easy one. The tax rate going forward, we're estimating right around 41%. And as I think I mentioned earlier, the - incrementally it will be - that's without the stock based compensation, okay? And the incremental impact of the stock-based compensation will be a higher rate than that because only half of it's about deductible. So incrementally that will probably be, like, a 60% effective tax rate.

Okay.

I think if you use 41%, you should be in pretty good shape.

Okay, thank you.

Okay, going on to the deals, in terms of, I can't really target any one company that's standing out. I think what's interesting on the employer services side is that there's a lot of [VC] money coming into the space now, there's a lot of folks willing to overpay to enter the space -- certainly overpay by our standards. There's been some deals, a couple of deals that to me, I could never do, they were just priced way too out of whack, so we'll pursue our strategy in a different way.

So I'm thinking that, since they haven't closed yet, I'm thinking that on these deals that these are probably traditional VC type of transactions where they don't have to report quarterly earnings. We, on the other hand, do and I'm not - I don't want to blow it by $0.10 to make a deal happen. And that's what some of the stuff is. So there's some interesting transactions out there, there's a lot of money out there, right now search and asset deals. We have a lot of discipline, we are still looking to do deals our way and we'll just see how it goes. We're not lacking transactions, it's just that a couple of deals got priced really pretty high and I was fairly amazed.

All right, so you're not seeing any public companies competing, it's more private equity chasing [inaudible - cross talk].

Yes, until you see stuff close, I cant really make that statement because I don't know a lot of the recent stuff hasn't closed yet and we'll see if it's a public company or not but I'm venturing a guess knowing that who was most likely to buy this stuff, it's probably not because I don't think that they would delete themselves to the level necessary to make these deals happen. And it's, private equity has a - can do that pretty comfortably.

Okay, thank you very much.

Okay.

Okay.

Thank you. We have a follow-up question from Brad Eichler of Stephen's Inc. Your line is open.

Okay, got a couple of questions. First, what is the pre-tax option expense number for 2006?

Pre-tax option expense for 2006 is - I have it right here - $10 million. $10.2 million is our guess.

That's pre-tax?

That is pre-tax.

And then you're saying how much - what's the effective tax rate against that?

After-tax benefit of that is going to be about 80%. So it's about 20% benefit. Instead of 40, like you traditionally would have, it's about half that.

Okay, so a 20% effective tax rate?

Yes, on the benefit yes.

Okay, okay that's question number one. Second is - and on that just for just a second, the entire 10.2 million, is that all in corporate expenses?

No.

Where is that?

Well, it will be - it will be allocated out to the various segments, depending on where the employees are.

So on the - how much of that then shows in corporate and is that one of the big drivers for the increase in the corporate expense?

Well none of it's - I mean, Brad, none of it's in corporate now.

Okay, but now that I mean in '06?

In '06, some of it will be in corporate, I don't have the breakout of the divisions.

Okay.

But going forward it will be charged to the segment where the employees are.

Okay, just want to make sure I understand on the shares for just a second. Are you saying that the weighted average for the entire year should be 58 million, or are you saying that we should start the first quarter with 58 million and keep it relatively flat for the whole year?

Start -- start at 58 and let's - based on our projections today, you should hold it flat. And then if we do some deals that involve issuance of shares we'll adjust it But, yes, I think -

Yes, you have to adjust it, assuming there were no other stock being issued during the year Brad. Okay?

On Dealer Track, I want to make sure that I -- I want to make sure that I understand this correctly. 16% of the market cap of Dealer Track today is about $115 million.

Right.

If you decided tomorrow to sell your position in Dealer Track, that would be about $2 a share in value for each share of First Advantage. Is that correct?

Yes, roughly based upon 56 -- we got about -- actual shares outstanding about 56 million shares.

Okay, if you decided to keep it, or if you decide to keep it, what's going to be the impact on equity in earnings from that?

Well the - we are keeping it, at least at the present time, and the impact on earnings per share is going to be the amount of the incremental 1.5 million shares that we issued, that we're estimating issuing to First American.

Do you pick up though in equity in earnings?

Yes, we have some earnings in our budget for them, okay? We'll pick up 16% of their earnings going forward and we've - and like for instance in 2005 we picked up 20% of their earnings.

Yes, I mean their earnings will be tough, just like ours are from a standpoint they have a lot of expensing and -

And Brad, that number by the way was about a 1.4 million last year, our equity in earnings.

Right, what are you assuming for '06?

We just assumed it was essentially flat.

Okay final question is for Anand. Just want to make sure I understand, you're - one of the things I've heard you say before is that you are fairly heavily concentrated in the lender market as opposed to broker market and in a market downturn that should be a net positive as lenders tend to take share from brokers. And it sounds like one of the things you're saying now is that you're seeing some gains out of the broker market. Can you just kind of reconcile those two things for me please?

Yes, hi Brad.

Good morning.

Yes, well, traditionally what we have done is we have only gone out for the major lenders because we feel like in a declining market they retain share better. But we've also seen that more and more of the market is becoming a broker market. I think that in some cases people say that 50% of the mortgage market is today brokers. Obviously the broker market has a more acute sensitivity towards interest rate. But we kind of felt like with our increasing market share in the lender segment, we also needed to add some areas where we just don't add one-by-one brokers. What the - the acquisition that we made and the growth in market share and the broker segments is that we have had is more from portals and we feel like the portals have a longer staying power than just a mom-and-pop shop type broker who takes advantage of the low interest rates and then goes off the market when the rates go up.

Okay. And then you've got an obviously a real good pulse on what's happening out in the market. Two-part question, then this is the final question but a) how much do you think the mortgage market will be down volume-wise in 2006 relative to '05, just overall and then do you still feel comfortable given these market share gains with your 10% reduction that you've kind of factored into your guidance?

Yes, I think, I would say - and this has been talked about a lot, that the mortgage market will be down anywhere between, just pick an average of about 20%, that's what the pundits, industry pundits are talking about at this point. And we feel confident if that rate stays within the 15 to 22% range we will be able to hang on to a 10% decline and -- because we feel like we can outpace the market and host share better.

Okay thanks Anand.

All right.

Thank you. We have a follow up question from Mark Marcon of RW Baird. Your line is open.

Morning. First of all with regards to the investigative and litigation support area, obviously a very nice increase in terms of the margins there. What drove that? Is that just basically leverage and where could the margins go longer term?

You know the electronic discovery business we got with True Data is a very strong business and it tends to be, these businesses could be a pretty high margin business. I would anticipate this year, that that segment will have at least 15 to 20% margins for '06.

That's great. And then on employer services, the organic growth rate for the full year was 14.4%. For the quarter it was 5.1%. It sounds like you feel pretty good about employer services from a longer-term perspective. Was there a little bit of a slowdown in the fourth quarter and -- in anticipation of a re-acceleration or how should we think about that?

Yes, Mark - this is John Lamson. Quarter-over-quarter employer's organic growth rate was 5.1% and it was 4.3% year-over-year.

Oh, okay. I just - my mistake

You may have misunderstood me or -

Got it. So it has been accelerating?

Yes -

Right. And it's been accelerating in the areas we really want it to which is in the pure background screening which was up in excess of 10% and in our tax incentive business which was about 10%. We declined actually in drug screening which is fine because that's a pretty low margin business.

Yes, that is low margin. So should we expect the employer services margins to continue to increase?

I think from the second quarter on. First quarter is always seasonally slow.

Right.

But, yes, second quarter on I think you'll see a better year.

Okay great. And then in terms of thinking about the guidance for the year. So, just in terms of the EPS guidance. You gave us the share count, can you give us the anticipated depreciation and amortization as well as interest expense?

Well, we gave - we furnished EBITDA.

Right. I just wanted to get some precision on the other two line items.

Interest, we got about $12 to $13 million, okay, of interest.

Okay.

And depreciation and amortization is about 30 - what's that, 37 million, about 38? About 38 million.

38 million, okay. So, and - so when we think about the change in terms of the earnings guidance, I mean it sounds like $0.05 to 0.06 of that was due to Dealer Track in terms of the shares. And then the other change is primarily related to higher interest expense and maybe a slight uptick in terms of the corporate expenses. Am I characterizing that correctly?

That's pretty close, yes.

Okay.

Yes.

Great. And then in terms of Dealer Track, you mentioned you have no intention of selling your position there -

At least at the present time.

At least at the - what would be the reason for keeping it as opposed to potentially liquidating that and using that as a source to pay off some of your interest expense, your debt and then reinvest in your core business.

This is Anand Nallathambi, and let me comment a little bit about our relationship with Dealer Track. Part of the reason we even got into Dealer Track was because our business model in the automotive arena, and re-selling credit is through locking up distribution channels and Dealer Track is now becoming a dominant distribution channel connecting automotive dealers with automotive lenders. And if you just look at our volumes, even though it's been only over the last maybe couple of years, today about 13 to 15% of our volume comes through the Dealer Track channel and we think that that's going to -that percentage is going to continue to go up. So it is a -- it is a key part of our business model and it's a key part of our distribution strategy. Where we see a lot of value in being a part of that network and that kind of explains the investment thesis for us.

Great, that's very helpful. Thank you very much.

Okay. Thank you.

Thank you. Our final question comes from Colin Gillis of Canaccord Adams. Your line is open.

Great thank you. Just a couple quick follow-ups. John can you give us the latest update on the line of credit, where we stand on that?

Yes, sure. We've got available and unused lines of credit of $89.5 million at year-end.

Okay great. And then, also U.S. Search seems -- activity there seems to be picking up, anything that's driving that or any color you can give us about sort of the consumer business?

It's certainly had good year-over-year growth. It-s not racing ahead but it had good year - good annual growth this year. Continues to perform well, much better than before and we'll just - we're glad to have it as part of the data segment, but it's just - it's just one piece of it.

Yes, okay great. Thank you.

Okay.

Sure. That's it.

Thank you. this concludes today's conference call. Thank you for your participation. You may disconnect at this time.