First Advantage Corp (FA) 2006 Q1 法說會逐字稿

Thank you all for holding, and welcome to First Advantage Corporation's First Quarter 2006 Earnings Call.

[OPERATOR INSTRUCTIONS]

This call is being recorded and will be available for replay from the company's investor relations pages, on their website at www.fadv.com, and through May 2nd by dialing toll free within the United States, 800-754-7904 or 203-369-3332 outside the United States. A copy of today's press release is also available on the company's website 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 afternoon everyone. At this time, we would like to remind listeners that management's commentary and responses to your questions may contain forward looking statements. Including certain statements made in this presentation, relating to performance of the lender services segment in the mortgage market, completing the Accufacts acquisition, impact of introduction of new products in the multifamily segment 2007. Continuation of similar results in the investigative and litigation support segment for the remainder of 2006, estimated impact of stock based compensation expense on second quarter 2006 earnings per year, earnings per share, and EBITDA and second quarter 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 [that reflect] circumstances and events that occur after the date the forward looking statements are made. Risk and uncertainties exist, that may cause results to differ materially from those set fourth in these forward looking statements. Factors that could cause the anticipated results to differ from those described in the forward looking statements, include general volatility, capital markets, 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 to the degree and nature of the company's competition, increase 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 2005 annual report on form 10-K for further discussion of these and other risks.

We will now begin our conference call this afternoon. Our Chief Financial Officer and Executive Vice President John Lamson, will provide an overview of our financial performance for the first quarter of 2006. Following John we will hear from Mr. John Long, Chief Executive Officer, who will provide us with an overview of First Advantage's 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. First Advantage reported net income of $12.7 million for the first quarter of 2006, compared to $14 million for the first quarter of 2005. The company adopted the provisions of FAS 123R, share based payment as of January one 2006, using the modified prospective application method. Under this method, the impact of share based compensation granted prior to January 1, 2006, in addition to share based compensation granted in 2006 is reflected in the results of operations in 2006 to the extent is applicable. The financial statements prior to January 1, 2006, are not restated.

Results of operations for the quarter ending March 31, 2006, includes share based compensation expense of $2.9 million, which reduced net income by $2.2 million and diluted earnings per share by $0.04. Basic earnings per share were $0.23 and diluted earnings per share were $0.22, in the current quarter, compared to $0.27 in the first quarter of 2005. Corporate expenses were $8.4 million in the first quarter of 2006, including 1.5 million of share based compensation cost, compared to $3 million in the first quarter of 2005.

This increase in corporate costs of $3.9 million, excluding share based compensation, is primarily due to additional infrastructure and compliance cost that incurred to support company wide growth, including the CIG acquisition which was consummated in September 2005. As previously discussed, financial statements for prior periods were restated to reflect the CIG acquisition. The effect of the restatement helps in comparing operating results at the reporting segment level, but will make quarter-over-quarter comparisons difficult at the corporate and company wide level for the first three quarters of this year.

Corporate costs were $7.7 million in the fourth quarter 2005. Net income was $16.2 million in the fourth quarter of 2005, or $0.29 per share. As previously disclosed, the fourth quarter 2005 included a gain of $5.6 million net of tax or $0.10 per share, as a result of DealerTrack's sale of its common stock in an IPO price per share in excess of our carrying value. Excluding the gain in 2005, and the impact of share based compensation in 2006, diluted earnings per share increased by 37% from the fourth quarter of 2005, compared to the first quarter of 2006.

Earnings before interest, taxes, depreciation and amortization, minority interest, and share based compensation adjusted EBITDA, was $39.5 million and $30.9 million for the quarter ended March 31, 2006 and 2005 respectively. An increase of 28%. As previously disclosed, EBITDA was 29.8 million in the fourth quarter of 2005. A reconciliation of adjusted EBITDA to net income is included in our earnings release.

Cash provided from operations was $21.4 million for the current quarter, and capital expenditures were $6 million. Excess cash generated in the quarter was used to pay off $10 million of debt, in advance of its scheduled maturity date. Total revenue for the company was $194.3 million in the current quarter, compared to 140.3 million for the same quarter last year, representing an increase of $54 million or 39%. Total revenue for the fourth quarter of 2005 was $170.1 million.

Service revenue, which excludes reimbursed government fees, was $181.2 million in the current quarter, compared to $128.1 million in the same quarter last year, representing an increase of $53.1 million or 41.5%. Service revenues in the fourth quarter 2005 were $159.1 million. Operating income was $27.2 million in the current quarter, compared to $24.6 in the first quarter 2005. First quarter of 2006 includes $2.9 million of share based compensation expense. Operating income increased by 11% or 22%, excluding share based comp. Excluding the impact of share based comp, operating income increased at all our segments except for multifamily, where costs primarily associated with product expansion reduced margins and operating profits.

Operating margins were consistent in the lender and employer services segment. Margins decreased in the data, multifamily and dealer segments due to product expansion and revenue mix. Margins increased in the investigative services segment, as a result of a shift in revenue mix from lower margins surveillance work to higher margin electronic discovery and forensic consulting. The consolidated operating margin was 15%, 16.6% excluding share based comp, compared to 19.2% in the first quarter of 2005. Interest expense increased from $1.1 million in 2005 to $3.2 million in 2006, due to higher debt levels and an increase in the average interest rate of approximately 171 bases points.

The company wide organic growth rate for service revenue was 6.1% quarter-over-quarter. Lender services organic growth rate was flat. Data increased 20%, dealer 13.7%, employer 1.5%, multifamily 7.3%, and investigative 4%. At March 31, 2006, First Advantage had total debt outstanding of $208.4 million, including fixed rate debt of $39.2 million, with an average interest rate of 4.92% and variable rate net of 169.2 million, with an average interest rate of 6.29%. Our available unused line of credit was $84.5 million at quarter end. We had $24.8 million in cash at quarter end.

I'll now turn it over to John Long our CEO, who will discuss the status of our current operations.

Thank you, John. We are pleased with the first quarter results as revenue, earnings per share and EBITDA all came in at the upper end of our target guidance. This is our first reporting quarter since our acquisition of CIG that includes the effects of FAS 123R, the additional 1.6 million shares issued as a result of the DealerTrack IPO, and the cost associated with running a much larger First Advantage when compared with first quarter 2005. Without taking into account the effects of the pooling of CIG, first quarter revenues of 2006 were $194 million, verses $72 million for the first quarter of 2005.

Leading the way with our lender services segment, which had a strong quarter despite weakening trends in the overall mortgage market. Lender services benefited from tight cost controls and two acquisitions last year which helped [boost] market share. We remain confident that this segment will continue to outperform the overall mortgage market. Data services also had a strong quarter with solid growth with solid growth in lead generation, membership services, and our Teletrack unit. Organic growth was strong at 20% when compared to first quarter last year.

Similar results were achieved at dealer services with 14% organic growth rates. Employer services had a busy quarter with the completion of two background screening services acquisitions, National Data Verification Services and Tokyo-based Brooke Consulting, as well as SkillCheck a leading international skills assessment company. We expect to close the previously announced Accufacts transaction this quarter, subject to shareholder approval. New customer signing through mid-April has generated over $8 million in new annual revenue for this segment.

[Clearly] our strategy of expanded product offering and focused cross selling is starting to pay off. We will continue to invest heavily in this segment in terms of acquisition dollars, management talent and IT resources. Our accounting issues with drug screening are behind us, and we expect improving results as the year progresses. The multifamily segment was down slightly year-over-year, despite 7% organic growth. We continue to invest in additional product and services which should begin to paying off in 2007. We expect 2006 to be flat to slightly up on roughly 7% organic growth.

Our investigative and litigation support segment had a breakout quarter with margins jumping to 20%. This is primarily the result of True Data Partners acquisition in the fourth quarter of last year. True Data supplies electronic discovery services, which when combined with our computer forensic data recovery businesses, provide a [technical difficulty] combination. We expect similar results for the remainder of the year.

We have beefed up our corporate and IT infrastructure dramatically, to run what is now a much larger company. We believe those investments were necessary to position our company for future sustainable growth. Those investments are larger behind us now, and we feel better positioned to take advantage of opportunities afforded us. Second quarter is typically is seasonally a strong quarter for many of our businesses. We expect earnings per share between $0.26 and $0.30, 30 to 34 if you exclude the cost of share based compensation expense. EBITDA should come in between 43 and 47 million with revenue of 200 to 205 million.

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

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Colin Gillis, your line is open.

Yes hello John and John.

Hey Colin, how are you?

Congratulations on another great quarter.

Thank you.

So, could you guys talk a little bit about what you see in terms of the acquisition front, and pricing for the deals, and properties internationally?

We're continuing to do deals, we did three in the first quarter, we have others to close in the second quarter. The deals are not as large perhaps as we would like, because frankly that's gotten more aggressive and we're trying to stay very disciplined in our approach to the transactions we do. So to some extent, the market has gotten a little bit ahead of us, and we've chosen to step back on some of the transactions that we've seen in the marketplace to date, just because the pricing was so high that we felt the deals would be dilutive.

But we will continue to do deals, I think we'll still have a pretty busy year. But probably not at the size that we would have thought going into the year. Internationally, we did the Brooke Consulting transaction in Japan which helps us a great deal. We're continuing to look at other deals overseas and invest in that area. We'll be announcing the hiring of a person to lead that area in the next couple of days, for our general international development. So, I think we're right on target there in terms of our development overseas.

International revenue, we should think about that in the 6 to 7% range?

Excuse me?

International revenue for the quarter?

I'm sorry, we definitely have an unclear connection tonight. Can you try that one more time?

Sure, international revenue in the quarter?

Oh, how much was it?

Yes, around 6 or 7%?

Give us.

Actually it was 3.2 million for the --

It was 3.2 million for the quarter.

Great, and just the line of credit available, I think you quoted that on the conference call, could I just get that number again?

Yes, Colin, this is John Lamson, how you doing, it's a 84.5 million at the end of the quarter.

Okay, great thank you.

The next question comes from Jeff Kessler, your line is open.

Hey Jeff.

Hi, how you doing?

Good.

Could you, my connections okay?

Yes, we can hear you.

Okay, thank you. Could you just go a little more into your international strategy, what vertical markets are you looking at internationally? What Japan brings you from a vertical market prospective?

Most of what we're doing today internationally has been in the area of just plain background screening. We've also started to sale our Hiring Management Systems overseas. Our new skills assessment acquisition that we did in the first quarter has overseas capabilities. Also True Data, as part of our investigative unit has overseas capabilities. We're starting to pull it all together as we speak.

We've started to add additional people [at] additional management to develop our strategy further, to enhance our offerings and to enhance our technology. So I still think we're very early stage here. But a lot of our emphasis overseas right now and I think you'll see more deals [now]. We don't typically announce customer signings, but we did in the case of Hiring Management Systems recently, and that's because we think we have great opportunities overseas for a lot of our products.

So its still very much early stage, but I don't see it contributing a lot to earnings this year, mostly because the investment that we're making into the sector this year will to some extent slow down our earnings growth. But [I see] from a long term perspective we're doing the right things.

Okay, understood. In your electronic discovery and litigation segment, is there a niche in which you can gain some expertise, or [will this be general] are you going for a more general approach?

It's definitely more general, but I think what's helping us there is our willingness to gather large amounts of data quickly. That gives us a little more pricing flexibility. We've got a good strong technology group behind the True Data deal, and they've been able to move very fast when the opportunities have come up. And that's been a big help to us.

Okay, finally you noticed tenant services have organic growth, but overall it was down. Could you just elaborate on where you lose business? So if you have organic growth, how does the revenue end up actually being down?

We had organic growth within the tenant screening portion of multifamily, which was really offset from a margin depression standpoint from our expansion at the software services [inaudible] last year. So the software really is the area where we have the margin depression, and it's holding back our earnings. And again we've been investing in new product development, it's showing on the expense side, but it's not really showing on the revenue side yet. So it's a combination of a few things going on there.

The segment in general is very good shape, we just haven't done many new deals in that space and now we're trying to do it more organically. So, that's really what's going to slow us down there this year. But we still think the revenue will be up this year, it will be flat to slightly up. It's just we've done 15% plus gains and earnings in revenues the last couple of years, people have come to expect that we're going to do that every year, and we're just not going to be able to do that this year.

Okay, one final question that's on your free cash flow. CIG was a fairly substantial cash generator. Do you have any guidance for this year, at least for the next quarter? Something to give us on your free cash flow generation.

Yes, this is John Lamson, we've said in this current quarter our free cash flow about $15 million. The 21.4 we generated from ops and about $6 million worth of CapEx. I would expect the CapEx to be fairly consistent quarter-over-quarter. Obviously the cash flow is going to fluctuate because a number of things, but I would think you'd probably see an increase in the cash from operations to probably around the $25 million range in the second quarter.

Alright, great and thank you very much and a good quarter guys.

Okay.

Thank you.

Mark Marcon your line is open.

Good afternoon.

Mark.

Mark.

I was wondering -- I've actually got one of the bad lines I guess because I couldn't get the organic revenue growth rates by segment, would you mind repeating those?

No, not at all. They were -- sorry I'm just getting the right sheet of paper, bare with me. Consolidated basis is 6.1%.

Okay.

Lender services was flat. This is quarter-over-quarter. Data services 20.2%. Dealer services 13.7%. Employer 1.5%. Multifamily 7.3, and investigative 4.

Okay, great. And then you said lender services was flat quarter-over-quarter. I guess there were a couple of acquisitions lead to the boost in terms of year-over year. But even flat is pretty good given the current environment. Can you talk a little bit about that? What are you currently seeing? How do you think it's going to develop --?

Mark, Anand is here, let me put Anand on.

Okay, on the lender services segment we noticed that the mortgage application index from quarter-over-quarter was down about 21%, and if you just look at our volumes prior to these acquisitions coming in, it was down only 12%. That's consistent with our feeling that we can do better than the market, and if the market goes down 10 we'll go half. So, I think the first quarter of '06 over the first quarter of '05 proved that we -- our market share [increases] and our cycle of market shares really helped us, especially in a declining market.

Okay, that's great. And how do you think the balance of the year is going to shake out?

Everybody's still talking about a 10, 20% down turn for the year. And if it stays in that range we're going to do well. We'll hold our own very well.

Okay. And then on the employer services side -- up 1.5%, how do you feel about that? And then how do you think the margin profile is going to shake out over the year? Thank you.

The employer services is kind of a mixed bag. There's different components of employer services. A lot more product in that space. Let me -- yes one thing, our tax incentive business was down year-over-year, they're really a couple of reasons for that. One is, the new legislation hasn't passed this year yet. And last year we had a little extra from the legislation that was [inaudible] two years ago. It's tough on the organic growth numbers, because as that legislation goes it plays tricks with our sales. So part of that group was down primarily because of legislation. Background was actually up over 6%. Drug was up a little bit, a couple of points. That was the bulk of it. But background [trendning] itself, which I think most people are focusing it in on was up %6.

Okay, great. And margins, how do you think that's going to trend?

Margins will trend up in the second quarter. We're looking for roughly 11% in the second quarter. And hopefully it will increase from there as the year goes on.

Great, thank you.

The next question comes from Brian Ruttenbur. Your line is open.

Yes Brian Ruttenbur, a couple of questions, good quarter. Interest rates, you said you had, I believe 280 million of debt. Is that correct? You were breaking up, I had a bad line.

Yes Brian, it was -- that's a little high. The amount of debt we had was 208, two, zero, eight.

Oh, two, zero, eight. That's what happens when you have a bad line. Yes, can you talk a little bit about what your plans are on the interest rate side? You have I guess a large percentage of that at 6% and a very small -- what do you have planned on the debt side?

Yes, well we've got about 39 million of that is fixed rate and then we have variable rate of about 169 million. A lot of this gets into the entire capital requirements issues which is to a large degree by us driven by acquisition opportunities. But certainly to the extent that we have excess cash flow we'll be paying down on that variable rate debt. And we've looked at the possibility of hedging some of that debt, but we have not done so as of yet.

Okay, so you don't plan to lock in any more fixed rate debt anytime in the near term?

No, only to the extent we take some debt back in conjunction with an acquisition. Those are usually fixed rates.

Okay, and then I think I caught, but I wasn't sure, you talked about year-over-year internal growth of 7% as a goal in 2006. Is that correct? Or did I miss that?

I just talked about 7% growth for the multifamily for the year.

Okay.

I'm sorry we're having a tough connection today.

Yes I'm sorry, I'm listening out of the office and trying to catch --.

We have a lot of feedback on the phones, and it's just not working that well.

What is the goal on internal growth that you see, you had 6% in the first quarter overall. Is it going to be a 6 to 8% or 8 to 10%? What is your goal internally as a group?

Our goal across the company is 8 to 10.

8 to 10, so you're still sticking with that great. Okay, congratulations, thank you.

Yes, thank you.

The next question comes from Kevane Wong, your line is open.

Hey guys, how you doing?

Hey Kevane.

Good, Kevane?

First, I was hoping first you could dig into the investigative area a little bit, that really seems to have turned the corner the last couple quarters here have been good. One of the things I had heard some about was, there was opportunities with some of these law firms that would buy those services. Some of those guys were consolidating vendors, and there was sort of an opportunity there to add the organic scale to really capitalize on that. Could you give us a little sense on what's happening on that basis? Is that trend happening? Is there something else that's also playing in? Just trying to understand a little bit about the performance that's happening.

I think, well one of the key things when we'd talked about expanding our product mix, when we'd first started to develop the litigation support area. One of the things we had said was, we felt the computer forensics business would work very well with electronic discovery. And we've had -- it's been outstanding case proven in that case. We've sold huge amounts of business in terms of cross selling between those two units, and that's driven some of the growth. The forensics group has added a lot of product discovery work and vice versa.

So you've got the cross selling to start, you have a market that in general is -- the demands for these types of services is growing by enormous amounts each year. I think we have a very, very small percentage of the overall market to tell you the truth. So, from the standpoint of organic growth potential and [maybe] potential future investments transaction wise, there's tremendous potential here. So, I don't know about law firms consolidating or whatever, but we have opportunities for a lot of business not just here but overseas. There's a lot of demand for this product.

So [I] understand this [inaudible] forward performance here, it sounds like this quarter and the last quarter are sort of good basis to be looking at as far as where we're going to be running with this segment.

Yes, the segment looks real good this year. We like the base line business we have for the first quarter. It's a good measuring stick I think.

Right and then two other quick things. One, tax rates got sort of a little jump up this quarter, is that unusual, is it going to fall back down to a lower rate? What sort of expectations as far as the tax rate?

Yes, this is John Lamson. The tax rate is about 43.4% and that's higher than normal because of the FAS123. The stock option expense. Because we can't get a deduction dollar for dollar on that. Without it, it is about 41.5 which has kind of been our normal tax rate. But I think you can expect that 43.5 to probably be the rate going forward for a while. And that is because the incentive stock options verses the non-quals you can't get a tax deduction right away.

Got you, okay. And then as far as -- you gave a number guidance metrics for the year last quarter, as far as the service revenue, etc. on down the line through EPS. Are you basically sticking with those across the board or, how should we view those guidance figures that were given last quarter?

Yes, we're staying with the annual projections we previously disclosed.

Okay, great fantastic guys.

Okay, thank you.

Nat Otis your line is open.

Good afternoon, gentlemen.

Hey Nat.

Nat how are you?

Most of my questions have been answered just a couple of quick ones, I didn't hear earlier, did you have a net debt number?

Yes, we have debt of $208 million, and we have cash on hand of 24.8.

Okay, great. And really the only other question was just any update on what you guys are doing in government sector?

Been disappointingly quiet for lack of a better term. We haven't done much and it's like -- and I guess at the end of the day it's really no that strong a focus of our group. We haven't done much so far, but we're still working on it.

Okay, but you know - then expect the expectations for breaking anything out in the next couple of quarters then it sounds like --.

No, no definitely not.

Okay, that's it. Thanks, gentlemen.

[OPERATOR INSTRUCTIONS]

I believe that should do if for - we have one more call.

One more question, Colin Gillis your line is open.

Guys I just want to try again with another line. Could you talk about any marketing efforts that are occurring? Efforts to re-brand some of the acquisitions, and just give us an update there.

The re-branding effort that we launched last year covered most of our major product lines. And when we brought in the CIG deal, a lot of those businesses tied right in very quickly. So re-branding as we do these transactions is really an ongoing process. I wouldn't call it a major new effort, we don't really have a major effort going as we do the deals. It's just kind of naturally as part of our flow now. So our re-branding is really kind of ongoing.

Okay, great thank you.

There are no further questions.

That will conclude today's call.

Thank you.

Thank you.

Today's conference has ended, you may disconnect at this time. Thank you.