First Advantage Corp (FA) 2006 Q2 法說會逐字稿

Thank you all for holding and welcome to First Advantage Corporation's second quarter 2006 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 August 1 by dialing toll free within the United States 866-428-3801 or 203-369-0902 outside the United States.

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 afternoon everyone.

At this time we would like to remind listeners that management commentary and response to your questions may contain forward-looking statements including certain statements made in this presentation relating to growth in the investigative and litigation support segment, renewal of the Work Opportunity Tax Credit legislation, impact of international businesses on future earnings, impact of Work Opportunity Tax Credit legislation, interest rate, and corporate expenses on 2006 earnings, third quarter earnings, earnings for the remainder of 2006, and other statements that do not relate strictly to historical or current facts.

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

Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include - general volatility of the capital 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; the degree and nature of the Company's competition; increases in the Company's expenses; continued consolidation among the Company's competitors and customers; unanticipated technological changes and requirements; the Company's ability to identify suppliers of quality and cost-effective data; and other risks identified from time-to-time in the Company's SEC filings.

Investors are advised to consult the Company's filings with the SEC, including its 2005 Annual Report on Form 10-K for further discussion of these and other risks.

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 financial performance for the second 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 everyone.

First Advantage reported net income of $16.6 million for the second quarter of 2006 compared to $12.2 million for the second quarter of 2005.

Results of operations for the current quarter include share-based compensation expense of $3.1 million, which reduced our net income by $2.5 million and diluted earnings per share by $0.04.

Diluted earnings per share were $0.29 in the current quarter compared to $0.23 for the second quarter of 2005. The second quarter of 2005 includes charges related primarily to the CIG merger and relocation costs, which reduced net income by $5.1 million or $0.10 per diluted share.

Diluted earnings per share increased from $0.22 in the first quarter of 2006 to $0.29 in the current quarter, a 32% increase.

Earnings before interest, taxes, depreciation, and amortization, minority interest and share-based comp, adjusted EBITDA, was $46.6 million and $31.5 million for the quarters ended June 30, 2006 and 2005 respectively. An increase of 24% considering that EBITDA for the June 2005 quarter included charges remitted primarily to the CIG merger and the relocation costs, which reduced EBITDA by $6 million.

Adjusted EBITDA was $39.5 million in the first quarter of 2006, resulting in an 18% increase in the first quarter.

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

Cash provided from operations was $25.7 million for the first half of the year and Cap Ex was $15 million. Cash payments during this period for interest were $5.2 million and for income taxes were $23.2 million.

Working capital was a healthy $56.7 million at June 30, 2006 compared to $21.4 million at year-end, an increase of $35.3 million.

Corporate expenses were $7.3 million in the current quarter, excluding $1.7 million of share-based comp compared to $3.3 million in the second quarter of 2005, excluding the previously mentioned $6 million of merger and relocation costs.

This increase in corporate costs of $4 million is primarily due to additional infrastructures, security, and compliance costs incurred to support Company wide growth including the CIG acquisition, which was consummated in September of 2005.

As we've 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 makes it rather difficult on quarter-over-quarter comparisons at the corporate and Company wide levels, at least for the first 3 quarters of this year.

Total revenue for the Company was $205.1 million in the current quarter compared to $163.4 million in the same quarter last year, representing an increase of $41.7 million or 26%.

Total revenue for the first quarter of 2006 was $194.3 million. Revenue for the first 6 months of June of 2006 was $399.5 million and $303.7 million for the comparable period in 2005.

Service revenue, which excludes reimbursed government fees, was $191.7 million in the current quarter compared to $151.2 million in the same quarter last year, representing an increase of $40.5 million or 27%.

Service revenues for the first quarter of 2006 were $181.2 million. Service revenue for the 6 months of 2006 and 2005 was $373 million and $279.3 million respectively.

Operating income was $33.3 million in the current quarter compared to $24.2 million in the second quarter of last year.

As previously mentioned, the second quarter included $3.1, the second quarter of this year includes $3.1 million in share-based comp expense while the second quarter of 2005 includes $6 million of merger costs.

Operating income increased by 20% excluding the share-based comp and the CIG merger and relocation costs.

Amortization of purchased intangibles was $3.9 million in the current quarter compared to $1.7 million in the second quarter of 2005, an increase of $2.2 million.

Excluding the impact of share-based comp, operating income increased at all of our segments except for multifamily where costs primarily associated with product expansion, reduced margins, and operating profits.

Operating income increased from $27.2 million in the first quarter of 2006 to $33.3 million in the current quarter, an increase of $6 million on an increase in service revenue of $10.5 million.

Operating margins increased in lender, dealer, investigative, and employer services segments. Margins decreased in the data and multifamily segments, primarily due to product expansion and revenue mix.

Margins increased in the investigative service segment as a result of a shift in revenue mix to lower margin surveillance work, to higher margin electronic discovery and forensic consulting. Margins increased in employer services and dealer segments due to increased revenue levels of 27 and 32% respectively.

The consolidated operating margin was 17.4% for the current quarter, 19% excluding share-based comp compared to 20% excluding the non-recurring charges in the second quarter of 2005. And the margin was 15% in the first quarter of 2006.

Interest expense increased from $1.5 million in 2005 to $3.1 million in 2006 due to higher debt levels and an increase in our average interest rate of approximately 225 basis points.

The Company wide organic growth rate for service revenue was 3.3% quarter-over-quarter. The data segment grew by 11.3%, dealer segment 14.5%, multifamily 3.4%, and the lender segment had organic growth rate decline by 3.3%.

In the case of the employer services and the investigative and litigation support segments organic growth rates do not accurately depict how the underlying businesses are actually performing.

For instance, in our employer services growth rate was flat organically. However, on a Pro Forma basis, assuming all of our acquisitions were consummated at the beginning of April 2005, the employer services growth rate was 9.6% quarter-over-quarter, reflecting the positive impact of product and geographic expansion and cross-selling strategies.

In the investigative segment, their organic growth rate was 3.8%. On a Pro Forma basis, the growth rate was 31.5%. Acquisitions made in the fall of 2005 in the electronic discovery business have blended in well with our existing computer forensics expertise, creating significant revenue and earnings growth in this segment.

For June 30, 2006 First Advantage had total debt outstanding of $227 million including fixed rate debt of $37 million with an average interest rate of 4.95% and variable rate debt of $189.5 million with an average interest rate of 6.55%.

Our available and unused line of credit was $62.5 million at June 30, 2006. We had $19 million of cash on hand at the end of the quarter.

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

Thank you, John.

The second quarter was a good quarter for us. Revenue, earnings per share, and EBITDA all came in at the upper end of our guidance. We had strong margin improvement in 4 of our segments when compared with second quarter last year.

Our lender services segment had a record quarter despite a continuation in the decline of the overall mortgage market. It benefited from tight cost controls, market share gains, and the 2 acquisitions completed last year that were flawlessly integrated.

Our dealer services segment had a solid quarter as a combination of strong organic growth and tight cost controls more than offset slower new car sales. The addition of 580 automobile dealerships this year helped this group post a nearly 300 basis point margin improvement over second quarter last year.

We are currently experiencing record volumes in this segment.

We had another strong quarter in our investigative and litigation support segment as our eDiscovery product offering rapidly gains market acceptance. Our strategy of offering eDiscovery in computer forensics has led to a $2.5 million in cross-sell revenues so far this year.

We were recently named as one of the top 10 eDiscovery providers in the fourth annual Socha-Gelbmann Electronic Discovery Survey. The demand for eDiscovery services is estimated to double by 2008.

We are extremely encouraged by the performance of our employer services segment during the second quarter. Our domestic background screening products all did well with improvement across the board, especially our fingerprint solutions business, which had a breakout quarter.

Our hiring management products were also very strong. This group is new and includes applicant tracking skills, assessment, and job recruitment services.

Our tax incentive businesses had a good quarter despite the delays associated with the renewal of the Work Opportunity Tax Credit or WOTC legislation.

When the WOTC legislation is in hiatus, we experience the extent but are unable to recognize the earnings associated with this credit. We eventually expect this legislation to be renewed, retroactive to January 1, although we cannot guarantee it.

In any event we are running out of time for WOTC to meaningfully impact earnings for 2006.

On the international front, we recently completed the purchase of [Rep Shore] Australian background, the leading background screening company in Australia. This deal, when combined with our Crest Research and Brook Consulting acquisitions increases our dominance in the Asia-Pacific market.

We have a significant new customer backlog in this region, which bodes well for future earnings contribution from this group beginning in 2007.

All in all our employer services segments are year-over-year margin have proven of 255 basis points, which would have been even better if not for the delay in recognizing WOTC revenue.

One other thing, so far this year we have closed in excess of $8 million in new business in this segment as a result of cross-selling efforts, which confirms the prudence of our product expansion strategy.

Let's move on to guidance.

Go forward guidance for the balance of the year has gotten tricky for us. One reason is the uncertainty over the WOTC legislation, which could impact our earnings as much as $0.04 per share.

We also expect slowdown in our lender services segment, particularly in the fourth quarter, although this business has surprised us to the positive this year.

Our internal forecast for both of these segments are very conservative, which we believe is prudent under the circumstances.

Corporate expenses for the year will be $0.06 per share higher than our original plan, primarily due to increased costs for compliance and infrastructure. Add another $0.02 per share for higher interest costs.

We expect this third quarter to be similar to the second quarter in terms of earnings and margin profiles. We believe that our new full-year guidance assumes a worst-case scenario for the fourth quarter.

The costs we have incurred on infrastructure, operating systems, security, regulatory compliance, and management are investments that are necessary and prudent as we build a powerful Company with well-diversified business segments that are leaders in their respective industries.

We are very pleased with the progress of our business segments. It has been and will continue to be our corporate strategy to build businesses for the long-term benefit of our customers, employees, and most importantly our shareholders.

Let's open the call up for questions.

We'll take some questions now.

Thank you.

[OPERATOR INSTRUCTIONS]

And our first question comes from Brad Eichler from Stephens, Inc. Your line is open.

Hey, good afternoon guys.

Hey, Brad.

A little bit of confusion on the guidance. I know at the beginning of the year we factored in a slowdown in the lender services business of around 10% that was already factored in our number. And obviously year-to-date we're down I think it was 3.3%.

And so I guess if you add together this WOTC of $0.04, corporate expense hire at $0.06. That's 10 plus $0.02 in interest costs. Is that the majority of the difference or have you actually changed something on the assumptions for lenders services?

That's actually, that's the bulk of it. If you look at our original guidance was 145 to 130. You take that $0.12 and subtract it from the 130 you now have the new top of our guidance at 118.

That is it pretty much.

The rest of the businesses, some are a little better than others. Some are up and down. But more or less they're performing in line with how we expected.

Okay. And so specifically on that just one other question before I move on and that is with the lender services, I guess I've been kind of operating under the impression that that business has been running relatively flat year-to-date. And then you reported it down 3.3% and at quarter.

Did you guys see a pretty substantial fall off in that in the month of June?

Hey, Brad, Anand is here. Let me ask Anand to answer that.

Brad, we didn't see any huge drop. The business has been sliding. So it's a very slight correction. We're still very encouraged about the transaction volume. The volume trends show a lot of resiliency and we continue to outpace the overall mortgage market.

But it's not, I mean you're talking about an industry, which is down 15 to 20% and we're down 3%.

I know you've done real well. I was just curious if you've seen something some greater deterioration recently.

No. Actually if I look at the July volumes they are slightly higher than June volumes. And usually from a seasonal perspective it's the other way around.

So we see a lot of resiliency there. If there is any caution in our future outlook it's due to the uncertainty in the rate of decline for the mortgage market going into the fourth quarter, which right now is kind of iffy because resales are down and inventories are high according to the National Association of Realtors. And that gives us some concern to be cautious.

Okay. Multifamily and data both looked a little weak, one on the top line one on the margin line. John Lamson ripped through those kind of quickly. Could you just give a little bit more detail there please?

Let me take multifamily and then we'll let John talk about data while - cause it's a complicated segment.

Multifamily has had some pricing pressure. And also higher costs of compliance from the bureaus because of a data privacy issues they've gotten a lot tougher in terms of investigating who you're customers are and doing on-site inspections.

We've had to go back on a number of our clients and re-inspect sites. And it's added to the cost of that business and driven down the margins.

It's we're cycling through it this year and hopefully by the end of the year we'll be wrapped up and that won't be as much of a factor next year.

There's also a little bit of pricing pressure in some of the criminal investigative work that we've done. And for that segment it's much more so this year than last.

So we've expected that business to be rather flat this year and margins to decline. And also we have entered a little bit more into that software processing business, which is lower margin too.

So this business this year for multifamily will be off a little bit.

John you want to talk about?

Brad, how are you doing? Good to hear from you.

Hey, John.

On the data side the margins went sequentially from first quarter to second quarter have remained pretty consistent around the 27, 26% side. If you recall we acquired [We Click] in the fall of last year. And with the heavy dose of purchase accounting and amortization we have on that, that really kind of reduced the margins that were in '05 like 34, 35% range down into the 26, 27% range.

So I think that segment at least quarter-over-quarter has performed pretty consistently.

Okay. I'll jump back in the queue. Thanks.

Okay. Thank you.

Jeff Kessler from Lehman Brothers, your line is open.

Yes, I'd like you to go, can you go back a little bit over - you went through the employment services on a both on a apples-to-apples and Pro Forma basis and on a reported basis as well as investigative services, the difference between 3.8%, 31.8%. These are fairly significant businesses that you in your group. And I'm wondering if you could perhaps elaborate a little bit on the performance of both those?

Okay. Let's take the easier one, which is investigative. On the litigation support side we did a deal in November I believe, True Data services, which is a - I'm sorry True Data partners, which is a electronic discovery firm.

That at the time we were closing that transaction the business was improving very rapidly in the, on the eDiscovery side.

We then put that together with our forensics folks. And almost instantly we had been giving away by and large the electronic discovery work during the last couple of years that we've owned the computer forensics business and immediately we were able to start turning that business over to the eDiscovery firm.

And it was an instant win. It was one of those home runs that you don't see that often. And it really jumped up the sales and the earnings of the eDiscovery business and vice versa. Because they got some work on the other side.

So the way we do our organic growth calculations is on businesses we've owned for full year. And unfortunately we haven't owned that business. So it, the way we'd normally calculate organic growth only showed that 3 plus percent growth rate. But the truth is that business is really rocketing.

And the combination of the 2 businesses is terrific.

Similar on the employer services side, we've gotten into an applicant tracking systems; we've gotten into field assessment, job recruitment types of services mostly in the last 9 months. These types of services, they're not in our traditional organic growth rate numbers.

And but they're growing rapidly and we're seeing tremendous cross-sell between the different businesses.

And on the fingerprint product that we mentioned that had a breakout quarter, that's also not in our traditional margin, organic growth numbers. But yet the revenue is way up year-over-year.

So there's a lot of great things happening in the segment. And it's hard to show it by the traditional ways that we measure.

Where are you seeing the most cross-sell in employer services?

Bart's here. Bart, can you help on that?

I'm sorry. Repeat the question.

On the cross-sell.

Where are you seeing the most cross-sell in the employer services area?

We're having a great deal of cross-sell between our traditional background services and occupational health. We're also seeing significant cross-sell with our Advantage Biometrics business, which is our fingerprinting business. We've had some cross-sell success in that area.

And it's really been also - it's also inclusive of tax. We're getting cross-sell pretty much in every area. It's many of our clients once they've accepted one product it's very easy to introduce that next product to them.

All right, great, and by the way John and John, hello. I'll get back in the queue.

Colin Gillis from Canaccord, your line is open.

Great.

Quick question for Anand, any talk about the pricing for the Instant Merge project right now?

Can you repeat that question again?

Sure. Just pricing for Instant Merge.

Yes. That's our automated product. Are you talking about price pressure or price erosion?

Yes, price erosion.

There is price pressure on the automated product. Maybe because the credit report itself is rapidly becoming a commodity. But what we're trying to do is we're supplementing it with data analytics and positioning tools that we sell along with it.

And we're also trying to add in with non-credit products like IBM fraudware applications, which seem to support the higher margins that we need.

So then how much does Instant Merge make up as a landing segment right now?

I would say about 92% of our volume is automated per course.

Okay. Got it.

And then just John, can you talk a little bit how long you've been in discussions with Rep Shore and can you give us a sense of their position in the Australian marketplace?

How long we've been in discussions. Well Rep Sure was a deal we Anand and I flew out over Memorial Day weekend and made. Some of our folks have been talking with them for a couple of months.

And we're real excited about the opportunity. They, Rep Sure itself was the combination of the top 2 players in the Australian market. And they wanted to join up with someone who was dominant in Asia. That was a really good combination.

They've got a lot of business backed up as does some of our other divisions in Manila; Beijing is growing rapidly. Our overseas work is really promising. Although at the moment it's not contributing anything to earnings because we're investing so much into infrastructure.

But we really see great upside to this probably start in '07.

John, along the international side, are you doing any work on the employment side internationally for customers also domestically like in Manila?

Yes, yes. We've had great penetration on the multinational side. And we're doing it both domestically and overseas.

Yes. I mean it's, our customer list overseas is a who's who in multinational companies.

Okay great. And John lastly, could you go over, should we expect any change in stock ops for the September quarter? Could you also repeat your organic growth per segment as well as total organic growth?

First of all in the stake of stock-based comp, the impact of that for the first 2 quarters of this year has been $0.04 a quarter. And that's going to go down to our estimate now is $0.03 per quarter in the third and fourth quarters.

That's because some of the original options that were granted when we went public have now they were 3-year options. So they're amortization period, they were fully vested. So they won't be factored in our expenses for stock-based comp for third and fourth quarter.

I think that's what you're referring to, right?

Yes.

And I think the second part of your question was the organic growth rates?

Yes. The total organic growth as well if you could just repeat the segment.

Sure. The Company wide total was 3.3% quarter-over-quarter. The data segment grew 11%, 11.3 pardon me, percent. Dealer was 14.5. Multifamily was 3.4. And the organic growth rate at the lender services declined in the quarter by 3.3%.

And then we've mentioned the Pro Forma growth rates at the employer services segment of 9.6% where they were flat the traditional organic growth rate.

And in investigative segment their organic growth rate was 3.8% but their Pro Forma growth rate was 31.5%.

And I might just add that our traditional organic growth rates are basically computed similar to like a same store sales that the Company had to be in, acquired by us in both periods that we're comparing to. And but we thought in the employer and the investigative segment because there really has been significant increased business in those 2 segments. We thought we'd point it out on a Pro Forma basis.

Okay, great. And then John could you give us a sense as to where the stock-based comp fell into what line item or the breakdown on the line items for the June quarter.

Yes. I'll tell you what, if you go to the earnings release and you go to the segment information ...

Oh, great.

... we disclose the operating results with and without stock-based comp. And you can just sink that difference. And that's the segment that it fell into.

Okay.

Okay?

Great. Thank you.

You're welcome.

Brian Ruttenbur from Morgan Keegan, your line is open.

Great. A couple of quick questions on the miss, I just want to make sure I understand. It's primarily the top line is related to lender services in this. Is there anything else that has been disappointing versus the original guidance 9 months ago that you gave us? Or is that the main disappointment?

I think the probably the where we had the biggest problem was anticipating the corporate expenses on an ongoing basis to run the combined business.

And we've struggled with that. I think right now we close the CIG deal late in the year. And then we didn't really have a good visibility on what those numbers were. So it's taken us a while. And then we've just waited to see if some of the other businesses would make up for it. And they're just not going to do it.

So the bulk of it I think is on the corporate and the interest side.

Lender itself has actually performed pretty well. Multifamily's been off a little bit. And we're going to be probably off a little bit on employer from our forecast if WOTC doesn't get renewed with enough time to start recognizing some of that revenue.

So that's also hanging on us so far. But the biggest thing I think is probably just us miscalculating some of the compliance related costs that we have and the infrastructure costs that we've had to put into play.

So just data security is an area now we're starting to spend some money on.

We're a different type of Company now. And we've got customers that are demanding that we have secure; much more secure data methodologies than perhaps we've had in the past. And we just do what we have to do to manage the Company in its much larger form.

This is John Lamson. I just might add just to make sure we're clear with everybody that the lender segment is actually ahead of where we thought it would be at this stage.

We had originally forecasted a 10% decline in that business. And at least year-over-year for the first 6 months it's organically it's only down 2%. And 3.3 of that was in the second quarter.

So it's actually doing better than we had anticipated it would.

Okay, just so I understand internal growth going forward, historically you've gone between 8 and 10% internal growth. It seems like with lender services declining and some other areas growing slower, what do you think is a realistic go forward internal growth number for the Company overall in terms of revenue?

Well this is John Lamson. I think that as a couple of quarters pass here and at least the way we compute organic growth, some of these investigative segments are going to put into that, some of the operations in the investigative unit are going to flip into the organic growth.

And also the employer services with their continued emphasis on cross selling and the new products we have there.

So we have been saying around 8 to 10%. And I still think perhaps that's a pretty good range to think about as we go forward.

Some of that obviously in the short term depends upon what happens with the WOTC legislation as John's already talked about. That's a wild card I just can't predict.

And that kind of still assumes that we eventually see some, about a 10% decline in the credit business. Although as Anand pointed out, up to date here we certainly haven't seen it as of yet.

Okay, so if we have the 10% decline in lender services and WOTC gets delayed or whatever, you're probably just talking about very low single digits for a while until that bump gets by you. And then you can get back to a higher level, is that what you're looking for?

I think that's fair. I think that's a reasonable ...

We're trying to not to look that close at it to tell you the truth. We're obviously concerned about WOTC. It's a big product for us. And that's affecting those numbers. And we're hopeful that by the end of the quarter the legislation will at least be passed and we can start seeing the benefits in the fourth quarter. But there's just no way to know.

And lenders a wild card, the business has done much better than the market. It could have brought down our growth rates overall, certainly possible.

But again I think that business is performing extremely well. And I think in our guidance we're being very conservative in our approach to what that business is going to do the rest of the year. So hopefully it'll out perform.

Okay. And then the charges, was this the last quarter of charges relating to CIG?

Yes, those charges were in the 2005.

Oh, okay. I'm sorry. I misread that.

Your debt situation, how closely are you tied to interest rates when they change? Is everything floating?

No. We've got on the debt side we have $227 million of total debt. And $37 million of that is fixed rate. And the balance is variable rate debt. It's LIBOR plus about 130 bits. That's kind of the last.

But that's obviously gone up. I think I said in my introductory remarks about 225 basis points over last year.

Okay. And then last question on the acquisition front doesn't seem like you're doing as many acquisitions this year. Can you just give us some kind of read on if you're going to have an acceleration in here? Or if there's what's going on in more competition, what?

Well, we've done a few smaller deals this year. The larger deals have been expensive. And we've just really not wanted to go reaching for some of the transactions.

We really liked the small deals we've done have been pretty good. We've spent about $40 million so far this year on deals, which is fairly low for us, admittedly.

But we're still looking for bigger deals. And we don't have necessarily a target per se of how many deals we want to do. But we're looking for the right transactions. And right now the way the market is I think we've got a lot of businesses that have opportunities to grow without transactions.

So if we're not able to do a deal right now because it's too expensive in this market we're very comfortable in that we can have real good organic growth rates going forward just on the business we've accumulated

But there's still more deals to come. It does seem a little quiet, I must admit, but a lot noisier than most companies.

Great. Thank you very much.

Kevane Wong from JMP Securities your line is open.

Great, how are you doing guys?

3 quick ones hopefully, first on the lender services, you started talking about a slowing fourth quarter. And I'm trying to understand why you'd be concerned about fourth quarter coming down when I'm sort of looking at the MBAA estimates for example.

I mean it seems like this quarter and next quarter are sort of the weaker ones. Is there something else that's happening that would cause 4Q to slow down? Is there a bit more of the lagging sort of part of your business than sort of anticipated? Why would you sort of expect 4Q to possibly slow on lender services versus these most recent quarters?

Sure. Kevane this is Anand. The lender services business seasonality is just set up in a way that the fourth quarter is usually the low quarter.

After Thanksgiving home buying, home buying season basically ends. So our December is usually very, very low. And the November starts to also be low.

So that's what's reflected in it. And if you really look at what we've been billing this year for the last couple of quarters and what it looks like to be a third quarter, there is understandably we think that fourth quarter is going to be lower.

Cause we're on a tare. Actually a lot of people are complaining about 3% being down. But the market is down 15 to 20% and we're only down 3 on total revenues. And quarter-over-quarter our margins are actually being up.

So we're working on productivity enhancements. We're working on successful completion of integration of acquisitions. We're also implementing new consumer disbursements with more automation and stuff.

So I look at the business and I see nothing but positives. Its just seasonality wise fourth quarter is always lower. That's just.

That's not a year-over-year effect. That's a quarter-to-quarter effect. Is there a difference for this year versus last year?

I also think it's this year as it was last year will be lower mainly because of the mortgage market. If you really look at it it's lower than last year.

Okay. Second question employer services, 2 things. One as far as the WOTC and welfare to work, when would you need that to sort of, for Congress to renew those 2 before it would start having an impact? Is that immediate? Or is there sort of a timeline you're looking at?

And then second on employer services one of your competitors recently had a miss then. They're talking about the June quarter having sharp drop off. Were you seeing anything of that ilk during, in July that would sort of make you worry about that? Or just maybe that's specific to that one competitor?

Okay, let's take it off the top with. Let me answer your flat question first. Our business is terrific in investor services. So I don't, and we're the only Company with a mix products with the cross sell opportunities that we have.

If you look at our mix of products with employer services and look at other companies, which is really not an apples-an-apples comparison. We had a fantastic June and that's all I'll say.

Business is good.

Going back to WOTC, WOTC for us we're already at a point right now where it's not possible for us to regain the full $0.04 or so a share this year. If it were to pass the next month I'd probably think we probably have at best the ability to recapture maybe $0.02 in the fourth quarter.

If we start getting into early October we're just out of time. And you'll start seeing some big numbers from December but not necessarily; the bulk of it might not be until first quarter.

But the good news is assuming the legislation is renewed, and you know it's the government of politics and I can't, I don't know what's going to happen at the end of the day. But assuming that that legislation is renewed eventually we will see that revenue.

So in effect it's deferred, hopefully it's deferred. And if it doesn't come in by year-end and that legislation passes, we'll see it in first quarter, which will boost our first quarter numbers.

Great. And the last topic and I'll hop back off here.

For the most recent acquisitions, Rep Sure, AccuFacts, Inquest, one can you give us sort of a sense on how much annual revenue each of those is contributing?

And then on Rep Sure it looks, from what I saw it looks like they had just had that merger with that other provider in like May. Is there an issue as far as systems, multiple systems over there that you'll have to address?

Yes, there's lots of work ahead.

We've just built out our international background screening system that's called CSPI. And it's really starting to work fantastic and it's deployed to Manila, it's being deployed to other countries as we speak.

So Rep Sure will go on that system. They are backlogged with business. And it's a nice problem to have. And they're looking forward to the technology that we can bring to the table there.

So that part is good.

On the terms of their contribution to revenue, best guesstimate for '07 is 8 to $10 million in Australian based revenue.

AccuFacts and what was the other deal?

Inquest.

Inquest, those 2 businesses will add about 10, $11 million in revenue on an annualized basis.

Great. Thank you.

[Jeff Moiller], RW Baird, your line is open.

Hi, it's Jeff Moiller in for Mark Marcon. Just a quick follow up on the additional compliance costs. Are those going to be upfront costs or are those going to be ongoing costs we should expect from this point forward?

I think ongoing. I think when you look at our corporate overhead structure that structure is a pretty fixed structure at this point. I think it's just a different Company now, a lot different than last year.

And we will do a better job when we do our guidance for '07. We'll do a better job of capturing that going forward.

But yes, think about that as a permanent part of our running the business.

Okay, thanks, and then a follow up.

Sure.

On the WOTC you were previously assuming that it would get passed at some point in this year and now you're assuming that it will not get passed, is that correct?

That's why we held off. A question in the last call had been if we were going to adjust guidance. And we held off making an adjustment back then because of thinking we could get WOTC through and capture it for the full year. And that just hasn't happened.

And we were also hoping maybe that some of the off, the extra corporate costs that we've had could somehow could be offset by increased earnings somewhere else.

And there's just not enough there I think to do it.

So that's why we're adjusting it now. But yes, WOTC we had hoped, we were hopeful back in April that would pass.

We've been through this a number of times. The actually, the management team that runs our tax incentive business this is the fifth or sixth extension that they've been through. It's fairly typical. It's interesting to manage through.

Its just business as usual and unfortunately we can't time with the revenue recognition.

Yes. So no sense that it's not going to get passed, you're just being a little bit more conservative?

Well I think we have to be conservative. I don't think we have any choice. We just don't know what the priorities of our government are right now in terms of passing the bill.

So we're being very conservative in our forecasting. We have deliberately laid out a worst-case scenario in our guidance.

Okay, fair enough.

And then congratulations on the Rep Sure deal. Could you just talk a little bit more about long term? Obviously you've built a pretty good footprint in that region. How many more players are there to acquire in Asia-Pac? And how are you going to balance that with building it out internally going forward?

You know actually there aren't many other players that we're aware of. I mean so I'm not necessarily thinking that we're going to do any more deals over there. Although admittedly 6 months ago I didn't know that Rep Sure existed.

So maybe a deal will pop up that we don't know about.

I think areas that are possible if we want to continue to do transactions maybe in Europe and certainly if we were able to find something in Latin America I think that would be very welcome.

We would like to fill out the global footprint if we could. But right now with running Asia through our Asia-Pacific market is a full-time job. And if we don't do anything else for a while I think we're pretty happy.

By the way, we don't talk about it but our Canadian operation is doing really terrific. We did that deal about a year and a half ago, actually 2 years ago. And that's done well.

So I really feel good about our international stuff. We'll just see if the screening is just not big around the world at this point. And so there is not much that you can really buy.

But anything we can find and Rep Sure was a great pick up. I got to tell you, those guys are sharp. They did a good deal. With buying Australian background in May and then sold the mine business to us I think hats off to them.

Okay, thanks a lot.

This is Anand by the way. Just to add on to what John said on the Asia-Pacific market.

With our footprint now I think there's a ton of integration opportunities by just putting the different operations together and then cross selling some of those clients across the board.

So I think most of our competitors, our Asia presence is better than anybody. And we're really bullish on the prospects for the future.

Thanks for the call. I'll jump back in queue.

Thanks.

[Kevin Fong] of West Park Capital your line is open.

Hey, guys. Can you talk a little bit about the upcoming quarter's guidance in terms of the sales? You're guiding about 200 to $210 million in revenue. Can you just kind of break out a little more detail for us kind of how you're thinking about the segment growth?

Give us a second.

It's one of the comments that I made earlier was it's a similar looking quarter. Traditionally you start to see a little bit of slowing in lender. So we would expect that to slow a little bit.

Employer is just on, is stronger. So I suspect that'll be better.

We think it's just kind of averaging out. It'll probably be a little bit higher. I would think probably closer to 210 than this quarter's 205.

But there's not going to be a lot different about the quarter. I expect it'll be for a fairly similar numbers with maybe a slight variation, maybe a little bit less in lender. Maybe hopefully a little bit more in employer. We're hopeful.

So I would say think about the same pretty much across the board and you'll be pretty close.

And I might add too, this is John Lamson. That some of the recent acquisitions we've done will be in there for the full quarter in the third quarter also. So that'll ...

Pick it up a little.

That'll pick up some of the increase in revenue.

But if you go back, if you go back historically at least the usually, and we do have some diversity in the businesses, but usually the second and third quarters are usually fairly comparable in terms of the volumes and therefore the revenues that are generated during those quarters.

Okay, and do you have a sales target and margin associated with your kind of annual guidance at all?

Not really. Sales, our sales target, you know we're at $400 million roughly before government fees. And I certainly think we'll probably do somewhere between 810 and 820 on that number.

The margins overall are going to really depend on where the fourth quarter comes in. The fourth quarter is the quarter of concern here. It's very difficult today for us to really get a good feel for that quarter as to how good or not it's going to be.

And that'll affect the margins' performance of the overall Company for the year.

But I can tell you this; we were really thrilled about the improvement in a number of our businesses in the second quarter and especially employer, which had a nice jump. And we've been waiting to - we think that that's going to be sustainable going forward.

And dealer, I'll tell you, dealer jumped 3 points. I didn't think that business could make that sort of a move. And it's having a record July right now. So that's encouraging.

So I mean we think we'll, our margins will over the next year will continue to grow in most of our core businesses. And I think slowly but surely we'd like to get over 20% hopefully next year.

We'll have to see. We have a, we still got to work on that.

Thanks.

Nat Otis, KBW, you may ask your question.

Good afternoon, gentlemen.

Hey, Nat. How are you doing?

Hey first I think you should - a couple of things that you mentioned before. First, do you have an operating cash flow number? I didn't catch it.

Yes. For the first 6 months it was cash from ops was $25.7 million.

All right. And then, and you also talked about the Rep Sure market share. Did you have an overall percentage for the Australia, New Zealand market that they had?

Yes, I don't - do you remember what that was? Give us one second.

It's an Asian market. And the reason for the acquisition is what is expected for that market Australia and New Zealand market to grow into.

And so if you really look at it they could tell you that today they are about 60% share in the Australian market and New Zealand market. But that's just a very small phase.

And that phase is going to - we felt like it's going to explode and it's going to grow by leaps and bounds. So we felt like we took a market share leader share now. But the current market share has not relation to what the market is going to be in a couple of years.

Okay, great. And did you have just an international revenue number for the quarter?

Yes, we do, about $4.2 million in international revenue for the quarter.

Great. And just last question, not to beat tax credit stuff to death, but instead of WOTC through your biometric stuff, do you have any exposure to the R&D tax credit?

Right now, this Bart Valdez. We do not have much volume in the R&D tax credit at this point in time. We do however, are getting some benefit from the Katrina tax credits that are out there as well as some of the ...

All right, great. That's all. Thank you.

And we have time for one final question. And that comes from Brad Eichler from Stephens Inc. Your line is open.

Hi, guys, just a couple of quick follow-ups.

On the WOTC deal, how big a business does that and what's the typical operating profit margin?

The, suddenly our phones are going again. But the business is about $12 million book of business for us typically with a 40% plus operating margin.

The, and does that show up, there's not a balance sheet in the press release, but does the revenue that gets deferred, does that actually show up in deferred revenue? Are you actually collecting?

Brad, this is John Lamson. When we use the - when we indicated the revenue was deferred, it doesn't actually get booked. It's just delayed until such time as the law is enacted. Okay?

Got it.

When you look at cash flow from operations for the first half of the year, $25.7 million seems a little low. What are your expectations for free cash for the year or for the balance of the year in Cap Ex?

Yes, historically the first half of the year, the cash flow is lower than. If you look back our cash from operations has been, or our free cash flow I should say has been in the high 40s, $45 million or so.

Right.

And for the first 6 months it's about $10 million. But it's usually skewed toward the second half of the year because in the first quarter, which is a slow quarter for us to begin with, we pay out a lot of year-end bonuses in the first quarter. And we also made a lot of tax payments this quarter because we now have to make the tax payments cause of the CIG deal obviously.

So and we didn't make many tax payments in the first quarter this year.

So I think we'll still be pretty much at that run rate we've historically been at on the free cash flow.

Around 40 to 50?

Things get kind of jammed into the first and second quarters.

Okay. And then the final question is you guys are still sitting on about $100 million of dealer track stock. Is that right?

Yes. It's about $110 million.

Any update on what your plans are there?

Things are the same. We're recording the earnings. And we've got a great partnership with them. We're doing a lot of business with them. And we have no plans to make any changes in our holdings at this point.

Okay. Thanks, guys.

Okay, thank you.

I'll now turn the call back for closing remarks.

That will conclude our call for today.

Thank you. At this time you may disconnect.