First Advantage Corp (FA) 2006 Q3 法說會逐字稿

Thank you all for holding, and welcome to First Advantage Corporation's Third 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 available for replay from the company's investor relation pages on their website at www.fadv.com and through November 8th by dialing toll free with in the United States 866-454-1411 or 203-369-1234 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 commentary and response to your questions may contain forward looking statements. Including certain statements made in this presentation relating to fourth quarter and full-year earnings per share, and other statements that do not relate strictly to the historical or current facts. Forward looking statements speak only as to the date that they are made, and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date or before statements were 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, company's ability to identify and complete acquisitions and successfully integrate businesses that it acquires.

Changes in applicable government regulations, the degree and the nature of the company's competition, increases in the company's expenses, continued consolidation among the company's competitors and customer's, 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 third quarter of 2006. Following John, we will hear from Mr. John Long, Chief Executive Officer, who will provide us with an overview of First Advantages strategies 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 $18.6 million for the current quarter, compared to $16 million in the comparable quarter of 2005. Results of operations for the quarter ending September 30, 2006 includes share based compensation expense of $2.5 million, which reduced net income by $1.8 million and diluted earnings per share by $0.03. Diluted earnings per share were $0.32 in the current quarter and $0.30 in the third quarter of 2005.

Net income for the nine months ended September 30, 2006 was $48 million compared to 42.7 million for the same period in 2005 an increase of 12.4%. Share based comp expense was $8.5 million for the nine month ended September 30, 2006. Earnings before interest, taxes, depreciation and amortization, minority interest and share based comp, adjusted EBITDA was $47.3 million and $35.2 million for the quarters ended September 30, 2006 and 2005 respectively; an increase of 34%.

A reconciliation of adjusted EBITDA to net income is included in our earnings release. Our effective tax rate was 41.7% for the nine months ended September 30, 2006 and 38.5% for the current quarter. Cash provided from operations was $61.9 million for the nine month ended September 30, 2006 or 130% of net income. Cash provided from operations was $41.1 million in the comparable period in 2005.

Cash from operations increased $20.8 million or 50.6% from the comparable period in 2005. This substantial increase in cash from operations is a key indicator not only of our earnings growth from last year, but also the quality of those earnings and our management of the balance sheet. Capital Expenditures were $22.3 million resulting in free cash flow of $39.6 million for the current nine month period. Working capital was $54.6 million at the end of the quarter, September 30, 2006 compared to $21.4 million at year-end, December 31, 2005; an increase of $33.2 million.

Corporate expenses were $7.9 million in the current quarter, excluding $1.3 million of share based comp, compared to $4.7 million in the third quarter of 2005. This increase in corporate cost of $3.2 million, as we have discussed on previous earnings calls is primarily due to additional infrastructure, security and compliance costs incurred to support company wide growth including the CIG acquisition which was consummated in September of last year. Financial statements for prior periods were restated to reflect that acquisition.

The effect of the restatement helps in comparing operating results at the reporting segment level, but is made quarter-over-quarter comparisons difficult at the corporate and company wide level for the first three quarters of this year. Earnings per share grew by 16.6% from last year excluding the impact of share based comp, and the operating income of our segments excluding corporate costs was up 35.5%. Total revenue for the company was $212 million in the current quarter compared to $169.9 million for the same quarter last year, representing an increase of $42.1 million or 25%. Revenue for the nine months ended September 30, 2006 and 2005 was $611.5 and $473.7 million respectively.

Service revenue which excludes our reimbursed government fees was $198.6 million in the current quarter compared to $157.7 million in the same quarter last year, representing an increase of $40.9 million or 26%. Service revenue for the nine month period ended September 30, 2006 and 2005 was $571.6 million and $437 million respectively. Operating income was $34.1 million in the current quarter compared to $28.1 million in the comparable quarter of 2005. As we previously mentioned the third quarter of 2006 includes $2.5 million of share based comp expense.

Operating income increased by 30% in 2006 excluding share based comp. Amortization of purchased intangibles was $4.1 million in the current quarter compared to $1.9 million in the comparable quarter of 2005. Year-to-date amortization of purchased intangibles is 11.9 million in 2006 compared to 4.9 million in 2005. Operating income increased at all of our business segments. Operating margins increased in the lender, dealer, investigative and employer services segments.

Margins decreased in the data segment primarily due to product expansion, revenue mix and increased amortization of intangibles. Margins were down only 100 basis points in the multifamily segment despite increased regulatory costs. Margins increased in the investigative service segment as a result of a shift in revenue mix from lower margins surveillance work to higher margin electronic discovery and forensic accounting. Margins increased in the employer services and dealer segments due to increased service revenue levels of 41.7% and 9.5% respectively. The consolidated operating margin was 17.2%, 18.4% excluding share based comp, compared to 17.8% in the third quarter of 2005.

Interest expense increased from $1.6 million in 2005 to 3.6 million in 2006 due to higher debt levels and an increase in our average interest rates of approximately 150 basis points. The company wide organic growth rate for service revenue was 3.1% quarter-over-quarter. By segment, data grew 12.9%; dealer services 9.5%, multifamily 2.9% and our lender services organic growth rate declined by 2.4%. In the case of the employer services and investigative and litigation segments, organic growth rates do not accurately depict how the underlying business which include key acquisitions in the past year are actually performing.

For example, employer services growth rate was 1.5% organically, however, on a pro forma basis the employer services growth rate was 8.1% quarter-over-quarter reflecting the positive impact of product and geographic expansion and cross-selling strategies. In the investigative segment their organic growth rate declined by 9.6% as we terminated non-profitable surveillance services to certain customers. On a pro forma basis the growth rate was 20.9%. Acquisitions made in the fall of 2005 in the electronic discovery business had blended in well with our existing computer forensics expertise creating significant revenue and earnings growth in this segment.

At September 30, 2006 we had total outstanding debt of $215.4 million including fixed rate debt of $32.4 million with an average interest rate of 4.89% and variable rate debt of $183 million with an average interest rate of 6.86%. Our available and unused line of credit was $67.5 million at September 30, 2006. We had 31.1 million of cash at September 30th.

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

Thank you, John. Third quarter was another good one for First Advantage as you year-over-year operating results continue to improve nicely. We were happy with the results from all of our segments and encouraged by the increasing balance of our earnings stream. Lender's services had another strong quarter as it continues to benefit from market share gains in the two acquisitions we completed last year. Margins jumped four points over third quarter last year proving the scalability of the model. This segment has had a terrific year in a very difficult lending environment.

Our employer services segment continues to improve. We had good results from our hiring management, back ground screening and tax incentive businesses. Our tax incentive business continues to perform well despite the ongoing hiatus on the WOTC Legislation. We remain uncertain as to the status of this legislation, and will remain guarded on the future performance of this business unit until we have further clarity. Overall, employer services continue to benefit from strong cross-sell success and we see current positive trends continuing in 2007.

We had another nice quarter from dealer services with good organic growth and continued margin improvement. New dealership gains continue to offset an otherwise sluggish new car sales environment. Last week we announced an expanded partnership with Reynolds and Reynolds to sell our league generation products through their network. We are always looking for ways to leverage this very successful partnership and adding league generation should give additional lift to this and the data services segment next year.

The investigative and litigation support segment had another good quarter. We remained pleased with our improvement in this segment and look forward to continued growth in 2007. We recently announced the acquisition of Evident Data, which boosts our presence in computer forensics. This should lead to continued growth in our higher margin electronic discovery business.

Deal flow continues to slow as we get more selective about the deals we do. Generally speaking, pricing remains high so we are more inclined to sit on the sideline than not. We look for fourth quarter earnings to come in between $0.19 and $0.23 per share excluding the effects of a $0.07 gain as a result of the recent DealerTrack Holding's offering. And including $0.03 per share related to the recognition of stock option expense per FASB 123R. This is at the high end of the previous guidance of $1.00 to $1.04 per share for the 2006 earnings year. We reported $0.29 per share in the fourth quarter 2005 and that included a $0.10 per share gain on the DealerTrack IPO and did not include stock option expense.

We will be holding our annual investors day on December 5, 2006 at the NASDAQ Stock Exchange, detailing our 2007 business plan. We will be providing 2007 full-year guidance prior to the market opening that day.

Let me open the call up to questions. By the way, Anand Nallathambi our President and Akshaya Mehta our Chief Operating Officer will be here also to answer questions.

Thank you.

Carol, we'll take questions at this time.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Colin Gillis from Canaccord. Your line is open.

Yes, hello everyone. Congratulations on a great quarter.

Thank you, Colin.

Hey, John can you talk a little bit about the seasonality and it just has -- got a little bit of a different mix shift in the product launch than [you had] in December and the March quarters, you know what should we be thinking about in terms where the seasonality is coming from.

Well a lot of our business is slow in the fourth and first quarter. The second and third are our peak quarters of the year. You certainly see a slow down in lender services in the fourth quarter. You'll see it -- well, you normally see it in employer; you may not see it this year. Only because we have so much going on in that segment. Yes, the multifamily has traditionally slowed down in the fourth quarter. You know, it's a tough quarter for us to forecast. I have confidence we'll hit within that range that we've put out there. But it is tricky quarter because there are so many different things going on. But generally speaking, it is slower. First quarter, should start to pick back up a little bit.

I mean, I guess that is sort of the reason of my follow on. I mean your visibility into this quarter, because you're trying put -- could you talk about that. Do you think you are sort of taking a conservative stance on the outlook?

Well, you know October is always good. So if you look at our October numbers, you always think you're going to have a better quarter than you do. December gets tough. Around mid December, it seems like business stops. We have very high confidence in the range that we've put out today or we would not have put it out. We are starting to learn, that don't put out a number that you're going to miss. I wouldn't want to take anything more than what we are saying here.

Yes, very fair, very fair. On the multifamily side, can you just talk about pricing? You know is there ability to lift prices to sort of offset the regulatory costs and are your client's seeing strength in the rental market?

I think the market is okay overall. I think there has been some price pressure in that segment for us this year, plus the regulatory costs. I do feel it is stabilizing. I like the year-over-year numbers, were good compared to the rest of this year. So, I'm confident that hopefully we can reverse the trend next year.

Okay, great. Thank you.

And the next question comes from Brad Eichler of Stephens Incorporated. Your line is open.

Hi, good afternoon, guys.

Hey, Brad.

How are you?

Good. First question is for Anand. Can you talk a little bit about what is going on in lender's services? Obviously, kudos to you on the results, but how sustainable is that as we progress?

Brad, we have been very fortunate this year. I think we made steady progress [amidst] strong headwinds in the mortgage industry. And the only thing we can guarantee as we, with our market share gains and our customer relationships that has mostly the who's who in the mortgage industry. We feel like we'll hold our own. We will outpace our competition. But as far as the market is concerned it's anybody's guess, with the rate environment being uncertain.

What is the biggest challenge you're facing right now Anand? Is there a pricing issue in the market? Did you have to revamp any of your products, what is the challenge to keeping that share?

Price reduction, we have seen it before and I think we will continue to see it. That doesn't bother us so much. We don't also worry about upstarts. It used to be there was a lot of irrational competition. I think now it is just a question of what will be production environment for a lot of the mortgage bankers and what does that mean from a total market perspective. What is the available amount of mortgage applications out there? So our focus is to get close to our customers, focus on product development. Because there is a lot of need in the ID and [soft] solutions in the industry. So we are trying to kind of diversify in those areas. So that's -- we don't necessarily look at as a challenge, it's more of an opportunity to kind of extend our reach.

Okay. The dealer services area and the Reynolds and Reynolds agreement this past week, is that a significant deal and is there an opportunity to roll that out to more of your clients?

I think so. I think on the dealer services side our strategy has been to extend our product lines to include products more focused on the consumer. And I think leveraging our relationship with Reynolds and Reynolds we are trying to distribute it to the dealerships out there. So I think it is a good opportunity for us. It is a deal that will help a lot of our companies, not only just credit, you're talking about Teletrack from a bank [lease] perspective, [inaudible] from a lease processing perspective.

LeadClick from a lead generation perspective, and CMSI from a credit position perspective. So we feel like we are now bringing solutions that include a lot of our companies. In that we are leveraging the distribution relationship and the alliance we have with Reynolds and Reynolds.

And then just -- I've got three quick number's related questions for John Lamson. But tax rate, John, was down this quarter. Is that something, what should be the expectations going forward there?

Yes, Brad, we have been the first two quarters providing taxes at about a 43% tax rate. And after the third quarter, you'll notice by September you filed most of your tax returns and you kind of step back and do a true up. And it really looks like our ongoing effective rate is somewhere going to be around close to 42% it looks like right now.

42% in the fourth quarter?

No, that was --.

The whole year?

Adjusted to in the third quarter. Our year-to-date tax rate now is 41.7%. And it got caught up in the third quarter, that's why it's a little lower than that.

Okay, and then for the year you're still looking at 42?

Probably, yes, yes.

On the share comp it's a little bit lower at 2.5, is that a good number going forward?

Yes.

And then finally, on organic growth, I know you said it was 3.1% and you talked about employer, and you talked about investigative services. If you go in and actually adjust for those numbers and employer and investigative, you get an organic growth rate closer to 7%.

I didn't do that math, but okay.

But does that seem reasonable?

Yes, that's what -- it does. We've talked about organic growth rates in the 6 to 8, 9% range.

Okay, thank you.

Okay.

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

Hi, this is Brian Ruttenbur. A couple of questions, you paid down I think 12 million in debt. Is that -- that's got to be one of your largest quarters where you paid down debt, is that correct?

Yes it is, and Brian, this is John Lamson. As you know we -- paying down the debt is a function of obviously a couple of things, how much cash we are generating. And the first nine months of this year we've done pretty well, especially in this current quarter and so we did pay down a lot of debt. We actually -- and the fact that we only did a couple of acquisitions this quarter, freed up more cash to pay that down. So I think that you're probably right, that it is probably the biggest non-scheduled, if you will, pay down of debt that we've done.

Okay, maybe we can dig on that a little bit. Can you talk about how many acquisitions you've done this year versus how many you did last year? Seems like there are a lot fewer acquisitions, I goes the debt payment is partially reflects that. That you are not buying as many companies. But can you talk a little bit about that, how many acquisitions you've done so far this year versus last year?

Sure, this year for the first nine months, we've done nine acquisitions and for a total purchase price of about $49 million, okay?

Okay.

And 31 of that was cash, then the rest is divvied up basically between those and some stock. And in this quarter, just the third quarter alone, we did two of those for a total price of about 8.7 million, 5 of which is cash. And the other is 3 million of debt and a little bit of stock.

Okay. Do you know what you did last year? I know you had the one big one, but it seems like you had a bunch of little ones too, is that right or not?

Yes, we did and I don't have the exact -- besides the CIG, we did 16 for the year.

16 total for the year.

I don't recall exactly what it was in the third quarter, but.

Okay, so you definitely did a lot more last year. Can you talk a little bit about are things picking up at all, because you did two in the quarter? Or are there still a lot of competitions out there for the acquisitions?

Brian, obviously the deals this year are smaller. We are just looking at a lot of transactions today, its not that we're not looking. I don't want anybody to think that. A lot of the deals we've wanted to do we just haven't felt that the price has made sense. And now there has been a lot of confirmation without getting into specifics, but there has been a lot of confirmation that some of our strategic transactions sin the employer services space where we've gone smaller.

And actually where we bought smaller at a much lower price with the lower earnings, have actually turned out to be much more successful from some of the very high priced transactions we've seen in the market place. We are being careful. We like the fact that we've got a lot of cash paying down debt. And what we would like to do if we are going to for a big one, we' d like to make that kind of a prize instead of just --. A lot of our segments are fairly well developed now, and we don't need to reach for irrational types of transactions.

And I think we are just doing smarter deals this year. I would tell you the deals this year, those nine deals at 50 million are the best deals we've done since we've been public. We've just had great success with these smaller strategic transactions.

Okay and then just a follow-up on the debt side, where can you take the debt up to if you decide to go out there and aggressively acquire some additional things. Can you take it 300, 400 million how big can the debt line go?

Yes, well Brian right now our existing line right now, as I said, we've got 67.5 million available on it. And we have an according feature on that that can bump it by another 50 million. Our current debt to cap is about 25% and our debt to EBITDA multiple is pretty low. So we could conceivably do I think easy, three times EBITDA on debt and that would be conservative.

Okay.

So I think there is plenty of liquidity from a cash standpoint in terms of capital needs going forward.

Okay, and then if I can ask Anand the last question. Do you have any year-over-year growth statistics that you could give us?

Yes, I have nine months-over-nine months, is that good enough?

Yes, nine months over nine months, that's fine.

Yes.

Did you already give those, did I miss that?

No I didn't give them, I just gave quarter-over-quarter, but I have some --.

Nine months over nine months, that's perfect.

Company wide it is 4%. I'll just give you the segments. Lender's down 2.2%; data is up 14.6; dealer is up 13.9; employer services is flat; multifamily is up 4.4 and investigative is flat. Now I don't have pro forma growth for employer and investigative on a year-over-year basis. But we gave you that last quarter for the second quarter and we gave it for this quarter. So, I think you can get a feel for what that is.

Great, thank you very much.

Yes.

And the next question comes from Mark Marcon from R.W. Baird. Your line is open.

Good afternoon, John and John.

Hey.

Mark.

I was wondering with regards to lender's services you are obviously doing a great job there in terms of the environment. Are you picking up any new lenders? I mean, is it still mainly that 18 out of the top 20 that you are doing business with? How are you offsetting the declines we are seeing in terms of mortgage applications? And I know you're concentrated in the big players and you're not as exposed to the smaller mortgage brokers that are being impacted to a greater extent, but still seems like a tremendous performance given the environment and the headlines.

Yes, this is Anand, we are focused on the middle market too and I think we have been making a lot of gains there. We do have I believe, 19 or 20 of 20 now, of the top mortgage lenders. But, our focus this year has been a little bit on the middle market lenders and that has been because of our Anthem score, that's the emerging market initiative. It's more focused on non-traditional borrowers.

And what we have found is where as that particular segment by itself is not a huge transactional volume for us. It really helps our core business because of what we do in addition to what we can provide as [inaudible] for the major, the main sector of the industry.

Okay, so you've gained new clients in that mid market and that has kind of offset the overall declines. And then it seems like you are -- is pricing better in that mid market? Because you're margins are up nicely.

Most of the margin improvement has been through automation and trying to really go after production efficiencies and stuff. The pricing maybe is more stable in that middle market, maybe, but I wouldn't necessarily say it is anything better than demonstrably better than the top tier.

So it's mainly the efficiency gains. And then how would you see the fourth quarter in lender's services playing out?

Fourth quarter seasonally is a low quarter as John explained when he talked about the second and third quarter being up. Outside of that if I had to pick today, we are basically flat compared to last month. So, that's -- it's anybody's guess where it is going from here.

But in terms of your overall guidance, how should we think about -- should we just think about the normal seasonal pattern holding but not any big changes on a year-over-year basis similar to what we saw in the third quarter.

Yes, just cautious. You know it's cautious, it's just prudent to be cautious and it's seasonal and expect the normal seasonal declines and we'll see what happens.

Yes.

But it doesn't sound like you're forecasting on a year-over-year basis, which would obviously take into account the seasonality, any major deterioration relative to what you say a year ago. Is that correct?

Not at this point, like John said we're cautiously optimistic. I would say.

Because, it's hard for us to answer that question. I'd rather almost not. I mean, I think the bottom line of it all is that we've done better this year, every quarter that we thought we would and I hope we can keep it going. But, we're not going to bet the farm on it. We're just going to keep doing the best job we can do to fight the trends.

Okay. I was just trying to figure out what was implicit in your guidance with regards to that segment.

Yes, it just we expect business to slow in November and December. And where we actually wind up is tricky.

Okay. And then on the employer services side, obviously terrific job in terms of the pro forma organic growth. Can you talk a little bit about the margin profile there and how its developing and I would imagine that there is some investments that are occurring in terms of driving the cross-sales.

Sure, first of all there is one product in that group that always holds back it's margins and I don't think we talk enough about it. The drug screening business is a comparatively low margin business. We feel it is an important part of the overall package we offer. But we traditionally have been under 5% in that market, when we make money at all. And as you know, we did have some problems with that business earlier in the year and since doing better. But again, that's almost a quarter of the segment in terms of the revenue and it haltered back. Where we are seeing nice improvements has been in the tax incentive business.

Our hiring management systems have done terrific. As a matter of fact, that was the area I was really referring towards the deals. We've done some great deals there and we've got a nice package of products that all have better margins that we are putting gout in the market place today. So, we like that. Our background screening businesses continue to make slow progress, I'm going to emphasize slow, but we are doing better every quarter in that space as we bring together what I think has been maybe 12 or 13 transactions over three years. So that is not easy in the combination, but that is making progress.

Overall, I feel pretty good about the progress in the group. This is a definite trend that we think we are going to have a strong year next year in the group, as we -- just so many of our products are starting to do better there. And the cross-sell is starting to work. But the drug screening will hold back margins forever. And the business I guess in some respects is holding back the organic growth. Unfortunately we are not growing in drug screening. So that is at least helping us a little bit on the upside. But, it's going to hold us back until we can get more of these other businesses larger. But I see steady growth the next couple of years in terms of the overall margin profile of that segment.

Alright, great. And then can you talk a little bit about monthly trends or are you seeing any improvement in terms of the employment market. And then can you also comment with regards to how much of employer services is coming from overseas and how you see that ramping.

You know the employment trends; our business is just a little bit too complex to even worry about it. There are a lot of moving parts for us, because a lot of what drives us to cross-sell a lot of what drives our earnings is consolidation. It is fairly fluid and we don't have I guess, the luxury of being able to sit down and not have a year go by and not have done anything so that we can sit and then say that the trends were plus or minus. I've heard from some folks that it is sluggish in the market. We're not focused on that.

We are focused on operating efficiencies; we are focused on cross-sell. And if there was an employment decline, I genuinely believe we might not know it, because of some of the other things that are going on with the segment. So it is different for us than for probably some of the other calls you're on where people have or can measure that more directly.

Okay.

Yes, Mark, this is John Lamson. The foreign revenue was 5.9 million for the quarter and 13.7 year-to-date. You had asked about that.

Yes. Great, terrific. And then in terms of your general outlook from a trending perspective. If we take a look at most of your segments, in terms of your guidance are you basically assuming kind of the normal seasonal patterns just taking effect relative to the third quarter going into the fourth quarter across all of the segments. Are there any sort of special areas that we should factor that may end up having something unusual or something special that would drive them?

This is John Lamson, I think generally speaking there is nothing that would lead us to believe that the variance between third and fourth quarter this year is going to be anything significantly different than it was last year. Okay, between third and fourth. The only thing I would say that we have some potential not to be as dramatic is in the employer services segment. Because we've increased a lot of the products and services in that segment from what we had last year in acquisitions this year. Which I think may have an opportunity to let's say take some of the seasonality out of it in the employer services space. Okay?

Great.

Okay, thanks.

Sure.

The next question comes from Jeff Kessler of Lehman Brothers. Your line is open.

Thank you. At the ASIS show you folks had a very good cross-selling presentation for the employment services business. While the organic growth in employment services has not been all that great for a lot of factors, economic one of them over the last year. Can you go into what you hope type of driver, what type of accelerator some of theses beginning to integrate the businesses a little bit better can have on the employment services area?

Sure Jeff, this is John Long.

And I don't mean this to be a softball question to you, it's just the business has been lagging a little bit and this could, if you can put it together you have a real opportunity here.

Jeff, no question about, by the way I missed you there, sorry about that. We didn't seem to get that together, but. Jeff the thing that we don't talk a lot about is in the employer services segment, I think we've done [inaudible] deals in the last three years. So there has been a lot of what I would call complicated combining of businesses and training and cross-selling as we speak right now there is a sales conference going on about ten miles from here. Where everybody is learning different things about the different services we've added a number this year.

As with any or a lot of acquisitions and a lot of combinations you do lose some customers. And some of those customer losses specifically in drug screening cut the organic growth rates. But I got to tell you the overall strategy is a homerun, no question about it. We just did a customer conference with on our hiring management systems. We related, specifically we focused a lot on some of the different products we had like background drug screening and skills assessment as the various types of products we have.

We had a wonderful response on it. It was almost, I haven't seen us take so many orders in a conference. The strategy especially centered on hiring management systems it's just a really good one. I think we've just got to keep working on getting better operating wise. I think that does hold us back a little bit. But putting together the products, we still maybe a year, year and a half away from running this business as well as we could. But I see big organic growth numbers in the future.

Once we get past the consolidation phase, once we lose a few less customers in the transition, so that when we actually do get new customers just add more in. I see a lot of great stuff coming out of this and you'll see a lot of improvement next year. But I think as you go out it is going to even get better.

Can we drill down just a little bit in trying to get what -- are there, well we'll call them multi-mobile services at this point in time that customers are actually trying to get you to put in place at that same time. And are there gaining factors to getting to that point?

Well, we said we sell a number of package transactions where we are implementing a bunch of different or two or three products at one time. So, it's going on, other obstacles other problems in the sometimes in bringing customers various things and giving them everything they want. Sure, sure. But the demand is there and that is what I think -- what we have done is we've proved that the concept works and now we just have to get better at the execution.

Okay. Thank you very much.

Okay.

And Bruce Simpson from William Blair. Your line is open.

Good afternoon.

Bruce.

Hey, Bruce.

Let me talk about a little bit about the WOTC. What is the approximate revenue push out on the quarter that you are not getting that you had expected to get because of the WOTC hiatus?

I'm going to say it probably cost us a couple million bucks this quarter. That's [guess] on revenue. We still have some overhang. WOTC -- the actual payment for WOTC is for 18 months. So we are still getting WOTC revenue in from last year transactions, but it is starting to wind down.

Okay. And so just anticipating that ahead, are you kind of throwing in the towel for the December quarter, right?

Yes, it's not on our numbers at all in December. The earliest it could be approved assuming they get anything done in the Lame Duck session would be say the end of November, which effectively the year is over for WOTC as far as we are concerned. Right now we are looking toward '07.

Okay. And then can you explain to me why the organic growth numbers really aren't applicable in those two segments investigative and employer?

Well, this is John Lamson, Bruce, how are you doing? I don't know if not applicable is the right term. The point is that in the investigative for example, we just got into the computer forensics and especially the electronic discovery business in the fourth quarter -- or pardon me, or yes, the fourth quarter of last year and that is in the True Data acquisition. So they won't be in our organic growth numbers this year.

Until the anniversary.

Until the fourth quarter. Until actually the first quarter of '07. So the purpose of the pro forma concept is just to show how those businesses are growing regardless of who owned them.

Okay. And I think --.

And that's really the same in employer services too with a lot of the recruiting solutions businesses that we've acquired in the past six months.

I see, so when you say pro forma it is thrown back in as if you owned them in the third quarter of '05?

Correct. Correct.

Okay.

Just to show how those businesses are growing regardless of who owned them.

Okay. And then what should we be thinking about in terms of sustainable organic growth. I know I'm touching back on what the question you just got asked kind of conceptually John Long, but is high single digit appropriate for this level. And when you think forward to the next couple of years is that probably a realistic target?

Do you mean on blended or segment basis.

Blended across the whole company?

I think certainly above five should be good.

Six to eight.

Six to eight.

Of course I've always talked about the six to eight ranges.

It's again its tough not knowing the mortgage market and what is going to happen there. We do think that employer does have the potential to go over ten, over time. So I think that will be big boost. Investigative really is quite -- it's got a lot of high growth qualities to it and that could be pretty significant. We're not sure how to forecast out next year for [inaudible] and lender. On the automotive portion the dealer is always a little tricky too. But I think six to eight long-term two to three, whatever long-term is these days is not a bad number and we'll just take it as it goes.

Okay and then I guess I was a little concerned or a little bit surprised in your guidance for the fourth quarter. Given that you benefited from rollout tax rate in this quarter and relative to the number that you put out last quarter for the full-year. Is that just sort of you pulling your horns in after having gotten burned a couple times and since you've got funny fourth quarter seasonality that's hard to model?

As I said, we are at the high-end of the range. I think it is just prudent for us to just be cautious, there's nothing wrong with it. We really do have a tough time with December and we're not making that up. From Thanksgiving to New Years, there's not a lot of business done in a lot of our segments. And I can tell you there have been times in mid November where I thought we were going to have a blow out fourth quarter. Only have the holidays hit and then -- I mean who hires the last two weeks of December.

So I'm reluctant to go any further than this. I think lets just see how it turns out. We are going to benefit a little bit from better going forward tax rate, which is encouraging. Believe we've been over taxed for a long time. So this is money we are owed, this isn't one time stuff. I was thrilled to get it and I'm pleased. We are clomped up against people with tax rates in the upper 30's and we've been at 43 all year. So, it's great to get down closer to 41.5 or so. And I'm comfortable with that going forward. And we'll just see, let's see how the quarter goes. There's nothing wrong, if it's conservative, maybe it is conservative, but I'm not prepared to up it from here and we'll see how it goes.

Okay, my last question has to do with the international portion of your screening business. Is it possible to quantify the approximate PNL of that piece or the operating loss just in the international segment in the quarter?

The business for us is in developmental stage. We bought businesses around Asia, the Asia Pac market and Australia, Tokyo, India, et cetera. We are combining these various operations. We have management in place to do that. We are in an investing stage, so I think you should focus on revenue growth. Don't worry about earnings right now that is a longer term strategy for us. We're trying to really develop that into something. So the earnings part to us is less important to at the moment then actually just developing the footprints and developing the technology necessary to really run a global operation.

Okay, thanks guys.

Yes.

The next question comes from Kevane Wong from JMP Securities. Your line is open.

How you doing guys?

Good Kevane.

Good.

I think I've only got two questions left after all this. So on the investigative and litigation supports area you gave the pro forma of 20.9% and otherwise it was done 9.6%. Just want to get a sense of how much is that is simply the market growth versus how much was from determination of some non-profit surveillance work. Can you give sort of a quantification of how much in revenues was lost through the terminated contracts on your part?

Well, this is John Lamson. Almost the entire 9.6 decline is in the surveillance business. Because essentially that was the only significant business we were in a year ago.

Was that all from those contracts that you voluntarily terminated or is that partly just a difficult market for those guys?

That has been one of the greatest business we've been in. It's been a tough business and it was pretty geographically dispersed and what we've done we've tightened the geography on that business to try to have a better cost structure. And it certainly is improving the results but its churning at the organic growth level. So that's really what that is about. That is very much a conscious decision to get smaller before we get larger again. But the 20% that we are talking about the pro forma is really the growth in the electronic discovery side, which is a really a really good business for us right now.

And we've invested heavily in that and we've I think added this year ten sales people. Very highly professional sales people. We are really starting to penetrate that market. So we tend to -- we are downplaying the surveillance in terms of how we talk about it and really talking up the electronic discovery, because that is the future of that segment is the whole litigation support side. We've got good investigative businesses, but the high margin stuff the stuff that is really going to drive the earnings is coming out of the litigation support side. And that's why we are talking so much about it.

Okay the litigation support the E-discovery stuff is actually on its own. I mean will we be looking at that operation sort on a stand alone really growing at 30%-ish rate at that market, you're saying.

You know the margin is growing a lot, I wouldn't want to speculate what we are going to do next year on that, yet. But it is nice to be in a market that is expanding at that rate. But I think they have good opportunity there.

As I think we've talked about on prior calls that of all our businesses is -- most of our business is transactional in nature. And that one, I think the word you guys use is lumpy. And it's more obviously project driven. Although we haven't seen it because we owned it for a while, but there is potential there for that to be a little more volatile in terms of quarterly earnings or [revenues], than the other businesses we have.

That makes sense. And then just also since you mentioned that terminated contracts that you did sort of on your part, are there any other sort of lumps of contracts that you will probably be terminating in that segment [total] or any other segments or are we sort of done with any [threshing] out of accounts or just low margin or low performance for you?

I'll tell you one thing. This may sound terrible, but we are always looking for opportunities to get rid of that business. You do a lot of deals you get some stuff that doesn't work. So, there are different ways to do it. Sometimes you cancel them, and sometimes you just don't bid them aggressively going forward, because everyone seems to want it at a lower price anyway.

So, we like I said in our drug screening business, we defiantly we are very flat to down in that business and nothing wrong with that. With the business we are left with we think is going to be a higher margin business going forward. So, sometimes we kind of ease out of an account, sometimes they ease us out of an account. But it is generally speaking it's not too bad.

Okay, thanks guys, I appreciate it.

Okay.

Nat Otis of KBW, your line is open.

Good evening gentlemen, nice quarter.

Hey, how are you doing?

Thanks.

End of the line so I think pretty much all of my questions have been answered, I'll just follow-up on one quick one. On WOTC, John you talked about the possibility of it being passed in the lame duck session and in a rosy scenario, maybe hits in November for you guys. I think the legislation is retroactive to the start of the year, so does that mean that you could conceivably in November have a nice little bump there or would it just start to trickle back.

This is John Lamson, Nat, how are you doing?

Good. Yourself?

Good. You know if it does get passed in the lame duck session, I don't think you are going to see any significant spurt of business here in the last month of the year. It just takes a while to process those things. Although we've been doing the work, you have to get them out to the states and it has to come back to the state approved. And that's not going to happen in 30 days.

It's more like if it passes in November it will help the first quarter.

Yes.

You should think in terms of the first quarter and hopefully we're not talking about this on the next earnings call.

Right. But that is assuming it gets through the lame duck session to begin with.

Yes, the lame duck session.

I understand. That's it. Thank you, gentlemen.

Okay.

[Dan Mullen] of Virginia National Bank. Your line is open.

Thank you. I seemed to have missed the -- what was the capital spending number for the September quarter?

We didn't talk about for the December quarter. This is John Lamson. We did talk about our cash flow for the nine months. And that was -- our CapEx was $22.3 million for the nine months and --.

What was -- can you tell me what it was for the six months ending June?

I don't have that information in front of me. That is in our June 10-Q.

Okay. My other question was is there some reason to think that your business would be adversely affected if First American was either spin-off or somehow separate themselves from that ownership position that they have. Is there a reason why customers might choose to not look your way any longer?

Listen, I don't think so. All of our business is very entrenched. We are [inaudible] in everything that we do. The ownership probably helps us get new customers and you know, but there are really -- first of all I think they will be here for a long time. So I don't think they are going anywhere. But no, I think these businesses stand on their own pretty well.

I guess what I'm wondering, how much I should worry about it.

I wouldn't worry. Everything about First American and this company is good, so I think I just wouldn't worry about anything related to them. I think they have stated their intention to own us long term.

Okay. Thank you very much, and nice quarter, by the way.

Thank you, very much.

And our final question today comes from Brad Eichler of Stephens Incorporated. Your line is open.

I just want to quick follow-up -- I just want to make sure. What is the size of the terminated contract in surveillance?

Its more than one, Brad.

No, its --.

No, I mean in aggregate, what is the size of those contracts?

I'd say it's about $2 million. If you look at the reduction that we've had year to date, comparatively [over last] it's about $2 million. And it's not really termination of contracts its more of a selective geographic presence that we want to go into. In the past we were trying to be everything to everybody. Now, we are focusing on those states where it makes sense for us because we have presence there.

Thank you, very much.

Okay, thank you.

All right.

Are we done?

That does it.

Carol that will conclude our call for today.

Thank you. You may disconnect at this time.

Thank you.

Thank you.