First Advantage Corp (FA) 2006 Q4 法說會逐字稿

Thank you all for holding, and welcome to First Advantage Corporation's Fourth Quarter and Full Year 2007 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

This call is being recorded and will be available for replay from the company's investor relations page on their website at www.FADV.com, and through February 26th by dialing toll free within the United States 888 455 0031 or 210 234 0001 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 Miss Cindy Williams, Investor Relations Manager, to make a brief introductory statement. Thank you, ma'am, you may begin.

Thank you, and good afternoon, everyone. At this time, we would like to remind listeners that management's commentary and responses to your questions may contain forward-looking statements including certain statements made in this presentation relating to the impact of WOTC on future earnings and first quarter diluted earnings per share, 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 form those set forth in these forward-looking statements.

Factors that could cause the anticipated results to differ from those described in the forward-looking -- forward 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 fourth quarter and full year 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 please to turn the call over to Mr. John Lamson.

Thank you, Cindy, and good afternoon, everyone. First Advantage reported net income of $18.2 million, or $0.31 per diluted share for the fourth quarter of 2006, compared to $16.2 million, or $0.29 per diluted share for the fourth quarter of 2005. Net income was $66.2 million, or $1.14 per diluted share for the year ending December 31, 2006, compared to net income of $58.4 million, or $1.09 per diluted share for the year ending December 31, 2005.

Results of operations for the quarter and year ending, December 31, 2006, include a pre-tax investment gain of approximately $7 million, or $0.07 per diluted share, while results of operations for the quarter and year ending December 31, 2005 include a pre-tax investment gain of $9.5 million, or $0.10 per diluted share. Both related to the issuance of stock by DealerTrack Holdings Inc., an unconsolidated investee accounted for on the equity method.

Results of operations for the quarter and year ended December 31, 2006, include share based compensation expense of $2.4 million and $10.9 million, which reduced diluted earnings per share by $0.03 and $0.14 for the respective periods in 2006. Results of operations for the year ending December 31, 2005 also include merger, relocation and marketing related expenses, which we recorded in the second quarter of 2005 of approximately $6 million or $0.10 per diluted share.

Diluted earnings per share, excluding the impact of the aforementioned investment gains, share based comp and merger relocation and marketing costs was $0.27 and $1.21 for the current quarter and year ended December 31, 2006 respectively. This compared to $0.19 and $1.09 for the quarter and year ended December 31, 2005. This represents an earnings growth rate of 42% quarter-over-quarter, and 11% year-over-year.

Operating income for the current quarter and year at the six business segments, excluding share based compensation costs, increased by 31% and 32.6% over the comparable periods in 2005. Earnings before interest, taxes, deprecation and amortization, minority interest, gain on investments, and share based comp, adjusted EBITDA was $40.2 million and $173.6 million for the quarter and year ended December 31, 2006, compared to $29.9 million and $127.5 million for the quarter and year ended December 31, 2005.

This is an increase in adjusted EBITDA of 34.7% quarter-over-quarter and 36.2% year over year. A reconciliation of adjusted EBITDA to net income is included in our net earnings release. Cash provided from operations was $91 million for the current year or 138% of net income, an increase of $18.7 million from last year, or 25.9%. This substantial increase in cash provided from ops 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 $33 million in the current year, resulting in free cash flow of $58 million for the current period. Total revenue for the company was $206 million in the current quarter, compared to $170 million in this same quarter of last year, representing an increase of $36 million or 21%. Revenue for the year 2006 and 2005 was $817.6 million and $643.7 million respectively.

Service revenue, which excludes reimbursed government fees was $193.3 million in the current quarter, compared to $159.1 million in the same quarter of last year, representing an increase of $34.2 million, or 21%. Service revenues for the years 2006 and 2005 were $764.8 million and $596.1 million respectively.

Operating income was $25.8 million in the current quarter, compared to $21.1 million in the fourth quarter of 2005. As previously mentioned, the current quarter of 2006 includes $2.4 million of share-based compensation. Operating income increased by 34% in 2006, excluding share based comp.

Amortization of purchase intangibles was $4.6 million in the current quarter, compared to $3.2 million in the fourth quarter of 2005. For the year amortization of purchase intangibles is $16.5 million in 2006, compared to $8.1 million in 2005. The consolidated operating margin was 14.6% excluding share based comp in the fourth quarter of 2006, compared to 13.3% in the fourth quarter 2005. For the year, the consolidated operating margin was 17.2%, excluding share based comp, compared to 16.4% in 2005.

When comparing the fourth quarter of 2006 to the fourth quarter of 2005, excluding share based comp, operating margins increased at all of our segments except dealer. Margins increased in the employer services segment, primarily due to product diversification, principally the hiring management solutions group, which has reduced the seasonality in the business.

Margins increased in the investigative services segment as a result of a shift in revenue mix from lower margin surveillance work to higher margin electronic discovery and forensic consulting. Margins decreased in the dealer segment due to operational issues in the vehicle lead generation business. We have taken steps to consolidate those operations into existing facilities and centralize management and operations.

The actual credit report volumes increased in the quarter by 15% from last year. We anticipate the margins in this segment to rebound starting in the June quarter of this year and be back on track in the second half of the year as we continue to expand our market share in the dealer segment.

For the quarter, interest expense increased from $2.5 million in 2005, to $3.3 million in the current quarter, due to higher debt levels and an increase in average interest rates of approximately 85 basis points. For the year interest expense increased from $6.6 million to $13.3 million. The company wide organic growth rates for the service revenue was 7.1%, quarter-over-quarter.

By segment, data grew 20.8%, the dealer segment grew 7.2%, the multifamily segment grew 3.2%, lender services grew by 3.6%, and employer by 6.1%. In the investigative segment, their organic growth rate declined by 9.9% as we continue to terminate non-profitable surveillance services to certain of our customers. On a pro forma basis, the growth rate for this segment was 24.9%.

Acquisitions made in the fall of 2005, in the electronic discovery have blended in well with our existing computer forensics expertise, creating significant revenue and earnings growth in this segment. In the employers services segment, product diversification, primarily in skills assessment, applicant tracking applications and hiring solutions yielded a growth rate of 12.5% quarter-over-quarter on a pro forma basis, driven principally by cross-selling initiatives.

At December 31, 2006, First Advantage had total outstanding debt of 20 -- $200.3 million, including fixed rate debt of $25.9 million with an average interest rate of 5% and variable rate debt of $174.4 million, with an average interest rate of 6.83%. Our available and unused line of credit was $75 million at year-end. We had $31.9 million of cash as of year-end.

It is now my pleasure to turn it over to John Long, our Chief Executive Officer, who will give his thoughts on our current operations. John?

Yes, thank you, John. We ended the year in pretty good shape with fourth quarter operating earnings coming in at $0.24 per share, excluding the DealerTrack gains. This was the first time we have beat our own guidance, so we're pretty happy. The full year came in stronger as well at $1.07 per share excluding the DealerTrack gain, after our previously announced adjusted guidance of $1.00 to $1.04 per share.

Our results were broad based with five of our six segments showing strong, year-over-year, gains in earnings and margins. Let's start with the usual over performance of lender services. It ended a great year with another stand out quarter in which we saw organic growth rates of 3.6%. For the year organic growth was flat despite an overall decline in mortgage originations between 15 and 20%.

These are amazing numbers that we could only hope to repeat in 2007. Our employer services segment closed strong as well with across the board improvement, especially in our hiring solutions group which grew rapidly throughout 2006. Our tax incentive businesses did very well also with sales in used taxes, fuel tax reporting and Katrina tax records -- tax credits offsetting the WOTC hiatus.

Also of note is the rapid growth of our international background screening business, which grew organically 36.7% for the year, but more importantly 53.5% for the quarter. January's organic growth rate numbers were also in excess of 50%. Earlier this month we completed the acquisition of R E Austin, which filled a major operations and strategic gap for us in the UK. Response from existing customers to this acquisition has been great with immediate new business commitments in the ten days since we announced the deal.

We also just returned from Singapore where we had a strong showing at the ASIS Security Conference. Interest in our services has never been greater while competition in this part of the world remains limited. Our confidence in our international strategy improves daily, as does our overall service levels.

Our data services segment had another great quarter with organic growth rates of 20.8% and 16.25 for the year. There are many pieces to this segment, but some of the standouts include Teletrack, our subprime Credit Bureau, National Background Data, our criminal records data base, our direct to consumer credit business, and believe it or not, US SEARCH, which is performing much better these days.

Results from our multifamily segment were also encouraging, as we've seen the end to its earnings decline. We saw improvement for the first time in 2006 in the fourth quarter and 2007 has started strong. In addition to growth in our core tenant screening produce, we are seeing increasing demand for our renter's insurance products.

Our investigative and litigation supports segment had another strong quarter as well as it completed a break out year. Sales and earnings grew in excess of 70 and 500% respectively for 2006. Our expansion into Europe through our DataSec acquisition looks like it will pay dividends as the year progresses.

Our only negative for the quarter was in dealer services, where operating problems and its lead generation unit lead to an earnings decline. This is isolated to this piece of business with the rest of dealer services business looking good. In addition, our DealerTrack investment continues to gain value and add to our earnings.

So, we're starting 2007 in great shape. We feel good about all of our segments. January was very strong and February looks equally good. Lender continues to perform better than expected, and Employer looks like it is ready to take off. Now that WOTC has been renewed, much of the risk has been taken out of the earnings.

2007 will be the year that we show the power of our diversity and the success of our strategy and execution. As for the first quarter, we are setting our guidance at $0.26 to $0.28 per share. This is above our plan. We'll leave our full year guidance the same for now, pending the results of the first quarter.

Let me open the call up to questions.

Thank you.

[OPERATOR INSTRUCTIONS]

The first question comes from Colin Gillis, please state your company name.

Yes, it's Canaccord Adams. Hey, John, and John.

Hey, Colin, how are you?

Colin, how are you doing?

Hey, so good results out of the international side, can you just tell us a little bit -- what fueled the growth in that particular area, and how many customers you're servicing now? And, just what you see in terms of the cycle to get new customers in?

Well, I can't really answer the customers. The only thing I -- it's the physical number of the customers. What I can tell you is that besides just being a normal financial services group of customers that has been really bringing us out to these different areas, now we're starting to see a lot more of the traditional BPO type of business. We're also seeing a lot of people being moved around within Asia.

So, for example, some areas that are short on labor, like Hong Kong or perhaps Singapore, are shipping in people from places like Manila and we're doing the background screening there for different companies. What you're starting to see, I think in background screening in general is a greater acceptance of the product globally.

As the multinationals have moved into these markets, they're just starting to demand the services that we're providing, and they're just really isn't a lot of good choices for clients. So, that gives us a pretty good competitive edge. And I think that the aggressive position that we took early on to buy different businesses in different countries is starting to pay off.

So, the demand is real, it's just -- and I would tell you further, it really feels like it's very early stage. When we were in Singapore it just -- people were just starting to talk about trying to figure out whether or not they should do background screening, yet as you can see our sales are starting to mushroom. So, I -- we're just very bullish. We came out of that trip very bullish, and we love the R E Austin deal. We think that's going to be a big home run for us in the UK.

Got it. Is there any particular geographical locations you can point to, whether it's the Philippines or India, where you're seeing exceptionals in that, or is there -- ?

India is rocking. We're having a really good -- a lot of growth in India. The Philippines have cost -- we didn't -- we opened that operation a little over a year ago and we're at 80 -- I think 94 people now in the Philippines.

Really, I think the bulk of the growth for us is clearly Asia, Asia Pacific. The Australia deal was very good, and they're out of space. And we quite frankly, can't open facilities quick enough right now in Asia. So it's really -- Asia is the story. I think UK will be a good story also.

And just finally, any colors to the percentage of revenue that's coming from international right now? I know it's still nascent.

Colin, this is John Lamson, I can tell you that for the quarter, fourth quarter --

Yes.

Our foreign revenue was $7.3 million, and for the year it's $21 million.

Okay. Great. Great quarter. Thank you.

You can do the math on the percentages.

Yes, still small, but we're getting there.

Beautiful. Thank you.

Okay.

Brian Ruttenbur, your line is open, please state your company name.

Brian Ruttenbur, Morgan Keegan. Very good quarter, congratulations.

Thanks, Brian.

Thank you, Brian.

Couple questions on DSOs, I don't believe I heard those. Can you go over what the DSOs were?

Yes, you didn't hear it because I didn't have it in my prepared text, but --

Okay, I didn't know if I just missed it or --

No, no, I can tell you, we're at about 53 days at year-end.

Okay.

So that's about what it was last year.

Okay, very good. And then the GAAP -- the EPS that you're giving, the 26, 28, is GAAP. I just want to make sure.

It is. It is.

Okay.

GAAP with stock based comp and everything, it's GAAP.

Okay, perfect. On the -- two questions really is data services. What should we look for any kind of slow down? I mean what's a key that would slow this? Because it seems like this one is growing much quicker than we anticipate or you anticipate.

You know there's a lot of small businesses in that segment that have really good growth characteristics, and I don't see any major slow down happening this year. I think --. And we still haven't actually gotten the growth out of the lead generation business in that segment than we'd like. So this is really coming from other areas. So I think we are certainly good for this year.

And it's kind of taking a year at a time, but a lot of those businesses just have strong growth characteristics. We've really done very well with that national background data deal that the criminal backgrounds record business is really good. I mean, US SEARCH is doing very well. They're the consumer credit business -- we had a very strong quarter there. It's just -- right now, there's no reason to believe that anything is going to change. I think we have a -- it's just become a nice segment for us.

Okay, and then on lender services, that's performing much better than maybe you thought at the end of the year when you had the analyst conference, where you're talking about down 10%. Now, maybe you're a little bit more optimistic on that.

Anand is on the other end of the phone somewhere. Anand, you want to take that?

Sure. Hello, John, we start off the year very well. And we just -- we feel bullish but we don't know exactly if one month sets a trend for us to reverse what the plan is. So, we're sticking with the plan. The market's good. I think we're building on the leadership position that we have established with our Anthem suite, that's the non-traditional product suite that helps our core business.

Can you maybe talk to me about what the first month looks like? Is it -- it's only down a couple percent, or is it up a couple percent? Can you give me some kind of perspective how January versus January looks?

I would say it was pretty stable with 2005.

Okay, very good. Thank you. Those are all my questions.

Okay, thank you, Brian.

Jeff Kessler, your line is open. Please state your company.

Hi, this is actually, [Mon] with Lehman Brothers. A couple of quick questions, could you repeat or can you give us what the organic growth rate for the total company was in the fourth quarter and full year for '06?

Sure. For the full -- for quarter-over-quarter for the company --

Yes.

It was 7.1%.

And do you have that for the full year or, no?

Yes, it was 4.1%.

All right. And to the international side of the business, I mean, clearly it's doing great. And of that $7.3 million, is your Quest acquisition that you made last year or a while back the majority of that, can you give us some color on that?

And additionally, with all these different acquisitions you're making in the UK and you had a good conference you said in Singapore, are there any sort of synergies or cross-sell that you can do from having these different locations and is there some sort of long term target you guys are looking towards and with just the international background screening?

Well, there's some great synergies just -- as we're picking up countries and expanding our countries, we're expanding existing customer relationships into those countries almost immediately. So, you've got the instant synergies there.

The big homeruns that probably lie ahead for us will be when we can pull some large multinational companies domestically as a result of our international presence. Which is something that we're betting big on, we think it will help us here also.

But the -- and going back, the Quest deal, clearly was the foundation for our business in Asia, and the stuff that we've added on has really been quite complimentary. But, that was the real basis for the business, and we've got strong operations in India. And now this -- the operations in Manila have been terrific.

The Refsure deal we did in Australia is great, and the deal we did in Japan as well. It's just been a series of relatively small transactions that have filled gaps throughout the region. And now we've got some pretty good service capability in those areas that I think gives us quite an edge because we just don't see the sort of competition out there that does stuff like that.

So we like our position, and it's still early, but I could see this business growing 50% a year for a few years.

All right, great. And one final question was -- just with respect to your comment on the first quarter guidance of 26 to 28 being above your plan. Could you give a little more color as to what maybe your prior estimates were? Does that mean if you meet this 26 to 28 guidance range, that your full year guidance that you'd given would prove to be conservative?

No, what I'm really saying is if we were ready to raise guidance we would have. But what we wanted to really just kind of give you a heads up, and just tell you that business is very good. And it's better than we thought. And if the trends continue that -- it's certainly a possibility we will. It's certainly a lot better this time this year than it was last year, is maybe the best way to put it.

All right. Great. Thanks a lot, guys. Good quarter.

Okay, thank you.

Kevane Wong, your line is open. Please state your company name.

Hi, JMP Securities. How are you doing guys?

Hey Kevane.

We're good.

I guess a few things. First, data services, you sort of addressed growth, and obviously you're optimistic on the growth there. That's also been a segment that's been very choppy for the same reasons of having a lot of different businesses, and so some might do well, some a little less so and that makes it a little bit difficult for forecasting.

Any sense as far as quarters, how they should shape in the year? I mean, has this thing sort of gotten big enough that things will be a little more steady and sort of predictable, and can you help us figure out how to predict that as we go through the year?

John's looking at me, and I'm looking at him. There were a lot of changes -- there were a lot of deals and changes that resulted in the mix change and the -- swinging a little bit last year. I mean, we've done less deals recently. So, just by virtue of -- in all of our segments I think, you'll see a certain, a better level of predictability probably than it was when we were doing a lot more deals. So, it's still going to be a rough segment for that, but it's probably a little more predictable.

Yes, I would add that with -- LeadClick was a pretty big acquisition that we did. So I think when you -- when you see it for the whole year now, it's going to be a little more predictable than it was last year.

That makes sense. Also, jumping over to dealer services, obviously the one under performer there. From what I understand, you'd already had some management change if I remember putting in more of an operator, or in the process of putting in an operator versus the entrepreneur in one of those pieces.

Can you give us just -- maybe just a little bit more of a nuance as far as why that's sort of suffering? I mean that was sort of a big -- last quarter it was at 9.6% internal drop, it really because of the business that was purposely dropped, but here we're coming down to that same level with this sort of problem in there.

Can you give us just a little bit of sense underneath there, what's happening, what's specifically changing, how that's being sort of worked together? Just trying to get a sense on that. I'm sorry, that was dealer service, I hit the wrong numbers. Well, 9.57% this quarter. But a little sense on more and what's sort of going on there, and how that's being fixed.

Yes, sure. Anand, do you want to -- ?

Yes, let me take that John. The vertical lead generation business that we referred to as bar none, it's a smaller piece of our dealer services business, we are in the midst of an operations transition. We are consolidating operations management in all the facilities with other dealer services function to fit better with our bigger, stronger credit services business.

In addition to that, we're also changing the workflow of marketing leads and tightening it up in response to the new regulatory environment regarding firm offers of credit. That has an impact on response rates. And we're now in the process of improving the response rates with better analytics and better marketing collateral language, things like that.

We still feel very confident about our lead generation business. It's the most often asked for product enhancement when we sell credit reports to dealers. And I think the changes that we are making will help us position the lead generation processing business better to be a real value added service to the credit reports we sell to the auto dealers.

And is there -- the new personnel can be more of an operator in charge of that specifically, is he already in place, or is that still in process?

Yes, he's already in place. We're also making some more operations changes and we're also doing some consolidations. The new person that we brought on has more of an Internet exposure. So, I think that would help us as we go forward in marketing [leads].

Got you. And then I'll throw out one, which is more of an interest point. But in India or just international background it's been obviously great growth, you know [NASCOM] has been doing some changes there. And last we had checked you guys were one of a smaller number of people sort of approved for that project. Is that a big driver of growth, or is that -- is everything else growing so much that, that's really not a particularly large piece of that, as far as it being a growth driver for international background screening?

It's really -- that's not much of it at all.

Oh, okay.

Yes, we're -- no.

Great. Thanks very, much, guys.

Okay, thank you.

Mark Marcon, your line is open. Please state your company name.

RW Baird. Congratulations on the quarter.

Thank you, Mark.

Thank you.

With regards to employer services, should we assume that all of the foreign revenue is in employer services?

At the moment, the great majority of it is what's -- that's going to start swinging as the year goes on. You're going to start seeing more of the -- more of foreign revenue come out of the support as we expand there. We are taking on some cases in the UK, there. So, that's one area, but the bulk of it is still going to be in employer, but I think as the year goes on we'll be able to talk more about the [inaudible] support group.

What you -- Mark, this is John Lamson, what you -- fourth quarter and for the year, it's -- substantially all is employer.

So we take that 7.4 and that would be a safe assumption that that was --?

Yes, yes.

Okay. And what are you seeing in terms of the organic growth rate in employer domestically? And how much of a cross-sell are you getting with your domestic clients because of your international capabilities? Or, what sort of impact is that having?

Well, I think it's still a little bit too early to measure it backwards. I think -- we do think that that's going to be the ultimate prize for us when we start -- when we use this dominant position overseas to really bring us more business domestically. I mean there's been some activity, but we don't think about it so much that way right now.

I think our -- just our general cross-sell that we've started really a couple of years when we were working at developing the strategy, we're having a great success with it indeed. This hiring solutions group has done fantastic. Much better than I think we expected. And they're not only cross-selling within the group, but they're feeding background screening, they're feeding drug screening.

I mean, that model is absolutely working. And hardly a day goes by, matter of fact, today there were two major clients sold, that I keep getting emails on, and it's just a fantastic position to be in. So I think again, the strategies have taken a while to develop and the service levels clearly to be able to support those strategies take a while to develop, but we're starting to really reap the benefits from it.

And I think we've felt for a long time that the [inaudible] employer services segment has the potential to really increase on the organic growth side, and I think we'll start to see it as the year goes on.

Mark, I might add that I think our -- we're a little more optimistic about the employer services group, perhaps than some others who might be in this business because we do have a lot more product diversification. We're doing more than just the traditional background screen and a drug test.

And that's why we've been given kind of pro forma growth numbers in this employer services segment, because the applicant tracking and the hiring management solutions type businesses that some of the other folks are in this business don't have are really taking off.

Can I just add to what John is mentioning, we have a much more complete and comprehensive product set that enables a -- more of a solution set for the employers. In addition to that, I think we're making big strides in the educational vertical with our fingerprinting business. It's -- not a month goes by before we sign on another school district. And I really think that our product sets that we assembled is pretty young, and the future is, in our minds, looks bright and that gives us a lot of confidence.

Great. When you talk about that pro forma growth rate, is there any way to split it out between domestic versus international to give us a sense of that?

I don't have that here.

Okay. Any rough way to think about it?

I think the background -- the [foreign] background has been growing and certainly, I think higher, if you just isolate that, than the -- what'd I say, 9.5% for the year. Okay? But it's a relatively small piece of the total, so it doesn't move the total that much. But just looking at the foreign, it's been growing at 20% plus.

Great. And then when we think about your guidance for the first quarter, what are the underlying assumptions in terms of revenue by division, the way -- how should we think about that?

I didn't give revenue guidance. [Inaudible] usually do. We never give it by division.

Yes.

If you want to take a shot at it. Yes, okay. Yes, we don't actually have that number off hand.

Any area that we should see any sort of meaningful divergence in terms of trends relative to what you've generated in the fourth quarter on a -- on kind of a pro forma or organic growth rate?

I think it stays pretty steady in the areas --.

Okay.

That we've talked about. One comment I will make is that probably lender services will probably be relative flat for the first quarter. It will be good. It won't be down probably, we're hoping anyway, that it won't be done. But we're not necessarily thinking it's going to be up either.

So whatever growth we get in earnings year over year is really coming from all the other segments, which is really good news. And that's what we had wanted to do, was build up these other segments. And we're really expecting a pretty big year out of employer services. And the other segments have shown steady growth too. So, we're looking for the growth this year to be from the non-lender related businesses.

Last question, just employer services. Where do you think those margins can get to?

Well.

Like in the relatively near term, a year or two years?

We think we can move the needle a point, point in a half a year. The real Achilles heal in that business -- in that segment is our low margin drug screening business. And it makes -- since it's such a large revenue base, it makes it tough to move it. But a point to two a year for a while, for the next couple years.

Great. Super. Thank you.

Okay.

Nat Otis, your line is open. Please state your company name.

KBW. Congratulations on a nice quarter, gentlemen.

Thank you, Nat.

Thank you.

Let's -- just one more international question. Are you seeing any international competition for deals out there?

Yes, there's a little bit of competition, and it's certainly -- there are local companies in each market that are popping up daily. And you will get somebody who comes in there at half the price, and says they can do these services and they're doing it on a typewriter. So, I mean there's clearly levels of service -- or service level difference that distinguish us from many of the potential competitors out there.

There is not a lot of, what I would call, high end organized competition that's trying to really create what we're doing. And that's not to say it won't appear or somebody won't attempt to assemble it like we have. I just think we've gotten such a good start -- a head start on this.

And we know the deals that we made in the various markets, and in most cases we bought the best company that was available. And it is -- just isn't going to be that easy to replicate it. So, it's a little tricky, there's certainly competition out there, but when I look at doing a deal that goes across say the UK to Asia to Australia, I look at the potential companies and it looks -- I look at us and I see us as really the most capable out there.

Okay, great. Yes I just -- other of your US competitors have talked a little bit more and more about the international business, and I wasn't sure if you were seeing them in the competition for buying companies.

Nat, last time I got off the plane in Mumbai there was nobody else there.

Okay, fair enough. Second question, any idea when you're going to be done kind of through terminating those businesses and then investigative and litigation segment?

You mean getting rid of some of the less performing clients?

Exactly.

Yes, its -- we're certainly trying to achieve that this year. All businesses -- these types of businesses have some challenges. We're certainly looking at -- we're also looking at our drug screening clients too, I mean to see what clients are less profitable than others, that maybe don't do a lot of other business in some other areas.

So we're looking at all of our business -- all of our businesses are that have not performed as well as we'd like, and looking to reduce the size of those businesses. If we can't grow our way out of the problem we're looking to reduce some of our exposure to certain clients, absolutely.

Okay. And then just last, numbers question. Tax rate going forward, it's been a little bit lower than the kind of 41, 42% rate, but is that still what you have going forward?

Yes, you know the rate this year came out to be 40.75, basically -- percent. And I think that -- somewhere between there and 41% is probably a good rate to -- for modeling purposes.

Yes. All right. Great. Thank you, gentlemen.

Okay. Thank you.

And our final question comes from Bruce Simpson, your line is open. Please state your company name.

Hi. Two part question. Hey, John, what do you think operating margins can get to at the end of this year, or the quarter, which I guess is third quarter, if you continue to have solid unit volume growth like this?

Yes, John Lamson's going to take that.

Bruce, how you doing? Well, for the -- if you look at the September quarter or the June quarter, past year, we were around 17% on a consolidated basis, operating margins. And I think we could get pretty close to probably 18.5, 19% maybe, depending on how the progress goes on weeding out some of these lower margin customers that we've got in the segments we just discussed.

Yes.

And a lot depends on what happens in volumes, but I think we can approach that.

Okay. And then my second question has to do with the subprime market. I know that within your lend -- I'm sorry, your dealer services and then again within Teletrack, and I suspect probably within some of your lender services, you got a pretty good exposure to the subprime market. And there's lots of media attention on that lately as delinquency rates pick up.

So, how are you seeing that impact your business? Is that built into any of what you're looking at for the year ahead?

Anand?

This is Anand, I'll take that.

Okay.

From a lender services perspective, I think what's going on in the subprime market might impact volumes, but I think that with what we are seeing with the non-traditional emerging markets, that would more than make up for the decrease there.

On -- from a lead generation perspective, and from a subprime credit bureau perspective, the current trends actually fuel growth for more transactions, because people do want to do a more underwriting in those markets. In the lead generation business this switches. If its -- it's more of a -- not necessarily a subprime loan market, it's more a micro-loan type market and the [Internet] lending is still pretty prevalent there.

Could you estimate how much of the lender service unit volume goes into subprime mortgages?

I don't have exact percentages, but it's very, very minimal. As we always talk about, our penetration with the top mortgage bankers, the top 20 is pretty high, and they're mostly in the retail side of the world.

Thanks, Anand.

Thank you, Bruce.

Operator, that concludes our call.

Thank you. You may disconnect at this time.