First Advantage Corp (FA) 2007 Q2 法說會逐字稿

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

(OPERATOR INSTRUCTIONS)

This call is being recorded, and will be available for replay from the Company's investor relation pages on their website at www.fadv.com, and through August 8, by dialing toll free within the United States 866-501-2958 or 203-369-1826 outside the U.S. 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 future cross-selling or getting growth in our segment, improved operating efficiencies, product line expansion and impact to offshoring effort on operating efficiencies, and other statements that do not relate strictly to historical or current facts.

Forward-looking statements speak only as to the date they are made, and the Company does not undertake to update forward looking statements to reflect circumstances or events that occur after the date the forward looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements.

Factors that could cause the anticipated results to differ from those described in the forward-looking statements include; 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 agree in 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 [consultative] 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 2006 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 2007. Following John will hear from Mr. Anand Nallathambi, President and Chief Executive Officer, who will provide us with an overview of First Advantage's 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. Our First Advantage reported net income of $18.3 million or $0.31 per diluted share for the second quarter of 2007, compared to income of $16.6 million or $0.29 per diluted share in the second quarter of 2006. Earnings before interest, taxes, depreciation and amortization, minority interest and share based compensation; adjusted EBITDA, was $48.8 million for the current quarter compared to $46.6 million for the quarter ended June 30, 2006.

Cash provided from operations was $26.1 million in the current quarter or 142% of net income. Capital expenditures were $11.6 million, resulting in free cash flow of $14.5 million for the current quarter. Service revenue, which excludes reimbursed government fees was $207.4 million, in the current quarter, compared to $191.7 million in the comparable quarter last year; representing an increase of $15.7 million, or 8.2%.

Operating income was $34.3 million in the current quarter, compared to $33.3 million in the second quarter of last year. For the six months ended June 30, 2007, net income was $29.6 million, or $0.50 per diluted share and adjusted EBITDA was $88.5 million. Results of operations for the quarter ending March 31, 2007, included severance costs of $8 million, or $4.7 million after tax, $0.08 per diluted share, relating to the transition agreement with John Long in March of 2007.

Excluding approximately $4.6 million of non-share based severance costs, incurred in the first quarter, adjusted EBITDA was $93.1 million for the six months ended June 30, 2007, an increase of 8% over the comparable period from last year. The consolidated operating margin was 16.5% in the current quarter, compared to 17.4% in the second quarter of 2006.

When comparing the second quarter of 2007 to the second quarter of 2006, operating margins increased in our data segment, our multifamily segment, and in our investigative and litigation support segment. Margins increased in the data segment primarily due to strong results in the membership services business, people locate business and in our criminal records business, and consistent margins in our other data based businesses within this segment.

Margins increased in the investigative and litigation support segment from 20.5% in the second quarter of 2006 to 23.4% in the current quarter, primarily due to higher margins in our electronic discovery business. Margins increased in the multifamily segment due to increased revenue from our renter's insurance program and expense reductions due to continued consultation and efficiencies.

Margins decreased in the dealer segment due to operational issues in the vehicle lead generation business. As we discussed in our last earnings call, we have taken steps to consolidate those operations into existing facilities and centralize management and operations.

The actual credit report volumes increased in the current quarter by 6% from last year and 4% from the first quarter of 2007. We originally expected the margins in this segment to rebound in the second half of this year. Based upon our current projection, it appears that the turnaround will be delayed with gradual progress over the second half of 2007.

The operating margin in the lender's segment decreased from 31.5% last year, to 27.3% in 2007. Revenue declined by 6% from last year, a rate which is less than the overall industry decline. Operating costs increased in connection with increased offshoring activities.

As we mentioned in our first quarter call, we are expanding our infrastructure in India, and the retention is tough due to a competitive market for talent in Bangalore. In addition, we increased our bad debt reserve in the current quarter in response to softening market conditions. The operating margin of 11.8% in the employer services segment was consistent with last year and an improvement from the 9.3% margin in the first quarter of 2007.

As we have discussed in the past, we are still in the process of consolidating facilities in operating platforms in our background screening business, where we have made numerous acquisitions over the past few years. Last week, we announced the closing of our Melville, New York location. We expect shutdown and severance costs associated with the closing and a few other smaller locations, to be in the range of $1.6 million to $1.8 million.

We are estimated that substantially all of those costs will be reflected in our third quarter operating results. We estimate that future operating results in the employer services segment will be improved by approximately $1 million a quarter, as a result of these location closings and more improved operating processes at our existing locations. These initiatives will commence in the third quarter and should be fully implemented by the start of the fourth quarter.

In the current quarter, interest expense decreased from $3.25 million in 2006 to $3.1 million in 2007 due to slightly lower average debt balances. The average debt outstanding during the first -- during the second quarter of 2007 was $203.3 million, compared to $218.5 million in 2006. The average interest rate on our debt was 6.35% in 2007 and 5.95% in 2006.

The company wide organic growth rate for service revenue was 4% quarter-over-quarter. Growth rates by segment are as follows. Lender services revenues decreased by 6.2%, data services had organic growth of 9.7%, dealer services growth decreased by 4.1%, employer services organic growth rate was 8.4%, multifamily segment was increased by 4.9% and our investigation and litigation support revenues increased by 22.6%.

In the employer services segment, product diversification along with cross-selling initiatives and geographic expansion drove the organic growth in the current quarter. [Foreign] background screening and the tax incentive businesses were the major contributor to the growth rate for the current quarter.

In the data service segment, the direct to consumer, people locate and our criminal data businesses were the primary contributors to the 9.7% organic growth rate. Growth rate in the dealer segment was impaired, due to reduced revenue and the aforementioned vehicle lead generation business. As I previously mentioned, the actual volume of credit reports increased by 6% from last year.

Growth rate in the investigative and litigation support segment was due to increased electronic discovery of litigation support services during the current quarter. The decline in revenue at the lender services segment is due to overall decline in origination volumes in the mortgage industry.

The multifamily organic growth rate was 4.9%. Revenue increased due to an increase in the number of new accounts, product expansion within those screening business, and increased ancillary revenue primarily is from renter's insurance.

At June 30, 2007, First Advantage had total debt outstanding of $194.8 million, including fixed rate debt of $19.2 million with an average interest rate of 5%, and variable rate debt of $175.6 million, with an average interest rate of 6.8%. Our available and unused line of credit was $71 million, and we had $29.8 million of cash at the end of the quarter.

Anand Nallathambi, our CEO, will now discuss the status of our current operations. Anand?

Thank you, John, and good afternoon, everyone. We're pleased with the results of the second quarter as we continue to see improvements in our cross-sell strategies and increased operating efficiencies overall. Our earnings per share were $0.31 for the second quarter of 2007, versus $0.29 for the second quarter of 2006. Service revenue in our lender services segment decreased slightly, year-over-year, in the second quarter of 2007.

The impact of continuing [pressures] in the sub prime market is starting to affect the overall mortgage market, and we are seeing credit underwriting criteria being tightened. Even though the outlook for the mortgage industry in the second half of 2007 looks to be signaling a softening market, we are still confident that we can continue to outpace market trends as we have in the past.

Our market share with the major market mortgage players has always enabled us to retain share better, in a declining market and we expect that trend to continue. We're also increasing our presence in the portfolio evaluations side, where the demand is higher due to current market conditions. Any contraction in the general market should also create the environment where lenders are aggressively looking at emerging markets where our offerings are unique and well positioned.

The data services segment had a strong quarter as service revenue increased nearly 10%. Our consumer membership services unit is having a banner year. The people locator business, criminal records and specialty finance businesses also continue to perform well.

In dealer services, our credit transactions continue to increase due to market share increase among dealers. You are familiar with our advantage position in the leading distribution channels in the industry. We are now expanding our reach amongst the independent dealer space, which opens up the used car market to us.

The overall margins in this segment were impacted by our continuing challenges with the lead processing operation. We had mentioned in our last call that we completed the relocation and management transitions. The top line is now being impacted by the slower market, subprime pressures, and is going to take the rest of the year to build the revenue growth to where we need it to be.

As I said before, the auto credit reporting revenue for the dealer services segment remains strong in the second quarter with an increase of nearly 9% over the same quarter last year. Employer services experienced a 23% year-over-year increase in service revenue for the second quarter, with excellent contributions from our international screening and tax consulting businesses.

The platform integrations are progressing well, and we have stepped up the consolidation efforts, as John had briefed earlier on the costs and expected future benefits. Streamline operations will provide us the solid foundation to consistently increase operating efficiencies, as we grow scale in many of our products in this segment. We continue to review options to improve the contributions from our occupational health group.

Our international screening division grew 17% from t he first quarter and margins improved by 35%. This growth is all organic, by the way. In the tax consulting business we're starting to experience the resurgence of margins driven by the pick up in the [WATCI] related businesses.

The multifamily segment posted a year-over-year increase in service revenue of nearly 5% as we continued to increase share. Revenues increased 12% from the first quarter as the second and third quarters usually represent the peak seasonality in the resident screening business. The margins also improve nicely from the first quarter.

Our investigative and litigation support segment had increases in revenue and margins, due to growth in the international litigation consulting area. This side of the segment grew 26% in service revenue in second quarter of 2007 compared to the second quarter of 2006. We're excited about the growth prospects in Europe and Asia for our litigation support services, and also for due diligence support services.

In closing, I would like to say that across the enterprise we're continuing to focus on cross-sell, organic growth and improving operating efficiencies. Our offshoring efforts are adding to the efficiency gains in our key segments. For example, part of the improvement in international screening margins is due to offshoring from expensive labor markets to the areas with labor cost efficiencies. We're also actively pursuing product line expansion through acquisitions where it makes sense.

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

Thank you.

(OPERATOR INSTRUCTIONS)

Thank you. Our first question is from Kyle Evans of Stephens. You may go ahead, please.

Hey, Anand and John. How are you?

Hi, Kyle.

Good, Kyle.

Could we talk a little bit about the lender services segment first? Can you first quantify maybe the subprime exposure there? Talk a little bit about how much of that segment comes from portfolio management today, and give us an update on pricing trends there.

First -- to talk about the sub prime pressures. I think we addressed it in the last earnings call too, we have taken a harder look at the subprime exposure for us, and we're comfortable to stay its in the low single digits as a percentage of revenue for us.

What we are talking about now and what we are seeing now is, the mortgage market -- we are seeing definite signs of a softening, and with the tighter -- current underwriting tight -- criteria, you're going to see the industry going into some sort of a contraction.

And its also not uncommon in a downturn -- in a mortgage market downturn to have higher debt -- bad debt -- slightly higher bad debt from clients who are not necessarily subprime but just go through some troubles.

In that low single digit number, is that -- that's your entire company or just in your lender services segment?

That's in our lender services segment.

And so, if you were to give me a total company exposure to subprime, would it --?

We are not -- we're not that connected to the underwriting market. As you know, we provide data and information products to the subprime industry. So there is some overall impact. For example, Bar None, part of the reason for the top line depression is because of the depressed sub prime markets out there. There is some impact in our LeadClick company, which provides lead generation. There is some impact from subprime, but not in a way that's direct or not in a way that's anything alarming to us at all.

Okay. And can you talk about how much of the lender services business is portfolio management today?

Very little. This is a new area for us, and that's why we're kind of excited about the portfolio evaluation. I'm taking your question to mean the portfolio review side of the business. Right?

Yes. Yes.

Yes, that's a new area for us. We were predominantly before in the origination side and that market is opening for us, and we're really excited about it. And part of it is because of our proximity and the familiarity and also sponsorships from First America, who has -- the [co-logic] segment has a lot of connectivity into the capital markets.

Okay. And lastly, on lender services. The pricing trends there -- have you seen any compression?

We're not seeing any major pricing -- price compression there. That's -- everybody is just trying to kind of -- there's definitely a [flight] towards quality and I think that bodes well for us in the future. And I think, there is definitely a rising demand in the portfolio side of the business.

In the employer services segment -- we're just off the Choice Point call not too long ago and they were -- they spent some time talking about pursuing opportunities in the middle market, which I would assume is kind of your bread and butter there in employer services. Have you seen any change in the competitive landscape in that business?

No we haven't. We are actually very upbeat and bullish about the prospects for employer services.

Okay. Lastly, and then I'll get back in queue. Can you -- last I remember talking about Bar None, I was kind of thinking about that as a fifth of the dealer services revenue, roughly. Is that still and accurate --?

Yes, that's a -- that's pretty close Kyle. Yes.

Okay. Thanks. I'll get back in queue.

Thanks, Kyle.

Thank you. Our next question is from a Colin Gillis of Canaccord. You may go ahead please.

Yes, good afternoon.

John. Colin, how are you? Great. Can you just talk on the international side? Just give us what that revenue number is, and are there any other targets you see out there in terms of screening that are attractive?

I'll talk to -- John's looking at the numbers, but I'll talk to the opportunities. We are continuing to look at opportunities. I think we have an excellent footprint in the Asian market and that growth has been very good. And I think the acquisitions that we made in Australia last year is starting to pay really big dividends for us.

And I mentioned about how we are even offshoring between our international segments, we are now processing work for our Australia and New Zealand subsidiary out of our -- development center -- offshore development center in Manila. So things are going well. We see Europe as a really big market for us. That seems to be the immediate target of growth, UK and Western Europe.

Got it. And then on that Manila topic, I wanted to ask you if you're going to be moving some internal back office operations over there as well, and what you see that headcount being maybe at the end of '07 or the end of '08? Whatever color you can give in terms of that.

It is an increasing number. We dong have an exact number on exactly what the headcount is going to be, but the last time I talked to our offshoring guys they said that we are ahead of plan, actually. And that's going to be a key piece of our back office operations. Strategy wise.

So, internal back office operations that would allow for some --

[Should see] gains. Yes.

Suspension of margins. Okay, great.

Colin, this is John. The foreign service revenue in the second quarter for the employer piece is $9.8 million.

Okay, got it. And then just -- are you still comfortable with your 2007 EPS guidance of $1.18 to $1.24 ex charges?

Yes, we established our guidance last year, and so far we are exactly where we thought we would be. Obviously the mortgage market volatility is a concern to us and something that we need to really watch over the next couple of months. But at this point, like I said, we're where we thought we will be so we've got to wait and see.

The market conditions are not surprising you.

No. We kind of expected this. There's some negatives in the marketplace, but we're also seeing some positives in the portfolio review areas and stuff. So it's a wait -- we are in a wait and see mode for the next couple of months to see how the third quarter shapes up.

Great. Thank you.

Thank you. Our next question is from Mark Marcon of RW Baird. You may go ahead please.

Good afternoon, Anand and John.

Mark, how are you?

Hi, Mark.

Good. With regards to employer services, obviously impressive growth. What was the domestic growth in the ES side, and where are you seeing that coming from? Is it from winning new RFPs? Are you doing more screens per client? How are prices trending? What sort of color do you have there?

Let me address where our focus has been and where we're seeing a lot of the contract wins. Obviously we're trying to kind of focus on our client base and trying to go after enterprise level sales, and we have had some really good successes with the sales unit targeted at the higher end of the market.

We're also seeing a really good cross-sell success this year. Last year, I think we believe we had about $13 million in cross-sell for the year. I think at this year, for the first half, we're at about $8 million. So as you can see, we're ahead of last year's trends.

And do you have a number in terms of what the domestic growth was?

The domestic -- the organic rate, quarter-on-quarter domestically, is about 5%.

Okay.

On the domestic front. That's just the background screening.

And are you seeing -- are you seeing price increases or number of -- what sort of trends are you seeing within your existing clients?

I think it is -- the U.S. market is always a very price competitive market. To some extent, the basic services are obviously being -- rapidly being commoditized, which is one of the reasons we kind of go after product extensions where we focus more on talent acquisition and hiring solutions, things of that -- products of that sort. But I -- we don't necessarily see a major change in the environment.

Okay. Great. And with regards to lender services, how would you view the second half of this year in terms of the way that that could end up looking, relative to what you ended up doing this last quarter?

It's a question mark at this point. Like I said before, the next two months -- next couple of months will really give us a feel for where we are -- where the market is headed. One thing is for certain, we're going to outpace our competition as we have in the past. We don't have any doubts about that.

The issue is exactly how big the market is going to be and what our sharer is going to be. In the -- and also this additional rising demand in the new areas of portfolio review. What's that going to happen?

And its kind of tough to say right now because at some point -- there's some sectors of the industry they say that this is all going to work out and if you look at the ten year treasury yields, they're not out of whack, they're still in a pretty attractive range. So it's just a question of trying to see where the origination volume is going to come in.

I mean, if the people over at like CountryWide are correct, that this is going to take a while still to unwind. How would that play out, vis a vie, we keep hearing stories about people at the lower end who are having a difficult time in terms of getting approved and therefore are applying to multiple sources? Just trying to -- I'm wrestling with that aspect of it in terms of --

If there's -- as you just -- in that example that you just talked about, if there is increased foot traffic between lenders, we stand to gain because of it because of our market share. If there is -- in other words, if there is five applications printed out to close one loan, you can just kind of multiply that by our market share, and that goes to ten apps for loan you can see what will happen to us.

But the issue is most of the lenders, like you talked about, have huge production capacities built up over the last few years and contracting it to fit to the flow now is going to be a tougher thing. I think I see that as more of a transitionary issue for a lot of them. I'm not sure how that relates directly to the market in terms of foot traffic or the closure rates.

So, if you were to be around the same levels -- last year in lender services we had a slight sequential decline from Q2 to Q3, and then, obviously, seasonally we have a decline going into Q4.

If we think about that sort of being the seasonal pattern -- and obviously there's all sort of market related factors that we haven't seen in a number of years, maybe even decades, that are occurring in this market. How should we think about your profitability levels in this segment? What sort of levers do you have to control the possibility?

The couple of things that we look at is obviously, we are trying to get ahead of the curve and to make sure that we automate processes, we look to offshoring where we can improve our margins. We're looking also at this new area that heretofore has been not a big area for us as a growth area, which is the portfolio evaluation side.

And if you look at those kind of things, you're talking about -- portfolio review is a product that doesn't have any labor overhang to it. We do the analysis, we compile the reports, we send it back to the capital market's client, and there's not a lot of customer service attached to it. There's not a lot of -- consumer dispute attached to it.

So it's kind of a new phenomenon. So that's one of the reasons we're kind of grappling with it, to say, we like the fact that we have -- we see an area with rising demand and we are perfectly positioned for it. Exactly how that will turn out, it is too early to tell.

Yes.

And, Mark, this is John. You're always going to -- at least historically, the credit business -- that seasonal climb you alluded to in the fourth quarter, there's really no reason to think that that won't be there also.

Okay. Great. I'll follow up more a little bit later. Thank you.

Thanks.

Thank you. Next we have Nat Otis from KBW. You may go ahead, please.

Morning, and good afternoon, gentlemen.

Hey, Nat.

Thanks, Nat.

Hey, a couple questions and they're kind of follow up questions. First, you talked -- you kind of talked about the lender service segment a lot, but -- and you always seem to talk a little bit about operational efficiencies helping you through what's kind of a softening market. At what point in time do you run out of levers to pull?

I think actually this is the first time we were excited about a new growth area.

Not necessarily -- certainly the new growth area, but I mean just certain -- in your basic business. I mean you've obviously been doing a great job of managing through the cycle, but I'm just getting an idea of -- are there still other ways you can become more efficient in that segment?

I think so. I think we can. I think we also kind of try to look at ancillary products and see where they could, because most of the ancillary products, like fraud and ID protection and things like that that today go along with the report carry higher margins.

So I'm not here to say that there -- forever we could kind of focus on cost efficiencies and improved margins, but we try to supplement them with other things that would make the credit report a fully bundled product with other key things that the lender is looking for. And that is one key area where we're hoping we'll keep the margins up in a very comfortable range.

Okay. Okay. Fair enough. And following up on your commentary on the screening business and maybe seeing competition there. I think on that earlier call they also talked about expanding into the international segment and even specifically into the UK market. Not necessarily in the marketplace, but just for acquisitions or possible acquisitions, have you seen maybe an increase in people out there looking at deals?

We do hear about some people looking at deals. But here is how I size up the international market for us. The -- the growth that we have received -- obviously, the main products, the background screening and stuff is always there.

But in the international market it's always fed by some other product leading into the background investigations market. So a competitor to us can come in and go and buy a background screening market. That's not where the market -- demand is driven. It's usually driven by our hiring solutions group going in there with their application tracking system, getting the people to sign up with them on the front end, and then provide the back end verifications.

So if they're going to have to really effectively compete with us, I'm not trying to give them a cookbook to compete with us, but to effectively compete you're going to have to buy more than just background screening companies internationally.

Okay, great. And just last question. In the past you've talked about the drug testing business, and trying to figure out a way to maybe get it off, at least remove the margins from the segment. Is there any movement on what you're doing there, and progress in possibly moving the margin off?

Yes. We are reviewing it. We are looking at options. We know it is a very key product for us, so the client facing activities and stuff, we need to be involved in it. We are -- we are in the process. Lets put it that way. We don't have anything to report yet. We're hoping to report something soon.

Okay. Thank you.

Thank you. Our next question is from Kevane Wong of JMP Securities. You may go ahead, please.

Hey, guys. How are you doing?

Good, Kevane.

Hi, Kevane.

I guess, following everyone else's lead, on lender services, just trying to get a little sort of quantification help so I can understand sort of the downside here. I think last quarter there was a reserve that was taken.

I think you mentioned in the first part of the prepared statement something about increasing the bad debt reserves again in the quarter. Looking at sort of historical trends when markets have gone down, is there some sort of a -- some sort of quantification you can help us get as far as what is sort of the risk on the down side to this, as far as on the operating margin and as far as growth?

Outside of a slight depression -- I mean a slight increase in -- in the past cycles, in the down cycles we have seen that bad debt tends to be a little higher than usual, and that is a fact that is based on the economic trends out there. So we are just kind of trying to be prudent and trying to get ahead of the curve.

At the same time, we're not necessarily saying that this is going to b e a problem for us. We're really focusing on the clients and watching the day sales outstanding and individual customer performances and their volumes. This is just -- we have seen this market ups and downs for a long time. We're just kind of being more cautious and prudent I guess.

I think maybe -- and I don't know if you want to give an exact figure. But if you're looking at sort of your bad debt reserve levels in this quarter versus sort of where its gotten to in bad markets, I mean, is there sort of quantification you can give us? Or for example, it might be 1% of -- that you're reserving against, maybe in the past it's gone to like 2%. Can you give us some sort of quantification to just get a feel there?

Yes, Kevane, it really just depends on -- there's like general reserves established, and then we did have a few -- what were, for the most part, subprime lenders who had minor amounts outstanding due. So it's not a large amount of dollars we're talking about in the segment.

It's pretty hard to generalize on it. Its just kind of as -- in an environment like this, as specific accounts head south, you just try to watch them closer. And what we've done now that we've been kind of into this for at least three or four months on this subprime issues that are floating around, you're just a little more selective in who you're doing business with.

Got you. And maybe a different angle is, for the quarter what was the -- what was sort of the impact of increasing the bad debt reserves in the quarter? Did it change the operating --?

It was about $400,000 --

margin by like 50 basis points or something?

About $400,000.

Okay, so not a huge number.

Not a big number. No.

So you can kind of take a look at our revenues and its not [different].

No.

Got you. And also just maybe a little broader question. If I'm looking at just a number of the segments in general, sort of lender, data, dealer, employer services -- internal growth has come down sequentially on those and I can probably just -- in sympathy you also have that same element on operating margin that's hit them.

Is there sort of a sweeping broad thing that's hitting these guys, really all sort of operating segments specific? Just trying to get a sense if there's more of a larger sort of theme that's occurring or is it really just sort of segment by segment?

No. This is John. I think it's really, if you're looking at Q1 versus Q2, you said sequentially. Yes, I mean a lot of it, the lender business, as we alluded to, is just a down turn in the second quarter from the first, where we were down about 6% sequentially. The data services business is down about 3%. But that's pretty volatile in terms of first quarter, second quarter.

So that can fluctuate anywhere from 3% to 5% either way. And the dealer business was -- essentially flat for reasons we've talked about on the regeneration side of the business. On the other side, the employer business was up 5% sequentially. So in multifamily, which is seasonal, more so than the other segments, was up 11%. So, I think it's really a kind of a segment-by-segment story, not necessarily some pervasive reason.

Got you. And I'll give you a -- throw out an easy one. Tax rating looks like it's higher. Should we be expecting like a 41% tax rate for the second half of the year?

About 41 is what it looks like it's going to be, yes.

Okay, great. Thanks, guys.

Okay.

Thank you. Next we have Jess Kessler with Lehman Brother. You may go ahead please.

Hi this is [Mono] for Jeff. Just a few quick questions. First, on the whole cross-selling initiative, which is obviously an important part of your story. Do you guys quantify how much dollar value of cross-sell you got -- lets say domestically and internationally? And can you give us some color as to how much you see that increasing going forward as you improve the cross-selling between the divisions?

We don't -- first, the answer to the first question is, we do not separate it domestically and internationally. The second one is, outside of the fact that we want it to be higher, and like we mentioned earlier, we're on a higher plane than where we were last year and we just want to continue to improve.

And I think as we also work into the segments and streamline the workflow and improve the operating efficiencies and things of that nature, that would just only increase the rate with which we are able to cross-sell. One of the areas that we see that is really a potential area for us to have a lot of cross-sell is in the financial services area, because most of our lending services clients are now really looking for employment services solutions and I think that bodes well for us because these are big employers and could be high -- heavy targets for us.

Okay. And I'm sorry if I missed this, but could you give me like the first half of '07, your international revenues and sort of the organic growth rate in international?

Yes, the revenue for the second quarter in the employer services space was -- foreign revenue was $9.8 million, and it was $8.3 million for the first quarter. And in the investigative unit, with support where we have some overseas operations, it was about $6 million in the second quarter. The -- and then we've just commented on the overall employer services organic growth rate of 8%.

Okay, and I guess final question, the EPS guidance and revenue guidance, that remains unchanged or is there any sort of inclination towards the lower or middle end of the range?

We already commented on the EPS guidance. It's -- we're about where we thought we were going to be now, but the reality is it is -- the mortgage market and its pretty volatile out there right now. So we're just going to have to wait and see where we come out on the third quarter.

Okay. All right. Thanks a lot, guys.

You're welcome.

Thank you. Our next question comes from Brian Ruttenbur of Morgan Keegan.

Hi, you guys.

Hey, Brian.

Hi, Brian:

Hey, so I just want to be clear on the revenue and earnings guidance. There no longer is any revenue or earnings guidance? You've retracted that?

Yes. We're not giving any more new guidance on the quarterly.

Okay. So the old guidance that you have, you're taking that away.

Yes, what we said was -- no, we didn't say that. What we said was we're about where we thought we would be. We gave that guidance back in November as you know.

Right.

4/07. We're about where we thought we we're going to be, after we're halfway through here. But we're really going to have to -- it's a volatile market out there, especially on the mortgage side. So we're just going to have to wait and see what happens in the third quarter.

Okay. Very good. That was my questions. And -- well, actually I have one other follow up, in terms of seasonality, third quarter is typically very seasonally strong. Is there any indication that you have right now that third quarter won't be seasonally strong?

No.

No.

Not at this point, no.

Nope.

Okay. Very good. Thank you very much.

Okay.

Thank you. Next we have Mark Marcon of RW Baird.

Just a quick follow up to that last question, in terms of the seasonality, last year lender services did fall off a little bit in the third quarter. Would you not expect that to occur again, or do you think it could pick back up?

Mark, right now, like we said, we are -- we do have some good wins in the portfolio review side and we are still in negotiations with a lot of lenders in the capital market side, and so combine that. And then also, it's really early in the third quarter from a volume standpoint.

We are not seeing as much as a down turn as what we are hearing in the marketplace, and its difficult for us to say what will be our experience based on the -- what we are hearing in the marketplace. So we're kind of really trying to kind of figure out where things will be in the next 30, 45 days, before we come up and say all right this is where we think we'll be headed.

Can these portfolio review wins be fairly significant? Could they be multi million dollar type of deals?

I can't -- these are almost like in process stuff and I can't comment on that at this point.

Okay.

But you can assume that you're talking about capital markets type of players. So it's not smaller.

It would be material if you ended up getting a decent sized one there.

Potentially.

Yes.

Potentially.

All right. And then, just to step back a little bit. Anand, when you first came on, clearly we're seeing a bit of a strategic shift, less of an emphasis with regards to acquisitions and more with regards to integrating operations.

And I'm just wondering if you could give us kind of your perspective in terms of where we stand in terms of ultimate -- relative to where you ultimately would like to get the company in terms of integration of the operations. How far along are we in that process? What should we expect as we look out over the next six months to a year in terms of progress on that front?

Yes, I like acquisitions and we continue to look at product line extensions. I want to make sure that our acquisitions follow a very strict discipline pattern. We know that we are very good in credit related underwriting products. We know that we are really good in employment servicing -- employment screening type products. We know we can -- we know how to handle transactional type businesses.

So, we kind of look in that area and then we kind of see if our businesses have the scale and we have the proper foundation to really take advantage of these operations. So if there is any reprieve, what we have done, as you can see, that we have done a lot of integrations and consolidations and stuff. Those things are continuing at almost a faster pace now.

And we really do want to do some acquisitions because we feel like that will continue to be a key part of our strategy. It just hasn't panned out yet. We have -- in other words we haven't stopped looking. And we have been looking, I just -- maybe like I explained what's our acquisition criteria has been, I just talked about it. We've been looking at that and we just haven't hit upon the right spot yet.

Okay and then, so -- are you -- in terms of not seeing anything, is it because primarily the prices are still too high, or there's nothing that fits?

In some areas the prices are still too high, and in some areas we kind of feel like it would be good to get our -- some of the product line -- the streamlining and the consolidations done so we can properly integrate them faster.

Okay. And how far along are we in the consolidations? Or, when would you expect them to be completed?

A while back we laid out a target like we would be in that kind of a mode until maybe the first quarter of 2008. And I think we are actually doing really well. Our offshoring, as I explained, is ahead of plan on -- as far as the number of jobs and where it's coming from and how we're doing it.

So I think, we're still in that time frame but that's -- I wouldn't necessarily say we'll wait to do an acquisition until that time. We're continuously looking. If we find the right asset and it's in -- the proper fit and the valuations are right, we'll pull the trigger.

Great. Thank you.

Okay.

Thank you. And our last question comes from Kyle Evans of Stephens. You may go ahead please.

Hey, guys. One quick follow up. The -- it looks like some -- you guys had some nice wins in the discovery piece of the investigative and [litigative] support segment. How should we be thinking about that going forward? That's fairly lumpy revenue if I'm thinking of that correctly.

It's also a segment that's a very hot market. We're also looking at it to see what do we do, where the industry is headed, and can we continue our competitive advantage and it's a process. In the meantime, we like what we're doing in Europe and Asia, and we like what we're doing here and we're enjoying the wins.

Okay.

All right?

Thanks, guys.

Thank you, Kyle.

Thank you.

Okay.

Thank you. And that does conclude today's conference call. You may disconnect at this time. Thank you for your participation.