First Advantage Corp (FA) 2007 Q3 法說會逐字稿

Thank you, all, for holding and welcome to First Advantage Corporation's Third Quarter 2007 Earnings Conference Call. All participants will be in a listen-only mode until the question and answer session of today's call.

This call is being recorded and will be available for replay from the Company's Investor Relations pages on their website at www.fadv.com. And through November 7th by dialing toll-free within the United States 1-800-253-1054 or 203-369-3219 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 the impact of liquidity on the mortgage market in the next few quarters, the ability of the Company to execute on platform consolidation and systems integration, fourth quarter results, 2007 earnings guidance and other statements that do not relate strictly to historical and current facts.

The forward looking statement speaks 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 and 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 2006 annual report on form 10K 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 2007. Following John we will hear from Mr. Anand Nallathambi, President and Chief Executive Officer, who will provide us with an overview of risk management strategy and operations. At this time, it is my pleasure to turn the call over to Mr. John Lamson.

Thank you, Cindy, and good afternoon, everyone. First Advantage reported net income of $19 million, or $0.32 per diluted share for the third quarter of 2007 compared to income of $18.6 million, or $0.32 per diluted share for the third quarter of 2006.

Results for the current quarter include a pre-tax charge of approximately $1.7 million, or $0.02 per share incurred in connection with the closing of certain duplicate facilities in our employer services segment.

Excluding this charge, which we previously discussed in our second quarter earnings call, earnings per share grew by 6.3%. This growth came despite the substantial decline in mortgage originations and disruptions in the credit markets that occurred at the end of the second quarter. This, of course, negatively impacted our lender services segment and our lead generation businesses.

Our other segments were not adversely impacted in any significant way by the disruptions in the credit markets and performed exceptionally well.

Earnings before interest, taxes, depreciation, and amortization minority interest, and share based comp, adjusted EBITDA was $48.6 million for the current quarter, compared to $47.3 million for the quarter ended September 30, 2006.

Cash provided from operations was $38.9 million for the current quarter, 205% of net income. Capital expenditures were $9.6 million, resulting in free cash flow of $29.3 million for the current quarter.

For the nine months ended September 30, 2007, cash provided from operations was $90 million and capital expenditures were $31.5 million, resulting in free cash flow of $58.5 million. Free cash flow for the comparable period in 2006 was $41.7 million.

Service revenue which excludes reimbursed government fees was $205.3 million in the current quarter, compared to $198.6 million in this same quarter last year. Operating income was $34.6 million, including the $1.7 million charge in the current quarter, compared to $34.1 million in the third quarter of 2006.

For the nine months ended September 30, net income was $48.5 million or $0.82 per diluted share and adjusted EBITDA was $137.1 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 we entered into with John Wong in March of 2007.

Excluding approximately $4.6 million of non-share based severance costs incurred in the first quarter, adjusted EBITDA was $141.7 million for the nine months ended September 30, 2007, an increase of 6% from last year.

The consolidated operating margin was 16.8% in the current quarter, compared to a 17.2% operating margin in the comparable quarter of 2006. The consolidated margin was 17.7%, excluding the impact of the $1.7 million charge.

When comparing the third quarter of 2007 to the third quarter of 2006, operating margins increased in our multi-family segment, our investigative and litigation support segment, and in our employer services segment, excluding the $1.7 million charge.

Margins substantially increased in the investigative and litigation support segment from $18.6 million -- I'm sorry, from 18.6% in the third quarter of 2006 to 39.4% in 2007, primarily due to higher margins and revenue growth in the litigation support business. Continued growth in our international operations was the primary source of the revenue growth. Revenue from international operations in this segment was $14.4 million in the current quarter. The organic growth rate was 92%, quarter over quarter.

Margins increased in the multi-family segment due to increased revenue from our renter's insurance program and increased screening volumes and expense reductions due to continued consolidation efficiencies. The market remained strong in the residential rental space. The organic growth rate for this segment was 5.8%, quarter over quarter.

Margins increased in the employer services segment from 11.1% in 2006 to 14% in 2007, excluding the aforementioned $1.7 million charge. We continued to consolidate platforms and streamline operations to operate more efficiently. In addition, international operations, primarily in Asia, continued to experience high growth rates and expanding margins. Revenue from foreign operations was approximately $12.5 million in the current quarter, compared to $5.9 million in the third quarter of 2006.

Product expansion, including our tax incentive business and hiring solutions group, contributed to the margin expansion. The organic growth rate was 5.8%, quarter over quarter.

Margins decreased in the dealer segment due to previously discussed operational issues and current market conditions in the vehicle lead generation business. The actual credit report volumes and related revenue increased in the quarter by 4% from last year. Sequentially, the margins in this segment increased from 12% in Q2 2007 to 14.5% in the current quarter, approaching the 15% margins that are customary for this segment.

We have made significant progress on the operations front, as evidenced by our sequential margin growth. Revenue was down 10% in this segment. The operating margin in the lender segment decreased from 33.3% last year to 19% in 2007. Revenue declined by 20% from last year. The change in revenue reflects the overall decline in mortgage originations resulting from the current economic issues in the credit markets and housing markets.

In addition, bad debt expense increased from $200,000 in the third quarter of 2006 to $1.1 million in the current quarter as a result of collectibility issues with certain sub prime lenders and smaller, traditional lenders. Anand will discuss the current conditions in this segment from an operational standpoint, the steps we have taken to deal with the reduced volumes.

Decline in lead generation revenue of 28% from last year, primarily in subprime related verticals, and a 9% decrease in revenue in our specialty finance business, were the major factors in the 5.4% decline quarter over quarter in our data segment revenue. Margins in the segment declined slightly from 27.7% to 26.3%, quarter over quarter.

Improved performance in our direct to consumer, criminal records, and transportation businesses offset in part the reduced volumes in the lead generation and specialty credit businesses.

For the quarter, interest expense decreased from $3.3 million in 2006 to $2.6 million in 2007 due to lower average debt balances. Average debt outstanding during the quarter was $182.7 million, versus $221.5 million in 2006. The average interest rate on our debt was 6.7% in the current quarter, compared to 6% in 2006.

At the end of the quarter, September 30, 2007, First Advantage had total debt outstanding of $170.6 million, including fixed rate debt of $16.1 million with an average interest rate of 5% and variable rate debt of $154.5 million, with an average interest rate of 6.7%. Our available and unused lines of credit was $90 million at quarter end and we had $33.7 million of cash.

On October 10th, we sold the US Search.com business for cash proceeds of approximately $24 million. As we have discussed in the past, this is the Company that we acquired in a reverse acquisition, principally as a means to go public. While it is a good business, it was not strategic to us and thus the sale. The resulting gain, after tax, is approximately $12.2 million, or $0.21 per diluted share. This, of course, will be booked in the fourth quarter.

We just closed on the sale, and announced this morning, of 2,875,000 shares of Dealer Track, common stock resulting in cash proceeds of approximately $81.6 million, after taxes and a booked gain after tax of approximately $56.7 million or $0.96 per diluted share.

We continue to own 2.5 million shares, or approximately 6% of DealerTrack. Those shares will be carried on our books at approximately $10.55 per share. As a result of our decreased ownership percentage, we will cease using equity accounting and use the cost method of accounting going forward.

Due to the fires in San Diego, Anand, our CEO and I are -- are at two different locations today. Please keep this in mind during the Q&A session. We may not be as coordinated in responding to your questions as we would like to be. Thanks in advance for your understanding and cooperation. I will now turn it over to Anand, who will discuss the status of our current operations and our strategic objectives. Anand?

Thank you, John, and good afternoon, everyone. Our third quarter results demonstrate the diversity in our business segments and the counter cyclically in the industry verticals we serve.

While our mortgage and lead generation businesses undergo market pressures, the data, employer and litigation support businesses accommodate the need for stepping up and delivering great results.

The mortgage market has been a challenge recently for everyone, and although we continue to outpace our competition, the lender services segment was impacted by the market environment. The revenues in our lender segment decreased by 20% in the third quarter when compared to 2006.

The current mortgage market have pressured Tier 2 competitors in the 40% to 60% range in terms of revenue declines and we're seeing this trend as an opportunity to increase market share. Based on past experience, this is also an environment that fosters industry consolidation.

From an operational standpoint, in a down market, we keep our focus on one key metric, reports for employee. At the end of the third quarter, it was at 13.3 compared to 11.85 in the same period of 2006. When volumes are down, its time to stay lean and stay ahead of the downturn by reducing staff and cutting expenses. In aggregate, our mortgage operations staffing levels are down 35%, compared to a year ago.

Our data services segment saw a 5% decrease in service revenue in the third quarter, primarily the result of a decrease in sales in our lead generation and specialty credit reporting businesses. The impact of the credit crunch has affected sales in these two businesses.

Our membership services and criminal background data businesses experienced good growth in terms of revenue and profitability. Service revenues in our dealer services segment declined by 10% year over year. While our automotive credit business continues to grow, despite market challenges, our lead processing business continues to be negatively impacted by the overall lead generation and sub prime markets.

As we have discussed on previous earnings calls, we're continuing to make progress in this area from an operational infrastructure side, but with the current market conditions our top line growth has been under pressure.

In the auto credit business, we continue to make inroads into the independent dealer space, expanding our presence into franchise dealerships. The credit related revenues in the automotive space increased by 4% in the third quarter of 2007, compared to the same period in 2006. The number of active accounts in the third quarter of 2007 was about 11% higher than the same period in 2006.

Employer services experienced a 10.5% year over year increase in service revenue for the third quarter with excellent contributions from our international screening and tax consulting businesses. In addition, we have also seen an increase in the foreign portion off our hiring management solutions business.

From an operational perspective, platform consolidations and system integrations continued to progress on plan. We're seeing improvement in the operating margins of our occupational health group as we continue to analyze our customer base, product profitability and their usage of other product offerings in this segment.

As I mentioned earlier, our international screening division has done exceptionally well, increasing service revenue by 119% in the third quarter, year over year.

The multi-family segment posted a year over year increase in service revenue of nearly 6% as we continue to increase market share. As we mentioned in our earlier calls, the second and third quarters usually represent peak seasonality in the resident screening business. Margins also improved nicely year over year, reflecting a 16.4% increase over 2006.

The slow down in the mortgage market also increases the demand for resident screening business. Our investigative and litigation support segment had significant increases in revenue and margins during the third quarter, aided by explosive growth in projects around Europe and Asia, we saw a 96% increase in service revenue during the third quarter.

Though the revenues in this segment are more project based, professional services, we are excited about the fact that the serve in revenues and margins are coming from same store sales. We continue to seek new opportunities for growth in Europe, Asia and the UK for our litigation and due diligence support services.

As John discussed earlier, we recently sold a U.S. search business and a portion of our shares in DealerTrack. We have been going through an organized process of looking at our portfolio of assets. The U.S. search asset, while a great business was not core to our offerings.

In terms of DealerTrack, over the last few years we have built a strong relationship between our two entities which gave us the luxury to look at the stock ownership from an investment perspective without impacting the operational and strategic alignment that has been built. As we go through a strategic review of our core competencies and the alignment of our various assets, we felt that it was a good time to take advantage of liquidation opportunities to substantially improve our balance sheet.

As we have stated before, our priorities have been focused on executing well operationally and also looking into strategic growth options for the future.

Our core competencies, in our minds, are as follows. Number one, we specialize in employment related and credit related screening services. Number two, our infrastructure and personnel are highly skilled in growing and operating transaction oriented business models which can leverage data and scaled related efficiencies.

If what we do centers around these principals, we have a great opportunity to build industry leading companies that dominate their verticals. It has worked well for us so far and we're confident to continue down that path in the newer industry verticals we are in. that's the plan.

Finally, we want to provide some commentary for earnings outlook for the fourth quarter, mainly due to the uncertainty surrounding the lending and the lead generation markets. Our EPS through the first nine months is as reported, $0.82 per share, which includes the impact of severance of $0.08 in quarter one and shut down costs of $0.02 in quarter three. Excluding those two events, we are at $0.92 per share, just where we thought we would be when we prepared the 2007 business plan. Our original guidance for 2007 was $1.18 to $1.24 EPS.

In the mortgage and lead generation areas, we could see a deeper trough in the fourth quarter because of the flat trends felt in October. The increase in margins in multi family will continue, but their normal seasonality is a low fourth quarter.

We are indeed headed for another strong quarter in our litigation support area and an improving trend in our employer services segment. Our fourth quarter expectations put us at the low end of our original guidance for the year. This, of course, excludes the impact of Q4 EPS of the [apid] dispositions, namely U.S. Search and the sale of DealerTrack shares.

In closing, I'd like to point out, given the magnitude of the macroeconomic events of the second half of 2007, we are extremely pleased with our financial results and our competitive positioning in the markets that have seen quite a bit of turmoil. We are well positioned for 2008 and beyond. At this time, I'd like to open the call up to questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question will come from Kyle Evans of Stephens Inc, your line is open, you may ask your question.

Hey guys, this is Neal for Kyle.

Hey, Kyle.

Hey, Kyle.

Could you guys talk a little bit about why the operating margins in the lender services were so weak this quarter?

John, let me take that.

Okay.

Kyle, first of the -- obviously the revenue was down quite a bit in the third quarter and what we noticed in the past down turns, it was only a volume related issue and we do much better than everybody else, and like we mentioned a while back our 20% compares to like 40% to 70% in some cases with Tier Two competitors out there.

What was different this time was the lack of liquidity and the credit crunch. Which really meant that there was a lot of bad debt. In other words, these are people that came out of the blue, that they couldn't close loans and they went bankrupt or just closed shop. So these were accounts that were really current until they went bad. That was a big piece of the margin variance.

Okay. And then could you guys also talk a little bit about the growth in the investigative services, the litigation business, was there any one large contract there that led to the increase in revenue in that business?

I don't -- I wouldn't say there was only one large contract. Obviously in that business, the top 10 clients contribute about 80% of our revenues, but it was mostly geographically spread. I've talked to the people there and my understanding is that from where the -- the nature of the contracts are there were a lot of contracts that -- and engagements that we signed on in spring that were delayed and we're seeing an influx of activity, that actively now and also the spread in geography in Europe and Asia and we're told now in the fourth quarter we're also increasing this by adding two more geographies to the existing relationships that we have.

That should be fairly stable then it sounds like.

At least over the near -- yes, the near term. It seems to us like its going to be really good for us. Yes.

Okay. Good. And then lastly, and then I'll get back in queue, now that you guys have sold a portion of Dealer Track, what are you guys planning to do with those proceeds.

We've --

Anand, I can take that one if you'd like.

Sure. And I'll follow up later.

Okay. Initially, what we're going to do is pay down some of our line of credit because that's the really the best return we can get on a very short basis for the funds that we received. Certainly, and Anand can expand on this, but we certainly are excited that it gives us obviously more ammunition a we look for potential acquisitions down the road, given us more cash obviously and more lending capabilities. Anand, would you like to expand on that?

Yes, I would. Kyle, we have been looking at a lot of different options for us. We've been looking at our portfolio to see what's core and what's non-core and you're seeing some of the activities coming up now.

In DealerTrack, I already explained, I really see that we have built a lot stronger relationship with them that we had the luxury to look at it as an investment option and we felt like with where the stock was it was a great option for us to kind of liquidate a piece of it. It is still a strategic asset.

But as far as what are we going to do with the proceeds? We've been looking at a variety of options to extend or add to our product line, strengthening our employer segments front end services in talent acquisition and hiring solutions, unique data and analytics, and taking advantage of consolidation opportunities are all possible avenues. So we're looking at all of them and the good thing is having the ability to go now shop is exciting. We just want to make sure we're disciplined in how we execute that growth strategy.

Okay, excellent. Thanks guys.

You're welcome.

Thank you. Our next question is from Jeffrey Kessler, of Lehman Brothers. Your line is open. You may ask your question.

Thank you. With regard to --

(inaudible)

Hello. Yes. With regard to investigation and litigation support services, just a follow up on that. Are -- do you know, from the accounts or from the -- from the folks that you deal with, whether or not there were any cross selling opportunities that were taken here? I mean the growth was -- the growth is good enough that it seem that it probably -- there is likelihood that leads came from, perhaps, other sources inside of First Advantage and not just inside of the investigative and litigation support services group.

There is -- we're always looking for cross sell opportunities, Jeff. The spike or the good surge in volumes and margins are common, not necessarily because people are just using one particular service from us, in - for example, electronic discovery. It's across a wide range of products and services that we offer. And also the ability for us to go across multi-lingual capabilities and to add the computer forensic has been a big boon for us.

Okay, can I ask a question about your international business, particularly quest and India, obviously you have fairly large growth there. At what point in time do you see this beginning to actually really move the needle in your results? Obviously it had some impact this quarter, but what I'm looking for is when it has perceptible impact.

I think 2008 would be the year because we just came back from spending some time in the UK we really looked at the -- what they call the EMEA region, Europe and middle east and Africa region and in international we have a really good footprint and we're looking at opportunities to even grow our presence there.

So I really believe that 2008 you're going to see that becoming a considerable piece of our operations and we're looking for some exciting opportunities there. There could be also some assets there that really make sense in addition to our product line.

Okay. One final quick question, that is -- I know from talking to both [Kroll] and Choice Point, there are demands for them on the part of their larger multinational customers to start providing services internationally on one platform across borders, across U.S. to EMEA and across even to far east services on this -- we'll call it on an equal basis to the same Company. Have you begun any successful program in which you're providing a cross border program to multi-nationals?

On the front end services, our platforms are pretty well matched up. On the back end services, the utilization of these products and service differ based on geography, even though it could be a multi national client. In other words, fulfillment of background services in India is completely different work flow than the workflow that happens in going through in the U.S. Part of it is because of data sources, part of it is because of automation, what the level of automation from our sources are.

But I think, what we are trying to do is our platforms internationally are pretty much mirrored and it's a subset of our main four platforms here and we are now connecting everything through a corporate portal. So the plan is to get there but today, how much of demand is there to have it all on one, not much, it all depends upon the geography.

Okay. Thank you very much.

Thank you.

Thank you. Our next question is from Kevane Wong of JMP Securities. Your line is open.

Hey how you doing guys? Glad to hear you're both fine with the fire. I guess, first can you address how -- is there a risk to the Poway facility, how safe is it? I understand it was relatively close.

The fires were relatively close and I got to tell you that I have never seen anything like this and, I myself, have been one of the families that have been evacuated. I actually came up to L.A., Orange County and I'm working out of our First American office right now.

But, as we have experienced in the 2003 fires, our Poway facility was very good and it - and the systems handled it with remote functioning. I mean we process reports on Monday and Tuesday and today. The calls were redirect - the telephone calls or the customer service calls were redirected to Portland and Garden City in New York.

So we have been fortunate in that we still have a lot of road closures and for example, it's tough for me to get back so I'm hoping to get back tonight. There's a lot - I mean we have probably about 50% of the people -- we opened our office back today and 50% of the people, around that number, are back at the office. But it's going to take a while.

This is - these sets of fires were unprecedented and the damage is going to be huge. So far we were fortunate. I haven't heard of any bad news from any of our people yet.

It sounds like the major risk, at least to the facilities etc. is passed at this point.

No, yes. The facilities are great and yesterday -- yesterday evening we had our I.T. guys there that looked at it. They said the air quality is actually better in our facility and they were the ones who suggested let's open up and lets move back and start getting back to normal again.

Great. And then, joining the queue on the investigative litigation support services, as I recall, the litigation support can be - can come and go fairly quickly and you mentioned it's probably stale near term. How long are these contracts that you've gotten this quarter? Obviously it's a huge jump up. I'm sort of curious as far as how long of visibility that gives you.

It's not a time based contract, Kevane. It's more of an event based. So if they have a case and we are supporting the case, until the case kind of gets close and -- so because we mostly work with the law firms and then we also work directly with the clients and stuff. So its not any term based thing that we think that its -- when I said near term, I was just kind of speaking from how its professional services, just because you climb up, its not a plateau from there, you go to the next level. That's what I meant by it -- by that comment.

Maybe another way to look at it is the cases that these thins would be working on, how long do those tend to last for?

Some cases last a couple of years and some cases even last longer than that. It's purely -- I can't comment on the specific cases, but it's not small entities so --

Okay. And then also, just looking at the lender and data services, the margins, obviously there is sort of issues behind there, would you have sort of a sense, maybe you can give us how long it would take to bring those margins back up to sort of maybe level we saw in the first half of this year? I don't know if there's a good way to do that, but any color would be great.

Well, let me -- lender services, the margins could really jump back up. You put the volumes back up we're back there. So it's a question of volumes and of bad debt. So both of them, to me, it seems like an easy situation because our workflow and our operation is set up in a way I can almost predict to the -- to within a half a percentage point how much money we'd make if you tell me how much the revenue is going to be. So those are very, very scalable so it's very predictable.

On the data services side, we are trying to expand -- lead generation has been a hard hit area. We are trying to expand into a lot of different verticals, insurance being one employer area -- the employment area being another one. So we kind of feel like there is -- in addition to the markets coming back, we're also trying to kind of expand our verticals and go with new business verticals because we feel like we could utilize that asset of lead generation and qualifying leads to a better extent within our family of companies.

Yes.

Kevane, I would just add one -- a couple things on the lender side. The bad debt hit our margin by about 4.5%, 5%. So if you -- as we do -- well, if you believe that this has kind of bottomed out. In other words the shock of the mortgage origination reductions is behind us now. I'm implying it will pick up any time soon, because I don't think we know that.

But the shock of it, which is kind of reflected in the increased bad debt numbers. I think that should continue - that should stabilize a little. So that should help our margins, even if volumes stay where they are today.

And in the data segment. The lead generation business, as we pointed out, has also been hit by the -- with the more macroeconomic issues, but that business is very scalable. So once those volumes get back, it's similar to the lender piece in the sense that the margins will pick up pretty quickly.

Okay, great. Thanks guys. And also glad to hear you're okay Anand from the fire.

Thanks, Kevane. Thank you.

Thank you. Our next question will be from Nat Otis of KBW. Your line is open, you may ask your question.

Good evening, gentlemen.

Hey, Nat.

Hey, just a quick follow up on that bad debt? Is there anything that you guys are doing internally to also prevent that from going on in the future? Or do you just think that because of the market those people are basically going to be out of the system and you won't hear from them again.

Yes, I'll try that and Anand can chime in, but what happened is because the -- this thing happened so quick, in other words, like the -- what the last two weeks of June? Things kind of fell off the cliff. And all -- most of these companies were very current in their accounts. But the -- so a few of them went bankrupt, just as quickly. They fold up tens pretty quick.

So we got kind of caught. A guy could be 30 days past due, which isn't any big deal and then the next minute he's bankrupt. So you have to write it off. So we've obviously take a closer look at some of the smaller players who we're extending credit to.

But I think -- Nat, my take is most of it is -- at least the larger write-offs are out of the system now.

Nat, to just expand on it from an operational perspective. We have put in workflow to make sure that people are constantly monitoring accounts if it gets to be of any sizeable number in billing.

Okay. And then just following up on the same segment. Any additional color on any traction on portfolio review?

The traction on portfolio review is interesting. We got all the contracts that we thought we will get. But the volumes that we originally - that they originally forecasted that they were going to scan through the portfolios, that has not happened.

So in other words, what they're saying is we like the service, we want to do it, but rather than sending you 50,000 transactions, we'd like to kind of see if you could help us with [stratisfying] the sample with maybe 5,000 first or 2,000 first. Let's get a feel for it and then slowly get in. so if you ask me, the pipeline has just extended and we haven't seen the volumes that we thought we were just going to kind of get from the capital market side as we originally hoped.

But we - we got everybody that was interested in signing a contract to sign the contract. It's a question of now getting the share of wallet, so to speak.

Okay. All right. Fair enough. Just last question, one of your competitors has talked about moving into the middle market in screening and I just wanted to see if you have any color on seeing added competition there, any added pricing pressure there, anything like that?

I don't see that. My -- from a traditional competition, I think you're talking about Employer Services. From a traditional competitive standpoint there, I think our - the difference and that's - which is our advantage is our process in the front end services like talent acquisitions, hiring solutions, and the ability to push job requisitions out there to the job boards and bring them back and provide applicant tracking service on it. That's where we're kind of really differentiating ourselves from other people.

The other differentiating factor is international and that's what's funding out growth. So those two areas are areas that we are trying to really expand and grow faster.

Okay. Thank you.

Thank you. Our next question is from Dom Lacava of Canaccord Adams, your line is open. You may ask your question.

Hi guys.

Hey.

Hi.

So, can you just give a little more detail on your -- I guess your whole take on the lead gen market and outside of DealerTrack do you feel -- or how do you feel about the market, given all the new entrants and pricing pressure, etc?

When you talk about lead generation?

Lead generation, yes. Heading into the next quarter and '08.

It's -- the way we look at it is we could find leads, it's not the -- problem is not finding the leads. It's finding a home for the leads. In other words, if you really look at it. What we do in the lead generation business is we convert customer's requests for information over to people who can satisfy those needs.

Right.

And that's where the credit crunch has really, really dried things up where there's not a lot of people who can really -- we -- there's not a lot of homes for the leads that we can find out there. So we need to kind of throttle it, we need to kind of look at different areas and stuff. So that's the difference for that market space.

Okay. And so is that something you feel comfortable with by mid '08? How long might that imbalance last?

Yes. It's very tough to say. It has to come back in concert with the lending -- with the lending markets out there but I have a feeling that it would because with the front end services that we provide in credit underwriting we cannot feel like as long as we can find qualified leads of them, for the different verticals and then provide an ability to credit qualify those leads, really expand our services much closer to the front end and much closer to the point of sale. So I believe that it would work out. It would come back up.

Okay. Okay. And then on the investigative and litigation side, was it all revenue growth or the higher margins, is there anything else behind the better margins and is that something we can expect to normalize, going forward?

Needless to say, a big piece of it was from revenue growth.

Right.

But John, do you have additional color?

Yes. No, Anand, I think you're right on. Most of this is just a revenue growth. It's -- these are projects. A lot of consulting type businesses. So I think as the -- if the revenues are sustainable, I think you can anticipate those type margins out of this business.

Okay. Okay. And then some housekeeping things. Can you just give a quick run down of the organic growth? I know you give it kind of spread out a little bit. I just want to make sure I have it all.

Sure. Yes, I'd be more than happy to. Lender -- this is quarter over quarter.

Yes.

'07 to '06. A lender was down 20%, as we talked about, Data services was down 5.4%, and Dealer was down 10% for reasons I think we've pretty much covered.

Yes.

The employer services segment was up 5.3%, Multi-family was up 5.8%, and investigative was up an astonishing 92.5%. Those were organic growth rates.

Okay. Okay, great. And just a last one, it was on EPS, that is -- that's on a GAAP basis?

Yes. It is.

Okay. So that's not -- if you take that 10% in one time, that wouldn't imply that on a GAAP basis it would be $1.08 to $1.14?

What 10%? I'm sorry.

I mean the $0.10 of one time.

Yes.

Items in '07 so far?

That was not in our original --

Right.

-- guidance from a year ago.

Okay. So $1.18 to --

We're at $0.82 right now, including that $0.10. So without it, it'd be $0.92.

Okay. So that $0.82 is in line with the $1.18 and $1.24. Those are apples to figures?

No. $0.92.

The $0.92. Okay. Got it.

$0.92 is.

Got it. Okay. Thank you very much.

You're welcome.

Thank you. Our next question will be from Sean Connelly of RW Baird. Your line is open. You may ask your question.

I am calling in for Mark Marcon. My question was regarding employer services. It looks like on a year over year basis revenue was up about $5.6 million and if I got the numbers correctly. I think you said earlier that international was up about $6.6 million and there was also some increases due to the tax incentive business.

So that makes it seem to me like your U.S business saw a decline and I was just wondering if you could maybe comment on what you're seeing in terms of hiring in the U.S. and if there are any particular groups or verticals that you're seeing some worse hiring from?

Yes, I'll -- let me clarify something on the numbers first. We've -- as we've talked about, we've -- in our occupational health business, we've been kind of going through that business trying to weed out some of the unprofitable business that we've experienced in that space. So our revenues there for quarter over quarter are down about $1 million, from about $14 million to $13 million, quarter over quarter.

So that's some of the -- I hate to use the word, but it's almost like a planned decline in some of the revenue. In the drug business, the occupational health business. Our organic growth rate actually in the domestic background screening was 10%, quarter over quarter. So the pure back ground screening, we're actually up on the domestic front.

Okay --

And I think a lot of that has to do with -- we have a quite a large diversity of customers and we're -- I would say our normal customers is a customer that maybe has 1,000 to 1,500 employees, that type range. Where we're not as skewed toward the large fortune 1,000 customers, the really large employers as some of our competitors are.

Okay. And then in terms of that 10% organic growth. Would you say that most of that is coming from pricing or volume?

I would suggest to you that probably most of it is due to volumes.

Okay. And then I had a question on multi-family and the -- on a year over year basis, margins were up about 4.3 or 430 bips and I was just curious -- I was curious what was sort of driving that and if I'm not mistaken I believe you had said previously that -- for example, say a REIT comes in and they're requesting a credit check on someone. I think you guys had to go through a period of months and go through and actually go back and physically inspect the REIT to make sure that they had a front office and --

Right.

I was just curious how much of the improvement might have been from that process being wrapped up?

I don't know exactly how much is due to that, but you're right. Last year we had -- the bureaus had wanted us to do -- at least what I would call a little more due diligence, so we had some catch up to do with a lot of our customers, just not the nationwide REITs, but a lot of them. And I think most of that is behind us.

Yes, most of it is behind us and also the big increases in the margins have actually come from expense cuts. I mean they have gone through and looked at it and just tried to run a lot tighter shop in them.

All right. Great. Thank you.

You're welcome.

Thank you. That is our final question for today. I would like to thank everyone for joining today's conference call. That will conclude today's conference you may now disconnect. Thank you.

Thanks.

Thank you.