First Advantage Corp (FA) 2007 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. 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 March 5th by dialing toll free within the United States, 800-294-9511 or 203-369-3236 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. 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 interest rates and the economic stimulus package on lender services, continued execution of operation efficiency on dealer services, ability to integrate verified products and cross sell to its client base, continued growth in revenues, market share and cross selling activities in the multifamily segment, continued growth in the investigative and litigation segment, 2008 service revenue and earnings guidance, 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 this company does not take to update forward looking statements to reflect circumstances or events that occur after the date forward looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward looking statements.

Factors that could cause the anticipated results to differ from those described in the forward looking statements include general volatility of the capital markets and the market price of the Company's Class A common stock, the Company's ability to successfully raise capital, the Company's ability to identify and complete acquisitions and successfully integrate businesses it acquires.

Changes in applicable government regulations, the degree and nature of the Company's competition, increases in the Company's expenses, continued consolidation among the Company's competitors and customers, unanticipated technological changes and requirements, the Company's ability to identify suppliers of quality and cost effective data, and other risks identified from time to time in the Company's SEC filings.

Investors are advised to consult the Company's filings with the SEC, including its 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 fourth quarter and fully year of 2007.

Following John, we will hear from Mr. Anand Nallathambi, President and Chief Executive Officer who will provide us with an overview of First Advantage's strategy and operations.

At this time, it is my pleasure to turn the call over to Mr. John Lamson.

Thank you, Cindy, and good afternoon, everybody. First Advantage reported net income from continuing operations of $77.4 million or $1.30 per diluted share for the fourth quarter of 2007, compared to $17.6 million, or $0.30 per diluted share for the fourth quarter of 2006.

Included in net income from continuing operations in the current quarter is a $97.4 million pre-tax gain, or $58.4 million after taxes, or $0.99 per share, related to the sale of DealerTrack stock and a $7 million pre-tax gain, $4.1 million after tax, or $0.07 per share in the fourth quarter of 2006 related to DealerTrack. Excluding these gains, earnings per diluted share from continuing operations was $0.31 in 2007, compared to $0.23 in 2006, a 35% increase.

Net income from continuing operations was $124 million, or $2.10 per diluted share for the year ending December 31, 2007, compared to $65.6 million, or $1.13 per diluted share for the year ending December 31, 2006. Excluding the impact of the investment gains recognized in the fourth quarter of 2007 and 2006, earnings per diluted share from continuing operations was $1.11 in 2007, compared to $1.06 in 2006.

Results of operations for 2007 includes an $8 million severance payment made in 2007 to our former CEO, equivalent to $0.08 per share and $1.7 million of restructuring charges related to our employer services segment, or $0.02 per share, recognized in the third quarter of 2007.

Excluding these two items and the investment gains, diluted earnings per share from continuing operation increased from $1.06 in 2006 to $1.21 in 2007, an increase of 14%. Including the contribution of U.S. Search's operations of $0.03 per share, our adjusted operating EPS was $1.24 per share at the high end of our 2007 guidance provided to you last year.

This significant earnings growth for the fourth quarter and for the year was achieved despite serious economic issues in the housing and credit related markets that significantly impacted our lender and data segments.

Earnings from continuing operations before interest, taxes, depreciation, amortization, minority interest, gain on investment and share based comp, adjusted EBITDA, was $43.9 million, and $175.9 million for the quarter and year ended December 31, 2007, compared to $38.6 million and $170.4 million for the quarter and year ended December 31, 2006. This is an increase in adjusted EBITDA of 14% quarter over quarter and 3.2% year-over-year.

Excluding approximately $4.6 million of non-share based severance costs incurred in the first quarter of 2007, adjusted EBITDA for the year increased by 6%. A reconciliation of adjusted EBITDA to net income is included in our earnings release.

Cash provided from continuing operations was $141 million for the year ended December 31, 2007. This includes the cash flow benefit of approximately $40 million of income tax liability related to the gain on the sale of DealerTrack stock, which we will pay in the first quarter of 2008. Capital expenditures were $40.4 million, resulting in free cash flow of $100.6 million for the current year.

Total revenue for the company was $204.9 million in the current quarter, compared to $200 million in the same quarter last year. Revenue for the year, 2006 and 2007, was $842.9 million and $797.8 million respectively.

Service revenue, which excludes our reimbursed government fees was $192.1 million in the current quarter, compared to $187.2 million in this same quarter last year. Service revenues for the years 2007 and 2006 was $788.1 million and $745.1 million respectively. Operating income was $29.9 million in the current quarter, compared to $24.9 million in the fourth quarter of 2006. This represents a 20% increase in operating income.

For the year, operating income was $117.6 million, compared to $119.4 million in 2006. Excluding the impact of the severance costs of $8 million and restructuring charges of $1.7 million, operating income increased by 6.6% for the year.

Our consolidated operating margin was 15.6% in the fourth quarter of 2007, compared to 13.3% in the fourth quarter of 2006. For the year, the consolidated operating margin was 14.9%, compared to 16% in 2006. The operating margin for 2007, excluding the severance costs and restructuring charges, was 16.2%.

When we compare the fourth quarter of 2007 to the fourth quarter of 2006, operating margins decreased in the lender and data segments as a result of issues in the housing and credit markets. In addition to reduced revenue in the lender segment, fourth quarter margins were further compressed, due to an increase in bad debt expense from approximately $300,000 in the fourth quarter of 2006, to $2 million in the current quarter.

Bad debt expense was $4.7 million for the year, an increase of $3.7 million from 2006. In our data services segment, our lead generation and specialty finance businesses both were negatively impacted by the current economic environment resulting in revenue declines and reduced operating margins.

Margins increased in our employer services segment from 10.6% in 2006, to 17.3% in 2007. This significant margin growth is a function of overall organic segment growth in the revenue of 8.8%, with higher than average growth in our foreign background screening and tax incentive businesses with cost reduction initiatives in the domestic screening business.

In addition, we continue to provide -- improve our operations in the occupational health business via tighter expense controls and the elimination of unprofitable customer relationships. For the year, the operating margin in the employer services segment increased from 10.2%, to 13.3% excluding the impact of the $1.7 million restructuring charges.

Margins continue to increase in the investigative services segment, as a result of a shift in revenue mix from the lower margin surveillance work, to the higher margin electronic discovery and forensic consulting. Our operating margin was 45% in the fourth quarter of 2007, compared to 17.4% in 2006. For the year, the operating margin was 34.5% compared to 19.2% in 2006.

Margins also increased in the Dealer segment, as we have reduced our operating loses in the vehicle lead generation business and continue to see growth in our vehicle credit reporting business. The actual credit report volumes increased in the quarter by 4.3% from last year.

Margins also increased in our multifamily services segment from 14.3% in the fourth quarter of 2006, to 15.5% in the fourth quarter of 2007. For the year, margins increased from 22% to 25.8%. Margin growth is attributable to tight expense controls and revenue growth.

Give you some information no our organic growth rates by business segment. These are year-over-year results. In lender, declined 14.1%, the data segment declined 5.6%, and our Dealer segment declined by 6.1%. We had year-over-year increases in our employer services segment of 8.8%, multifamily segment of 5%, and 65.8% in our investigative and litigation support segment.

Our quarter over quarter organic growth rates, the declines were in lender services of 32.7%, data of 23.2%, in Dealer of 10.4%. And, we had quarter over quarter increases in our employer services segment of 8.8%, multifamily 3.8% and investigative and lit support of 154%.

Our balance sheet is very strong. At December 31, 2007, we had total debt outstanding of only $32.7 million, including fixed rate debt of $14.7 million, with an average interest rate of 5.15%, and variable rate debt of $18 million with an average interest rate of 7.25%. Our debt to capital ratio was only 3.6%, our available and unused line of credit was $225 million at year end. We had $76.6 million in cash.

For the quarter, our interest expense decreased from $3.3 million in 2006, to $1.4 million in 2007, due to significantly lower average debt balances. Proceeds form the sale of the DealerTrack stock sale were used to pay down debt in the short term. Average debt outstanding during Q4 2007, was $108 million, versus $208 million in 2006. Our average interest rate was 6.14% in 2007, and 6.27% in 2006.

With that, I will turn the call over to Anand Nallathambi our CEO, who will now discuss the status of our current operations. Anand?

Thank you, John, and good afternoon, everyone. In our third quarter earnings call, I remember pointing out that despite the downward trends of the housing market, our year-to-date performance was in line with planned expectations. Well, the fourth quarter performance enabled us to report financial results for the full year 2007 that exceeded our business plan expectations.

While the mortgage and lead generation businesses were impacted by the economic downturn, the employer and litigation support segments reported robust performances in 2007. On a comparable basis, adjusting for discontinued operations, our results came in at the higher end of our earnings guidance.

Our service revenues were down 14% year-over-year in the lender services segment. Considering the trends in the mortgage market over the last five months of 2007, this number is better than most of our competitors. The liquidity crisis really hurt a lot of small and mid market lenders by forcing them out of the business.

While this scenario plays to our benefit in the long term, because of our industry position and market share, we did feel the impact through higher incidence of bankruptcies and business failures. Heading into the new year, however, we have witnessed a spark on higher transactional volumes. January daily volumes were 34% higher than December 2007, and February daily transactions were higher than January.

The industry is feeling the positive impacts of interest rate cuts and the economic stimulus package. We also felt it was time to take advantage of consolidation opportunities. To gain strategic advantage and capitalize on a consolidating lending industry, we recently acquired CredStar, the mortgage credit reporting division of Pfizer.

In addition to scaled related consolidation benefits, we expect CredStar to open up new markets by providing our core product offerings to credit unions and smaller financial institutions. As we mentioned in the previous quarter, from an operational standpoint, we continue to focus on driving operational efficiency reports for employee. At year end 2007, it was 12.74, compared to 11.76 in the same period of 2006.

From an operational standpoint, again, our lender services customer focus staffing levels at year end were down from 260 to 150, a decrease of more than 42% compared to the previous year. In our data services segment, the impact of the subprime credit markets continue to affect sales in our lead generation and specialty finance businesses.

Though the margins are still very healthy in our specialty finance business, the lack of robust top line growth in these two areas hurt the overall profitability of the data group. In the lead generation business, we are expanding our sales presence to include additional verticals like life settlement and healthcare.

In the specialty finance business we are positioning for international growth. As we have mentioned on previous calls, we have established Teletrack UK to take advantage of the expanding payday lending industry in that region. We began our operations there in [November] 2007. We're also exploring similar opportunities in other countries.

Our criminal records and consumer reporting businesses continue to perform well. Both those businesses [posted] higher than 15% year-over-year revenue growth, and a bigger increase in profitability.

The dealer services segment had revenue decline of 6% year-over-year, primarily due to the negative effects of the subprime credit markets and the challenges faced by our lead processing business. This business has experienced market compression and top line pressure for a while, however, we're already seeing operational efficiencies increase and we remain confident that they will continue to improve and regain profitability in 2008.

Our automotive credit business is showing resiliency in a tough market, due to superior product and service solutions. They continue to gain market share in the independent and franchise dealer markets. The focus on identity verification, portfolio management, fraud detection and compliance management solutions are all drivers that help fuel our growth in this market.

With the emphasis on employer services being our primary growth area, we are extremely pleased with the 19.5% year-over-year growth in revenues. It is especially rewarding to note that our higher margin contributors, hiring solutions and tax consulting groups grow in the double digit range, with the international division growing 88% year-over-year.

In 2007, we expanded our international product suite to expand from background screening services to include integrated talent backed position services and hiring management systems. We have seen strong demand for these integrated services, particularly in Asia.

The recently announced Verify acquisition will enhance our client base and regional geographic presence in high growth Asian countries. We will quickly integrate the product sets and cross-sell their client base with our comprehensive talent acquisition services.

We currently have a background screening presence in the UK, and look to extend the talent acquisition product expansion in the UK and throughout Europe. We believe that tough regulatory and privacy legislative environment favors a committed long term player like us.

It is encouraging to note that certain industries, particularly financial institutions have embraced the extensive suite of employment screening services. Identity and background verifications along with fraud management solutions are experiencing greater acceptance, now has tools to identify, prevent and manage criminal activity.

The multifamily segment continues to grow in market share and profitability. Revenues grew 5% and profits grew more than 20% year-over-year. We should see continued growth in revenues and profitability in 2008 as we increase share and cross-sell our clients with the renters insurance product.

We're also making a concerned effort to focus on unique data elements that could generated from the resident population, and to work with our distribution network of landlords and property management companies to bring other financial products and services to their consumers.

Our investigative and litigation support segment finished the year with yet another strong quarter, exhibiting increased momentum in service revenue and operating margins, particularly in litigation support and the e-discovery business. This segment had a 67% year-over-year increase in service revenues.

Increases in service revenue have been the result of diversified product based e-discovery and computer forensic services. Much of the growth over the last couple of quarters have come from Europe and Asia. We believe the international growth in Asia will continue for the litigation support businesses.

In closing, we are pleased with the way we closed the year in 2007, and how we have come out of the blocks to start the new year 2008. While the economic outlook for the rest of the year has some uncertainty, we remain steadfast focused on our priorities. They are, number one, to build on, grow and improve margins in our core strategic business.

Number two, redeploy nonstrategic assets into our core businesses. And number three, leverage the unique data elements that enhance the value of our products and services, and add analytical product [additives] wherever possible. From a financial perspective, in 2008, we believe our service revenues will be between $825 million and $845 million, with earnings per share in the range of $1.27 to $1.32.

At this point, I'd like to open the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS)

And your first question comes from Kyle Evans.

Yes, hi guys, this is actually Carter Malloy on the line with Kyle. Can you help us think about the segments in '08 as it relates to the guidance?

We're -- we're not giving specific guidance on segments. But as we said in our earnings call, we're really looking for a -- the lender services and those businesses that are impacted by the housing and credit issues to -- for that to turn around in the second half of the year, and that would be our lender segment and certain pieces of our data segment, as Anand and I alluded to.

Okay. And then kind of as a follow up to that, I'm looking at the pretty -- fairly rapid margin deterioration within the lender services. Is there any scenario where you think that those EBIT margins could actually go into the red?

I don't think so, at this point. This is Anand, by the way. The fourth quarter margins were impacted because of bad debt and we were aggressive in taking a look at this and cleaning it up. And if you really think about it, as we mentioned, in January, our volumes are back up like 34% and that's -- revenue was also relatively close, in the same range of increasing and our margins are back up to like in the mid 20's.

So it was -- we think fourth quarter was an aberration because of what the macro economic environment brought upon us.

Okay. Great. And, just so I can have a little more clarity maybe, can you give us some ideas of the cost structure in that as far as fixed versus variable, and some of the levers you may have, additional leverage you can pull.

Yes, the -- this is John. Certainly about -- right off the top about a third of the costs are costs to goods. So, that's certainly all directly variable costs. Once you get past that, there's -- there is a lot of fixed costs in the business. That's why when the volumes are up -- if you go back last year, even in the beginning of 2007 and 2006, you're looking at the margins -- approaching 30% operating margins.

And while you see margins this quarter below ten, and certainly a lot that had to do with the bad debt -- increase in bad debt expense we mentioned and volumes. But, at least through January, as Anand alluded to, the volumes are up. So, it's a two-way street.

Okay, great. Thanks. I'll get back in line.

Thank you, your next question comes from Jeffrey Kessler.

Thank you. I attended a -- a few months ago or a couple months ago, attended an electronic some kind of briefing, with a number of small companies in it. And it was interesting -- the business was interesting given, particularly given the position of [Crowland] and it seems like you are now up in that bracket of top companies in that part of the business and certainly the growth in your business has gotten up there.

I'm just wondering, given the fact -- given the strength in that business, what types of clients are you seeing, are coming to you? And, is this mainly international growth you're seeing at this point, or is this something you're getting both in the United States and in internationally?

Jeff, I -- this is Anand. I would answer that, we are seeing increase in growth in U.S., but it's -- the international growth has been really rapid.

And the -- can I get some of the verticals or types of clients that are coming to you? Obviously legal firms, but the question is what types of business are they seeking out with you in this?

This is John. Jeff, how you doing?

Hi.

Most of -- first of all, for I think obviously we can't necessarily name our clients because its litigation relate stuff, but typically what you see -- at least in the space we're playing in is larger lawsuits. And at least historically, a lot of that has been in -- when you get into verticals its been in pharmaceuticals and financial services industries that typically have quite a lot of large litigation.

All right. And is this mainly European or Asian, or the combination of the two.

Yes, it's kind of all over the map too and just to give you a flavor, in the litigation support work, that segment, about 44% of our revenue was from international operations.

Okay. Thank you very much. I'll get back in queue.

Yes.

Thank you. Your next question comes from Brian Ruttenbur.

Okay, very good. Two quick questions. First of all, the earnings guidance that you gave, is that GAAP earnings, is that pro forma earnings? Can you elaborate on that a little bit?

Brian, this is John.

Hey, John.

Yes, that's GAAP earnings. Earnings per share --

Fully diluted GAAP earnings. Perfect.

-- GAAP earnings per share and I tell you, because our earnings per share structure is a little confusing this year, the equivalent would be about $1.21. As I said, we reported $2.10. Okay?

Right.

$0.99 of that has to do with a -- the Track gain, okay?

Okay.

You can pull that out, then add $0.10 back for the $0.08 charge in the first quarter and the second -- and the $0.02 charge in the third quarter. So if I was -- what to base that off of would be $1.21 in '07.

Okay. And can you give us a little color on the balance sheet? Also, I think you're going to have to pay $40 million down in the first quarter, the end of March, I assume, to pay your taxes from DealerTrack. And then, maybe you can tell us how the balance sheet will shake out at the end of the first quarter, because you've made a couple acquisitions here.

Yes. We -- the CredStar deal was at the end of the year, so we funded that at the end of the year. But as I said in my remarks, we've got about $77 million worth of cash at the balance sheet at year end. So, I think we should be pretty good in terms of -- we funded the Verify deal, and we have a tax bill to pay, so -- and we've got some earn out payments coming up. But I think we'll be pretty good. Your debt is very minimal so --.

You won't have to go into your line at all any further.

If we do, it will be not much. Yes.

Okay. And then if I can ask just one more follow up, and I'll shut up. On the growth side, from your service revenue, do you see gross margins higher, going up in 2008 according to your guidance? Should we see gross margin expansion?

You mean operating margins?

No, I was thinking gross, but I'll take it down to the operating line. Do you see gross -- excuse me, do you see operating margins expand from the levels they were in '07?

Yes.

Yes.

Yes. Yes, you will.

Can you give us a number.

No.

Okay. Thanks a lot.

Thank you. Your next question comes from Kevane Wong.

Hi guys, how are you doing?

Hey, Kevane.

Hey a few things. First, will you guys be posting sort of pro forma numbers excluding [U.S. search] or are we just sort of work with what we've got at this pint essentially?

Yes, the U.S. search -- in the release, you'll see that that's segregated in discontinued operations.

Yes, just for the -- for this quarter and the fourth quarter '06 and for the year but nothing as far as first through third quarter. So for comparability on modeling makes it a little more trickier, that's why that's going to be available or not.

It will be. And when we file the 10-K it will be in there.

Okay, got you. Also, looking at sort of the sequential increase in the revenues in the investigative litigation support, is that new business that's come on, or is that sort of follow on from some of the big increase you saw last quarter?

I don't know if there's a particular large project or a few projects that you started to see in third quarter, and whether they carried into fourth quarter and then built up, or if this really is sort of additional new business that you saw in the quarter.

It was a mix of both, but what it was in new matters with the existing clients in new geographies. That's the best way to explain the European -- or the Eurasian increase in revenues for that segment.

Got you. And it is sort of a situation of -- trying to remember off the top of my head. I think before you said there's something like eight of the top ten banks, or clients are a major part of that business. Is it still pretty concentrated as far as the customer base, or is that going to spread out?

I think we talked about eight of the -- eight clients, not necessarily top banks, but --

Yes, I meant clients. I'm sorry.

Yes, and I think that that's true. I mean what we are doing is -- these big clients also have multinational presence, and some of these matters in dispute are expanding indifferent geographies and we're growing with it.

Okay. Fair enough. And as I recall, sort of the stuff in 3Q was project related. Is -- and I know I'm sort of dancing around this, but I'm trying to figure out if a particular project, how long that project lasts for the stuff that came on in 3Q '07, and is it similar as far as any new business you got in 4Q '07?

So is there a point where you worry sort of, I guess, about a drop-off in '08, or are you seeing a good pipeline that you're really not worried about any kind of drop-offs as far as --?

I think we focus, Kevane, more on the pipeline and we kind of feel comfortable that it's more of a capacity utilization issue for us. And what we try to kind of look at it is there are some engagements we are walking away from today because of our -- but -- [our] currently engaged projects. So, I feel like as things drop off, we have no dirt for new prospects that we can bring in -- that we have in the pipeline that we can bring in.

Got you. Okay. And I'll do one more and then jump back in. But the acquisitions that you made recently, Verify etc., can you give us any sort of metrics as far as size, profitability, accretive, dilutive? What's sort of the impact as far as the numbers?

I can have John kind of walk through the accretion. It is slightly accretive. The way to look at it is Verify -- that deal -- the reason we liked it was it had a really good technology platform, very experienced management, and they had a growing presence in the financial services vertical and sponsorship from Hill and Associates which is a security consulting firm, which was their sister company.

So, when you look at all of this kind of things, it seemed to us like this would further entrench our footprint, and enable us to grow into high growth Asian markets, and we liked that fact. And with the kind of growth that we're seeing internationally, we kind of felt like this is a perfect acquisition that will just propel us into the next round.

Was this all of -- sold essentially background screening business?

Yes.

Okay.

It was all in a public company, and then they kind of sold this piece off.

Got you. Okay. And any financial metrics that you can share with us as far as the acquisition?

Yes, I mean we -- it was about 7.5 times trailing EBITDA, and what's looking like about a five times forward looking EBITDA based on '08. So it was a -- from just a financial metric standpoint, a fairly conservative deal for us, but as Anand said, it fills in some nice gaps that we had in that part of the world and also brought along a pretty strong top management team.

[It] solidifies pretty much your leading position in Asia, and I don't know of anyone that really had any scale like Hill and you guys did separately so.

Exactly, exactly.

Perfect.

So, as Anand alluded to, it helps us leverage the existing management we have over there too. So it's a win/win from that standpoint.

Got you. All right. Thanks, guys.

Okay.

Thank you. Your next question comes from Mark Marcon.

Good afternoon.

Hey, Mark.

Hey, Mark.

Just wondering, with regards to employer services, how much of your business is now international?

Yes, Mark, for the year, we had about $43 million of international revenue, and that's about 18% of the service revenue for the year.

And what's the growth rate for that international part?

The foreign employer services for the year was -- organically, was about 38% revenue growth. So, it's a -- needless to say, a good piece of business for us. Growing fast, and not to be repetitive, but I guess I will be for a minute, but the Verify deal really helped us there, and just as important as getting the good business, it brought in some good management talent too.

Terrific. And then -- how much of the employer services is non screening at this point? In other words, applicant tracking etc.

Mark, we don't have that -- that really level of detail. But certainly, the non-screening, if you will, if you want to call it that non screening businesses.

It's the growing part, right.

It is certainly the growing part. And when you -- but I don't have specifics on the revenue break out.

Do you have like, just a general feel like plus or minus [10%]?

Oh yes, it's

[About 40].

It's -- the screening parties probably about half.

Okay. So I mean -- so roughly half is non-screening.

Yes.

Yes.

That's quite substantial. Terrific. And then, with regard to lender, obviously a very difficult environment, but did you say January was picking up?

Yes, we were -- like we wanted to kind of give some color, especially because of the fourth quarter performance and January, as I mentioned, was about 35% higher than December and February's continuing on.

How is January relative to a year ago? January a year ago?

I don't think it was even, because 2006 and 2007 we had pretty robust January.

Right.

Also, the number that I talk to you about does not include the new acquisition.

Okay.

The new acquisition added about 15% to our transaction volume.

Okay, but in terms of just January, I mean you would normally be up in relative to December, would you not, because --

Yes, very little. Not a lot because if you really look at the seasonality, January and December are both low months, and then it slowly starts to pick up in February, March and then the peak months obviously are the spring and summer months from a lending perspective.

And so, in terms of January, it's still down versus year ago, but a bigger sequential increase than you would normally see under normal seasonal conditions.

Yes, and it's obviously because of the interest rates and the economic stimulus package.

Do you think that was primarily refis or --?

It's very difficult for us to say mainly because of sometimes, we see transactions even before they decide what product type they're going to put the person in. but I would think that its mostly refis. We also feel like the rest of the year there's a lot of existing rate reset that's going to happen.

So we remain -- cautiously optimistic. The liquidity crisis and the credit crunch, that has a -- that has an impact on the market that its very tough to judge, but there are a lot of positive moments from an interest rate environment standpoint, from a rate resetting standpoint there's a lot of pent up demand coming up.

Because, I mean, it looked like there was a burst of refis that occurred when mortgage rates temporarily dipped, but it looks like they went back up, and then for the last week of data, it looked like it petered out again. So, you think its going to continue through all of February?

We don't know. I mean we just saw the first -- like you mentioned, the first half of February was still on -- still on up. But where is it going to go? That's the question that we're all trying to answer is -- how sustainable is it.

So, in terms of think - I mean that would probably be your -- that along with data would be your two most variable areas from an economic -- at least from the credit crisis perspective.

Correct.

When you're giving your guidance -- what kind of are you thinking about in terms of the low end and the high end of guidance as it relates to those two areas?

The best way I could answer that is, on the lending side, we kind of almost assumed a pretty flat year 2008, compared to 2007. So we feel confident that getting out of the blocks ahead of where we planned bodes well for us.

And that would be back end loaded?

We did assume some recovery in the back end, but on a full year basis, we didn't expect that 2008 is going to be drastically different than 2007. And if you look at 2007, the second half of 2007 was really down.

Yes.

So, we felt that we were being cautious.

Okay. And do you think the same would hold for data?

In some ways, because of lead generation, I would say that. But on the other side, there is some areas of data that are doing really well. I mean, our consumer -- direct to consumer business is doing well and we got some big contracts like we talked about.

The specialty finance business has some potential, especially international -- in the international area, now that we have been there for a while. This is our second quarter of being in operations there. I think that that will start to pick up. So we feel -- outside of the lead generation business, we feel pretty good about it.

Okay. Great. And then the last question, just to go back to an earlier question about where you think the balance sheet might end at the end of the first quarter. Do you think you're going to basically be at a net cash position of somewhere in the $15 million to $20 million range or where do you think that's going to --?

Well, yes. I mean we'll always -- we'll probably be around that mark, around that balance mark. Probably $30 million range or so.

Okay, great. Thank you.

Yes. Thank you.

Thank you. Your next question comes from Jeffrey Kessler.

Thank you. Quick question. About a year or so ago, I visited your booth at one of the trade shows, and you were talking about employer services and the beginning of this whole integrated approach. I'm wondering, while you aren't going through all of the numbers on employer services.

Obviously, it was an interesting and surprisingly up number for -- given the fact that your competitors don't seem to be having --. The question is, these integrated services that were laid out -- a couple, a year or so ago, can you basically identify the lifecycle of these services? What are you presenting to the client to give them more than just background screening?

The differentiating factor between us and the traditional competitors and why we're seeing some growth is the hiring solutions area and the recruiting solutions area. And I think, our focus has been wherever we're going to grow now, we're trying to kind of grow in the front end services business.

The value propositions that we're trying to go with to our client base is, we're going to help you identify better candidates early on in the process that you don't -- so you're not out too much money trying to kind of profit somebody, and then find out that this is not a perfect fit for you at the end. And I think as much as we can do that, that we will be in a better position to kind of grow our businesses.

We also find that, in addition to the growth perspective, the profitability perspective also looks better with these services on the front end. So recruiting solutions, other talent acquisition solutions, skilled assessments, providing analytics, these are areas that seem to have a long standing impact of value with our client base.

Is it fair to say that international revenues and the lack of competing product previous from other competitors in the international arena are one of the growth -- one of the primary growth areas in employer services, given that you've just said that 50% is screening and 50% is non screening?

I actually think the growth that we see in the international area is more on the -- more towards the front end. If we -- I think we have talked in earlier conference calls that our hiring -- applicant tracking and hiring management solutions are really garnering support in the new -- in hospitality and gaming industry in Macau and other growth areas.

So, it's not just necessarily the traditional type screening services that where our traditional competitors can easily come in and compete with us.

Okay. Thank you very much.

Okay, Jeff.

Thank you. Your next question comes with Kevane Wong.

Hey guys. A couple of follow -ons. First, as far as the -- in the guidance you talked about having sort of a second half turn. Is that really more because of the comparisons are much easier for the second half of the year for a [guy like] lender? Or, is there something else that makes you feel comfortable that second half of the year is when you're going to start to see sort of some improvement there?

Well certainly, Kevane, the comps certainly will be easier in the second half.

Yes.

As you alluded to, especially in lender --

This is Anand, to add on to this, the part of the reason for us to think that the second half of the year we could see a good recovery is, we also have a lot of joint ventures with some major mortgage lenders out there and we kind of talked to them and take a look at what Fannie and Freddie and everybody is kind of looking at the market.

So, given an industry perspective, there was some enthusiasm to say that things should start to improve in the second half of the year. Now, all of it is all dependent upon what happens with the liquidity and credit crunch out there. That's an unknown phenomenon that we're all dealing with at this point.

But those are the, kind of the inherent assumptions we made when we put together the plan.

Yes, no -- got you. You got to make this happen to --

(inaudible) great.

Yes, hear you. And then the other thing to challenge on the bad debt that you mentioned that you sort of addressed in the quarter for lender services. It's actually been several quarters in the last year where you had some bad debt impact. So, first quarter you took a reserve for subprime customers -- trying to be aggressive, but there's also some in 2Q and 4Q here.

Is there -- just trying to figure out a way to get some sort of comfort that this really is it. Is there really a way you can help me understand, or get comfort that this really should capture it? Or, is this still sort of ongoing risk simply depending on how bad things get?

Yes, most -- most of the "surprises" that we've had in the bad debt area and the lender services segment, which were really the larger dollars we're talking about --

Yes.

-- have been in the third and fourth quarter. And, as I think we've mentioned in the past, what happens here is that a customer's current -- they're paying their bills and then all of a sudden they're bankrupt.

Yes.

Because what happened with the --

They can't close loans --

In that business they can't close loans anymore, and they just go bankrupt very quickly. Okay?

Yes.

So, it's somewhat hard to anticipate that. We think we're through most of that, and that's once again what we build into our plan for '08. Just because the passage of time. I mean, this has been -- the "crisis" has been out there for six moths now. If they haven't gone bad by now, the probabilities are that they're going to be okay.

Kevane?

So, that's kind of the logic that's involved there.

Yes, Kevane, to add on to that, what we are also doing from an operational perspective is we're really being strict with how we set up accounts. Now we have -- through the CredStar acquisition, we have the ability to put some clients on credit card payment.

And so, we're trying to do the best that we can, but is very difficult when you've had clients who have paid as agreed, and then never been delinquent for three, four years and then all of a sudden they just go out of business because they just can't close loans.

Yes, got you. Okay, no those are tough ones, because obviously it's trying to get you the forecast in the future. So, do appreciate at least putting a line in the sand. Thanks, guys.

Thank you. That concludes today's conference call, and at this time you may disconnect. Thank you.