First Advantage Corp (FA) 2008 Q3 法說會逐字稿

Thank you all for holding, and welcome to First Advantage Corporation's Third Quarter 2008 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.

It will be available for replay from the Company's Investor Relations pages on their website at www.fadv.com and through November 10, by dialing toll free within the United States 866-485-0037 or 203-369-1609 outside the US. 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 response to your questions may contain forward-looking statements, including certain statements made in this presentation relating to consolidating and integrating new acquisitions in the third quarter, developing tools or product extensions in the litigation consulting segment continued cross savings for the remainder of the year, including headcount reductions, facility consolidation, reduction in professional services and marketing related expenses and other statements that do not relate strictly to historical or current fact.

The forward-looking statements speak only as to the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially 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 that are acquisition.

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 2007 annual report on Form 10-K for further discussion of these and other risks.

We will now begin our conference call this afternoon with our Chief Financial Officer and Executive Vice President, John Lamson, who will provide an overview of our financial performance for the third quarter of 2008. Following John, we will hear from Mr. Anand Nallathambi, President and CEO, 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 $12.6 million or $0.21 per diluted share for the third quarter of 2008, compared to $18.8 million or $0.32 per diluted share in the third quarter of 2007.

Operating results in the current quarter includes costs associated with consolidating certain operations in our dealer and lender segments that totaled $2.8 million, including an impairment charge of $1.7 million, negatively impacting earnings by $0.03 per diluted share. We have also incurred an additional $1.3 million of severance cost this quarter, as we continued to streamline operations. Results for the quarter ended September 30, 2007, include a pretax 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.

Earnings from continuing operations before interest, taxes, depreciation and amortization, EBITDA, was $34.7 million in the current quarter, compared to $45.1 million for the quarter ended September 30, 2007. A reconciliation of EBITDA to net income is included in our earnings release. Cash provided from continuing operations was $35 million in the current quarter. Capital expenditures this quarter was $7.5 million, resulting in free cash flow of $27.5 million.

Year-to-date, our cash flow from operations was $88.5 million, excluding the $56 million of tax payments we made in the first quarter this year, relating to the gain we recorded on the DealerTrack shares that we sold in the fourth quarter of 2007. Our capital expenditures was $27.1 million for this nine-month period, yielding free cash flow of $61.4 million for the first nine months of the current year. At September 30, 2008, we had positive working capital of $103.9 million.

Service revenue, which excludes our reimbursed government fees, was $174.7 million in the current quarter, compared to $194.7 million in the same quarter of last year. Operating income was $21.8 million in the current quarter, compared to $34.2 million in the third quarter of 2007. Our consolidated operating margin was 12.4% in the current quarter, 14.3% excluding the restructuring charge, compared to 17.6% in the third quarter of 2007.

When we compare the third quarter of 2008 to the third quarter of 2007, operating margins decreased in our lender, employer and data segments, excluding the restructuring charges in the third quarter of 2007 in employer, as a result of continuing issues in the housing and credit markets. As you know, the declines in these markets started to negatively impact our business near the end of the second quarter of 2007.

Margins declined in the investigative and lit support segment due to decreased revenue in the electronic discovery business. Margins increased in our dealer services segment excluding the restructuring charges and in the multifamily segment, primarily do the cost containment initiatives. Margins in our lender services segment decreased from 18.6% in the third quarter of 2007 to 12% in the current quarter.

Revenue decreased by 16.5% or 25% organically with the balance due to the CredStar acquisition, which we closed at year-end 2007. The significant decrease in margins is attributable to decreased volumes in the current quarter compared to last year. Sequentially, revenue declined 11% from the second quarter of 2008. Margins in our employer services segment were 12.3% in the current quarter, compared to 13.9% in the third quarter of last year.

Margins decreased slightly from last year despite a 8.4% decline in revenue. The revenue decline is due in part to global economic issues and continued focus on customer profitability. Margins declined slightly due to revenue mix, offset by cost containment initiatives. Sequentially, revenue declined by only 2% and margins improved from 7.4% in the second quarter to 12.3% in the current quarter. This 490 basis point improvement in margin is attributable to the cost reduction initiatives and continued consolidation efforts we have initiated in this segment.

Margins in our data services segment were 17.9% in 2008 compared to 27.8% in 2007. Our specialty finance credit reporting and our lead generation businesses have been directly impacted by the housing and credit issues and are the primary reasons for the decline in our margins. Sequentially, the margins decreased from 19.9% to 17.9%, primarily the result of decreased margins in our lead generation business.

Margins decreased in the investigative services segment, as revenues declined from $24.9 million in 2007 to $18.6 million in the current quarter, resulting in operating margins declining to 33.8% in the current quarter, compared to 46.9% in 2007. Margins were consistent on a sequential basis, despite a 12% decline in revenue. Margins increased in our dealer services segment, excluding the restructuring charge, from 16.4% to 18.8% in 2008, due to tighter expense controls and the restructuring of our vehicle lead generation business.

Margins increased in our multifamily services segment from 30.8% to 33.7% in the current quarter. Margin growth is attributable, once again, to tight expense controls in this segment. On an organic basis, we had quarter over quarter declines in service revenue by 24.8% in our lender services segment, 17.5% in our dealer services segment, 11.5% in employer and 25.2% in our investigative and litigation support segment. Our data services segment quarter over quarter -- our revenue increased on an organic basis by 6.5%, and the multi services segment organic growth rate was essentially flat.

At the end of the quarter on September 30, First Advantage had total debt outstanding of $50.5 million, including fixed rate debt of $6.4 million with an average interest rate of 5% and variable rate debt of $44 million, with an average interest rate of 4.4%. Our debt to capital was a very conservative 5.3%. Our available and unused line of credit was $189.8 million at the end of the quarter, and we had $45.5 million of cash on hand at September 30, 2008.

For the quarter, interest expense decreased from $2.9 million in 2007 to $687,000 in 2008, due to significantly lower average debt balances. Average debt outstanding during the current quarter was $64 million, compared to $182.7 million in the third quarter of 2007. Our average interest rate was 3.9% in 2008 and 6.75% in 2007.

As we discussed on our second quarter earnings call, we are closing a facility in the lender services segment. We expect that it will be completed in the fourth quarter this year. We expect to incur shutdown costs of approximately $1.1 million or approximately $0.01 per share in the fourth quarter of 2008. We will continue to seek opportunities to improve and expand our businesses for the long term benefit of our shareholders and take the actions necessary to implement them.

Last quarter, we revised our earnings guidance and estimated that earnings per share from continuing operations for the remainder of 2008 or for 2008, excuse me, excluding our restructuring charges, would be in the range of $1.10 to $1.18 per diluted share. That guidance assumed that there would be no further deterioration in economic conditions that existed at the end of the second quarter.

Obviously, economic conditions have worsened significantly since then and the chance of us hitting the previous guidance is unlikely. Attempting to forecast earnings in this environment is difficult to say the least, so we have decided to forego guidance for the fourth quarter.

As Anand will discuss in more detail, we have taken actions to streamline the operations, reduce costs and maintain or improve our market share in our major business lines. These actions have not only had a positive impact in 2008, but more importantly, will make our future operations more efficient. As I have discussed earlier, our working capital position is strong, we have a very conservative debt to capital ratio, and our cash flow is very good. We believe that we have taken the appropriate steps in reaction to the current economic conditions and continue to have strong economic fundamentals. Anand?

Thank you, John. Good afternoon, everyone. Commenting on the economic crisis would be overstating the obvious, but it wouldn't be a surprise to note that the impact was felt in every segment of our company. In lender services, revenue are down 11% on a sequential quarter over quarter basis. Revenues are down 30% from January of this year.

Despite the tough macroeconomic environment, the bright spot is that our market share is increasing with the industry contraction, and this should bode well for us when the markets stabilize. Based on industry metrics, we estimate our market share to be greater than 50%. Over the past two quarters, we have been reducing our costs aggressively through personnel reductions and systems consolidation. These efforts are beginning to show results.

The operating margin for September was 15%, though the third quarter margin was 12%. Last quarter, we reported total cost savings of about $8.9 million on an annualized basis, and with the continued streamlining of operations, we have increased that number by another $1.1 million. Additionally, we are on track with the consolidation of operating platforms in this segment from five to two by year-end 2008, and have already migrated a majority of the clients.

The data services segment saw an increase in service revenue of 6.5% on a year-over-year basis, and an increase of 11.2% over the second quarter of this year. Increases in revenue were largely the result of emerging verticals and lead generation and customer expansion in our consumer credit reporting business.

Although the core verticals of our lead generation business, which include auto finance and cash advance, are still under pressure, our Internet marketing network, eAdvertising, saw an increase in revenue generation of 200%. eAdvertising, although a lower margin product, will be essential in helping us identify and capitalize on higher margin leads eventually.

Our consumer credit business performed well in the third quarter, as 200,000 new members were added to a private label identity protection product. The additional members increased our total number of managed membership count to 1.8 million. Currently, we are aggressively pursuing additional products, which have the potential of doubling our managed memberships.

Economic pressures continue to affect our specialty finance and transportation businesses. Teletrack, although feeling the impact from the credit crisis and ongoing regulatory pressures, remains focused on cost containment and diversification. While operating margins remain steady at the usual levels, it's the top line reductions that impact profits. Product line diversification and international expansion have been areas of focus as we strive to improve growth and sustainability for the long-term.

Service revenue in our dealer services segment decreased 12.6% sequentially on a quarter over quarter basis. Speculation about the sustainability of the big three US auto manufacturers and limited access to credit availability has negatively impacted the transactions, as US car and truck sales sank to a 15-year low in September.

As John mentioned earlier, exclusive of impairment and restructuring charges, the operating margin in this segment would have been 18.6 in the third quarter due to increased expense controls and restructuring in the lead processing business. We have been successful in pairing down the auto lead processing business and realigning it with our automotive credit business to improve efficiencies and leverage resources such as sales, marketing and support functions.

In addition to expense reduction initiatives, our strategic focus continues to be launching new products and adding distribution channels. The new expansion areas are related to the upcoming red flag legislation skip tracing through the Teletrack database and enhancing our core credit product with concise summary information to aid underwriters and finance personnel at dealerships.

In the employer services segment, revenues decreased 8.4% during the third quarter on a year-over-year basis. However, the trend between the second and third quarters of 2008 has been very encouraging. This segment posted profitability improvements in every division, though revenues were down in most divisions. Revenues were down 2% from the second quarter of 2008, but operating margins were up to 12.3% in the third quarter from 5% in the second quarter of 2008.

The hiring solutions, tax consulting and international background screening tools had operating income improvements of greater than 35%. In response to the continued weakening in the labor markets and the overall economy, we have worked diligently to control costs and to increase efficiencies through operational improvements, primarily focused on consolidating infrastructure and reducing overall costs.

Last quarter, we had reported that our cost savings initiatives had reached $9.4 million on an annualized basis. In responding to the continuing softening of the labor markets, that number is at $11.9 million right now. We are in an unprecedented economic cycle and our teams are focused in mapping our infrastructure to the environment we operate in. As we manage through the cycle, we are also aggressively pursuing business development opportunities to expand our presence in the human capital space.

Service revenue in the multifamily segment remained flat during the third quarter, with an increase in operating income of 10.7% year-over-year. Although deterioration in the credit markets have made an impact on several of our other businesses, multifamily services remains resilient in spite of the decline in resident turnover, as fewer people are leaving rental units for homeownership. This segment has also boosted their margins through the consolidation of facilities and personnel reductions.

On the business development side, we are near completion of our consumer account performance database and continue to roll out analytical products that facilitate efficient property and tenancy management. Our investigative and litigation support segment saw a decrease in service revenue of 25% in the current quarter versus the third quarter of 2007, and down sequentially 12% from the second quarter of this year.

The downtown and -- the downturn in service revenue was primarily due to decreased demand on behalf of one of our larger clients. The trends are just reflective of the project-oriented nature of this business. The sales pipeline looks good and we are seeing favorable reactions to our newer technology products that facilitate ongoing data recovery services for our clients and recurring revenues for us.

The hedge fund data business has been impacted by the economic environment, due to reduced activity. We are told there are a lot of funds moving to the sidelines with the erratic market fluctuations. This segment has been a big growth area for us, and we anticipate it will continue into the future. While it is a tough business to forecast, due to its project-oriented nature, it's safe to assume that economic down cycles drive more litigation and this industry views the unprecedented financial market meltdown and economic dislocations across the globe to further increase electronic discovery needs.

Finally, from a cost containment perspective, we are continuing to stay aggressive in our efforts. I reported in our last call that our efficiency drive will result in $21 million in savings on an annualized basis. The labor part of the initiatives was 57% of the total, and lender and employer services accounted for 85% of the savings. Comparatively, as of now, the initiatives will total $30.8 million in annualized savings.

The labor part is about 61% of the total and the lender, employer and dealer segments account for 87% of the savings. Cost takeouts are never easy, but we are responding to the environment we are dealt with without losing focus that we are the market share leaders in most of our business segments, and we remain committed to continue to build on our market positions.

I would now like to open the call up to questions.

Thank you, sir. We will now begin the question and answer session.

(Operator Instructions)

Our first question from Brian Ruttenbur with Morgan Keegan. Your line is open. Brian, your line is open and please check the mute --

Okay, I was on mute. Thank you very much. Okay, in terms of your line of credit, first of all, have you seen any reduction whatsoever or any inclination that that would be cut or reduced?

Hey, Brian, this is John. No, no, not at all. No. We have, as you know, our total line is $225 million. We have about $189 million available and we are easily within any -- within the covenants that we have with the lenders. The lenders in our group -- it's headed up by Bank of America, who are in a very strong position. So to answer your question, no, our line of credit is good.

Okay. Do you see any circumstance in the near term where you would turn unprofitable? It looks like you are being very proactive in your cuts, but do you see a situation where you could turn unprofitable?

No, obviously, predicting the future is difficult. But certainly, we feel comfortable that given our current level of operating expenses, where we have pared down a lot, as Anand referred to, I think we are in good shape from the standpoint of earnings and cash flow, obviously relative to the economic climate we are in.

Brian, this is Anand. Just to add to what John said, our cash position is very good and the third quarter was actually a very good quarter from a cash generation standpoint.

Okay. And then last question, where would be the first area that you would start to see that you anticipate that would come back with an economic recovery? And what area do you see that revenues would start picking up?

Good question. I would say that you would see it in hiring, obviously in lending, in automotive, because that's related to consumer confidence. And with all this economic bailout about protecting people's homeownership and their equity lines and things, or the equity that they have built in their homes, you will see that in the resurrection of the housing market. So that is -- we are sitting pretty close to seeing activity that when it comes up, we'll see it first.

Okay, great. Thank you very much.

Our next question from Mark Marcon with R.W. Baird. Your line is open.

Good afternoon. I was wondering if you could describe in the employer services division and also lender services and dealer services, what sort of monthly trends were you seeing? And, what have you seen in the early stages of October?

I would say on the lender side, especially on the mortgage market, we have seen a continued downturn, Mark. And on the dealer side, obviously with so much of consternation about the big three US auto manufacturers and their financial viability, we have seen some decline in transactional volumes on the automotive side after a long time of -- a lot of resiliency there.

We also noticed that they are going to be pushing a lot of the used car volumes through a lot of incentives and guarantees and things -- guaranteeing residuals and stuff. So we have seen a downturn in those transactional volumes a little bit in the early part of October.

Employer services is a mixed bag. Actually, our background screening unit has had a very good performance this year. International, we are seeing some softness and that is reflective of the global financial markets starting to destabilize. But we are encouraged by our hiring solutions and our tax consulting group, which actually got helped out by the new bailout package because a lot of things on the work opportunity tax credits were extended.

Okay. And then -- I mean, could you give us an order of magnitude with regards to how much of a deceleration you saw, or anything that could help us to triangulate in terms of thinking about Q4 in those divisions -- top line if nothing else?

It's very tough to say, because this is an unprecedented market and I am not just using it as an excuse. In lender, the difficulty is, we usually see the third quarter step up and then it rolls down in the fourth quarter, which is the normal seasonality. We didn't not only see the step up in the third quarter, but we actually saw a decline in the third quarter. So if you had to mark from that kind of trend, I would say that the fourth quarter will be a lower quarter. So that's obviously a concern for us.

Automotive, we have seen some early depression and transaction volumes, but I also see that the dealer groups out there are really aggressive in incentives. And in the past, we have seen the incentives pull back, because you will see in a matter of two, three weeks in the weekend, things pull back. But so far, indicators are, the automotive market will have softening through the fourth quarter.

Okay. And in employer, have you seen any marked slowdown in the second half of September and [going into] October?

No, actually, like I said, there has been some slowdown in the international area. But on the contrary, we just got an EMEA contract that covers 25 countries to do background screening for a major financial institution. So it is kind of a mixed bag.

Okay. And then, can you give us the specific charge -- the breakout in the charge by division so that we can actually strip that out?

Sure, John's --

Yes, I can give that to you, Mark. Yes, the $2.8 million charge that we took in the -- in this quarter, $2.5 million of that is in the dealer services segment. Okay? And about $350,000 is in the lender services segment.

Great, thanks. I will jump back in the queue.

Yes, okay. Thank you.

Our next question from Kyle Evans with Stephens. Your line is open.

Hi, thanks for taking my questions, guys.

Hey, Kyle.

Hey, Kyle.

Could you comment on lender services -- any bad debt impact in the quarter and also, a look at pricing?

Yes, I'll -- the bad debt in that quarter was about -- it's pretty consistent, actually, with what we had in the previous quarters. It was about $0.5 million in lender services.

Okay.

So there wasn't a big change in that, either year-over-year or sequentially.

And pricing?

I will take the pricing question. We are seeing heavy pressure on the pricing from irrational competition, and I attribute that to this fact. What is happening right now is that the lower tier competitors are on their way out or on their last gasp. I did mention that our market share is improving over the last couple of months of the second quarter.

We don't have the third quarter [reports] yet on application volume. But as of end of June, early July, our market share was actually 50% and our guys' estimate, that number could be upwards of 53% right now, which kind of shows that we are taking share, but there is a lot of competition in pricing as lower tier competitors are just about going out of business.

Great. And last, the litigation business, I mean, overall, this is a difficult model, I think, for investors. But that line in particular, because it's got such a high contribution margin, because it's so volatile, could you just kind of step back and instead of talking about fourth quarter or even 2009, what's the long-term kind of growth potential of that business?

We have looked at it pretty -- in deep fashion over the last, probably six, seven months. We feel very encouraged about the long-term prospects of that business. We -- if you look at what we forecasted for this year, they are right on target for it. There is some fluctuations quarter by quarter because of the nature of the business.

But looking at the pipeline and what kind of matter or cases that are coming up and where our engagements are, we feel like we could be right back to where we were in 2007 fourth quarter. It's a question of when it is going to happen. So the long-term prospects of that business is really good, and I am told that this current economic climate only means more business from a litigation and electronic discovery standpoint.

Okay, and that's helpful. What is the client concentration there? It sounds like one customer hurt the numbers there. Is it highly concentrated?

It used to be more on matter, whether it's one customer in different jurisdictions or not. We have a similar type -- and that's just the nature of the business. What happens is, we sign on a major customer and they start us off in two jurisdictions and then you end up -- the case just mushrooming to many jurisdictions, and that's how our international expansion actually took place. We have a similar situation with the customer, which we can't go into a lot of detail. And it is a question of when and how it evolves.

Okay, thank you.

Yes, thanks.

Our next question from Jeff Bronchick with RCB Investment Management. Your line is open.

Good afternoon. Given the downturn and pressure on [lit], are there any areas of the business that you consider to be non-core or further portfolio restructuring? How are you thinking about that?

I think we have been in the restructuring -- or at least looking at non-core and non-strategic assets and pruning them away. We are by far mostly done with that process. We would probably have one or two that we are looking at. But I think for the most part, I think our enterprise is made up of credit and employment screening related businesses and the data services business obviously bridge both.

And let me ask it another way. First American had a plan. They pulled it. And as you look at a downturn and you look at your expense costs, you have a fairly complicated structure with a variety of different joint ventures and a complicated parent structure. How much closer to you are resolving some of those issues or it just never comes up?

This is John Lamson. We really -- we, First Advantage, we really don't have any complicated joint ventures in any of our businesses. So I think with the current mix of businesses we have now, we are fairly comfortable with those businesses.

We are always looking at possibilities of fine tuning things, but we have divested of a few businesses over the last 12 months that we felt were either not strategic or weren't performing well and we couldn't -- we didn't think there was a good opportunity to improve on them. But the businesses that we have now we are very comfortable with, and really our capital structure below us is pretty uncomplicated.

Got it. So let me turn it the other way. People bleeding, what are you able or mentally looking at acquisitions or additional services or are you sort of biding time through the downside here -- down cycle?

Yes, through this down cycle, what we are trying to do is to really be really focused on our cost structure, because we want to improve our margins. That has been something that we have been able to do in the past and we want to continue to do so. And we want to also fit our infrastructure to the market that we serve. So that is our primary focus.

As far as looking at opportunities to expand our business units or to look at opportunistic acquisitions, those are conversations that we have on a weekly basis. But obviously, the current market valuations -- value expectations [of the seller], those kinds of things obviously play into it.

Great, thank you.

Okay.

(Operator Instructions)

Our next question from John Emrich with Ironworks Capital. Your line is open.

Hi, thanks. Could you give me please cash and debt on the balance sheet at September 30?

Sure, I can. Our cash position was, we had $45.5 million of cash at -- this is September 30, obviously.

Right.

And our total debt was $50.5 million.

And you gave it once already, I apologize -- what was free cash flow year-to-date?

Yes, sure, no problem. Our free cash flow for the quarter and that's just for three months, was $27.5 million.

Right. And I am sorry, year-to-date you said --

Yes, year-to-date, our free cash flow was $61 million. Now, we have a large tax payment of $56 million we made in the first quarter of this year relating to a gain we had in the fourth quarter of last year, that we add back, just so you know.

I remember. And I guess my question is, that's like -- nine months of free cash flow is like a low-teens free cash flow yield on your enterprise value. It is just an insane valuation. What are the priorities for the cash you are generating going forward?

Yes, well certainly, we are -- first of all, we like the position we are in from a financial standpoint, given that we have a very conservative balance sheet and we've, despite the economic climate, I think done a pretty good job on free cash flow. So we like the position we are in right now. We are going to continue to pay down debt, which we have been doing.

Anand alluded to the fact that we are always at least talking about looking at potential acquisitions to improve our business. But these are kind of economic conditions that most of us have not experienced in our lifetime and hopefully we wont have to go through it again. But -- so, I think our position right now is, we are glad we are where we are. To the extent we generate free cash flow, we'll continue to pay down debt and look for opportunities going forward.

Great, thanks.

You're welcome.

Mark Marcon with R.W. Baird, your line is open.

Just a follow-on to the last question. It's twofold. First of all, can you remind us what the fourth quarter -- from a seasonal perspective, obviously there is cyclical fluctuations that are going to have an impact. But from a seasonal perspective, free cash flow wise, is this typically a good quarter, a not so good quarter, how do we think about it?

Yes. Certainly fourth quarter -- once again, relative to overall economic conditions, is normally a pretty good quarter, Mark. At least historically, we are usually coming off -- everything else being equal, and I am not sure that applies this year, but usually, fourth quarter earnings, at least historically if you go back, have been a little less than third quarter earnings. But cash flow is usually a little better. Okay?

Yes. That was my recollection. I just wanted to make sure there wasn't any --

Yes, and then I am breaking out any unusual timing of tax payments. And then, quite frankly, the -- at least historically, the weakest, I guess you could say, quarter for cash flow is usually the first quarter. Okay?

And then can you talk a little bit about -- you didn't mention buybacks. How would you prioritize a buyback vis--vis buying another entity?

I am not sure I follow your question.

Well, just given where your valuation is, how do you think of the valuation or the value generation in terms of buying back your own stock as opposed to buying another company?

Yes, well, we have -- certainly the scenario of us buying back shares, as you know, we don't have a lot of float to begin with. And I would kind of hope that the overall market will pick up a little and with it, what our share price will be, especially given the -- I think the pretty good cash flow we are generating, and as one of the callers mentioned, the returns based upon market prices are pretty impressive, so --.

And as I mentioned too earlier, we like the fact that we don't have much debt at the moment. We also want to be able to jump on an opportunity should one arise in the -- with respect to low valuations of businesses we might want to acquire, so.

Mark, this is Anand. Just to expand further on that, in terms of growing our business, we feel like some of the businesses that we have are outperforming in this environment and if you look at market valuations and then put those kind of values on those segments, we are clearly undervalued. And so, when we have conversations with people about different types of combinations, that is something that we are looking at, to see how that would change the outlook for us.

Okay. And can you talk a little bit about -- on lender services, you did have a -- the margin performance is quite good given the environment, but obviously the environment is quite tough. At what point do you hit kind of a breakeven point on lender services? How much would revenue have to fall off before you'd say [it's hard] to be profitable?

Pretty low. I mean, I would say that obviously -- the first off, I tend to view that most costs are variable over a period of time, [and] you had to look at it. But I am sensitive to the fact that in the short term, you have got to think about your fixed costs. But if I have to look at it, I would probably see another 30%, 40% before we worry about that.

Okay. And same question on the employer services side?

Employer services side is very difficult to make that kind of a statement, mainly because it's made up of five different product groups and they all trade and travel from a trending perspective in different terms.

Yes, that's -- in terms of the biggest component, how far would that have to move? Just your best estimate.

I would say at least 20% -- maybe 20%, 25%.

And in both cases, it doesn't sound like we are anywhere close to either one of those scenarios.

No. And it is also -- you are talking about how other services that we have tie into it. When we go in there and we win a contract for drug screening, obviously that has an effect -- impact on our background screening services. So the same way when we sell recruiting solutions, that has a downstream effect on background screening, and vice versa.

Great, thank you.

Okay.

At this time, we will conclude today's conference. Thank you for your participation. I am showing no further questions.

Thank you.