First Advantage Corporation Q4 2008 Earnings Call Transcript

Feb.24.09 | About: First Advantage (FADV)

First Advantage Corporation (FADV) Q4 2008 Earnings Call February 24, 2009 5:00 PM ET

Executives

Cindy Williams – Investor Relations Manager

Anand Nallathambi – President and Chief Executive Officer

John Lamson – Chief Financial Officer

Analysts

Carter Malloy – Stevens, Inc.

Brian Ruttenbur – Morgan Keegan

Mark Marcon – Robert W. Baird & Co.

Nathaniel Otis – KB&W

Operator

Welcome to First Advantage Corporations fourth quarter and full year 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 and will be available for replay from the company’s investor relations pages on their website at www.fadv.com until March 10th by dialing toll free within the United States at 866-421-0435 or 203-369-0798 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 Ms. Cindy Williams, Investor Relations Manager, to make a brief introductory statement.

Cindy Williams

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 cost-reduction initiatives and impact on improved efficiencies in future quarters including headcount reduction, facility consolidation, reduction in professional services and marketing-related expenses and other statements that do not relate strictly to historical or current facts.

The forward-looking statements speak only as to the date they are made, and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially 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 2007 annual report on Form 10-K and third quarter 2008 10-Q for further discussion of these and other risks.

We will now begin our conference call this afternoon with our Chief Financial Officer and Executive Vice President, John Lamson, who will provide an overview of our financial performance for the fourth quarter and full year of 2008. 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.

John Lamson

Thank you, Cindy, and good afternoon everybody. First Advantage reported a net loss from continuing operations of $3.5 million or $0.06 per diluted share in the fourth quarter compared to net income of $78 million or $1.32 per diluted share in the fourth quarter of 2007. Results of operations for the current quarter includes an impairment loss of $19.7 million or $13.7 million after taxes and minority interests, $0.23 per share, and a restructuring charge of $3.4 million equivalent to $0.03 per share. The impairment charge reflects the change in the estimated fair value of goodwill associated with our lead generation business as a result of less than expected cash flows generated by the business together with reduced market evaluation metrics in the current economic environment.

Results of operations for the quarter and year ended December 31, 2007, includes a pre-tax investment gain of $97.4 million or $58.4 million after tax, equivalent to $0.99 per diluted share, related to the sale of common stock of DealerTrack Holdings. Excluding the impact of these transactions, diluted earnings per share from continuing operations was $0.20 per diluted share in the current quarter compared to $0.33 per share in the fourth quarter of 2007.

Operating results for the current quarter includes $1.5 million of costs associated with consolidating operations in our lender services segment, $800,000 in our employer services segment, and other restructuring costs at corporate and other segments that totaled approximately $1.1 million. Operating results for the year ended December 31, 2008, include restructuring-related costs of $9.7 million as results for 2007 also include $9.7 million of severance in restructuring costs.

Earnings from continuing operations before interest, taxes, depreciation, and amortization, or EBITDA, was $35.1 million for the quarter ended December 31, 2008, compared to $42.3 million for the quarter ended December 31, 2007. A reconciliation of EBITDA to net income is included in our earnings release. For the year ended December 31, 2008, EBITDA was $142.2 million compared to $162.8 million in 2007.

Cash provided from continuing operations was $32.5 million in the current quarter. Our capital expenditures were $7.7 million in the quarter resulting in free cash flow of $24.8 million. For the year, our cash flow from operations was $122 million excluding approximately $56.9 million in tax payments made in the first quarter of 2008 relating to the gain I mentioned previously on the DealerTrack shares that were sold in the fourth quarter of 2007. Capital expenditure was $35.3 million in the current year, yielding free cash flow of $87.1 million. At December 31, we had positive working capital of $102.8 million.

Service revenue which excludes our reimbursed government fees was $181.9 million in the current quarter compared to $187.7 million in the same quarter last year. For the year, our service revenue was $727.3 million compared to $770.2 million in 2007. Operating income excluding the impairment charge was $18.7 million in the current quarter compared to $31 million in the fourth quarter of 2007. For the year, operating income was $93.6 million, once again excluding the impairment charge, compared to $121.1 million in 2007. Our consolidated operating margin was 10.3% in the current quarter compared to 16.5% in the fourth quarter of 2007, once again, excluding the impairment charge.

Lender services margins increased from 7.45% in Q4 2007 to 11.1% in the current quarter excluding the restructuring charges of $1.5 million. Our volumes picked up in December due to reduced interest rates, triggering increase in mortgage applications. Organic growth declined by 25% year over year, 17% quarter over quarter, and 13% sequentially, reflecting the reduced volumes that we have seen in the mortgage markets.

Data service margins were 15.5% in the current quarter excluding the impairment charge compared to 18.6% in Q4 2007. Margins improved in our direct-to-consumer lead generation and specialty credit businesses, offsetting reduced margins in our transportation and criminal data businesses. Year-to-date margins declined from 27.7% in 2007 to 18% in 2008. All the businesses in this segment experienced margin declines. In the case of specialty credit and transportation, margin declines were due to reduced volumes. In the case of our lead generation business, the margin decline for the year is due to a change in revenue mix from traditional higher margin lead generation to lower margin e-Advertising revenue. Organic growth in revenue was 20.5% for the year, 125% quarter over quarter, and 91% sequentially. Substantially, all of the growth was in our lead generation business, primarily e-Advertising and direct-to-consumer.

Margins in the dealer services segment were fairly consistent quarter over quarter and year over year. This is attributable to significant cost reductions and a paring down of our vehicle lead generation business. Revenue declined by 15% year over year and 31.2% quarter over quarter, reflecting reduced volumes and credit reporting and the aforementioned paring down of the vehicle lead generation business.

Margins in our employer services segment were 7.5% in the current quarter compared to 17.3% in the fourth quarter of 2007. Margins declined in all of the major business units and revenue declined by 24.7% on an organic basis. For the year, margins declined from 12.5% to 7.9% as revenue declined by 12.2%. Our multi-family services segments margins increased from 15.5% in the fourth quarter of 2007 to 20.6% in the current quarter due to cost reductions as revenue was essentially flat. For the year, margins increased to 28.8% from 25.8% primarily due to operating efficiencies as revenue grew by 1.5%.

Margins in our investigative and litigation support segment were 41.5% in the current quarter compared to 51.7% in the fourth quarter of 2007 as revenue declined by 45%. For the year, margins were 38% in 2008 compared to 42.7% in 2007, and revenue declined by 5.8%.

Our balance sheet is very strong. At year end, First Advantage had total debt outstanding of $32.8 million including fixed rate debt of $5.2 million with an average interest rate of 5% and variable rate debt of $27.6 million with an average interest rate of 2.6%. Our debt to capital was very minimal, 3.5%. Our available and unused lines of credit were $205.5 million at year end, and we had $52.4 million of cash on hand.

For the quarter, interest expense decreased from $1.4 million in 2007 to $408,000 in 2008 due to significantly lower average debt balances. Average debt outstanding during the current quarter was $41.6 million compared to $101.8 million in Q4 2007. The average interest rate was 4.7% in 2008 and 5.38% in 2007.

That concludes my presentation. Now I will turn it over to Anand.

Anand Nallathambi

Thank you, John, and good afternoon everyone. 2008 was the year where the global economic downturn impacted most of our business segments except for multi-family and lead generation businesses. Fortunately, we were able to identify these declining trends in early 2008 and react to the challenging environment with meaningful expense reductions in labor costs, business consolidations, and closure of underperforming facilities. The initiatives included decreasing US staffing levels by 22%, which ultimately resulted in a 20% annualized reduction in salary expense. In total, the expense reductions taken during 2008 combined with those in progress today will help us manage the downturn and pay long-term dividends in the year 2009 and beyond.

In lender services, year-over-year service revenue declined 16% in reflection of the market downturn that saw mortgage originations decline rather dramatically. After three quarters of decline, we saw a late pickup in the fourth quarter boosted by lower fed funds rates and increased mortgage refinanced activity. This surge continued through January and is still going on, though at moderate levels. The key point for us was the resurgence in our operating margins especially aided by all the cost cutting and consolidations done in 2008. Compared to 2008, operating margin of 15.5% the margin in January 2009 was 26.7%.

As announced just last week, the new administration’s housing bailout package is committed to helping nearly 9 million struggling US homeowners to refinance or modify their loans. The unified focus in stemming the foreclosures and reigniting the housing industry can only benefit us. Sharp increases in delinquencies are pushing lenders and portfolio holders to focus more on deteriorating credit quality. Cost solution products are back in demand as new regulations take effect in 2009. Our strategic marketing services provide solutions that help lenders in their loan modification programs. The current trends in the mortgage industry points well for us to be a market leader and continue to consolidate and grow market share.

The data services segments saw an increase in service revenue of 125% on a quarter-over-quarter basis and an increase of 21% on a year-over-year basis. Most of this upswing is due to our lead generation business. E-advertising revenue has been consistently growing since the middle of 2008 with a 600% growth in the fourth quarter. Although our traditional lead generation business in the payday lending and subprime automotive verticals continue to be affected by the decline in economic conditions, e-Advertising products particularly in the health and wellness area are still big drivers of demand. Our e-Advertising network, a market place of over 400 affiliates and more than 300 URLs, provide us with a unique opportunity to be the brokerage that facilitates in-demand consumer products.

Our consumer credit business performed well in the fourth quarter as 100,000 new members were added to the private label identity protection product. The additional members increased our total number of managed membership count to 1.9 million. The new year is starting off well as we are seeing encouraging growth in credit monitoring transactions and significant volume increases from new clients.

Our specialty finance and transportation services business continues to perform well in a tough economic environment. We continue to seek strategic diversification for our core products by utilizing other relevant data to supplement the traditional data sets, targeting more mainstream financial services clients and growing internationally. We are also developing antifraud and bad check solutions to help point-of-sale check cashers without the traditional lending infrastructure.

In our dealer services segment, amidst challenging market conditions, our focus has been to improve operational efficiencies and streamline our business so that margins remain strong. Our success in doing so is reflected in the operating margins which declined 7.5% on a service revenue reduction of 31% in the fourth quarter, and on a year-over-year basis, margins remaining flat, though service revenues decreased 15%.

While visibility into 2009 remains uncertain, especially in new core sales, a positive sign may be in the used car industry especially with strong January sales figures of certified pre-owned vehicles. Additionally, we are pursuing every opportunity to introduce new products to our distribution channels of more than 9000 auto dealers and more than 50 strategic marketing partners. More recently, we launched Credit and Lead Advantage, the industry’s first consumer information positioning product for auto, RV, and marine dealers. This product delivers consumer demographic and lifestyle information to dealers providing them with insight into every applicant so they can identify the highest quality process. Also, over the last 2 years, we have placed a special emphasis in growing our independent dealer network which should help us as the focus shifts more towards used car sales.

The employer services area has been adversely impacted with the global trend of reduction in labor. Services revenues in the employer services segment decreased by 23% on a quarter over quarter basis and by 10% on an annual basis. A steady stream of news from corporations announcing staff reductions indicate a global trend of employers going into preservation mode. In response, we have made measurable progress in our cost reduction programs and continue to address operating efficiencies throughout this business segment. Expense reductions during 2008 totaled $8.5 million which should mean approximately $12.7 million in reduced operating expenses on an annualized basis going forward. A significant part of the cuts were headcount reductions which saved $5.6 million in 2008 and should contribute approximately $10.5 million in 2009 and beyond.

On the business development side, we are actively engaged in brining on new client relationships within the US and internationally. In the US, the areas of client wins have been in gaming, biometric services with government and state agencies, and business services. In international, client wins have been in retail, business services, and financial services.

Service revenue in the multi-family segment remained flat during the fourth quarter of 2008 with a slight increase on an annual basis. Operating income increased significantly during the fourth quarter of 2008 to 20.6% versus 15.5% in the fourth quarter of 2007. On an annual basis, operating income reflected an 11% increase year over year, the result of strict focus on cost containment initiatives. The continued emphasis on analytic tools for the property management product sweep, deployment of a new billing system with online payments, on-boarding, and compliance have helped back office efficiency and improve the customer satisfaction.

Renters insurance continues at a healthy 30% annual growth rate. In our investigative and litigation support segment, the metrics point to lower revenues on a comparative level, but from a market and competitive perspective, we remain excited about the future. The decrease in service revenue is reflective of the project-based nature of the business and external pressures attributed corporate clients delaying cost outlays for litigation expenses and law firms continuing to reduce outsourced costs. The long term opportunities in e-discovery and litigation support will accelerate as the likelihood of lawsuits resulting from the economic fallout increases. We’re positioned globally to capitalize on opportunities we’re currently pursuing, investigations in the areas of fraud, price fixing, and Foreign Corrupt Practices Act.

As we navigate through this period of swift economic winds, we remain committed to focus our efforts in managing our business for the long term. When combining our product mix, global reach, and a strong balance sheet, we are confident that we can operate efficiently and effectively during these challenging times.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Carter Malloy from Stevens, Inc.

Carter Malloy – Stevens, Inc.

You noted that the volumes were up in December, but can you comment on the overall volumes itself throughout the quarter?

Anand Nallathambi

This is in the lender services segment?

Carter Malloy – Stevens, Inc.

Yes.

Anand Nallathambi

Yes, we did see the uptick in the fourth quarter. If we have to actually compare from end of December to January, the increase was significant. It was about 58%, so it was a significant increase, and January over December was about 18% increase. February, we’re seeing a slight drop-off in it, but not too much, so we remain enthused about it if the government’s housing bailout programs and the rates stay low, we could see some sort of continuous transaction levels.

Carter Malloy – Stevens, Inc.

Last quarter, you had also commented that your competitors were getting pretty desperate on the pricing and driving down industry pricing as a whole. Can you tell us if you’re still seeing that activity, and also maybe if you’ve seen a rise in the bankruptcy of those guys and, if so, the effect on your market share?

Anand Nallathambi

In general, because of the economic climate, we’re seeing a lot of our competitors going through a lot of pressures. There has been some irrational pricing out there, but in general, the client community is looking for high quality providers, so I think that you’ve got to balance that out. While we see people just about to go out of business putting out really ridiculous pricing out there, we’re seeing a little bit more reticence of lenders and other providers taking advantage of that, so I would say the pressure is still on, but it’s not as bad as it used to be.

Carter Malloy – Stevens, Inc.

Any bad debt issues in the quarter?

John Lamson

No, really nothing significant. Our bad debt expense was up a little bit in the fourth quarter compared to the third quarter. We were at about $2.9 million in the fourth quarter compared to $2.4 million, but it has fluctuated around that number all year, so I wouldn’t say we’ve seen any dramatic increases in credit, and the lender services fees, most of that behind us. It is more concentrated probably on the employer services segment versus lender now, but overall it’s pretty consistent. It wasn’t a big impact on the quarter.

Carter Malloy – Stevens, Inc.

Can you help up understand more the dramatic rise in internet advertising within your region?

Anand Nallathambi

We have always had our advertising network, and the business revenue mix and the composition of the revenues used to be in payday lending, sub-prime automotive, and e-advertising. The payday lending and sub-prime automotive verticals are basically nonexistent now or not profitable, and they used to be very profitable for a while. The e-advertising side is more of a brokerage where we match offers with consumers out there, but it’s a pretty healthy margin. It may not be the margins of payday lending and sub-prime automotive which used to in the 40% range, but it’s 15% to 18%, and maybe we could even move it a little up, and that is really growing, and from a product standpoint, it all is revolving around health and wellness, in home improvement, and those kind of products.

Carter Malloy – Stevens, Inc.

Can you tell us why you’ve seen that type of growth within that just now as opposed to over the long term?

Anand Nallathambi

This has been a growth not just over the immediate period. Like we said in our script, the growth has been building since middle of 2008. Obviously it was explosive growth in the fourth quarter, and that’s because of a health and wellness phenomenon called Acai Berry, but now we have a lot of health and wellness products. What we’re trying to do is to diversify within those lines to build a lot of sustainable traction in the long term.

Operator

Your next question comes from the line of Brian Ruttenbur with Morgan Keegan.

Brian Ruttenbur – Morgan Keegan

Along the same lines, first question was on the explosive growth in the data services, lead generation area, health and wellness, and you said what was that specifically in health and wellness, was there a specific area within health and wellness that you just said?

Anand Nallathambi

Brian, it’s basically in weight loss.

Brian Ruttenbur – Morgan Keegan

Do you expect that to just be seasonal, that people around the holidays began the year with picking that up?

Anand Nallathambi

There is some seasonality, but we’ve seen this build up from the middle of 2008, and it’s possibly also because of our focus that we have turned towards the e-advertising network as a long-term business that we can take advantage of. We are actually being cautious about our growth. If we let it, this could actually be a lot more explosive than it is, and we want to be cautious. We want to make sure that we work with the providers that we’re comfortable with, and we want to balance the growth, so today it’s weight loss and health wellness, and it would be different products as we go through the year. There is some seasonality for health and wellness in the beginning of the year because of most people’s New Year resolutions, but we see this continuing. We know already for February it’s been bigger than January.

Brian Ruttenbur – Morgan Keegan

Is January bigger than December?

Anand Nallathambi

Yes.

Brian Ruttenbur – Morgan Keegan

It looks like lender services is coming back. It looks like data services is getting this explosive growth. Employer services is down some and probably will be trending down, and everything else like multi-family is kind of flattish?

Anand Nallathambi

Yes.

Brian Ruttenbur – Morgan Keegan

Dealer services should be kind of flattish or down year over year?

Anand Nallathambi

The transaction levels we were worried about because of all the public scrutiny that it has garnered right now, but it hasn’t been as bad as we anticipated, so we’re encouraged by it, and I think it’s because in the first early months of the year, there’s been a lot of activity in the certified pre-owned vehicle area, so we have to wait and see. The automotive market is anybody’s guess, and obviously with the Big Three being in the shambles that they are in, we’re just cautiously optimistic.

Brian Ruttenbur – Morgan Keegan

Because of this ramp up of lead generation, gross margin should be running around the fourth quarter levels of 58% or if you back our the government fees 62%?

John Lamson

I think that’s probably a pretty good estimate and we as you know do it off of service revenues, so I would go with the 62%.

Brian Ruttenbur – Morgan Keegan

Just going on to salaries and benefits and other things like that, is it good to think fourth quarter levels holding up or is there anything that’s going to spike, other operating or sales and benefits either way, up or down?

John Lamson

I don’t envision anything going forward that would necessarily spike up in either one of those categories.

Brian Ruttenbur – Morgan Keegan

An easy question for you guys regarding tax rate. You had a lot of weird things going on in the quarter, but tax rate going forward should be around the level?

John Lamson

When you look at our whole year in 2007, it was about 53%, but going forward, it’s about 41% to 42%. That should be the effective tax rate.

Operator

Your next question comes from the line of Mark Marcon with Robert W. Baird & Co.

Mark Marcon – Robert W. Baird & Co.

What was the specific name of the service that you were marketing? I thought you mentioned one?

Anand Nallathambi

The Acai Berry? It’s a weight loss product. That’s just a product, but the product names that they have been marketed under could be any number of things. It’s basically health and wellness or weight loss aid type products.

Mark Marcon – Robert W. Baird & Co.

Do you have any famous brand names for this?

Anand Nallathambi

Not that I can think of.

Mark Marcon – Robert W. Baird & Co.

Is it essentially that it’s all been around one producer, or is it a whole host of them?

Anand Nallathambi

There is a whole host of them, and that industry works through anybody who wants to offer products to anyone, and what we do in the e-advertising network is present those offers to the eyeballs that are interested in it, so if you take a look at putting down what do we do, what we do is we facilitate a process by which we present consumers’ request for information with people with people who have the information to provide for that request.

Mark Marcon – Robert W. Baird & Co.

Obviously you mentioned January was better than December and February was better than January, so if we look at the revenue rate that you had in the fourth quarter, are you anticipating that that’s going to continue to build as the year goes on?

Anand Nallathambi

Again, with lead generation, there’s always a speculate element, but if I had to just go with the first couple of months of the year, I would say that revenues are in the $20 million range a month. Needless to say, because of such an explosive growth, John and I from a corporate perspective are very careful. We want the growth to be manageable and to make sure it’s growing with profitability and operating dynamics that we’re comfortable with, so we’re pouring over day sales outstanding and customer concentration type of products, diversification within product lines, all of those types of things.

Mark Marcon – Robert W. Baird & Co.

What’s your primary hesitation or reason for caution?

Anand Nallathambi

It’s mainly because it is lead generation. If you really understand that business, it’s like Oprah getting on our show and saying that this particular book is a great book, and I’m going to put it on the book club, and you would see that person rise into the bestseller list. I think most of the nervousness for us is because of the newness and because of the growth, the trajectory of it. We’ve always had e-advertising ever since we bought that company, and one of the reasons we bought that company was because of this network of affiliates and a marketplace that we see a lot of eyeballs and facilitate transactions. Now, we’ve just taken a cautious approach because this market has just been a topsy-turvy market.

Mark Marcon – Robert W. Baird & Co.

As you plan for ’09, how are you planning for it, and what would be a reasonable park with regards to revenue for the year and margins for the year?

Anand Nallathambi

That’s really looking too far out there. We’re looking at this business at least quarter over quarter at this point.

John Lamson

As Anand pointed out, it has grown rapidly really staring in mid 2008, but certainly accelerating in the fourth quarter and into the first quarter of this year, but it is new to us from the standpoint of the volume that we’re seeing, and we’re just being I think prudent in managing the volumes that we’re dealing with, so to try to speculate as to the sustainability of it over a longer term throughout the entire year is a little difficult at this point until we get a little more seasoned in the business.

Anand Nallathambi

I will tell you this though. E-advertising will be a key business line and business segment for us going forward in lead generation. We’re pretty comfortable about that. To the extent of how much and how many lines are we going to get into and what could that mean, probably give us another quarter or two, and we’ll be much more confident about what should that number be, should that be $100 million or $200 million.

Mark Marcon – Robert W. Baird & Co.

Have you had experience in the past with a particular vertical or service that ended up spiking but then pulled back? Is that part of the reason why you don’t want to project it at this point?

Anand Nallathambi

No. We like the fact that it’s a data business. We like the fact that this is in the consumer arena, but our focus in the past used to be payday lending and sub-prime auto because it closely aligns with our other businesses, and that business, payday lending and subprime auto, grew from 0 to $55 million over maybe 2 or 3 years and we bought it after about 18 months, so this is the nature of this industry, and we’re just now knowing that what used to be core is not core anymore that business is highly regulated and it’s going away, so we’re now transitioning into a different area, and we just want to be careful about it because this market used to be dominated by magazine publishers and those kind of businesses, and now it’s more into the data and consumer arena.

Operator

Your next question comes from the line of Nat Otis with KBW.

Nat Otis – KBW

Do you have the amount of international business that you did in the quarter?

John Lamson

I do. Do you want to give us your other questions and then we’ll get back to that one?

Nat Otis – KBW

The second one was actually if you could do the quarter or quarter organic growth stuff again quickly. Then the last question is just color on hedge fund business as you started ’09? Certainly it was dipping to end ’08, but just seeing if any changing dynamics in the market place make the likelihood that you might gain a little of it back to start ’09.

Anand Nallathambi

Nat, I’ll handle the last question while John is preparing the other information. On the hedge fund business, that business has been impacted because of the lack of activity over the last couple of quarters. Do we see a resurgence of activity in 2009? Maybe a little, but the bigger opportunity that we see is actually in litigation—e-discovery and litigation support work because of all these problems that they’ve been having in the hedge fund area, and that’s an area that we’re actively pursuing, and we’re engaged in a lot of discussions around investigations into fraud of hedge fund managers and portfolio managers.

Nat Otis – KBW

You’re traditionally talked a little bit about that e-discovery pipeline in there. Any comments there, and anything that actually is associated with more lawsuits from Wall Street? Anything like that?

Anand Nallathambi

Yes. Can’t go too much into it because those are all things in discussions right now, but yes, there are a few here and also internationally. We’re actively trying to get into those kinds of things. The big story in litigation support, and you would have seen our competitors, is there’s a lot of changes and consolidation happening amongst competitors over there, partly driven by corporations just going through delaying or trying to look at litigation as a discretionary expense. Law firms are trying to reduce outsource costs, and corporations are also trying to see how far they can delay it. We believe that those are going to be just a delay and not necessarily a drop-off because if it is an investigation, they do have to defend, they have to provide, and e-discovery services are part and parcel of the litigations, but it’s more of a timing issue, but right now that industry is definitely in sort of a lull.

John Lamson

I’ll give you the organic growth rates. Vendor was down 17%, data services was up 125%, dealer services was down 31%, employer services was down 24.7%, multifamily was basically flat, and investigative was down 45% and companywide that puts us down 5% on an organic basis. Did you ask about international revenue?

Nathaniel Otis – Keefe, Bruyette & Woods

Yes.

John Lamson

In fourth quarter ’08, it was $7.9 million. That’s background screening.

Nathaniel Otis – Keefe, Bruyette & Woods

That’s just in the background screening, okay.

John Lamson

Employer services was $8.2 million.

Operator

Your next question comes from the line of Mark Marcon with Robert W. Baird & Co., Inc.

Mark Marcon – Robert W. Baird & Co.

You mentioned on employer services that we should see some continued expense reduction. Obviously the trends are still going to be negative, so when we think about the margins and what you would hope to accomplish in that particular division, how should we think about it.

Anand Nallathambi

I’ll take the business side of it. Mark, that’s an area we have cut a lot with headcount reductions. What we are trying to do now is to try to look at other programs, maybe look expense reductions more from a reduced work or those kinds of things because these are businesses that we are committed to. These are core businesses for us, and we have a really good presence, and when the market turns, we are in a great position to take advantage of it. That’s more directly related to the economy, and right now you are seeing globally, and I think we’ve looked across the enterprise. Everywhere, hiring is down. We are getting some client wins, like I mentioned in different areas and stuff, but not enough to overcome the drop-offs by the delay in hiring or staffing reductions, so employee services is one that we have to wait and see. We have a lot of plans to manage expenses better. We have taken a lot out of expense out of it, on that side, but we have to wait and see. That’s one area that’s just globally going through a downturn.

Mark Marcon – Robert W. Baird & Co.

It’s pretty well known that employment is falling off globally. I guess what I was trying to think of was if the magnitude of the decline continues through most of this coming year, just trying to think through exactly what the offsets are in terms of expense reductions that you’ve already taken or are taking.

Anand Nallathambi

Over and above what I already mentioned, we are looking at lot of different ways that we can drop expenses off, and we probably have 5 or 6 programs that could help, but we are careful about what we are looking at. We took a lot out on headcount last year, and this year before we do it, we need to look at reduced hours and those sorts of things because we do need the skilled workforce to manage the flow

Mark Marcon – Robert W. Baird & Co.

So what you have taken out relative to the expenses that you exhibited in the fourth quarter was an additional $10 million in annualized cost savings?

Anand Nallathambi

Yes.

Mark Marcon – Robert W. Baird & Co.

Then with regards to lender, how should we think about the revenue opportunity for the refinances relative to a purchase application? Is there any difference?

Anand Nallathambi

For us, there is no difference between a refinancing and a purchase because a credit transaction sometimes happens even before anybody identifies what kind of a transaction it is. They are trying to qualify the borrower for anything, but the attractive side on the lender services side for us is the loan modification programs. They have a tremendous amount of things that at a lot of the lenders and the portfolio holders have to do to modify these loans, especially if they are going to send the foreclosures and the increase in delinquencies that has happened across the board.

Mark Marcon – Robert W. Baird & Co.

It sounds like that should continue to go on. Should you get back to your traditional margins in that area?

Anand Nallathambi

No. Unfortunately those won’t be in the traditional margins which is why we feel like the refi’s along with the loan mod programs will help us to balance out the margins and continue on to get back to where we used to be.

Mark Marcon – Robert W. Baird & Co.

So with a combination of those, we should see an improvement in terms of the overall margins for next year.

Anand Nallathambi

As you can see, for example in January, compared to our older infrastructure and older cost structure, we made the same amount of money on, I believe, about $2.9 million less revenues. That shows you the consolidation that we have done and that the cost takeouts that we have done is paying dividends.

Mark Marcon – Robert W. Baird & Co.

How should we think about that? That’s obviously been extremely lumpy.

Anand Nallathambi

I think there will be a period of delayed projects. That’s the way we look at it because these are projects in force and they are just delayed. I’m sure what kind of a timeframe to give you. I would probably say that first quarter I could see that being down, but it should come back, and especially with all these new investigations picking up, it should be fine beyond that.

John Lamson

As we’ve told you in the past, this is a lumpy business, and there is no reason to believe that it won’t continue to be that way going forward. There is really no seasonality to it per say, and we do think as Anand alluded to his planned presentation that the environment we certainly think will be right for some significant litigation given what’s going on in the markets.

Mark Marcon – Robert W. Baird & Co.

The quarters can end up being lumpy, but in general it sounds like if we take a look at your track record over the last couple of years, nothing would lead you to believe that you shouldn’t aside from particular quarters jumping around on an annual basis end up doing somewhat similarly to what you’ve done.

Anand Nallathambi

We believe so, and that optimism is coming from a couple of things. One is because of the pipeline and the discussions that we are in and the projects that we are trying to get in and the receptivity that we have received. Especially in Europe, we are now the bona fide leader in e-discovery. That’s another factor. The other thing that we are noticing from a competitive standpoint in the US is we see a lot of the lower tier competitors dropping out, so we think there’s got to be some consolidation opportunities, but again I like I said, this is a project-oriented business.

John Lamson

But structurally there hasn’t been any really significant change in business model itself.

Mark Marcon – Robert W. Baird & Co.

Lastly, how are you thinking about the usage of this cash? Obviously you’re paying down debt. Is that going to be the primary focus given the current environment?

John Lamson

I think we have done a good job managing the working capital and our cash position. We will obviously continue to do that. We will continue to pay down some debt. As we have talked about in the past we have some earn-outs that we have to continue to fund which is probably in the range of $20 to $25 million, so we will do that. Also in this market place there may be some acquisition opportunities, although we haven’t done many lately, as we planned not to, and I think that was a wise move. There may be some opportunities going forward, so I think we will continue to do what we have done, really focus on cash flow, pay down debt when we can, but still have ample leverage in our balance sheet to take advantage of opportunities that might come along.

Operator

At this time, there are no further questions. This will conclude our conference call. You may disconnect at this time.

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