First Advantage Q4 2007 Earnings Call Transcript

Feb.20.08 | About: First Advantage (FADV)

First Advantage Corporation (FADV) Q4 2007 Earnings Call February 20, 2008 5:00 PM ET

Executives

Cindy Williams – Investor Relations Manager

John Lamson – Chief Financial Officer & Executive Vice President

Anand K. Nallathambi – Chief Executive Office, President & Director

Analysts

Carter Malloy – Stephens, Inc.

Jeffrey T. Kessler – Lehman Brothers

Brian Ruttenbur – Morgan Keegan & Company, Inc.

Kevane Wong – JMP Securities

Mark S. Marcon – Robert W. Baird

Operator

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 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. Thank you, you may begin.

Cindy Williams

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 operating efficiencies and dealer services, ability to integrate Verify’s products and cross sell to its client base, continued growth in revenues market share and cross selling activities in the multi family segments, continued growth in the investigative and litigation segment, 2008 service revenue and earnings guidance and other statements that do not relate to historical or current facts. The forward-looking statements speak only as to the date they are made. This company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date forward-looking statements are made.

Risk 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 acquired, changes in applicable government regulations, the degree and nature of the company’s competition, increases in the company’s expenses, continued consolidation among the company’s competitors and customers, unanticipated technological changes and requirements, the company’s ability to identify suppliers of quality and cost effective data and other risks identified from time-to-time in the company’s SEC filings. Investors are advised to consult the company’s filings with the SEC including its 2006 annual report on Form 10K for further discussions 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 of our financial performance for the fourth quarter and full year 2007. Following John we will here from Mr. Anand Nallathambi, President and Chief Executive Officer who will provide us with a review 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

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 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 ended 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 the first quarter 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 contributions of US 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. The significant earnings growth for the fourth quarter and for the year was achieved despite serious economic issues in the housing and credit related market 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 the adjusted EBITDA of 14% quarter-over-quarter and 3.2% year-over-year. Excluding approximately $4.6 million of non-share based severance cost incurred in the first quarter 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 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 2007 and 2006 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 the 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 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 2007 compared to 13.3% in the fourth quarter 2006. For the year the consolidated operating margin was 14.9% compared to 16% in 2006. The operating margin for 2007 excluding the severance cost 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 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 regeneration 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. The significant margin growth is a function of overall organic segment growth in 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 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 continued 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 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 losses 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 multi family services segment from 14.3% in the fourth quarter 2006 to 15.5% in the fourth quarter 2007. For the year margins increased from 22% to 25.8%. Margin growth is attributable to tight expense controls and revenue growth.

To give you some information on our organic growth rates by business segments. These are year-over-year results. In lender declined 14.1%, the data 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%, multi family 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 a 23.2%, in dealer of 10.4% and we had quarter-over-quarter increases in our employer services segment of 8.8%, multi family of 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 $3.3 million in 2006 to $1.4 million in 2007 due to significantly lower average debt balances. Proceeds from the sale of the DealerTrack stock sale we 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?

Anand K. Nallathambi

Good afternoon everyone. In our third quarter earnings call I remember pointing out that despite the downward trends of the housing market, our Internet performance was in line with plan 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 a 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 are higher than January’s. The industry is feeling positive impacts of the 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 Fiserv. In addition to the scale 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 per 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 focused 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 business. Though the margins are still very healthy in our specialty finance business the lack of robust top line growth of these two areas affect the overall profitability of the data group.

In the lead generation business we are expanding our sales presence to include additional verticals like [inaudible] supplement and healthcare. In the specialty finance business we are positioning or 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 are already seeing operational efficiencies increased 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 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 90.5% 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 acquisition 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 environments favor the 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. Identify and background verifications along with fraud management solutions are experiencing greater acceptance, now has tools to identify, prevent and manage criminal activity.

The multi family segment continues to grow in market share and profitability. Revenues grew 5% and profits grew more than 20% year-over-year. We should see continuous growth in revenue and profitability in 2008 as we increase share and cross sell our clients with the renter’s insurance product. Also making a conservative effort to focus on unique data elements that could be 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 margin particularly in the litigation support and ediscovery business. This segment had a 67% year-over-year increase in service revenues. Increases in service revenue have been the result of diversified project base, ediscovery and computer forensic services. Most 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’re pleased with the way we closed the year 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 businesses; number two, redeploy non-strategic assets in to our core businesses; and number three, leverage the unique debt elements and 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.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Carter Malloy.

Carter Malloy – Stephens, Inc.

Can you help us think about the segments in 08 as it relates to the guidance?

John Lamson

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

Carter Malloy – Stephens, Inc.

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

Anand K. Nallathambi

I don’t think so. The fourth quarter margins were impacted because of bad debt and we were aggressive in taking a look at this and cleaning it up. If you really think about it as we mentioned, in January our volumes were back up like 34% and revenue was also relatively close in the same range of increases and our margins are back up in the mid 20s. So we think fourth quarter was approbation because of what the macroeconomic environment brought upon us.

Carter Malloy – Stephens, Inc.

Just so I can have a little more clarity maybe, can you give us some ideas to the cost structure within that as far as fixed versus variable and some of the levers you may have, additional levers you can pull.

John Lamson

Certainly, right off the top about a third of the costs are cost of goods so that’s certainly all directly variable costs. Once you get past that 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 margins approaching 30% operating margins and why you see margins this quarter below 10 and certainly a lot of that had to do with the increase bad debt we mentioned and volumes. But, at least through January, as Anand alluded to the volumes are up so it’s a two way street.

Operator

Your next question comes from Jeffrey Kessler.

Jeffrey T. Kessler – Lehman Brothers

A couple of months ago an electronic litigation some kind of briefing and the number of small companies in it and the business was interesting particularly given the position of Kroll in it. It seems like you are now up in the 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 strength in that business, what types of clients are you seeing, are coming to you and is this mainly international growth that you’re seeing at this point? Or, is this something that you’re getting both in the United States and internationally?

Anand K. Nallathambi

I would answer that – we are seeing increase in growth in the US but, it is the international growth that has been really rapid.

Jeffrey T. Kessler – Lehman Brothers

Can I get some of the vertical? Some of the type 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?

John Lamson

First of all, I think for the obvious reasons we can’t necessarily name our clients because it’s litigation related 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, when you get into verticals has been in pharmaceuticals and financial services industries that typically have quite a lot of large litigation.

Jeffrey T. Kessler – Lehman Brothers

Is this mainly European? Asia? Or the combination of the two?

John Lamson

It’s kind of all over the map too. Just to give you a flavor in the litigation support work that segment about 44% of our revenue was from international operations.

Operator

Your next question comes from Brian Ruttenbur.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

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?

John Lamson

Yeah, that’s GAAP earnings. Earnings per share.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

Fully diluted GAAP earnings?

John Lamson

GAAP earnings per share and I’ll 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. $0.99 of that has to do with the Track gain. If you 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, what to base that off of would be $1.21 in 07.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

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

John Lamson

The CredStar deal was at the end of the year so we funded that at the end of the year. But, like I said in my remarks we’ve got about $77 million worth of cash on 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 and we’ve got some earn out payments coming up but, I think we’ll be pretty good. Our debt is very minimal.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

You won’t have to go into your line at all?

John Lamson

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

Brian Ruttenbur – Morgan Keegan & Company, Inc.

Then, if I can ask just one more follow up and I’ll shut up, on the gross side, from your service of revenue do you see gross margins higher going up in 2008 according to your guidance should we see gross margin expansion?

John Lamson

Do you mean operating margins?

Brian Ruttenbur – Morgan Keegan & Company, Inc.

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

John Lamson

Yeah. You will.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

Can you give us a number?

John Lamson

No.

Operator

Your next question comes from Kevane Wong

Kevane Wong – JMP Securities

Two things, first where do you guys see your pro forma numbers excluding the Search or do we just work with what we’ve got at this point essentially?

John Lamson

The US Search, in the release you’ll see that that’s segregated in discontinued operations.

Kevane Wong – JMP Securities

For this quarter and the fourth quarter are sectioned for the year, but nothing as far as first through third quarters? So for comparability on modeling makes it a little more trickier, that’s why I was asking if it’s going to be available or not.

John Lamson

It will be and when we file the 10K it’ll be in there next week.

Kevane Wong – JMP Securities

Also looking at the sequential increase in the revenues in the investigative litigation support, is that new business that’s come on or is that follow on from some of the big increase you saw last quarter? I don’t know if there’s a particularly 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 is this really is additional new business that you saw in the quarter.

Anand K. Nallathambi

It was a mix of both but what it was is 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.

Kevane Wong – JMP Securities

So it’s a situation of – I’m trying to remember off the top of my head, I think before you had said it’s something like eight of the top 10 banks or clients are a major part of that business. Is it pretty concentrated as far as the customer base or is that going to just spread out?

Anand K. Nallathambi

I think we talked about eight clients, not especially top banks, but –

Kevane Wong – JMP Securities

I meant clients, sorry.

Anand K. Nallathambi

And I think that that’s true. What we are doing is these big clients also have multi-national presence and some of these matters in dispute are expanding in different geographies and we’re growing with it.

Kevane Wong – JMP Securities

And as I recall sort of the stuff in 3Q was a project related and I know I’m dancing around this, but I’m trying to figure out if it’s a particular project, how long that project lasts for the stuff that came on 3Q07 and is it similar as far as any new business you got in 4Q07? So, is there a point where you worry 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?

Anand K. Nallathambi

I think we focus, Kevane, more on the pipeline and we feel comfortable that it’s more of a capacity utilization issue for us and what we’ve tried to look at it as there are some engagements that we are walking away from today because of our currently engaged project. So I feel like as things drop off we have no dirt for new prospects that we have in the pipeline that we can bring in.

Kevane Wong – JMP Securities

I’ll do one more then jump back in, but the acquisitions that you made recently, Verify, etcetera, can you give us any sort of metrics as far as sign, responsibility, accretive, diluted, what sort of impact as far as the numbers?

Anand K. Nallathambi

I can have John 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 & Associates which is a security consulting firm which was their sister company. So when you look at all of these kinds of things it seemed to us like this would further entrench our footprint and enable us to grow in the high growth Asian markets and we like that fact. With the kind of growth that we are seeing internationally we kind of felt like this is a perfect acquisition that will just propel us into the next round.

Kevane Wong – JMP Securities

Was this all of essentially background screening business?

Anand K. Nallathambi

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

Kevane Wong – JMP Securities

Any financial metrics that you can share with us as far as the acquisition?

John Lamson

It was about 7.5 times trailing EBITDA and what’s looking like about a 5 times forward-looking EBITDA based on 08. So it was, from a financial metrics 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 pretty strong top management team.

Kevane Wong – JMP Securities

That 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.

Anand K. Nallathambi

Yeah.

John Lamson

Exactly. Exactly. And as Anand alluded too, it helps us leverage the existing management we have over there, too. So it’s a win-win from that standpoint.

Operator

Your next question comes from Mark Marcon.

Mark S. Marcon – Robert W. Baird

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

John Lamson

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

Mark S. Marcon – Robert W. Baird

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

John Lamson

The foreign employer services for the year organically was about 38% revenue growth. So it’s 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 a good business it brought in some good management talent, too.

Mark S. Marcon – Robert W. Baird

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

John Lamson

Mark, we don’t have that -

Anand K. Nallathambi

We’ll get back to you.

John Lamson

Really level of detail, but certainly the non-screening, if you will, if you want to call it that, non-screening businesses –

Mark S. Marcon – Robert W. Baird

It’s the growing part.

John Lamson

It is certainly the growing part and when you have – But I don’t have specifics on the revenue breakout.

Mark S. Marcon – Robert W. Baird

Do you have just a general feel? Like plus or minus 10%?

John Lamson

Oh, yeah. It’s - the screening part is probably about half.

Mark S. Marcon – Robert W. Baird

So roughly half is non-screening?

Anand K. Nallathambi

Yeah.

John Lamson

Yeah.

Mark S. Marcon – Robert W. Baird

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

Anand K. Nallathambi

Yeah, 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 is continuing on.

Mark S. Marcon – Robert W. Baird

How was January relative to a year ago, January a year ago?

Anand K. Nallathambi

I don’t think it was even because 2006 and 7 we have pretty robust January. Also the number that I talked to you about does not include the new acquisition. The new acquisition added about 15% to our transaction volume.

Mark S. Marcon – Robert W. Baird

But in terms of just January, you would normally be up relative to December would you not?

Anand K. Nallathambi

Yeah, 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.

Mark S. Marcon – Robert W. Baird

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?

Anand K. Nallathambi

Yeah, and it’s obviously because of the interest rates and the economic stimulus package.

Mark S. Marcon – Robert W. Baird

Do you think that was primarily refi’s or -?

Anand K. Nallathambi

It’s very difficult for us to say mainly because sometimes we see transactions even before they decide what product type they’re going to put the person in. But I would think that it’s mostly refi’s. We also feel like the rest of the year there’s a lot of existing rate resets that’s going to happen so we remain cautiously optimistic. The liquidity crisis and the credit crunch that has an impact on the market that it’s big to judge but there are a lot of positive movements from an interest rate environment standpoint. From a rate resetting standpoint there’s a lot of pent-up demand coming up.

Mark S. Marcon – Robert W. Baird

Because it looked like there was a burst of refi’s 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. Do you think it’s going to continue through all of February?

Anand K. Nallathambi

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

Mark S. Marcon – Robert W. Baird

So, in terms of – 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, when you’re giving your guidance, what kind of are you thinking about of in terms of the low end and the high end of guidance as it relates to those two areas?

Anand K. Nallathambi

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.

Mark S. Marcon – Robert W. Baird

And that would be back end loaded?

Anand K. Nallathambi

We did see some recovery on the back end but on a full year basis we didn’t expect that 2008 is going to be drastically different than 2007. If you look at 2007, the second half of 2007 was really down. So, we felt that we were being cautious.

Mark S. Marcon – Robert W. Baird

Do you think the same would hold for data?

Anand K. Nallathambi

In some ways because of lead generation I would say that but then on the other side there’s some areas of data that are doing really well. Our direct to consumer business is doing well and we’ve got some big contracts like we talked about. The specialty finance business I think has some potential especially in the international area now that we have been there for a while. This is our second quarter being in operations there. I think that will start to pick up. So, we feel outside of the lead generation business, we feel pretty good about it.

Mark S. Marcon – Robert W. Baird

Okay great. Then the last question, 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 that you’re going to basically be at a net cash position, somewhere in the $15 to $20 million range? Or, where do you think that’s going to look?

John Lamson

Well, we’ll always – we’ll probably be around that balance mark, probably the $30 million range or so.

Operator

Your next question comes from Jeffrey Kessler.

Jeffrey T. Kessler – Lehman Brothers

A 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 surprising number given the fact that your competitors don’t seem to be having – the question is, these integrated services that were laid out 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?

Anand K. Nallathambi

The differentiating factor between us and the competitors and why we’re seeing some growth is the hiring solutions area and the recruiting solutions area. I think our focus has been wherever we are going to grow now we’re trying to grow in the front end services business. The value propositions that we’re trying to go to our client base is, “We’re going to help you identify better candidates early on in the process so you’re not out too much money trying to kind of process somebody and then find out that this is not a perfect fit for you at the end.” I think as much as we can do 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 picture also looks better with these services on the frontend. So, recruiting solutions, other talent acquisition solutions, skills assessment, analytics, these are areas that seem to have a long standing impact of value with our client base.

Jeffrey T. Kessler – Lehman Brothers

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

Anand K. Nallathambi

I actually think that the growth that we see in the international area is more towards the front end. I think we had talked in earlier conference calls that our hiring applicant tracking systems and hiring management solutions are really garnering very good support in the hospitality and gaming industry in Macaw and other growth areas. So, it’s not just necessarily the traditional type screening services where our traditional competitors can easily come in and compete with us.

Operator

Your next question comes from Kevane Wong.

Kevane Wong – JMP Securities

A couple of follow ons, in the guidance you talked about having sort of a second half turn, is that really more because the comparisons are much easier for the second half of the year for [inaudible]? Or, is there something else that makes you feel comfortable that the second half of the year is when you’re going to start to see sort of some improvement there?

John Lamson

Well certainly Kevane, the comps certainly will be easier in the second half as you allude to especially in lender.

Anand K. Nallathambi

To add on to this, part of the reason for us to think 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 phenomena that we’re all dealing with at this point.

John Lamson

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

Kevane Wong – JMP Securities

Then the other thing, 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 few years where you’ve had some bad debt impact. So, first quarter you took a reserve for subprime customers obviously, you’re trying to be aggressive but, there’s also some in 2Q and 4Q here. Just trying to figure out a way to get some sort of comfort that this really is it. Is there may be a way you can help me understand or get comfort that this really should capture it? Or, is there still some ongoing risk simply depending upon how bad things get?

John Lamson

Most of the “surprises” that we’ve had in the bad debt area in the lender services segment which were really the larger dollars we’re talking about have been in the third and fourth quarter. As I think we’ve mentioned in the past, what happens here is that a customer is current and paying all of their bills and then all of a sudden they’re bankrupt. What happened in that business is they can’t close loans anymore and they just go bankrupt very quickly. So, it’s somewhat hard to anticipate that. We think we’re through most of that and that’s one again, what we built into our plan for 08 just because the passage of time. I mean, this has been – the “crisis” has been out there for six months now so if they haven’t gone bad by now the probabilities are that they’re going to be okay. So, that’s kind of the logic that’s involved there.

Anand K. Nallathambi

To add on to that what we’re 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. So, we’re trying to do the best that we can but it’s very difficult when you’ve had clients who have paid as agreed and 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.

Operator

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

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