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Equifax Inc. (NYSE:EFX)

Q1 FY08 Earnings Call

April 22, 2008, 8:30 AM ET

Executives

Jeff Dodge - Sr. VP of IR

Richard F. Smith - Chairman and CEO

Lee Adrean - Corporate VP, CFO

Analysts

Mark Bacurin - Robert W. Baird

Andrew Jeffrey - SunTrust

Kyle Evans - Stephens

George Gregory - Credit Suisse

Dhruv Chopra - Morgan Stanley

Jaime Brandwood - UBS

Michael Meltz - Bear Stearns

Justin Bouchard - Raymond James

Chitra Sundaram - Cardinal Capital

Operator

Good day, everyone, and welcome to the Equifax First Quarter 2008 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Jeff Dodge. Please go ahead, sir.

Jeff Dodge - Senior Vice President of Investor Relations

Good morning, and welcome to today's conference call. I am Jeff Dodge, Investor Relations; and with me today are Rick Smith, our Chairman and CEO; Lee Adrean, our Chief Financial Officer. Today's call is being recorded. An archive of the recording will be available later today in the Investor Center of our website at www.equifax.com.

During this call, we will be making certain forward-looking statements to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in the filings with the SEC, including our 2007 Form 10-K and subsequent filings.

In this call, we will refer to several non-GAAP financial measures for Equifax's consolidated in the first quarter 2008. These measures include adjusted net income, adjusted diluted EPS, adjusted operating margin, and adjusted operating income. These measures exclude acquisition-related amortization expense. We also refer to EBITDA defined as operating income before depreciation and amortization.

TALX's adjusted operating margin excludes the incremental impact of amortization from our acquisition of TALX. Please see the section of our earnings release entitled Reconciliations of Non-GAAP Financial Measures to the Comparable GAAP Financial Measures for further details and the GAAP to non-GAAP reconciliations posted in the Investor Center on our website.

Now I would like to turn it over to Rick Smith.

Richard F. Smith - Chairman and Chief Executive Officer

Thanks, Jeff. Good morning, everyone. With double-digit organic growth in our International, North American Personal Solutions, and North American Commercial Solutions businesses, and the performance of TALX, we continue to demonstrate a diversity and resiliency of our business model. We anticipate a challenging quarter and each one of our business leaders stepped up and delivered the strength in their franchise, the relationships with customers, leveraging our data assets and our solution engineering capabilities.

We made significant improvement with margins in our core U.S. Consumer Information Solutions business. This is something I committed to do when we had our earnings call for the total year back in February and I'm fully aware the team stepped up and delivered as I promised and we’ll give more details when we... later on.

TALX, North American Personal Solutions, and North American Commercial all delivered strong growth and operated while International sustained its outstanding growth and operating margins. At the same time, our new product revenue is accelerating and the revenue synergies between TALX and U.S. Consumer Information Services business are gaining significant traction. Given this tough environment in the U.S., I'm very proud of what we accomplished in the first quarter.

Total revenue was $503.1 million, up 24%. TALX contributed 19 points to that growth. Equifax, excluding TALX, grew 5%. Operating income was $126.2 million, up 8%, and adjusted operating income increased 19%. EBITDA grew to $164.1 million, up 19%. Diluted EPS was $0.50, down 7%, while adjusted EPS was $0.60, up 3%.

I'll now get into some business highlights for each of the five business units. First, U.S. Consumer Information Solutions, aggressive cost management delivered significant benefits. Operating margin improved 200 basis points to 38.6% when compared to the fourth quarter of 2007. They accomplished this while investing in the business for future growth. Equifax Settlement Services revenue continues to accelerate. First quarter gains made in Settlement Services offset the declines in our traditional tri-merge mortgage reporting products.

Enabling Technologies continues to grow and customers intensity continues to rise. For the quarter, 31% of our online transactions were delivered through one of our Enabling Technology platforms, up from 29% in the first quarter of 2007. Most of the gains occurred in our telco and regional sectors. We now have every major telco carrier using or implementing an InterConnect platform and 19% of our U.S. online transaction going for the first quarter included scores from models built by Equifax.

In credit marketing, over 45% of names listed including a score… included a score from an Equifax model. Credit Marketing Services revenue declined 12% in the first quarter as customers continue to minimize their account acquisition activities and focus more on their existing portfolios, where we can… where we again experienced double-digit growth with Portfolio Management Services. Direct Marketing Services revenue was down 14% in the first quarter reflecting the general slowdown in customers marketing activities.

Finally, two new products were launched during the quarter while the first quarter revenue contributed from previously released products approached $6 million. TALX continue to deliver on its objectives and is making significant progress in delivering revenue synergies. In fact we are now estimating that the revenue synergies between TALX and USCIS will be two to three times and close the deal last May.

The Work Number continues to build its franchise and deliver double-digit growth. While the Work Number is not immune to the overall economic environment it delivered 10% revenue growth in the quarter as the database grew to 174 million, up 19% when compared to the first quarter of 2007. Also during the quarter, a large Equifax partner has agreed to add over 300,000 employees and retirees to the Work Number database.

Our U.S. Consumer Information Solutions customers are very interested and how the Work Number products can assist them in assisting… in assessing the risk. At present, some of the largest credit card issuers have entered into agreements to test various products for enhanced risk assessment. We've also conducted test for customers across multiple industry sectors, including auto, mortgage, consumer lending, and collections. These are large revenue sources that we had not even thought of six months ago. Today, we have 24 cross-sell deals closed with a robust pipeline that includes many of our strategic accounts. In many cases we are running multiple projects for a single client. The interest level is high and our customer reaction to the Work Number has been very positive.

North American Personal Solutions continued to deliver outstanding performance with 14% revenue growth and 25.7% operating margins. Subscription customers grew to 1.4 million in the first quarter of 2008, up from 1.2 million in the first quarter of 2007. In the first quarter, we provided services for over a 127 data bridges with sensitive information about consumers were exposed. Approximately 68% of the revenue was subscription based, up from 62% in the first quarter of 2007. The newest product offering, Credit Report Control, which enables customers to lock and unlock their credit card online continues its strong performance with over 50% of new subscription customers often for this feature.

North American Commercial Solutions revenue grew 20% for the quarter while improving their operating margins. During the quarter, we signed a multi-million dollar contract with a major financial institution who is now fully integrated our solutions into their small business credit approval process. We also secured a long-term commitment with a large telco who is facing a competitor as their primary credit risk solutions provider. We continue to add trade lines to the database, which were up 2% from year-end. As of the end of March, 57% of our business folders have five or more trade lines. Six new products were launched during the quarter.

Our latest announcement was for the Business Fraud Advisor. The Business Fraud Advisor helps vendors fight what has become a rapidly growing $60 billion firm leveraging our analytics, expertise, knowledge of industry and third-party data, we have developed a solution that features ID authentication, verification of application data, and fraud prediction. Finally, significant progress has been made on providing a broader way of decisioning capabilities to our clients.

Our existing data asset now includes credit information on over 25 million small businesses and marketing information on 16 million businesses. Financial institutions are already using our InterConnect and APPRO enabling technology platforms. Through the partnership, we expect to shortly provide mid-markets and smaller customers with a robust decisioning engine.

Last on International. International had an outstanding quarter delivering double-digit revenue growth in every geography. Revenue was $129.9 million, up 23% while maintaining margins above 30%. Value-added solutions continue to drive growth and market penetration. Marketing Services revenue grew almost 8% in local currency and Predictive Sciences local currency revenue grew over 15% in the quarter.

Europe's revenue... revenues were up 13%, $47.7 million as our UK operations delivered strong growth for the quarter. Our growth in the UK has been driven by several factors. We addressed unique anti-money laundering products, which have resulted in strong revenue growth from existing and new clients. Our market-leading Predictive Sciences has enabled us to secure long-term partnerships... relationships with new and existing clients and providing high-value decisioning... high-value decision capabilities and a flexibility in adjusting to customers needs has enabled us to build long-term relationships with some of our largest customers.

Latin America's revenues were $53.2 million, up 34% with broad-based growth in each geography. Brazil continues to penetrate new markets with double-digit growth from banks, telcos, and insurance companies. In addition to our partnership with ACSP in Brazil, we are turning the corner making significant progress in restoring our competitive position and revenue growth in Brazil. Canada Consumer was up 22% to $29 million as it continues to build market share and increase share wallet with our large customers.

We are currently converting a large global credit card bank on to the Interconnects platform. This effort will be supported by the Global Enabling Technology Center of Excellence, example of how we globalize our value-added solutions. With the market interest high and active discussions underway with many customers, Interconnect will become the standard of enabling technologies in Canada. 15 new products were launched during the quarter and the new product revenue for the quarter exceeded $4 million.

Now we continue to make good progress on our global expansion initiatives. Last week we announced our investments in Global Payments Credit Services LLC, a leading credit information company in Russia. Once we receive regulatory approval, we will re-brand the company and assume responsibility for its operations in India. We have begun hiring key individuals, who we will have... who will have critical leadership responsibilities once we received approval for our credit bureau license application.

And we are working very closely with our partners who have very strong reputations with financial institutions across India. I'll now turn over to Lee for some details on the financials.

Lee Adrean - Corporate Vice President, Chief Financial Officer

Thanks, Rick. Good morning, everyone. This morning all financial information I'll be discussing will be presented on a GAAP basis except as otherwise noted. You should also refer to the Q&A and non-GAAP reconciliations attached to our earnings press release for additional financial information.

For the quarter, consolidated revenue was $503 million, up 24% and was positively impacted by the acquisition of TALX, which will anniversary in mid-way into the second quarter. EBITDA, a non-GAAP measure was $164 million, up 19% for the quarter. Operating income was $126 million, up 8% from 2007. Adjusted operating income, adjusted for acquisition-related amortization, increased 19%. Operating margin was 25.1% in the quarter, up from 24.5% in the fourth quarter of 2007. On a non-GAAP basis, adjusted for acquisition-related amortization, operating margin was 29.4% in the first quarter compared to 30.8% in the first quarter a year ago.

Net income was $65.7 million, down 5% from 2007. On a non-GAAP basis, adjusted net income increased 7%. Diluted earnings per share were $0.50, down from $0.54 in 2007, reflecting the lower GAAP net income and an increase in average shares outstanding as a result of the TALX acquisition. Adjusted earnings per share was $0.60, up 3% from $0.58 in the first quarter of 2007. We repurchased 1.1 million shares during the quarter for $37 million and outstanding debt ended the quarter at $1.4 billion, flat when compared to year-end 2007. In U.S. Consumer Information Solutions, Online Consumer Information Solutions revenue was a $156.9 million, down 3% when compared to same quarter last year. For our core product, online transaction volume was flat compared to last year with all sectors either slightly up or down for the quarter.

Mortgage Reporting Solutions revenue of $17.5 million was unchanged when compared to Q1 2007. Growth in our Settlement Services business enabled us to offset reduced tri-merge mortgage credit reporting revenue, a reflection of declining mortgage application volumes. Credit Marketing Services revenue of $35.4 million was down 12% for the quarter. Our prescreening revenue, which is primarily directed towards new account acquisition, was down 24% as financial institutions reduced new account marketing in this uncertain period.

Revenue from our portfolio of review products, which are used to manage and sustain existing customer accounts, was up 16%. Direct Marketing Services revenue was $23.4 million, down 14% compared to the first quarter 2007. The operating margin for our U.S. Consumer Information Solutions business was 38.6%, up 2 points from 36.6% in the fourth quarter of 2007, but down from 41.2% in the first quarter of 2007. The activities we undertook to improve the operating margin in the first quarter will continue to benefit us for the remainder of the year. TALX delivered $79.6 million in revenue, up 8% compared to the same period in 2007 when they were not part of Equifax. The Work Number delivered revenue of $36.3 million, up 10% for the quarter from its results a year ago. We added 8.3 million records to the database during the quarter. We now have 174 million records in the database, which is up 19% from the first quarter of 2007.

We currently have 7.6 million total records in backlog, down 15% from the fourth quarter of 2007, and closer to a level that we would like to maintain respectively. The Tax and Talent Management services unit delivered $43.3 million in revenue during the quarter and TALX operating margin was 16% on a GAAP basis. The adjusted operating margin would be approximately 30%.

In North America Personal Solutions, revenue grew 14% to $43.1 million. Operating margin was 25.7% for the quarter compared to 16.5% for the same period in 2007. North America Commercial Solutions revenue was $17.3 million, up 20% from the first quarter of 2007. U.S. Commercial transaction volume was 1.3 million, up 13% in Q1 of 2007 and transaction-based revenue in the U.S. Commercial business now represents 59% of total Commercial revenue in the U.S. Our International business grew revenue by 23% in the quarter to a $129.9 million. In local currency, revenue grew 11%. Canada Consumer revenue was $29 million, up 22% in U.S. dollars and 4% in local currency. We're starting to benefit from our strategic pricing initiatives as the online volume was up 3% in the quarter.

Europe delivered revenue of $47.7 million, up 13% in U.S. dollars and 10% in local currency. The UK's core consumer volume was up 8%, driven primarily by growth of financial services, retail and government sectors And Latin America grew revenue 34% in U.S. dollars to $53.2 million, in local currency, revenue growth was a strong 18%. Six of the seven geographies delivered double-digit growth in local currency and transaction volume growth in Brazil is beginning to accelerate. During the quarter online volume in Brazil was up 11%. Operating margin for international business, 30.5% essentially flat with 30.7% in 2007.

In summary, we made great progress in the first quarter and it is a good start to the year. While the strength and diversity of our business continues to support our performance across different economic conditions, we'll continue to challenge ourselves and find ways to control expenses while investing in critical growth opportunities. Now let me turn it back to Rick.

Richard F. Smith - Chairman and Chief Executive Officer

Thanks, Lee. We are currently obviously in a period of lot of economic uncertainties especially in the U.S. However we continue to believe that our full year guidance for 2008 for revenue growth of 9% to 12% and adjusted EPS of $2.48 to $2.58 is achievable. And now operator if we could open it up a questions? Operator?

Question and Answer

Operator

[Operator Instructions] We will go first to Mark Bacurin of Robert W. Baird.

Mark Bacurin - Robert W. Baird

Good morning, everyone.

Richard F. Smith - Chairman and Chief Executive Officer

Hi, Mark.

Mark Bacurin - Robert W. Baird

A couple of questions, very surprised to actually see flat year-over-year growth on the flattish results on mortgage, and you alluded to Equifax services gaining traction. Could you just talk about specifically how many customers you have signed up? What you see for what kind of the continuing trends there, and I think the guidance reflects a flattish number, but assuming continue to gain traction and the comps get easier to back up, will you be able to… think you might actually growth in that segment now?

Richard F. Smith - Chairman and Chief Executive Officer

Yes, the ESS is gaining significant traction, the interest is value proposition.

Lee Adrean - Corporate Vice President, Chief Financial Officer

Excluding the foreign exchange benefit related to our Canadian commercial business, revenue grew 13%, driven primarily by strong growth in US risk and marketing solutions.

Richard F. Smith - Chairman and Chief Executive Officer

Is significant, Mark. It's our ability to reduce the cycle time for once they've approved a loan that close that loan and it’s far faster than most anyone else in the industry. The unique thing there is, by the way, it's not just an ESS sale, we have... we're the only ones in the industry that can offer an employment verification, income verification, credit file, credit score, and the ESS products. Every mortgage lender that I've talked to, with Dann Adams or the top management has talked to is intrigued, I remain convinced that this is one of the single largest growth leverage we have and we'll continue to accelerate throughout this year and into 2009.

Mark Bacurin - Robert W. Baird

That's great. And then in terms of the TALX synergies, very encouraging, do you say two to three times the level there. Just hoping you could maybe give us some more color on specific new products you're seeing there? And then in terms of the cross-selling activity you alluded to, is most of that stuff now in the backlog or is that already contributing revenue in terms of contracts you've already signed?

Richard F. Smith - Chairman and Chief Executive Officer

Yes. That's is a good... it's a great question. We've closed 24, we have an amazing pipeline... I'm speaking of cross-sell now. We've closed 24, those 24 obviously are starting to contribute revenue to the Work Number. The pipeline is extremely strong on both the new products and on the cross-sells, Bill Canfield, Dann Adams, and I meet once every other week with teams just to rapid fire going through all the different opportunities, issues we have... the obstacles we may have internally get us out of the way to close those opportunities faster. So, it is accelerating across the board, and we have incentives in place, we have goals in place, we have NBOs in line. On new products, just think about this. Anyone who is offering... who is underwriting a risk today in this environment is interested in knowing if that that individual is employed and what the income profile looks like. That goes from auto to bankcards, to mortgages, any loan you can possibility think of. So, we know all those customers, on the core [inaudible] side, why that's our... that's our historical customer base. So we're bringing there on the Work Number into those clients to describe what they can do from... so I can tell you everyone we've talked to is interested, it's intriguing. The major banks, especially the credit card issuers right now, Mark, love what the Work Number can do for them.

Mark Bacurin - Robert W. Baird

That's great. And then just hoping maybe you could give us... obviously, it seems like the environment is probably about as bad as it can get for you guys in the financial services vertical and we have clearly seen a softening in the U.S. Consumer business over the last couple of quarters. Can you give us a feel for, are we getting toward kind of the trough here. What are clients telling you with regard to their plans for the rest of the year, just trying to get some sense of... my expectation is you might get some lift in the back half of the year, but wondering if you're seeing that yet from client conversations?

Richard F. Smith - Chairman and Chief Executive Officer

Significant improvement, it hasn't deteriorated if I look at what we've seen recently, I'd expect that... when you start to see the credit grantors, especially the credit card issuers start to do more acquisition of risk, there has been indication for me that we kind of hit the bottom and so keep an eye on that, we keep an eye on that obviously. When we see that sort of bouncing we see the portfolio acquisition stuff start to grow, then I'll be encouraged.

Mark Bacurin - Robert W. Baird

Very good. Thank you.

Richard F. Smith - Chairman and Chief Executive Officer

Sure. Thank you.

Operator

All right. Our next question comes from Andrew Jeffrey of SunTrust.

Andrew Jeffrey - SunTrust

Hi, good morning.

Richard F. Smith - Chairman and Chief Executive Officer

Hi, Andrew.

Andrew Jeffrey - SunTrust

Pardon me. Looks like nice performance internationally, particularly in Latin America, Rick, can you elaborate a little bit on what you are seeing on the competitive front and whether the modest acceleration you're seeing in that region is a function of market share or just overall economic growth?

Richard F. Smith - Chairman and Chief Executive Officer

Yeah, it's a combination of both and a third element as well. We continue to try to innovate, bring new products and we have a full time [inaudible] just adjacency transfer, which will bring products that have been successful in one part of the world and bring them to other parts of the world, Latin America, Canada, and Europe. That is a great way to... as I'd define help them grow at a faster rate. And we get great competition in every market in which we operate. We think we can do some things better than our competitors in all those markets and have proved them so in the past. To give an example, on the adjacency transfer, I mentioned in my notes early on, the InterConnect transfer to Canada didn’t exist a couple of years ago, now we have I think it's five or six different clearance banks across Canada either testing or installing InterConnect. So we continue to that in all parts of the world trying to differentiate, add value to our customers. There is no doubt that the Latin America economy is one of the stronger economic regions in the world, we do benefit from them. The thing I'm really proud of, Andrew, is our growing success in Brazil. We talked about it now a couple of years, I alluded to it back in February that this ACSP partnership we have signed, will you benefit, it is already yielding benefit and should accelerate going forward.

Andrew Jeffrey - SunTrust

Okay. And looking at the Commercial business, I realize there is some seasonality to the margins in that business. Looks like good year-over-year improvement in the first quarter, should we expect to ramp and as the year progresses? And I mean how close do you to scale on that business where we might expect just kind of mid to high 20s that we've... full-year operating margins.

Richard F. Smith - Chairman and Chief Executive Officer

The thing is that I can possibly see if you want to get this thing that... a couple of hundred million dollars in revenue and when it gets to that kind of platform, I would expect it to be mid-20s as far as its operating margin goes. Lee?

Lee Adrean - Corporate Vice President, Chief Financial Officer

Yes. Within this year, we are continuing invest... continuing to invest to drive the kind of revenue growth we just talked about. I think you'll see margins for the full year about the same or slightly higher than last year. You may see some quarters over last year and some quarters little under just as a function of the timing of that investment. So we're still... we're still in an heavy investment measure to drive the kind of growth, Rick talked and really focusing on driving the revenue while maintaining current margins right now, but obviously expect that margins will expand over time.

Andrew Jeffrey - SunTrust

All right. Thanks a lot.

Richard F. Smith - Chairman and Chief Executive Officer

Yes.

Operator

Our next question comes from Kyle Evans of Stephens.

Kyle Evans - Stephens

Hi, good morning, guys. Thanks for taking my questions.

Richard F. Smith - Chairman and Chief Executive Officer

Sure.

Kyle Evans - Stephens

Can we start with CIS trends and if heard, Lee correctly, the online CIS volume was flat in the period, revenue was down 3%. The difference would have to be a combination of price change and the change that are in those two enabling tech platforms that are in the segment. Can you help us see the part of the impact of pricing change from those two platforms, and maybe give us some rough perspective on the size of those platforms, please?

Richard F. Smith - Chairman and Chief Executive Officer

Kyle, repeat the last part of your question, if you would?

Kyle Evans - Stephens

The last part was the rough size of the two enabling tech platforms that are in the online CIS business.

Richard F. Smith - Chairman and Chief Executive Officer

Adrean, you take the first one and I'll take the second one.

Lee Adrean - Corporate Vice President, Chief Financial Officer

Yes on price increase?

Richard F. Smith - Chairman and Chief Executive Officer

Yes.

Lee Adrean - Corporate Vice President, Chief Financial Officer

The... obviously the pricing year-to-year is a function of mix and pure pricing in constant segments when you get some movement in both of those, but about down 3% year-over-year, it's about right and fairly consistent with what our historical experience has been.

Richard F. Smith - Chairman and Chief Executive Officer

As far as the enabling technology platform, are you referring to the two wins I discussed early on, or is this--?

Kyle Evans - Stephens

Well, Lee said on the fourth quarter call that he mentioned the origination platform and the broker compliance platform and the reason I asked is because the third to fourth quarter pricing and volume numbers didn't really jive and I've assumed that the difference was those two platforms, I'm just trying to get some sense for what that did in the period?

Richard F. Smith - Chairman and Chief Executive Officer

Yes, I'm sorry. Kyle, I didn't understand the platforms part of the question. Yes, we have a loan originations office, small loan origination software business that is reported in the online CIS sector. We also have a brokerage offering again relatively small. But in the fourth quarter as you note, both of those performed very well and we're now in a fairly flat quarter to kind of affect the trend even though they are not particularly large individually. In the first quarter they didn't have a meaningful impact on trends and I think what you’re seeing flow through in terms of volume pretty flat and revenue down about 3% is pretty reflective of what happened with the pure online transaction volume in the first quarter.

Kyle Evans - Stephens

Okay, great. Next we will dig down a little bit on The Work Number business and specifically there could you give us a mortgage exposure number for the period? Could you give us an update on the progress of The Work Number sales into the collections channel? And lastly on that one, could you help us, I mean, you're talking about a 2X to 3X the original revenue synergy projections but we've got revenue growth that's running at about 50% of records growth, which has been historically the best predictor of revenue growth?

Richard F. Smith - Chairman and Chief Executive Officer

Yeah. We saw that the first... well we don't break out the mortgage component for TALX, but obviously it is a shrinking component.

Kyle Evans - Stephens

Okay.

Richard F. Smith - Chairman and Chief Executive Officer

TALX is not immune to the mortgage downturn, the fact that in this economic environment where hiring is slowing, where credit granting is lower, the mortgage market is on melt and the fact that we can grow that Work Number 10%. I think this is a strong testament to that business model. So, the second part of your question was on collections. That is the fastest growing segment we have right now. In fact, we obtained getting together right now as you might guess. We have things we do within Dann Adams' business on collection. We have our own suite of collections products. We have things we do in the TALX business unit around collections. So, we have a summit we are holding in the next couple of weeks to think how we can blow that particular product out for faster growth rates than we're seeing now. But it is growing strongly, it is… it’s not a huge piece of our business yet. But, over the next, I would say, coming quarters and years in this economic environment, it will become bigger. The other part of your question was around, if you have all these great revenue synergies, why isn't the revenue growth following the database growth, is that what you said?

Kyle Evans - Stephens

Yeah.

Richard F. Smith - Chairman and Chief Executive Officer

Again I'd just say in this economic environment, it's tough right now, number one. And number two, it's important to know that when you look at the overall growth in the database of TALX, which happened short term because all the layoffs is inactive files for this first quarter and that's actually growing at a faster rate than the active files because we had a 20 some odd percent increase in year-on-year active files moving into inactive files because of the layoffs, does that make sense?

Kyle Evans - Stephens

It does.

Richard F. Smith - Chairman and Chief Executive Officer

Okay. The model still a fantastic model, two of those are growing double-digit in this economic environment.

Kyle Evans - Stephens

Yes. You got some... those are some real headwinds to deal with there?

Richard F. Smith - Chairman and Chief Executive Officer

Yes.

Kyle Evans - Stephens

Lastly pricing on The Work Number, is that kind of held up in the TALX, any mix shift changes which I'm sure you’re experiencing as the mortgage continues to melt down, has that held up constant?

Richard F. Smith - Chairman and Chief Executive Officer

Yes.

Kyle Evans – Stephens

Okay. Great. Thanks. I'll get back in the queue.

Lee Adrean - Corporate Vice President, Chief Financial Officer

Thanks, Kyle.

Operator

Our next question comes from George Gregory of Credit Suisse.

George Gregory - Credit Suisse

Good morning, guys. George Gregory from Credit Suisse in London. I had one question for you. I think, Rick, you mentioned that aggressive cost management drove improvements in the USCIS margin versus the fourth quarter of 2007, however that 38.6% margin strikes me as being some way below the first quarter of 2007. And now, if I recall back to your full-year announcement in February, I remember you guys mentioning that there were some sort of restructuring elements in the margin dilution there. So, have those restructuring elements carried through to the first quarter or I mean, should we assume that there is negative operational leverage still coming through those margins? Thanks.

Richard F. Smith - Chairman and Chief Executive Officer

Sure. Let me see if I can answer this way, George. First of all, as you know our model is a highly fixed cost model. I am referring to now the USCIS business, and which is wonderful in a growth environment, because your incremental margin is significant when you're in a slow growth or negative growth as it has been for the last few quarters, obviously that puts pressure on the margins such that backdrop, I think you very well. In the first quarter, we saw that economic environment obviously impacting our margins. As I mentioned back in February, we had made a statement then that economic environment in the U.S. would not improve throughout 2008 or 2009, if it does, we win. But build a business plan and a cost structure that would allow us to regain our margins steadily throughout 2008 from a low of 36.6% in the fourth quarter of 2007. So, I am thrilled of the fact that actions we took of outsourcing, restructuring, reducing discretionary spend, launching, and a process improvement called Lean, all yielded significant benefit in the first quarter of 2008. So, looking forward, George, I would expect that margin to continue, not that significant rate of increase we saw in the first quarter or fourth quarter, but continued increase from a level of 38.6%, back to our historical levels, which are in the range of 39% to 40%.

George Gregory - Credit Suisse

Okay. That's very, very helpful. Thank you very much.

Richard F. Smith - Chairman and Chief Executive Officer

Sure.

Operator

Our next question comes from Dhruv Chopra of Morgan Stanley.

Dhruv Chopra - Morgan Stanley

Good morning. I was wondering, if Lee, you could just comment a little bit on the gross margin improvement, how much of that was coming from mix shift with TALX versus some of these cost saving initiatives that you put in place?

Lee Adrean - Corporate Vice President, Chief Financial Officer

Yes, it's... I think the gross margin did improve some this quarter. It will tend to fluctuate a little bit period-to-period. I think we were aided probably more by the strong performance of our International business there, but the TALX obviously helps particularly on The Work Number in a very, very high gross margins in The Work Number. So that growth in The Work Number and growth in the International, both aided us there.

Dhruv Chopra - Morgan Stanley

Okay, great. You guys have a great insight into the consumer behavior and the retail financial institutions. Can you give us a sense on what you're seeing from the consumer, particularly in the U.S? And the UK, particularly in light of sort of rising oil prices, rising unemployment etcetera?

Richard F. Smith - Chairman and Chief Executive Officer

Sure. One of the things that we... we look at when we talk about the U.S. first. We track so many different metrics but one interesting metrics we track is the number of times consumers go to the market looking for products, looking to be granted a auto loan or credit card or mortgage on equity. And that is actually stronger than you might guess, stronger than I would have thought. However at the same time, the declinations, the unwillingness of the credit grantors actually issue to grant that credit obviously high. So I think what you have is, obviously a supply side credit issue, there is no doubt about that. But I was surprised to see that with part of the last quarter, where actual rate at which consumers were looking for credit far higher rates than I would have expected. There is no doubt that the consumer is under pressure with a $117 a barrel of oil. We saw a slight increase in refinancing, it didn't last long back in mid-January to mid-February. That drops off rapidly in mid-February continue to bid lower rates throughout the month of March. So everything you read, see and hear about the U.S. consumer, UK consumer. I said UK consumer right now is a little more resilient, but they are under a significant debt pressure as the U.S. consumers as well. We don't expect significant improvement by any means this year in the U.S. Some are calling Marc Zany [ph] for example, if you have seen his pieces, just came out and said he is now expecting a rebound in second half of 2008. If we get that rebound in the second half of 2008, with all the cost initiatives we have already implemented, Dann Adams' business will be a benefactor.

Dhruv Chopra - Morgan Stanley

Great. Thank you.

Richard F. Smith - Chairman and Chief Executive Officer

Okay.

Operator

Our next question comes from Jaime Brandwood with UBS.

Jaime Brandwood - UBS

I wanted to start just by looking at in a little bit more detail again at your volume trend in OCIS, would you describe this is flat year-on-year for the quarter. I think in Q4 you were marginally down, just wondered if you might be able to give a bit more granularity to the slight improvement in the volume trends that was coming from a particular customer set or anything else you can say about that?

Richard F. Smith - Chairman and Chief Executive Officer

It's modest. I’ll jump and, Lee, if you've got additional thoughts, please feel free. It's a modest improvement quarter-over-quarter, again we do have some refinancing in the six-week time frame in the first quarter, which is good. Number two is our telco business which is... we are a big player in the U.S., had a nice uptick in the first quarter. And we continue to invest in our regional account some mid-market segment in the U.S., which has always been a strong hold for us, and it continues to grow at a nice rate. So those three areas has helped us to some degree continue pressure in the large national and international efforts.

Jaime Brandwood - UBS

Yeah, that's very helpful. And what is baked into your full-year '08 revenue assumption in terms of OCIS volume? I mean what kind of scenarios have you got built into that 9% to 12% group revenue growth assumption for OCIS volume?

Richard F. Smith - Chairman and Chief Executive Officer

We've said that the core USCIS business go back to February, we announced that would not improve over the environment we saw in the fourth quarter of 2007. So as I think there is kind of 4% to 6% decline year-on-year. As we are going to expect to see for the balance here, again I go back there are others out there... economists who are saying we should turn the corner in the second half of the year. And if that happens we will benefit and we have built up cost models assuming that it’s not in the 9% to 12%, top line growth assumes that same environment we are in now, same environment we saw last… in the last year and the same thing goes with the EPS, so no improvement.

Lee Adrean - Corporate Vice President, Chief Financial Officer

Actually, just one slight refinement to that statement Jaime, we are assuming kind of a similar environment we saw in the first quarter and the fourth quarter continue through the year that would apply that you can see a fairly similar second quarter growth rate. The comparison started getting a little easier in the third and fourth quarters. So the present year-to-year will start getting more favorable. But we do expect that our overall USCIS line of business will be modestly down in revenue for the year if we continue more or less at these levels.

Richard F. Smith - Chairman and Chief Executive Officer

That's a good point. I was referring to the economic environment. Yes.

Jaime Brandwood - UBS

And I forget to say you are just ready to taking a kind of things they as it is approach rather than sort of baking in any potential deterioration?

Richard F. Smith - Chairman and Chief Executive Officer

Yeah, we are not baking in any economic deterioration or improvement.

Jaime Brandwood – UBS

Okay. And then just on the your breakdown at CMS. I think you said the prescreen was down 24% and portfolio review products were up 16%. Can you remind us of how that breakdown was in Q4 in terms of the CMS revenue decline of minus 16% in Q4, I mean that's what... sort of trends have been in those two pieces, prescreen and portfolio review products?

Richard F. Smith - Chairman and Chief Executive Officer

Yes, I don't recall exactly what the breakdown was in the fourth quarter. The trends obviously are in declining economic environment. Portfolio reviews do obviously rise and the acquisitions decrease. So, we don't, if you have that readily available. But, I wouldn't be surprised if it's kind of a net generic trend down on acquisitions and upon portfolio review.

Lee Adrean - Corporate Vice President, Chief Financial Officer

My recollection... because in the fourth quarter, CMS was down 16% versus--.

Jaime Brandwood - UBS

Yes. I was just wondering what the breakdown of that might have been 16, a little bit more?

Lee Adrean - Corporate Vice President, Chief Financial Officer

I think what we saw in the fourth quarter was a similar reduction in the account acquisition, but actually somewhat lower growth on portfolio revenue. I think the employees were facing such a shock in the fourth quarter, they were just pulling back on a lot of spending, of course... portfolio review products help them optimize what they have as a good return on it. But I think it was just a major pullback on spending, they've started to be a little more careful and what performance, we can see. So, the portfolio review growth I believe was a little stronger this quarter.

Jaime Brandwood - UBS

Okay. Thanks. And very lastly, should we be at all concerned with the slight slowdown in revenue growth in Personal Solutions, Q1 versus Q4?

Richard F. Smith - Chairman and Chief Executive Officer

No. No. It's still we have always... no, actually not --.

Jaime Brandwood - UBS

Its very healthy, but.

Richard F. Smith - Chairman and Chief Executive Officer

Yes, we've always said that business is going to be double-digit growth with kind of expanding margins in the mid-20s. In fact... first of all, the margins jumped to nice healthy 25%, 25.7% was fantastic.

Jaime Brandwood - UBS

Yes.

Richard F. Smith - Chairman and Chief Executive Officer

No, I don’t see it... and you will see it, and the pitch volume, ebbs and flows over time, new products, ebb and flow over time, the fact that we are 14%, I view it is very, very healthy.

Jaime Brandwood - UBS

Thanks very much.

Richard F. Smith - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Michael Meltz of Bear Stearns.

Michael Meltz - Bear Stearns

Hey, there. I think I have two questions. First, Lee, on repurchase, I think you have some cobwebs in your wallet there. Can you talk a little bit about slow repurchase in the quarter, what the expectation is going forward?

Lee Adrean - Corporate Vice President, Chief Financial Officer

Michael you're just going to get us more encouragement. Basically what we did is we spent our free cash... our quarter's free cash flow and share repurchases. First quarter free cash flow tends to be the lowest free cash flow of the year, quarter of the year just because the timing of certain items within the year. But, we did spend essentially a 100% of our free cash flow in the quarter on share repurchase. We do expect prospectively that we will spend the majority of our free cash flow this year on share repurchase.

Michael Meltz - Bear Stearns

Meaning that free cash flow ramps, repurchase might also ramp?

Lee Adrean - Corporate Vice President, Chief Financial Officer

Yes.

Michael Meltz - Bear Stearns

Okay. On Commercial, understanding it's still a small line and you had a good quarter. Can you talk a little bit though, have you seen just tighter business credit standards, have you seen an impact on that business? It doesn't seem like.

Richard F. Smith - Chairman and Chief Executive Officer

That's a great question and the answer is no, not yet. And the reason of being so is... while there may be… while the small business environment may be feeling a pinch, we read in the paper daily, right? We are so small out there that our ability to take share is so significant that we are seeing a way to grow through any slowdown, the small business, I feel.

Michael Meltz - Bear Stearns

Okay. And then in just to clarify you said no, not yet. But it doesn't sound like you are expecting it either.

Richard F. Smith - Chairman and Chief Executive Officer

It’s… again the environment, the small business environment may be feeling a slowdown. We are not and I don't expect to see a slowdown because we are so small.

Michael Meltz - Bear Stearns

Okay, lastly on DMS, can you talk a little bit about the softness there, it is not a surprise. But what you are seeing and what the expectation is going forward?

Richard F. Smith - Chairman and Chief Executive Officer

Was that on EMS?

Michael Meltz - Bear Stearns

No, direct marketing.

Richard F. Smith - Chairman and Chief Executive Officer

Direct marketing. It's just been a... it's a victim of the economic slowdown, the marketers are just not marketing. So we... what I want to do there, Michael, is to continue to try to integrate it into CMS integrated into DBS try to find ways make it a value added product and not just a commodity.

Michael Meltz - Bear Stearns

Okay.

Richard F. Smith - Chairman and Chief Executive Officer

But --

Michael Meltz - Bear Stearns

Thank you.

Richard F. Smith - Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Wayne Johnson of Raymond James.

Justin Bouchard – Raymond James

Good morning, Justin Bouchard for Wayne Johnson. Very happy to hear about the increased revenue synergies from TALX, any... sort of timeline when we might fully realize this?

Richard F. Smith - Chairman and Chief Executive Officer

Well, we are realizing some now. To ramp up each and another quarter... maybe this is not a future thing and this right now cross-selling I told you that we closed I think was 24, 26 a significant pipeline there. And these credits grantors interested in using that product is so significantly right now and the interest is so high that I would hope we are up here next quarter talking about the second quarter earnings and listening to some pretty significant wins.

Justin Bouchard – Raymond James

Excellent, we look forward to that. And one more question on the Bank of America conversion to InterConnect. Are we strong track for the second quarter or third quarter?

Richard F. Smith - Chairman and Chief Executive Officer

It's third or fourth quarter this year. I mean obviously as you might guess, be away and few other banks and got a few things on their plate... phase now

Justin Bouchard – Raymond James

Sure.

Richard F. Smith - Chairman and Chief Executive Officer

It has nothing to do with InterConnect's capability. It has nothing to do with our resource capability internally and it has everything to do with prioritization.

Justin Bouchard – Raymond James

Great, thank you very much.

Richard F. Smith - Chairman and Chief Executive Officer

Thank you.

Operator

We will go next to Chitra Sundaram of Cardinal Capital.

Chitra Sundaram – Cardinal Capital

Yes. Actually all my questions have been answered. But congratulations on a very well executed quarter. Thank you.

Richard F. Smith - Chairman and Chief Executive Officer

Thank you very much.

Operator

All right. We will go instead to Ram Seshardri [ph] of Welsh Capital.

Unidentified Analyst

Hey, guys. I had a question about margins. Have you seen the peak in margins, because in your own words, you mentioned couple of quarters and maybe next year doesn't look that great in terms of revenues and transactions in the U.S. business, which is about 50% of revenues?

Richard F. Smith - Chairman and Chief Executive Officer

Hey, Ram, this is Rick. We heard like every third word you speak, we’d try to one more time to go.

Unidentified Analyst

Oh, I'm sorry. My question is on margins. Have you seen the peak in margins, and because 50% of business is U.S and its kind of pressure, where as you tried a very good job of bringing up margins this quarter. I'm wondering whether international would be able to offset that?

Richard F. Smith - Chairman and Chief Executive Officer

No, the simple answer to your question. Do you... have you seen... do we think it's kind of peak in the overall margin. The answer is no. I don't think you’d ever see a peak. And I don't necessarily concern myself and Lee doesn't either with quarter-to-quarter--.

Unidentified Analyst

Right.

Richard F. Smith - Chairman and Chief Executive Officer

Variations in margins, it is a kind of long-term roadmap that we are on. We are investing now heavily in a process called Lean, I mean it is a systematic way to make sure you do things more efficiently that will improve margins. We will continue to invest in growth and that takes CapEx and the operating expense, which puts some pressure on margins. But I think this business can continue to grow at the rate we've talked about growing and continue to maintain and or expand margins.

Unidentified Analyst

Just a follow-up on that. My fear is that in modeling, in putting numbers through my model, I'm not able to see that unless there are more drastic cost cuts and the way that we are not aware of, because it's very hard to see the U.S. business. It's already declining at a 6% rate right now. And even if you assume that to be benefiting from year-over-year comparisons getting better in third quarter and fourth quarter. But credit is contracting it's not expanding.

Richard F. Smith - Chairman and Chief Executive Officer

What horizon are you talking about?

Unidentified Analyst

I'm talking, next six quarters. I mean, I'm talking the same time from '08, '09. I just don't see the margins getting beyond where you already are.

Richard F. Smith - Chairman and Chief Executive Officer

Again, I'll go back through and I can go through each individual business and they would all look unique and different.

Unidentified Analyst

All right.

Richard F. Smith - Chairman and Chief Executive Officer

USCIS, I had mentioned it was 36.6% last year. Throughout this year we'll get that back over the 39%. So that... If you think about that, you should be thinking about for USCIS, and probably staying in that level through 2009, and you won't see significant expansion beyond that until the SEC revenue growth in USCIS.

Unidentified Analyst

What kind of revenue growth in USCIS should I model? I mean down 6% already and it’s down a little bit more from the fourth quarter, so we still haven't seen a bottom.

Richard F. Smith - Chairman and Chief Executive Officer

Well, as we've said you'll see year-on-year comparisons getting easier in the second half of the year. So, you'll actually see it, what we'd just mentioned closer to lower single digits, 2% or 3% in the second half of the year. And, then obviously as you go into 2009, those comparisons will get a little easier again. So I don't... I would not expect us to say it's negative 6% through 2009 by any means.

Unidentified Analyst

Thank you.

Richard F. Smith - Chairman and Chief Executive Officer

Sure.

Lee Adrean - Corporate Vice President, Chief Financial Officer

Operator, we have time for one more question.

Operator

One more question, all right. We have a follow-up from Kyle Evans of Stevens.

Kyle Evans - Stephens

Hi, thanks. Could you guys give overall mortgage exposure in the period?

Richard F. Smith - Chairman and Chief Executive Officer

Yes. That's an in process as you know, but it is approximately 10% if my memory is correct. Yes, approximately 10%.

Kyle Evans - Stephens

Okay. Any change in the churn trends on the growing sub base in your PSOL segment?

Richard F. Smith - Chairman and Chief Executive Officer

In fact, that's a great question. We focus a lot on churn. Churn is actually seeing a slight improvement. I'm not going to give exact numbers, I don't think we'll disclose that. But we have seen a slight improvement in the first quarter of 2008 versus all of 2007 and including the fourth quarter 2007. Just taking our next job there.

Kyle Evans - Stephens

Great. Last question. You talked a little bit about the Direct Marketing Services' weakness. Could you give us any differences that you've seen between the financial services end market and some of the other end markets that you service? Are those a little bit rosier than some of the other end markets?

Richard F. Smith - Chairman and Chief Executive Officer

Yes. I alluded that [inaudible] but we are seeing in the quarter, actually some improvements in growth in total, some growth in our small and in regional banks as well. I was referring to just DMS, I missed that.

Kyle Evans - Stephens

Just in the DMS segment?

Richard F. Smith - Chairman and Chief Executive Officer

Yes in the DMS. Kyle, I can't think of any significant differences across the different verticals or sectors within DMS, it's kind of universal across all verticals.

Kyle Evans - Stephens

Okay. Well, that's a good answer.

Richard F. Smith - Chairman and Chief Executive Officer

Okay.

Kyle Evans - Stephens

Thanks.

Richard F. Smith - Chairman and Chief Executive Officer

Thanks Kyle.

Jeff Dodge - Senior Vice President of Investor Relations

All right. I 'd like to thank everybody for their participation, and we'll be available later today if you have any other questions. Thank you.

Richard F. Smith - Chairman and Chief Executive Officer

Thanks.

Operator

And ladies and gentlemen, this does conclude today's presentation. Thank you for your participation. You may disconnect at this time.

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