First Advantage Corporation Q1 2008 Earnings Call Transcript

Apr.28.08 | About: First Advantage (FADV)

First Advantage Corporation (FADV) Q1 2008 Earnings Call April 23, 2008 5:00 PM ET

Executives

Cindy Williams - IR Manager

John Lamson - EVP and CFO

Anand Nallathambi - President and CEO

Analysts

Kyle Evans - Stephens Inc.

Mark Marcon - Robert W. Baird & Co

Brian Ruttenbur - Morgan Keegan & Co.

Nathaniel Otis - Keefe Bruyette & Woods

Jason Boozer - Raymond James

Operator

Thank you all, for holding and welcome to our First Advantage Corporation's first quarter 2008 Earnings conference call. All participants will be in a listen-only mode until the question-and-answer session of today's call. This call is being recorded and will be available for replay from the Company's Investor Relations pages on their website at www.fadv.com and through May 7th by dialing toll-free within the United States 888-562-7629 or 402-220-6506 outside the U.S. A copy of today's press release is also available on the Company's website at www.fadv.com.

We will now turn the call over to Miss Cindy Williams, Investor Relations Manager, to make a brief introductory statement. Thank you ma'am, you may begin.

Cindy Williams

Thank you, and good afternoon, everyone. At this time, we would like to remind listeners that management commentary and responses to your questions may contain forward looking statements. Including certain statements made in this presentation relating to the integration of new acquisitions and lender services, future impact to facility and IT consolidations, expansion of business verticals in the lead generation business, financial impact of supposed restructuring, impact of restructuring on domestic workforce, overall economic market conditions in the second half of 2008 and other statements that do not relate strictly to the historical or current facts.

The forward-looking statements speak only as to the date they are made and the Company does not undertake to update forward looking statements to reflect circumstances or events that occur after the date's forward-looking statements are made.

Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward looking statements. Factors that could cause the anticipated results to differ from those described in the forward looking statements include general volatility of the capital markets and the market price of the Company's class A common stock; the Company's ability to successfully raise capital; the Company's ability to identify and complete acquisitions and successfully integrate businesses it acquires; changes in applicable government regulations; the degree and nature of the Company's competition; increases in the Company's expenses; continued consolidation among the Company's competitors and customers; unanticipated technological changes and requirements; the Company's ability to identify suppliers of quality and cost effective data; and other risks identified from time-to-time in the Company's SEC filings. Investors are advised to consult the Company's filings with the SEC, including its 2007 annual report on Form 10-K for further discussion of these and other risks.

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

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

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

John Lamson

Thank you, Cindy, and good afternoon everybody. First Advantage reported net income from continuing operations of $16.3 million, or $0.27 per diluted share for the first quarter of 2008, compared to $11.2 million, or $0.19 per diluted share for the comparable quarter in 2007. Results of operations for 2007 include $8 million, or $0.08 per share of severance payments, made in the first quarter of 2007 to our former Chief Executive Officer.

We have decided to dispose of our credit automation software and insurance fraud surveillance businesses. The loss from discontinued operations for the quarter ended March 31, 2008 was $3 million, or $0.05 per diluted share. Included in the loss for the quarter is an impairment charge of $2.3 million, after taxes, reflecting the amount by which the carrying value of the net assets being disposed of exceeds their estimated fair values.

Income from discontinued operations for the quarter ended March 31, 2007, also includes the results of operations for U.S. SEARCH, our consumer locate business which we sold in the fourth quarter of 2007. Earnings from continuing operations before interest, taxes, depreciation and amortization, EBITDA, was $37.1 million for the current quarter, compared to $31.6 million in the quarter ended March 31, 2007. A reconciliation of EBITDA to net income is included in our earnings release.

Cash provided from continuing operations was $22.5 million for the current quarter. This excludes the payment of approximately $56 million of income taxes primarily related to the gain on the sale of the DealerTrack stock, which we sold in the fourth quarter of 2007.

Capital expenditures were $11 million in the current quarter. Service revenue, which excludes reimbursed government fees was $188.3 million in the current quarter, compared to $191 million in the same quarter last year. Operating income was $27.2 million in 2008 compared to $21.9 million in 2007. Excluding the impact of severance costs, which was $8 million, operating income decreased by $2.7 million.

The consolidated operating margin was 14.4% in the current quarter, compared to 11.5% in the first quarter of 2007. When comparing the first quarter of 2008 to the first quarter of 2007, operating margins decreased in the lender and data segments as a result of issues in the housing and credit markets. It is significant to note that margins on a sequential basis increased in both of these segments from fourth quarter of 2007.

Margins in the lender services segment increased from 7.5% in Q4 2007 to 24% in the current quarter. Revenue increased by 39%, 23.3% of which was organic, with the balance due to the CredStar acquisition, which closed on December 31 of 2007.

Bad debt expense decreased from $2 million in the fourth quarter of 2007 to approximately $500,000 in the first quarter of 2008. This significant increase in margins is attributable to increased volumes, both organic and via acquisition, reflecting the scalability of the business and tight expense controls.

Margins decreased in the Employer Services segment from 9.3% in Q1 2007 to 6.5% in Q1, 2008. The decrease in margins is due to reduced margins in our tax incentive and hiring solutions businesses, offset in part by improved margins in our domestic background screening.

In our tax business, we had about a $1.5 million of [watzi] catch-up revenue in the first quarter of 2007. Margins were 17.3% in the fourth quarter of 2007. Once again, the sequential decrease in margins is due to reduced margins in tax and hiring businesses.

Quarter four is usually a very good quarter for the hiring solutions business. In addition, Q4 of 2007 was an excellent quarter for us in the tax incentive business. In that we billed approximately $5 million in location based incentives compared to $2 million in the first quarter of 2008.

Margins increased in the investigative services segment as revenues increased from $12.3 million in 2007 to $23.5 million in the current quarter. Resulting in operating margins improving to 40% in the current quarter, compared to 23.7% in the first quarter of 2007.

Margins decreased on a sequential basis from 51.6% in Q4 2007 as revenue decreased by $10.2 million. Margins increased in the dealer segment as we continued to see growth in our vehicle credit reporting business. Vehicle credit report revenue increased in the quarter by 6% from last year.

Overall revenue declined by 5% in this segment, due to declines in our vehicle lead generation business. Margins increased in our Multifamily Services segment from 24.5% in 2007 to 26% in 2008. Margin growth is attributable to, once again, tight expense controls and revenue growth.

Organic growth rates for our business segments are as follows, we had quarter-over-quarter declines in our lender segment of 23.5%, data 15%, dealer services 5.2%, and employer 3.7% and we had quarter-over-quarter increases in organic growth rates in Multifamily of 4.2% and 90% in our investigative segment.

Our balance sheet is very strong. At the end of the quarter, we had total debt outstanding of $104.5 million, made up of fixed rate debt of approximately $13 million, with an average interest rate of 5.2% and variable rate debt of $91 million with an average interest rate of 4.2%.

Our debt-to-capital was only 11.8%. Our available and unused line of credit was $146 million at March 31st. We had $61.7 million of cash on our balance sheet at the end of the quarter.

For the quarter, interest expense decreased from $3.2 million in 2007 to $425,000 in 2008, due to significantly lower average debt balances. Average debt outstanding during the first quarter of 2008 was $45.6 million, versus $206.1 million in the first quarter of 2007. Average interest rates declined from 6.26% in 2007 to 5.34% in 2008.

As we've discussed in the past, we are committed to make First Advantage more efficient and dispose of non-performing, non-strategic assets. In addition to the two asset dispositions we have discussed, we've taken additional initiatives as evidence of that commitment.

In our Employer Services segment, platform consolidation, improved work flow, and other productivity gains, which are the result of an overall management focus on productivity, are expected to reduce costs by approximately $1.3 million, per quarter, commencing in the second quarter of this year. We will incur a charge in the second quarter of approximately $1.2 million for severance payments and related asset write downs.

Anand will discuss further the focus we have in streamlining our current operations. With that, I will pass it on to Anand.

Anand Nallathambi

Thank you, John, and good afternoon, everyone. We are pleased with the results of the first quarter, most notably with the sequential increase in the lender services segment over the fourth quarter of 2007. Service revenues in the lender segment were up 39% from the fourth quarter of 2007, though compared to the first quarter of last year, revenues are down 15.7%.

We continue to gain market share as borrowers seek major mortgage lenders, who, in turn, look for higher quality service providers. Operating margins are coming back strong as we remain committed to maximizing operational efficiencies. The integration plans for CredStar, our new acquisition, is progressing ahead of plan.

From an employee standpoint, including the CredStar acquisition, we stand basically flat as of year end 2007. The reports for employee is at 13.02, up from 12.74 at year end 2007 and up from 12.31 at first quarter 2007.

We expect the integration of the last few acquisitions and the necessary consolidation of personnel and facilities to be complete by the end of the third quarter. The acquisition of CredStar and the evolving of our IT platforms in Poway, San Diego are the main drivers behind this efficiency drive.

Our data services segment had revenue and operating income increases of 9% and 24% respectively, compared to the fourth quarter of 2007. The year-over-year comparison show a decline in revenues and profitability, primarily due to the reduction and sales in the specialty finance and lead generation businesses as we continue to be impacted by the weak credit markets.

We remain optimistic that the focus on newer geographical territories in our specialty finance business and the expanded focus on additional business verticals in our lead generation operation will start to show results in the follow quarters. Our membership services and criminal background data businesses continue to perform well.

The dealer services segment saw a decline in service revenue of 5% year over year. As the negative effects of the credit markets continue to pressure our lead processing business. Though this subprime automotive business is showing positive signs in terms of revenue and profitability on a sequential quarter-over-quarter basis, we are closely reviewing the strategic fit with our other dealer services and the financial performance of this business coupled with the general market conditions.

As you already know, we have announced our intention to divest Credit Management Solutions Inc., our automotive consumer credit software business. We had purchased CMSI and Credit Online together back in 2000 and later contributed Credit Online into DealerTrack. That move worked out great for us and we still have a sizeable holding in DealerTrack.

Outside of some intellectual property that we are retaining, the software part of the business is a small portion of the dealer services segment, which did not align with our long-term vision and growth strategy.

Our automotive credit business continues to gain share amidst the lackluster automotive market with increases in service revenue and operating margins. Compared to the first quarter of 2007, revenues were up 6% and profits up by 20%. Sequentially, compared to the fourth quarter of 2007, revenues were up 15% and profits up by 34%.

In addition to expanding our presence in the franchise and independent dealer markets, we are adding product solutions that help dealers comply with the consumer authentication procedures that center around the federally mandated red flag ruling that goes into effect later this year. Employer Services segment experienced the impact of labor market contraction and weakening job postings, especially in the domestic market.

Service revenues were down 1.8% year-over-year during the first quarter. The declines are more concentrated in the domestic area of businesses. However, foreign background screening continues to grow and the Australia and Asia markets seem to have sustainable strength since we haven't seen any material change in demand. There could be some softening in the European markets, which isn't a big contributor for us anyway.

From an operational standpoint, we continue to remain focused on increasing our profit margins. There is a major efficiency drive underway that includes productivity improvements, business and platform consolidations, and right sizing the workforce to fit the emerging economic environment. John Lamson detailed the financial impacts of this restructuring move.

We are consolidating our two applicant tracking businesses into one best of breed hiring solutions platform. The restructuring initiative will have a net result of 17% reduction to our domestic workforce in this segment. This will enable us to be more cost efficient, almost to the tune of $4.7 million to $5 million a year, going forward.

In general, though the labor market indicators are showing a downward trend, the unemployment numbers aren't real drastic. Construction and manufacturing are the hardest hit areas. The service sector employment still shows opportunity for growth and we placed confidence in the consensus that there will be macroeconomic rebound and recovery in the second half of 2008.

Besides the economic outlook, the reasons for our optimism are based on the fact that the later quarters have been historically great quarters for us, thanks to our tax incentives and hiring solutions businesses and a steadily growing international component.

The Multifamily segment continues to grow in market share and profitability. Service revenue grew 4% in the first quarter with an increase of 10.6% in operating income. We're pleased with the resiliency of this segment despite the downward pressures of the credit market crisis. The growth in revenues and profitability is coming from cross selling data and analytic products, [Crimsafe] and scoring insight to our existing client base and the consumer product renters insurance.

Our investigative and litigation support segment saw a 91% increase in service revenue over the first quarter of last year. However, sequentially, we were down from the fourth quarter of 2007 by 30%, largely due to decreases in project billings in Europe and Asia. This decline in revenue is reflective of the lumpy project based revenue model.

From a pipeline perspective, the international portion of this business still looks strong. We just completed the expansion of our data centers in London, Brussels and Tokyo and rolled our out new data hosting platform services. We expect the projects in service to pick up in the next 30 days.

As mentioned in the earnings release, we have divested of the investigative and surveillance portion of this segment. We've spoken on numerous occasions how this business is not a strategic fit for First Advantage and we look forward to our new alliance with the acquirer, Global Options Group. We were fortunate to find the right buyer and also be able to execute a strategic alliance to cross-sell each others products and services.

As you can tell, we've got a lot of things underway and it's a busy time for us and the industry in general. At this point, I'd like to open the call up to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Cindy Williams

We'll now take the first question.

Operator

Okay. Our first question is from Kyle Evans. Kyle, your line is open.

Kyle Evans - Stephens Inc.

Thank you. I was worried we got cut off there for a second guys.

Anand Nallathambi

Yes.

John Lamson

Good to hear you -- from you, Kyle.

Kyle Evans - Stephens Inc.

Thanks. Hey, Anand, can we start off maybe with the bar none business you alluded a couple time on the call to your willingness to review that business and whether or not it's still strategic. Just how bad was it in the quarter when we look at that business relative to say the auto credit, which sounded like it did well on a year-over-year basis?

Anand Nallathambi

Yeah, the automotive credit business is really good. In general, the market for subprime automotive business, obviously as you know, is not good. We have fixed everything we can fix from an operational standpoint. We are just looking at that business from a lead generation perspective. We have the ability to generate leads from a couple of different places.

And from a question of processing it, we're just trying to review to say how important this is to hang on with the processing function of the organization and if it doesn't fit, then we have to kind of decide what we do with it.

Kyle Evans - Stephens Inc.

About how big was that business in the period? Just trying to get some kind of rough sense.

Anand Nallathambi

John?

John Lamson

Yeah. Kyle, how are you doing?

Kyle Evans - Stephens Inc.

Hi. Good.

John Lamson

It's roughly about 10% of the revenues for the segment.

Kyle Evans - Stephens Inc.

Okay.

John Lamson

Okay.

Kyle Evans - Stephens Inc.

And lead click, really tough in market there where I see that in other businesses that I follow. You didn't mention that you would review the strategic fit on that one, and instead you've decided to basically aim that marketing engine at different end markets. Can you talk about just how weak that was in the quarter and exactly which end markets you could be targeting that at in the future?

Anand Nallathambi

Yeah. I can talk about the markets and John can address the numbers side of it. We've had really good success, we've brought on a lot of people and we're kind of seeing a lot of pick up in the prospects and new clients sign up in the life settlement type areas. There's a lot of new areas that we can go in there. And we also see that the internet-based lead generation is still active, especially in the subprime area.

So we're kind of trying to go after financial services verticals to supplement what we already had in lead generation from that business.

Kyle Evans - Stephens Inc.

So in other words, cards and maybe insurance versus subprime mortgage.

Anand Nallathambi

Yes, no -- well. Our business originally was in the payday lending and subprime automotive concentration and lead click. Now, I think we're going more into the life settlement insurance and other financial services and financial products verticals.

Kyle Evans - Stephens Inc.

Okay. Lastly, if we're going to see a charge in Employer Services on the current quarter. Can you give us an update -- does that mean we're done with the platform consolidation then you've gotten that -- so we can expect to see the bit margin ramp on that business as the end market gets a little bit easier.

Anand Nallathambi

Yes. I think we actually took a pretty aggressive view to say the macroeconomic rebound we see that -- especially, in the domestic markets happening in the later part of the year and we kind of felt like this is the perfect time for us to do it. And we have -- you're correct in saying that we are done with the business consolidation from a platform perspective.

We had two different applicant tracking platforms, we're going to go to best of breed and obviously, we don't aim to add or acquire any more applicant tracking platforms. We maybe adding some products and services that go into more of the data and analytic space. So, we are expecting fully to see and EBIT ramp up, post this charge.

Kyle Evans - Stephens Inc.

And you still think long-term that's a high teens type number?

Anand Nallathambi

Yes.

Kyle Evans - Stephens Inc.

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

Anand Nallathambi

Thanks.

Operator

Okay. Our next question is from Mark Marcon. Mark, your line is open.

Anand Nallathambi

Hi, Mark.

Mark Marcon - Robert W. Baird & Co

Good afternoon, everybody.

John Lamson

Mark, how are you doing?

Mark Marcon - Robert W. Baird & Co

Good, thanks. I was wondering, can you talk a little bit about lender services? I mean that was a nice rebound there with regards to the margin sequentially. How sustainable do you think that is? And it looks like things just keep moving around with regards to what's going on with the mortgage applications. How much are we going to be subject to that or how should we think about that?

Anand Nallathambi

Yeah. You are correct that things are moving around. But here's where we get a little bit more optimistic about it. I think we've talked in the past that our concentration of clients tends to be towards the major mortgage makes or major mortgage lenders. We have seen over the first quarter, at least in the last couple of months, an increase in volume form the major market players, the top 10 seem to kind of get an inordinate amount of share of the new market out there.

So, from an overall transaction perspective, the volumes are kind of flat over the last couple of months. Maybe a little bit down from the rapid pace that we kicked off the beginning of the year, but where our optimism comes in is it seems to me that whatever is remaining in the market is going to the major market shareholders. And we have a pretty good penetration with them, so we feel like that's got to bode well for us in the coming quarters.

Mark Marcon - Robert W. Baird & Co

How much of the bump that we ended up seeing this -- on a sequential basis, do you think was due to the pick up just in the refis with the short-term movement towards better refi opportunities, which apparently just went away this last week or two?

Anand Nallathambi

Yes. If I had to pick a number -- obviously, we've got to validate it.

Mark Marcon - Robert W. Baird & Co

Sure.

Anand Nallathambi

Just from experience, if I had to say, I would say between the beginning of the year and now there's probably a 10% of transactions that were related to this refi bump, if you will. That was just more sporadic.

Mark Marcon - Robert W. Baird & Co

Really? And then the rest of it was -- so if we were at 27.6 during the fourth quarter of last year and we were doing roughly 39, we can basically strip out -- so basically, go about 35ish and that would be the real bump in terms of the underlying business.

Anand Nallathambi

When you talk about -- in terms of revenue you're talking?

Mark Marcon - Robert W. Baird & Co

Right.

Anand Nallathambi

Yeah, thereabouts. Yes, I would say that -- that's just based on where we are now. I mean -- this is a market, like you said, its shifting around, but I'm just trying to look at where we see that top six or the top 10 players and what kind of share they're getting. They seem to be getting a lion's share of the market and then their numbers are on the positive up. So --

Mark Marcon, Robert W. Baird & Co. - Analyst 40

Great. That was a great job with regards to the margins. Can you talk also a little bit about the fluctuations that we're seeing in ILS and how we should think about that from a seasonal perspective, or how you see that going as the year unfolds, because obviously it was great year-over-year growth.

Anand Nallathambi

Yeah.

Mark Marcon - Robert W. Baird & Co

Sequentially, did you expect it to drop off as much as it did sequentially? Or--?

Anand Nallathambi

Well, we -- yes, it's due to a lot of reasons. But it is lumpy and that is very tough to kind of predict out there. But from a pipeline perspective, we're still seeing a lot of activity and as a matter of fact, our guys tell me that East Asia is really red hot from an interest level for some of the new products that we're launching. So, I think we'll still have a very good year there. It's just very tough to predict exactly how and when it's going to come.

One of the things that we're trying to do is we're trying to be expand or -- going back, the whole area to really capitalize on margins in that business is capacity utilization, how well we manage that. And so far, we've been more of a domestic player going international. What we're trying to do now is, trying to hire a lot more in country personnel and train them, so we'll have some domain expertise right there, closer to the field.

And I think that would help us to really capitalize on a lot of these opportunities that are coming where we -- if we have to today traunch them into a sequential basis, we can kind of take advantage of some of those projects on a local level as it comes up. And that bodes well for us into the future.

Mark Marcon - Robert W. Baird & Co

Great. And can you talk a little bit about the margins there? Because even though you had a sequential drop off with regards to the revenue, you did a great job of holding the margins up, which is an unusually good performance.

Anand Nallathambi

Yeah, it's project-by-project, but it's mostly -- we are the highest priced provider out there. In that we've actually have enjoyed that luxury, mainly because of our service and our relationships and their ability to really turn around projects with our software capabilities. So, assuming that continues, and we plan to do that, and I think the new product that we rolled out is well received internationally. That should bode well to keep the margins up.

John Lamson

Yeah, and Mark, I might add, at this level of revenue, be it the fourth quarter or first quarter, the fixed cost component is relatively small so it's pretty manageable on the downside, giving me this level of revenues.

Mark Marcon - Robert W. Baird & Co

Yeah. I mean that was terrific. Can you give us -- I kind of missed it, if you gave it, but can you give a little bit of a feel for guidance? And I know it's a moving target, given that it sounds like you're evaluating different businesses. But if we keep the current businesses that we all have currently, can you give us a sense for how you would expect the second quarter and the year to shape up?

John Lamson

Well, we gave annual guidance, as you know, at the end of the year --

Mark Marcon - Robert W. Baird & Co

Right.

John Lamson

Last year and excluding the reserve we took for the discontinued operations, we're pretty much where we thought we'd be for our business plan. So, I guess -- we're not going to get into quarterly guidance, but we can say that through the first quarter we're kind of about where we thought we'd be.

Mark Marcon - Robert W. Baird & Co

All right. Great. I'll hop back into the line.

John Lamson

Okay.

Mark Marcon - Robert W. Baird & Co

Thank you.

Operator

Thank you. Our next question comes from Brian Ruttenbur. Ryan, your line is open.

Brian Ruttenbur - Morgan Keegan & Co.

Okay. Thank you. First question I have is on the investigative services business that you hold, I don't believe this has been asked, but wanted to know how much revenue you guys did in the first quarter and in 2007 in that --

John Lamson

Brian you are -- you're very -- you're hard to hear.

Anand Nallathambi

Breaking up.

Brian Ruttenbur - Morgan Keegan & Co.

Okay. Can you hear me now?

John Lamson

A little better. You asked about investigative services?

Brian Ruttenbur - Morgan Keegan & Co.

That's correct. How much did you do in the quarter in terms of revenue and how much did you do last year in terms of revenue?

John Lamson

You mean in the discontinued?

Brian Ruttenbur - Morgan Keegan & Co.

Yes.

John Lamson

Okay. Yeah, I can give you some light on that. In the surveillance, which is what you're referring to, in the first quarter of this year, the revenue was about $2.5 million.

Brian Ruttenbur - Morgan Keegan & Co.

Okay.

John Lamson

And last year, for the whole year '07, it was about $12.2 million.

Brian Ruttenbur - Morgan Keegan & Co.

Okay.

John Lamson

Does that help.

Brian Ruttenbur - Morgan Keegan & Co.

I'm coming in so weak, I'm going to ask my other questions off line. Thank you.

John Lamson

Okay. Sorry.

Operator

And our next question is from Nathaniel Otis. Nat, your line is open.

Nathaniel Otis - Keefe Bruyette & Woods

Good evening.

John Lamson, First Advantage - CFO, EVP 72

Hey, Nat.

Nathaniel Otis - Keefe Bruyette & Woods

How're you doing?

John Lamson

Good.

Nathaniel Otis - Keefe Bruyette & Woods

Just to follow-up on a couple of the questions that have been asked so far, just maybe a little more clearly, any color, I think you talked a little bit, that lender services volumes might be down a little bit of a tick as you start in April, but just any color on how trends are running so far after the quarter would be helpful.

Anand Nallathambi

It's basically -- essentially or basically flat from how we entered the quarter. When I said it was down, it was more like how we started the year and where the first quarter ended.

Nathaniel Otis - Keefe Bruyette & Woods

Okay. All right. Once again, on the investigative front, just first of all, do you have a percentage of investigative that was international this quarter?

John Lamson

Yeah, I can tell you how much of the revenue for investigative -- they had about $12 million of revenue that was foreign revenue, Nat, and that would be out of what -- $23 million, $23.5 million. So, almost half of it was foreign related.

Nathaniel Otis - Keefe Bruyette & Woods

Okay. And then just maybe to follow-up on that a little bit, I guess, correct me if I'm wrong, but I always thought that you guys were kind of focused on financial services and pharmaceuticals there and not to look for a silver lining in a tough operating environment right now, but given what's going on in the financial services markets -- market, don't you think that it might be right for kind of more litigation and how do you feel about how that business could trend out through the year? Any color on that?

John Lamson

Yeah. Well, I believe what you're referring to is in the past when we've talked about electronic discovery. Some of the early on cases, I guess, that kind of brought this, kind of a sub-industry, if you will, to the forefront was related to some financial services in pharmaceutical industries. That -- let's say were prone to litigation that required our services. And obviously there's been a lot of turmoil, if you will, in the financial services industry.

So, I guess anything that -- regardless of the industry, really, anything that spawns litigation is an opportunity for those of us who are in this type business to land some good projects. So, but you obviously have to get the projects, so --

Nathaniel Otis - Keefe Bruyette & Woods

Understandable. And I guess, what would be some of the other maybe vertical markets that you'd look to other than those that maybe you're already doing business with or whatnot. Just some more color there would be helpful.

John Lamson

I'd say telecom, retail maybe.

Nathaniel Otis - Keefe Bruyette & Woods

Okay. All right. And then, just one final number question. I didn't get you to start John, what was the operating cash in the quarter?

John Lamson

Yeah. Nat, it was $22.5 million with the -- and it's a little strange this quarter, that excludes a payment of $56 million we made on taxes, which is very high because of the DealerTrack gain in the fourth quarter of last year.

Nathaniel Otis - Keefe Bruyette & Woods

Okay. Very helpful. Thank you.

John Lamson

We had an abnormally high tax payment. But cash flow wise, it was a pretty good quarter.

Nathaniel Otis - Keefe Bruyette & Woods

Okay. Good. Thank you.

John Lamson

Yes.

Operator

(Operator Instructions). One moment, it looks like we do have a question. Mark Marcon you have the line -- you're open line.

Mark Marcon - Robert W. Baird & Co.

First, a bigger picture strategic question. Aside from bar none and some of the consolidations that you're going to do in employer services, should we anticipate that there might be other things that you might potentially look at streamlining?

Anand Nallathambi

We're always streamlining lender services. I mean, that's one of the ways we stay ahead of the market, Mark. I mean, we have bought a few companies in the lower end of the market and we have a couple of platforms and we are reviewing those to see which is better.

And obviously, we're very excited about the new acquisition that we made CredStar, they have a really good web services platform. But prior to that, we had bought a couple of lower end businesses that -- there's an opportunity there. We need to kind of constantly look at it and, like we said, in the lender services especially, we always stay ahead of the market to say our reports for FTE is the key operational metric and as long as that goes up, we then look at facilities, platform and other technology type investments that could be curtailed and brought more into the -- are more of the core platforms.

Mark Marcon - Robert W. Baird & Co.

Great. Anything else that we should think of?

Anand Nallathambi

Outside of it, I can't think of any. I mean we have taken a year to kind of really look at this strategic exercise to see what fits and what doesn't fit and if you ask me, I'm almost itching to go and expand our product set out there.

Mark Marcon - Robert W. Baird & Co.

Great. And by the third quarter you think we'll pretty well be done?

Anand Nallathambi

Yes.

Mark Marcon - Robert W. Baird & Co.

Okay. Great. And then, with regards to ILS, you said there was a big pipeline that was building up. Can you give us a sense for how quickly that pipeline can rebuilt?

Anand Nallathambi

If you go by the last 18 months, pretty quickly revolving. But its, again, it's very tough for us to commit to anything mainly because of the nature of these contracts.

Mark Marcon - Robert W. Baird & Co.

If we were trying to be conservative in terms of modeling things out, should we just assume a slight bump sequentially and then building continuously or could it come fairly quickly?

Anand Nallathambi

I don't know. I think maybe sequentially, building up.

Mark Marcon - Robert W. Baird & Co.

Okay.

Anand Nallathambi

Probably, because just have expanded our data centers where -- like I mentioned, we're hiring in Company personnel, we're training them so we can kind of expand the capacity. Because, as you know, our bailiwick, our claim to fame is how we marry electronic discovery services along with the computer forensic expertise. That's why we are good in what we do. And that just doesn't happen overnight. I mean, you don't develop computer forensic experts by just training them.

Mark Marcon - Robert W. Baird & Co.

Sure. I mean, your capacity remains the same as what you had previously, right?

Anand Nallathambi

Yeah. And to the extent that you can make the technology, kind of recycle products faster, you can get there. But from a forensic expertise level, you can -- you just don't have an exponential ability to just take on additional work.

Mark Marcon - Robert W. Baird & Co.

Sure.

Operator

I'm sorry. One moment. Okay, I'm sorry, sir. We -- your line accidentally got disconnected from the questioning. Do you want to queue up again? I apologize. Okay, we'll go ahead and take a question from the next part -- here we go, here's Mark, I apologize. Mark, go ahead, your line is open.

Mark Marcon - Robert W. Baird & Co.

Thanks. Sorry, I got disconnected. On the Employer Services side, can -- on the ATS's, are you going to combine the two elements of the two ATS's into one best of breed, or are you essentially going to go with one platform and transition you other clients to that platform?

Anand Nallathambi

It will be a little bit of a combination. There will be some skill sets or modules that we bring on. But predominantly we're going to pick one and then we're going to use that and then bring on some of the elements of the other into it.

Mark Marcon - Robert W. Baird & Co.

Okay. And how long do you think it will take you to do that?

Anand Nallathambi

I'm told that that operation is already underway.

Mark Marcon - Robert W. Baird & Co.

And you'll be completed by --

Anand Nallathambi

I would say, probably in the next couple of quarter and the technical side of it is a question of what is the highest and best use. Obviously, we're going to look at the modules that are absolutely a necessity for the client basis that we serve out there. but that's going to be an ongoing thing that we have to kind of look at it, but we have a lot of confidence, we brought in some additional senior management talent from the industry -- from the technology industry and we're confident that that thing is going to go, move in the right direction and start to produce some terrific results soon.

Mark Marcon - Robert W. Baird & Co.

Great. And then, with regards to the -- sequentially, typically the first quarter is a weaker hiring period, can you talk a little bit about the monthly trends that you saw in the base ES business and how you would expect -- I know you said that you were hopeful that the second half would be better as -- and that hopefully the consensus is correct, but anything else to think of there?

Anand Nallathambi

No. other than the fact that -- it's sort of flat, just like we talked about a lender services, volumes hanging around. I didn't see a drastic move one way or the other in the first quarter in the background screening side. If there is anything to note out there was we saw a little bit of a pricing pressure, or a price compression in the domestic markets, which is also why we kind of went aggressive on workforce reduction and really right sizing the workforce and getting ahead of this curve.

Outside of it, we didn't see a major concern other than obviously, you have seen the same reports that we've seen out there, that there is some weakening in the job postings out there.

Mark Marcon - Robert W. Baird & Co.

Yeah. That's pretty clear. In terms of the pricing pressure, is that coming from clients in a particular vertical or particular size or is it pretty widespread?

Anand Nallathambi

Yeah. I would say its pretty wide spread, probably more towards the higher end of the client base and the lower end of the client base, as you would expect.

Mark Marcon - Robert W. Baird & Co.

Okay. Great. Thanks. I'm going to follow up offline.

Anand Nallathambi

Okay. Thanks.

Mark Marcon - Robert W. Baird & Co.

Thank you.

Operator

Okay. Our next question is from Wayne Johnson. Wayne, your line is open.

Jason Boozer - Raymond James

Hi, [Jason Boozer] in for Wayne Johnson. How are you?

John Lamson

Hey, Jason. Good.

Jason Boozer - Raymond James

Just want to drill down a little more on the Employer Services margin. I know that was weakness in the tax and hiring segments. Was there anything specific within those segments that hurt margins?

John Lamson

Not really. We're coming off -- there was a quarter -- the first quarter of '07 there was some -- when they reenacted the work opportunity tax credit, we got some bump up in revenue that basically fell right to the bottomline. So it was about $1.5 million that did that. So, really, nothing really other than that on a year-over-year basis.

Jason Boozer - Raymond James

Okay. Just difficult comps. What percentage of Employer Services this year was international? Or this quarter, I'm sorry.

John Lamson

Yeah, international in Employer Services was $11 in the first quarter. So that would be $11 million of about $53.6 million in revenue.

Jason Boozer - Raymond James

Okay.

John Lamson

It -- was international.

Jason Boozer - Raymond James

Excellent. And what percentage of Employer Services is applicant tracking? If you'd remind me?

Anand Nallathambi

Yeah. We don't separate it by just applicant tracking. The hiring solutions is probably a better comp.

John Lamson

Yeah, that's --

Jason Boozer - Raymond James

Okay.

John Lamson

That is about 15% or so.

Jason Boozer - Raymond James

Okay. Excellent. Thank you very much.

John Lamson

You're welcome.

Operator

Okay. Our next question is from Kyle Evans. Kyle, your line is open.

Kyle Evans - Stephens Inc.

Thanks. Could you guys comment on Teletrack trends within the quarter and across the year?

Anand Nallathambi

Teletrack was one of the businesses that has been impacted by the weakened credit markets, Kyle. And while their margins are so very, very good, their topline has had some softening.

Kyle Evans - Stephens Inc.

That's one of the businesses that I think maybe some of us would have looked to for countercyclical strength. And by that I just mean as more consumers fall down into the payday lending category, I would expect more people at furniture rental stores and more checks on that data base. Am I just -- am I missing something there?

Anand Nallathambi

No, it's actually a different market and there is no progression of the prime markets heading into near prime or payday lending. I mean, that has not been the progression in the past. What we're trying to do is -- the U.S. market, the domestic markets are obviously impacted by the weakening credit -- the financial sector wakening.

We are looking to really improve the international growth and we've just been in Europe since November and we're trying to kind of accelerate the growth and maybe even take it to a couple of more countries to build some growth there.

Kyle Evans - Stephens Inc.

So, who are the primary users of the Teletrack database here in the U.S. just so I --

Anand Nallathambi

I would say payday lending customers and check cashing companies. National debt organizations, they're also -- they also sell lead generation to automotive generators. That's obviously a tough market right now.

Kyle Evans - Stephens Inc.

Yes. Okay.

Anand Nallathambi

Residential rental is for like a smaller piece of it.

Kyle Evans - Stephens Inc.

Okay. John, you were really cooking there when you went over the organic growth rates, would you mind repeating those?

John Lamson

Sure. Yeah, no problem. These are quarter-over-quarter declines were 25.3% in lender, data was down 15%, dealer 5.2%, and employer 3.7%. And increases were in multifamily 4.2% and the investigative segment was up 90% -- 91% actually.

Kyle Evans - Stephens Inc.

Okay and total international revenue in the quarter, when you said $11 million out of employer and I think you gave a litigation number earlier --

John Lamson

Litigation was $12 million. Yeah, they're almost the same.

Kyle Evans - Stephens Inc.

Okay. And that's pretty much all the international revenue period.

John Lamson

Yes. Yes.

Kyle Evans - Stephens Inc.

Okay. Great. Thanks.

John Lamson

Okay. You're welcome.

Operator

Okay. We do have one more question from Brian Ruttenbur, one moment.

Brian Ruttenbur - Morgan Keegan & Co

Am I in okay?

Anand Nallathambi

Hi, Brian.

John Lamson

Hey, Brian.

Brian Ruttenbur - Morgan Keegan & Co

Okay. Great. I'm going to try it one more time. All right, can you tell us what stock-based compensation was in the quarter?

John Lamson

Yes, sure -- it was $2.3 million.

Brian Ruttenbur - Morgan Keegan & Co

$2.3 million, okay. And then, if we take what you guys did this quarter and just take it out for the rest of the year, do you see any big drop off? I mean you talked a little bit about lender services going to be probably down a couple million dollars, but then you're also making cuts. I'm talking on an operating basis going forward, $0.35 -- $0.30 to $0.40 on a quarterly basis, does that seem reasonable kind of going forward, or are there any big hits or peaks that I should be thinking about?

John Lamson

Well, historically, a lot of our segments are pretty seasonal. The second and third quarters being the better performing quarters and first and fourth being less of -- you can look at the Multifamily. I think, historically you can look at lender services and draw that same conclusion.

Q1, historically, has been a relatively slow quarter for the Employer Services because hiring is typically -- forgetting economic conditions, just generally slow in the first quarter. So I don't think that you can necessarily straight line one quarter and come up with an annual number.

Brian Ruttenbur - Morgan Keegan & Co

Okay. So if I took it up in the second and the third quarters and then took it down in the fourth quarter, like you do historically, that's the way to model it and is there anything special that I should be thinking about other than trying to watch interest rates?

John Lamson

No, other than overall economy. No.

Brian Ruttenbur - Morgan Keegan & Co

Okay. Great. Thank you very much.

John Lamson

You're welcome.

Cindy Williams

That will end today's call. Thank you, everyone, for dialing in.

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