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Executives

Cindy Williams – Manager, Investor Relations

John Lamson - Chief Financial Officer & Executive Vice President

Anand K. Nallathambi - President, Chief Executive Officer & Director

Analysts

Kyle Evans – Stephens, Inc.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

Nathanial Otis – Keefe, Bruyette & Woods

Mark S. Marcon – R. W. Baird

Kyle Evans – Stephens, Inc.

First Advantage Corporation (FADV) Q2 2008 Earnings Call July 28, 2008 5:00 PM ET

Operator

Welcome to First Advantage Corporation’s second quarter 2008 earnings conference call. (Operator Instructions) We will now turn the call over to Miss Cindy Williams, Investor Relations Manager, to make a brief introductory statement.

Cindy Williams

At this time we would like to remind listeners that management’s commentary and responses to your questions may contain forward-looking statements including certain statements made in this presentation relating to consolidating and integrating new acquisitions in the third quarter, developing tools and products extensions in the litigation consulting segment, continued cost savings for the remainder of the year including headcount reduction, facilities consolidation, reduction in professional services and marketing related expenses and other statements that do not relate strictly to historical or current facts.

The forward-looking statements speak only as to the date they are made and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements.

Factors that could cause the anticipated results to differ from those described in the forward-looking statements include general volatility of the capital markets and the market price of the company's class A common stock, the company's ability to successfully raise capital, the company's ability to identify and complete acquisitions and successfully integrate businesses it acquires, changes in applicable government regulations, the degree and nature of the company's competition, increases in the company's expenses, continued consolidation among the company's competitors and customers, unanticipated technological changes and requirements, the company's ability to identify suppliers of quality and cost effective data and other risks identified from time-to-time in the company's SEC filings.

Investors are advised to consult the company's filings with the SEC including its 2007 annual report on Form 10-K 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 Anand Nallathambi, President and Chief Executive Officer who will provide us with an overview of First Advantage's strategy operations.

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

John Lamson

First Advantage reported net income from continuing operations of $13.7 million or $0.23 per diluted share for the current quarter of 2008 compared to $18.2 million or $0.31 per diluted share for the second quarter of 2007. Operating results for the current quarter include costs associated with consolidating certain operations in our Employer and Lender segments that totaled $1.7 million negatively impacting earnings by $0.02 per diluted share. Anand will discuss other steps taken to streamline operations and associated cost savings initiatives in a few minutes.

We completed the disposition of our credit automation software and Insurance Fraud Surveillance businesses in the second quarter. These dispositions are included in discontinued operations in 2008. Discontinued operations for 2007 also include the results of operation for US Search.com, our Consumer Location business which we sold in the fourth quarter of 2007. Earnings from continuing operations before interest, taxes, depreciation and amortization, EBITDA, was $35.2 million for the current quarter compared to $44 million for the quarter ended June 30, 2007. A reconciliation of EBITDA to net income is included in our earnings release.

Cash provided from continuing operations was $33.2 million for the current quarter. Capital expenditures were $8.2 million in the current quarter resulting in free cash flow of $25 million. Year-to-date for the six month period our cash flow from operations was $53.5 million excluding about $56 million of tax payments we made in the first quarter of 2008 related to the gain we recorded on dealer track shares that we sold in the fourth quarter of 2007. Our capital expenditures were $19.5 million for the current six month period yielding free cash flow of $34 million. At June 30, 2008 we had positive working capital of $102.5 million.

Service revenue which excludes reimbursed government fees was $182.5 million in the current quarter compared to $196.6 million the same quarter last year. Operating income was $23.1 million in the current quarter compared to $31.9 million in the second quarter of 2007. The consolidated operating margin was 13.1% in the current quarter, 14% excluding the restructuring charge compared to 17.3% in the second quarter of 2007. When comparing the second quarter of 2008 to the second quarter of 2007 operating margins decreased in the Lender Services, Data Services and Employer Services segments as a result of issues in the housing and credit related markets and the overall negative impact the housing and credit markets have had on domestic and global economies. As you know the declines in these markets started to negatively impact some of our businesses near the end of the second quarter of 2007.

Margins in the Lender Services segment decreased from 26.7% in the second quarter of 2007 to 16.4% in the current quarter. Revenue decreased by 23% overall, 31% organically with the balance to the CredStar acquisition which we closed on December 31, 2007. This significant decrease in margins is primarily attributable to decreased volumes in the current quarter compared to last year and sequentially to the first quarter of 2008. Margins in our Employer Services segment were 11.7% in the second quarter of 2007 compared to 7.4% in the second quarter of 2007 excluding the impact of the $1.1 million restructuring charge which occurred in Employer Services. The decrease in margins is due to reduced margins in our Tax Incentive businesses, Occupational Health and foreign operations offset in part of improved margins in our domestic background screening. In our Tax business we had about a $700,000 decrease in earnings from Hurricane Katrina credits. The Katrina legislation expired in August, 2007.

Sequentially we had a slight increase in margins from 6.5% margins in the first quarter of 2008. Margins in our Data segment were 20% in 2008 compared to 30% in 2007. Our Specialty Finance Credit Reporting and our Lead Generation businesses have been directly impacted by the housing and credit issues and are the primary reasons why the decline in the margin. Sequentially the margins were comparable. Margins increased in our Investigative Services segment as revenues increased from $15.7 million in 2007 to $21.2 million in the current quarter resulting in operating margins improving to 35.6% in the current quarter compared to 31.9% in the comparable quarter of 2007. Margins decreased on a sequential basis from 40.5% in the first quarter as revenue decreased by $2.3 million.

Margins increased in our Dealer Services segment from 13.6% to 18.6% in 2008 due to tighter expense controls and restructuring of our Vehicle Lead Generation business. Margins also increased in our Multi-Family Services segment from 29.8% in 2007 to 32.9% in 2008. Margin growth is primarily attributable to tighter expense controls. Organic growth rates for our businesses are as follows, quarter-over-quarter declines Lender Services 31%, Data Services 14.5%, Dealer Services 9.2% and Employer Services 7.2% with increases on a quarter-over-quarter basis in Multi-Family 1.6% and Investigative and Lit Support 34.4%.

At June 30th, 2008 we had total debt outstanding of $73.7 million including fixed rate debt of $13.4 million with an average interest rate of 5% and variable rate debt of $60.3 million with an average interest rate of 4.1%. Our debt to capital was only 7.6%. Our available and unused lines of credit was $175 million at the end of the quarter. We had $41.6 million of cash on our balance sheet at June 30th, 2008. For the quarter interest expense decreased from $2.8 million in 2007 to $1.1 million in 2008 due to significantly lower average debt balances. Average debt outstanding during the current quarter was $89.1 million compared to $203.3 million in the second quarter of 07. Our average interest rate was 4.8% in 2008 and 5.4% in 2007.

We are closing a facility in our Lender Services segment. We expect that it will be completed in the fourth quarter of 2008. We anticipate to incur shutdown costs of approximately $1.6 million or $0.02 per share in the second half of 2008. When we prepared our 2008 business plan and provided earnings guidance we discussed the fact that the plan and earnings guidance was predicated on the assumption that there would be a turnaround in the credit and mortgage markets commencing in the second half of 2008. As we discussed on our first quarter earnings call we on a company-wide basis were substantially on plan for the first quarter. As we are all aware the issues in the credit and real estate markets still remain with us and along with rising energy costs that expanded into the overall economy negatively impacting employment.

As we have discussed these global economic issues have impacted the operating results of our Lender Services, Data Services and Employer Services segments. We also do not believe that there will be a substantial improvement in these areas for the remainder of the year. In light of this we are revising our estimated earnings per share from continuing operations for 2008 excluding any restructuring charges to be in the range of $1.10 to $1.18 per share. As Anand will discuss in more detail we have taken actions to streamline operations, reduce costs and maintain or improve our market share in our major business lines. These actions will not only have a positive impact in 2008 but more importantly make our operations more efficient in the future.

As I discussed earlier our working capital position is strong, cash flow is very good and we believe that we have taken the appropriate steps in reaction to the current economic conditions.

Anand K. Nallathambi

After staying on plan for the first quarter we experienced the headwinds of a weakening economy during the second quarter. Businesses in Lender Services, Employer Services and Data Services segments were impacted by the downturn in the mortgage industry and challenging financial services markets. In spite of these adverse impacts we have continued to see bright spots of growth in International Employment Screening, Multi-Family, Litigation Consulting and Automotive Credit.

Service revenue in Lender Services was down 23% in the current quarter compared to the second quarter of last year. Conditions in the mortgage industry are as challenging as we have seen in a long time. Most industry estimates indicate a 30% to 40% decrease from January 2008 revenue levels. Our Mortgage Credit business experienced a drop of 25% from January. As we fight these strong headwinds our focus remains in improving operational efficiencies and increasing market share. The reports for Employee metric was 14.23% up from 13.02% at the end of the first quarter and 12.74% at year end. We have reduced Customer Service staffing by 23.4% from January. As mentioned in the last quarter call we are in the midst of consolidating and integrating new acquisitions. We are in the process of consolidating five brands into two and that process should be completed by the end of the third quarter.

In the Data Services segment the economic impact was felt by Specialty Finance, Lead Generation and Transportation Data businesses. The top line pressure in these business is the main issue we are focusing on with diversification efforts. In the Lead Generation side we are working on adding multiple verticals. Currently our concentration is in Payday Lending and Subprime Automotive. We have reorganized the business to align more closely with Employer Services and to generate passive candidate leads to our Recruiting Solutions group. The margin on the Specialty Finance business is so strong. Because of our strong market share in the US we are focusing on the international arena and our entry into Europe is starting to show results.

On the Transportation side the focus is to move more into Driver Monitoring and Management than reselling data for underwriting purposes. Our Membership Services in Criminal Background Data businesses continue to perform well. The Dealer Services segment saw a decline in service revenue of 9.2% on a year-over-year basis but operating income increased 24.1%. On the revenue side outside of the Lead Processing business we’re actually performing better than expected given the automotive market. We continue to add dealers to our active base and expand on our list of strategic marketing partners. We currently have over 50 channel partners and over 9,500 active dealerships pulling credit related services from us. The operating income improvement was a combination of continuing improvement of margins in Automotive Credit and containment of losses in the Lead Processing business.

In the Employer Services segment at first look the change in margins in a year-over-year comparison might seem big; however, in the current quarter we had the impact of the restructuring charge the absence of Hurricane Katrina tax credit work which was in 2007 and the integration of our new acquisition in Asia. The pre-tax margin in June was back to the double digit level. Revenue growth was down on a year-over-year comparison has been a positive 3.4% on a sequential quarter-over-quarter basis in 2008. The International Screening business now approximately 23% of the total segment revenues posted revenue growth of 35% year-over-year with 16% of this growth being organic.

The labor market contraction we reported in the first quarter continues and we have seen that in our domestic businesses and in the work performed for the US multinationals in Asia. We reported on the restructuring project on our last earnings call. At that time we were expecting the results of that move to produce cost savings of $4.7 million to $5.0 million on an annualized basis. That number has been revised to upwards of $9.4 million in annualized cost savings as we gear up to stay ahead of the softening labor markets. Our focus remains in growing our diversified businesses in the employment sector and continue to integrate the operations and keep improving the margins.

In the Multi-Family segment service revenue grew slightly by 1.6% with an increase of 12% in operating income. Considering that a depressed housing market results in low turnover rates which reduces transactional turnover for residence screening our performance in this area validates the diversified services we have. This business continues to perform well as our value is in helping property managers assess the quality of residents, profitability of their portfolios and analytics for emerging trends in property management.

Our Investigative and Litigation Support segment saw a 34% increase in service revenue over the second quarter of 2007. Sequentially we were down 10% from the first quarter of this year. Actually as said on previous occasions this business is difficult to forecast on a long term basis due to the project oriented nature of the revenue model. However, the sales pipeline looks good and we are pleased with the growth in Europe and Asia. The international portion is 55% of this segment’s revenues compared to 38% in the second quarter of 2007. We are the market leader in e-discovery in Europe and we are focused in developing tools and product extensions that will build and add more predictable recurring revenue streams to the current product set.

I want to give an update on the cost savings initiatives under way. Given the tough economic conditions and the prognosis for the next few quarters. We have been on an aggressive path to cut, reduce and defer expenses. This efficiency drive has been in motion since April but has intensified and will continue as we progress throughout the year. Currently the efficiency drive will result in cost savings of more than $21 million on an annualized basis. The Employer Services and Lender Services segments are the major components accounting for 85% of the savings.

Also the efficiency drive isn’t just focused on headcount reduction but facilities consolidation, professional services and marketing related expenses. The labor part of the cost savings initiatives account for 57% of the total.

From an overall First Advantage perspective over the last two years we have worked on balancing the diversity, improving margins by integrating platforms to maximize on scale efficiencies and build on the critical data streams that represent unique and exceptional value to our customers. Our segment diversity is more balanced now with Employer Services at 30% of the total and Lender Services at 18% with the rest of the business segments ranging between 10% and 15%. The 50 plus acquisitions that represent our company have mostly been integrated where we can start to drive productivity and efficiency projects that deliver demonstrable results.

We’re also close to getting all the non-strategic pieces divested that distract momentum. Our enterprise provides data and analytical services about consumers at high value touch points in various financial and employment verticals. We process more than 60 million credit files in the prime and subprime markets more than 15 million driving records and more than 15 million in back on screens and criminal checks in any given year. We provide critical data management services utilizing sophisticated technologies bridging consumers and businesses through best in class distribution channels. These are tough economic times, true. But we possess and provide exceptional value and we will continue to do so through the cycles.

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

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Kyle Evans – Stephens, Inc.

Kyle Evans – Stephens, Inc.

You’ve lowered the EPS guidance and that makes perfect sense, could you give us your thoughts on the top line? I’ve got some follow up questions as well.

Anand K. Nallathambi

It’s really difficult at this point to give top line numbers, Kyle, mainly because of where the market is. We tried to make a good estimate on where we think it will be and we feel like, given the circumstances, our performance will be very good and we’re focusing a lot on taking the costs out but the revenue line, because of our heavy reliance on mortgage, employment and other sectors that depend so much on the economic forces, it’s tough to give a revenue estimate.

Kyle Evans – Stephens, Inc.

Should we take the old revenue guidance and just throw it out then? We’re not anywhere close to halfway to the lower end of the previous range [inaudible].

John Lamson

Certainly I think it would be safe to assume that the prior revenue guidance, given the economic conditions, aren’t going to be achieved but we did not prepare to discuss specific revenue guidance.

Kyle Evans – Stephens, Inc.

Maybe a little bit near term outlook in the Litigation Support business since that’s become a primary contributor to operating income?

Anand K. Nallathambi

We have talked to our people there and they feel like the pipeline looks really good. Obviously it’s a weighted pipeline but they feel very confident that they don’t see any further deterioration or projects coming in. Again we talked a lot, Kyle, in the past in the calls about the Litigation business to us is more of a capacity utilization. We haven’t seen any problem of being the top price provider out there. So we feel pretty confident that we can be in the range. That’s an area that we feel even though it’s a lumpy business we feel a lot more confident than the credit and financial sectors of the business.

Kyle Evans – Stephens, Inc.

So if it was say a quarter of EBIT this quarter and I think actually it came in more like 23% before corporate, is that something that could be over 30% by year end as a percent of total EBIT pre-corporate expenses?

John Lamson

Certainly that business I think has the potential to be that. As we’ve seen from some prior quarters if you look at for instance I think it was the fourth quarter of 2007 when we had really an outstanding quarter in there. But certainly it’s got the potential for that but this just goes back to the issue of it being a little difficult to predict on any long term basis when a project is going to come into the door.

Kyle Evans – Stephens, Inc.

Last question then I’ll get back in queue, we’ve talked a lot about the expense structure for the Lender Services business and I think maybe investors were left feeling like there was a lot more variable expense in that business versus fixed and maybe you could give us some sense for how you see margins trending in that business through the year as we just went from 24% to 16% quarter-over-quarter.

Anand K. Nallathambi

I think the margins will start to stabilizing. We’ve had kind of a perfect storm in that type business. You’ve had revenue downturn because of the market and you’ve had bad debt situation which is really stabilizing now and the other thing that we’re noticing is the new business that we bring on board mainly especially from the capital markets and other portfolio type review business those are not in the traditional margins levels because they are more higher velocity transactions which carry a little lower weight. That business for us, I could see when the markets come back and we operate in it still to be 25% plus business. I’m not sure if that’s a 33% plus business.

Kyle Evans – Stephens, Inc.

Was there any bad debt in the Lender Services segment?

John Lamson

Yes, there was but it was about $500,000 which is pretty comparable with what it was a year ago and in the first quarter. It didn’t move the needle.

Operator

Our next question comes from Brian Ruttenbur – Morgan Keegan & Company, Inc.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

First question I had was stock-based compensation. I didn’t hear that in the quarter, what was it?

John Lamson

I didn’t say it, but I’ll give it to you. Our stock-based comp for the six month period was $4.9 million.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

The next question I have really concerns if the economy continues to turn down, you have plans in place to cut, you’ve expressed that but what about acquisitions? Obviously, acquisitions are getting cheaper out there, are there plans to go out there and acquire other struggling businesses in this area?

John Lamson

Are you referring to lender services?

Brian Ruttenbur – Morgan Keegan & Company, Inc.

Well, I’m talking across the board. It seems like everything is struggling a little bit, it’s not just lender services, its employee background checks, multifamily, everything is struggling somewhat and in your five verticals I was wondering if you had plans to go out and make aggressive acquisitions.

Anand K. Nallathambi

We do get obviously contacted because we’re one of the major players in all these markets and I will separate the comments in two areas, the lender services and multifamily, those kinds of areas we really look at them and we kind of look at those situations as a depressed market sale and if it doesn’t really fit us we really want to be very carefully. Obviously, we pulled the trigger in the first quarter on a deal which made a lot of sense for us. Going forward it has to be a compelling value proposition like that to do it. We are also cognoscente of the fact of what it does in the revenue distribution standpoint. I think right now we’re happy about where the contribution of the lender services compared to the other segments come in to play.

In employer services, even though the market is somewhat under pressure and the labor markets are weakening out there, we’re recently noticing and I’m sure it’s public news that there are some assets that are really being bit up and so it’s not necessarily a market – we have to really pick selective targets in the employment sector because in some areas the pricing is not necessarily reflecting what the revenue or the forecast look like.

Brian Ruttenbur – Morgan Keegan & Company, Inc.

Just a last question, the debt covenants with your lowered estimates on the year, are you running in to any issues there?

John Lamson

We’ve got plenty of room on our loan syndication line so that will not be an issue at all.

Operator

Our next question comes from Nathanial Otis – Keefe, Bruyette & Woods.

Nathanial Otis – Keefe, Bruyette & Woods

Any way you can give a little bit of color on timing on some of these expense cuts and how much we can see coming out say Q3 Q4? Just any bit of color you can give us would be certainly helpful form a modeling standpoint.

John Lamson

The annualized amount we referred to of $21 million, of course that’s a full 12 months run rate once everything gets implemented which I think you understand. We’re looking at some of this in the third and fourth quarter, probably roughly $10 million or so that we’ll see in the second half of the year and for which we, to one degree or another, built in to our guidance.

Nathanial Otis – Keefe, Bruyette & Woods

Do you have any deal pricing on your CMSI and the Investigative Services sales?

John Lamson

You know we have not disclosed the proceeds that we got on that deal. They were really relatively minor sales, okay. So the prices weren’t that big, they were small businesses.

Nathanial Otis – Keefe, Bruyette & Woods

Any idea when bad debt starts going even farther down from here? Even though it’s down 500 this quarter, it just seems obviously it’s still elevated given the current environment but do you have any expectations on trends for kind of the rest of the year just so you get an idea?

John Lamson

That’s down obviously a lot from where it was in the third and fourth quarters for instance, of last year. I would suspect we’ll see that continuing to go down actually as a lot of the players have pulled out of the market on the credit side. Whether we’ll ever get back to where we were running maybe $100,000 or $200,000 a quarter, I don’t know. I don’t think barring further significant deterioration that that number will certainly increase.

Nathanial Otis – Keefe, Bruyette & Woods

Just last question, any update on Bar None in any way?

Anand K. Nallathambi

We have addressed the cost side of it and like I mentioned on the dealer services performance, part of the performance improvement from the same quarter of last year was because of improvement in Bar None. But, the improvement and cost savings have become like the reduction in expenses has been like 18% to 20% but the top line pressure is a lot greater than that so what we are trying to do right now Nat is reduce the footprint, try to see if we can absorb some of the functions that we need to enter the automotive side and also in to the lead generation side and run it as lean and mean as we can. The one difficulty with the lead generation type business that I would like to point out is that these are companies that have like 35 to 55 to 60 people so when the times are good that’s why the margins are really good and when times are bad there’s not a lot to cut. But, we have cut a lot on the expense side and we are also considering some strategic alternatives.

Operator

Our next question comes from Mark S. Marcon – R. W. Baird.

Mark S. Marcon – R. W. Baird

I was wondering, on the lender services side, I mean obviously this is the worse housing market since the great depression so nobody would have anticipated that. But, it looks like listening to some of the bigger banks, they’re getting out of the kind of wholesale lending which you’ve got a good market share with some of the larger banks but they’re getting out of some of the wholesale lending services. How do you think that’s going to impact things? And, now that 30 year mortgages are at yearly highs and credit availability is down, how should we think about lender services over the next quarter or two presuming that things continue to get tough on that side? And, how much can you save there? It looks like you ended up having about $700,000 in charges for this quarter in that particular division.

Anand K. Nallathambi

I think the lender services side, this is probably the most challenging market that we have seen in a long time. Having said that, the wholesale side of the big banks that are our customers, let’s say the top 20 mortgage bankers that we always talk about, our focus has always been on the retail side and most of those guys have really big retail operations and they try – that is the side that is really being the difference between us and what our competition out there, the Tier II or even some of the Tier I competitors who have seen greater than 40% down turn in the lender services type market. I think the wholesale side, we’re not big players there because the wholesale by definition comes through the broker networks and stuff that somebody else feeds off. We focus more heavily on the retail side.

Mark S. Marcon – R. W. Baird

So the wholesale wouldn’t have much of an impact on you?

Anand K. Nallathambi

Yes. Now, to address your question about cost take out and how far can we go, obviously we have a pretty big infrastructure and one of the reasons that we are trying to consolidate brands in to a minimum amount of brands is to try and gain that ability to go after a little bit more in cost savings that we have done in the past. We’re also aggressively trying to improve our ability to move work offshore.

Mark S. Marcon – R. W. Baird

How much do you think you could save relative to where your current expense run rate is if we look out towards the fourth quarter or the first quarter on an annualized basis?

Anand K. Nallathambi

It’s still in process. For example, facilities and stuff we can’t move out of it until the end of the third quarter. But, if I had to kind of pick a number, the number is in the neighborhood of close to $10 million in annualized savings that we contemplate taking out at this point. Not including anything aggressive more over and above what we’re doing now in offshoring.

Mark S. Marcon – R. W. Baird

Would you anticipate more charges in order to do that?

Anand K. Nallathambi

We did say that there’s going to be some charges in the third quarter and I can have John talk to that.

John Lamson

Yes Mark, in my presentation I said that we were going to anticipate a charge of about $1.6 million in lender services in the second half and that’s primarily related to what you and Anand were discussing.

Mark S. Marcon – R. W. Baird

Then, how would you anticipate that the lender services revenue could trend for the rest of the year? Do you think we’ve hit a base level or would you anticipate that things would continue to trend down a little bit from these levels?

Anand K. Nallathambi

Right now what we saw, and one of the main [inaudible] when we changed guidance was looking at the lending markets, right. We saw the second quarter which in my mind is usually the quarter that you build the momentum in the spring months for the summer months and back to school and then the fourth quarter is basically a quarter that tails off from its normal seasonality. We did not see the momentum in the second quarter and basically what we indeed saw was the experience was more of a 5%, just about a 5% month-over-month steady decline. We are hearing from the industry that their expecting maybe a leveling off in the next 60 days and that would be the turn. So, that’s our hope at this point.

John Lamson

Mark, I might add that there’s a lot of macroeconomic things that are happening in the mortgage markets with the new government legislation and the propping up, for lack of a better term, of Freddie and Fannie and things like that and that certainly should be a positive at least. Now, how much it moves the needle, we’ll have to wait and see but it is certainly good that there’s action being taken.

Mark S. Marcon – R. W. Baird

It sounds like based on what you see and obviously, it’s hard to gage, things may or may not – I guess what I’m trying to ascertain is to what degree – where are you looking for stabilization in order to get to your new EPS forecast? I think you guys are doing as good of a job as anybody could do under these circumstances but obviously the circumstances seem to be changing for everybody.

John Lamson

I might add that companywide we think we’re going to have certainly a better second half in the employer services segment than we did in the first half of the year and a lot of that has to do with in my judgment we were ahead of the curve so to speak in starting to consolidate operations and as you know, we’ve been doing that in conjunction with our acquisitions. But, I think our folks that run that segment started off pretty early on in the year in terms of looking at synergies in that segment and certainly we had a lot of opportunity to develop them because we had all the acquisitions in there. But, we’re looking for some good margin improvement in the employer services space in the second half of the year.

Anand K. Nallathambi

And that’s been our seasonality.

John Lamson

Fourth quarter, if you look back is historically over the last year or two has been a pretty good quarter in that employer services space and that’s going against these macroeconomic headwinds too.

Mark S. Marcon – R. W. Baird

That was a nice sequential improvement when we back out the charge.

John Lamson

Yes, and we anticipate continued improvement in that segment in the second half of the year.

Mark S. Marcon – R. W. Baird

Can you give us kind of a sense for – I think one of the things for the investors who are listening on the call who may not be as familiar with you is when they hear the EPS guidance but there’s no sort of revenue that’s attached to it, it’s a little bit of a head scratcher. Can you kind of frame things a little bit?

John Lamson

I think I answered that before in terms of we weren’t prepare to give revenue guidance. Certainly, it’s going to be a tough act to follow last year’s given where we are mid way through the year. But, no we’re going to have to pass on the revenue question.

Operator

Our next question comes from Kyle Evans – Stephens, Inc.

Kyle Evans – Stephens, Inc.

John, you rapid fired through all those organic growth rates. Could you take a deep breath and go a little bit slower this time?

John Lamson

I’m sorry, I apologize. Quarter-over-quarter declines in lender services 31%, in the data services 14.5%, dealer services 9.2%, employer 7.2% and then we had increases in multifamily of 1.6% and investigative segment was up 34.4%.

Kyle Evans – Stephens, Inc.

Now, maybe some commentary on the market share that you’re seeing over in the lender services segment?

Anand K. Nallathambi

The lender services segment, I don’t think our market share has come down at all. Actually, I talked to our people and they would make a case to say that in down markets like this when refi’s come out and broker productions are very low, our market share actually goes up. So, I would just say that still its north of 40% to 45%.

Kyle Evans – Stephens, Inc.

Then lastly, you give international revenue contributions from litigation support and employer services, is there any other part of the business where there is international contribution?

Anand K. Nallathambi

Very little. Our investigative piece, outside of litigation support, there’s a piece that we have a database of hedge fund managers. We’ve been told that there’s a heightened level of interest in Japan and Hong Kong areas for those services. But, at this point I’d say it’s immaterial.

Kyle Evans – Stephens, Inc.

So total international contribution kind of been in the 13% range?

John Lamson

Well, I can tell you for employer services for the quarter Kyle, revenue was $12.3 million and for the international business it was $11.7 million for the quarter.

Kyle Evans – Stephens, Inc.

You gave me a $12.3 million number and then an $11.7?

John Lamson

In employer and then investigative services international revenue was $11.7 million.

Kyle Evans – Stephens, Inc.

Do you have in front of you the currency impact on the quarter?

John Lamson

I do not. But, it really wasn’t that significant.

Operator

Our next question comes from the line of Mark S. Marcon – R. W. Baird.

Mark S. Marcon – R. W. Baird

Could you mention some of the balance sheet items again, just what your net cash is and what the net debt is?

John Lamson

Sure, I will. We have cash at the end of June, these are obviously as of June 30th Mark, $41.5 million and we have total debt of $73 million, $73.7 to be exact.

Mark S. Marcon – R. W. Baird

And what did you say the availability is currently?

John Lamson

$175 million on our bank line and [inaudible] $25 million line.

Mark S. Marcon – R. W. Baird

And with your current EPS guidance, what would that translate to roughly speaking? Your cash flow generation continues to be quite strong, where do you think free cash flow could come in for the year?

John Lamson

Well, so far I think it could be pretty consistent on an annualized basis obviously, on what we have for the first six months.

Mark S. Marcon – R. W. Baird

So just basically the first six months, you don’t foresee much of a change relative to that run rate?

John Lamson

Not significant. I think our tax payments going forward will be pretty consistent. Cash flow is obviously a little harder to predict than earnings are because there’s more moving parts. But, I don’t foresee any big differences in cap ex, certainly if anything it might be a little less in the second half then where we are now. So, I think the first six months is probably a pretty good indication on an annualized basis where we might be.

Mark S. Marcon – R. W. Baird

In terms of [ILS], obviously that does tend to be quite lumpy, how are you thinking about that as we go out in to the second half of this year? Is there much visibility at all in terms of how that should trend? You know, last year during the second half you ended up having a really stand up performance, is there any seasonal aspects to it that could cause it to jump back up sequentially?

John Lamson

No, not really. It’s just a question of when a big project or two if you will comes in to the door. So, I wouldn’t look at last year’s third and fourth quarter for example, and think that’s indicative of what this year’s third and fourth quarter will be. Quite frankly, if there is any indication it’s probably more on a sequential basis than on a year-over-year or quarter-over-quarter basis.

Mark S. Marcon – R. W. Baird

Can you just tell us what CMSI and FAIS was just in the second half of last year just so we can get our models straightened away? Or, can we just take the impact that we saw in the first and second quarters and just annualize that?

John Lamson

Yes, of course, they’re in discontinued operations. I don’t have those prior year numbers in front of me. I might be able to get those to you if you give me a call.

Operator

That does conclude the conference for today. We thank everyone for joining.

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Source: First Advantage Corporation Q2 2008 Earnings Call Transcript
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