Scott Staples - Chief Executive Officer David Gamsey - Chief Financial Officer Stephanie Gorman - Vice President, Investor Relations

Good day, and thank you for standing by. Welcome to the First Advantage Second Quarter 2022 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation there is will a question-and-answer session. [Operator Instructions]. Please be advised, that today’s conference is being recorded. I would now like to hand over the conference call to your speaker today, Stephanie Gorman. Please go ahead.

Thank you, Angelina. Good morning, everyone and welcome to First Advantage’s second quarter 2022 earnings conference call. In the Investor section of our website, you will find the earnings press release and slide presentation to accompany today’s discussion. This webcast is being recorded, and will be available for replay on our Investor Relations website. Before we begin our prepared remarks, I need to remind everyone that our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2021 Form 10-K and our Form 10-Q for the second quarter of 2022 to be filed with the SEC. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures, to their most directly comparable GAAP financial measures, to the extent available without unreasonable effort appear in today’s earnings Press Release and Presentation, which are available on our Investor Relations website. I’m joined on our call today by Scott Staples, First Advantage’s, Chief Executive Officer; and David Gamsey, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.

Thank you, Stephanie. And good morning, everyone. Thank you for joining our second quarter 2022 earnings conference call. In June, we celebrated our 1st Anniversary as a publicly traded company, and I am extremely proud of all that we have accomplished in such a short amount of time. We have consistently delivered double digit revenue growth, industry leading adjusted EBITDA margins and tremendous cash flow from operations. On top of this, we have delivered product innovation that helps our clients hire smarter and on board faster, and executed its strategic acquisitions that have outperformed expectations. Reflecting on the last 12 months ended June 30, we had extremely high growth with revenues up 33%, adjusted EBITDA up 37% and superior adjusted EBITDA margins of 31%. This growth is incremental to the strong results we had during the prior year period. We leveraged our digital initiatives, including automation, bots, machine learning and artificial intelligence to do things better, faster and more cost effectively. In addition, as of July 31, our growing in house proprietary databases now include more than 650 million records with 50 million records in our verified employment and education database and over 600 million records in our National Criminal Records File database. These in-house databases strengthen our value proposition to customers, who depend on the speed and quality of our solutions to help them succeed in today’s dynamic and fast moving hiring environment. Our highlights for the second quarter are summarized on slide five. Continued strength across our business helped us achieve year-over-year revenue growth of 15.3% or 16.6% on a constant currency basis. We achieved this growth despite an uncertain economic backdrop, increasing interest rates and inflation continuing to strain the overall economy. Growth from our existing customers continued in Q2, along with additions from new customers and…

Thank you, Scott. And good morning, everyone. We are very proud of our results from another excellent quarter marking our eight consecutive quarter of double-digit revenue growth. Now turning to slide nine. Versus the prior year, our second quarter revenues grew 15.3% to $201.6 million, of which 10.5% was organic. On a constant currency basis, our revenues would have been approximately $2.2 million higher, representing 16.6% growth year-over-year. Our international segment, with revenues of $33 million, was up approximately 10% from Q2, 2021, even with the foreign exchange rate headwinds. In total, international represented 16% of consolidated revenues in the quarter. In Q2, revenues from our existing customer base contributed $9.6 million to our year-over-year growth. Revenues from new customers contributed $8.8 million or 5% to our year-over-year growth. Revenues from acquisitions contributed $8.3 million in total during the quarter. Adjusted EBITDA for the quarter grew 8% to $60.8 million. As expected, our adjusted EBITDA margin of 30.2% was below the prior year, primarily as a result of incremental public company costs, increased insurance premiums, increased third party verification cost, additional investments in technology and sales and lower margin results from our acquisitions, all of which were included in our prior guidance. On a constant currency basis, our adjusted EBITDA would have been approximately $700,000 higher or $61.5 million. We continued to be pleased with the high quality of our earnings, and a small number of add-backs included in our adjusted results. I will also note that inflation is having only a modest impact on our cost structure and margins and has already been reflected in our guidance for 2022. Adjusted net income increased 14.5% to $38 million, from $33.2 million in Q2, 2021. Adjusted diluted EPS was $0.25 per diluted share for the quarter. Please note that the prior…

Thank you, David. In summary, we are excited about the opportunities ahead, and we think First Advantage is well positioned for continued growth. Our focus continues to be on delivering value for our shareholders. Thank you very much for your time and your ongoing support. At this time, we will ask the operator to open the call for your questions.

Thank you, Scott. [Operator Instructions] Our first question comes from Ashish Sabadra from RBC CM. Please go ahead.

Thanks for taking my question. Scott, congrats on the large win, as well as steady pipeline of really strong wins. I was just wondering if you could talk about the pipeline for new opportunities going forward, but also discuss what drove that the new win that you highlighted. Was that from another large player or the smaller player in the space and further opportunity for First Advantage to consolidate the market? Thanks.

Yeah, thanks Ashish, a great question. So pipeline first. So you know the pipeline is strong. We are looking at our largest pipeline in company history. I think that is reflective of our vertical go-to-market strategy, the product innovation and investments that we have made and just pure sales execution. On the win, we’re absolutely delighted. It’s such a phenomenal win for the company, but it was not a new logo win just to be clear. It was the renewal from an existing customer, but we are really excited about the fact that it was a five year contract renewal, which is not normal in our industry, typically three year contracts and obviously large in scale. So I think as I highlighted in my comments, it came down to the technology, the account teams that are working with that customer, customer care, customer support, all the things that we put in place to help that customer as we like to say, you know higher, smarter and onboard faster.

That’s very helpful color. And one of the questions that we’ve been asking all the companies in our coverage universe is about the downturn playbook. If the economic environment were to slow down significantly, I was just wondering how should we think about any impact on the EBITDA and also what levers you could potentially pull in order to protect the margins. So any color on that will be helpful.

Yes, so I’ll give you a high-level overview of where we see the macro and then let David talk about the levers. As we said in our statement just a few minutes ago, you know we’re still seeing a strong demand for our products and services. I’ve been saying this for maybe the last year or so more. This is a different job market than we’ve ever seen. This is a generational shift that’s going on. And it’s been obviously good for our business. You know we keep pushing people back to looking at data and JOLTS [ph] data is a great source to go. I mean again, July quits data of 4.2 million. I believe that’s now 16 straight months of over 4 million in quits. If you do simple math, that’s over 60 million people quitting their jobs in the last 16 months. So I think we’re seeing generational shifts. We’re seeing more people come back into the workforce, un-retiring because of inflation. We’re seeing job turnover and our customers are expecting that job turnover to continue, because people are not just making job selection based on traditional socioeconomic factors, there’s more to play here. It’s work-life balance. It’s changing locations due to other reasons, whether it’s high-tax state to a low-tax state, changing of weather, quality of life, political reasons. There’s a lot of reasons people are moving and changing jobs, and that’s all good for our business and I think it’s showing up in our results and it’s been further clarified in our guidance. I’ll let David talk about the levers.

So to echo what Scott just said, if you look at our implied guidance, that would suggest that our adjusted EBITDA margins will remain over 30% for the balance of the year. We are staffed up and prepared for our seasonal peak, which generally runs September, October, November. They are our strongest months of the year. We are flexible relative to our staffing. We look at that constantly. We’re in touch with our clients, and we have grown over our public company costs, so we have now lapped that. So we feel very confident that we can maintain industry leading margins.

Thank you. Now our next question is from Manav Patnaik from Barclays. One second while his line is opening. Manav, please go ahead. Manav, you are live, so please go ahead.

I’m not hearing the question.

Yes, Manav we’re just going to drop your line just because we can’t hear you. I just ask you to try again. Just in the interest of time we’ll move on to our next question. [Operator Instructions] Our next question will be from Andrew Steinerman from JPMorgan. His line is just opening. Andrew, please go ahead.

Yes, hi! This is Alex Hess on for Andrew Steinerman. I wanted to briefly review maybe what you’re seeing in your largest verticals and especially with retail. We’ve seen some notable deterioration in headcount at a couple of the large retailers nationwide. It would just be helpful to get any color around what you’re seeing and maybe why that might be blocking larger trends? Thank you.

Yeah Alex, good to hear your voice. So you know in general, it’s just a quick reminder on our retail footprint. Our retail footprint is really not that strong in what we call traditional brick-and-mortar. So most of our retail footprint is really more of an e-commerce footprint or a discounter, and we have not seen hiring slowdowns in that sector. We know there have been some announcements of potential slowdowns or even layoffs at maybe corporate functions or things like that, but in the high-volume, high-velocity hiring aspects of those businesses, we are still seeing a very strong demand for our services and ordering volume. So obviously we’re monitoring that and we’ll keep an eye on that, but as of right now our vertical footprint in that space is still seeing very good growth.

Got it, and then maybe just a quick follow-up. Can you provide a little bit more color on the relationship with Plaid. How you sort of envision that creating a distinctive offering with respect to verification? What are sort of the mechanics of that arrangement?

Yes, so we you know – Plaid’s got incredible technology. We see a shift in the verification space toward faster near instant types of verifications and that shift being enabled through technology partners like Plaid, where you can verify present employer literally in seconds. So with the job market the way it is, customers are frantically searching for anything that will reduce their onboarding times and verification tends to be the long pole in the tent when it comes to background screening. So the ability to tap into a Plaid who can do near instant verification of present employment will certainly help our customers onboard faster and hit their business goals that they are trying to achieve.

Thank you so much.

Thank you so much for the question. [Operator Instructions] Our next question is from Shlomo Rosenbaum from Stifel. Apologies if I [inaudible] that last name there. Give me one second while I open your line. Please go ahead.

Hi! This is Adam on for Shlomo. I wonder what the M&A environment looks like given your previously communicated desire to continue to pursue M&A. Have valuations come down to a more reasonable level and how does the $50 million share repurchase impact the company’s ability to potentially do a larger deal?

David, do you want that one?

Sure. So the M&A market is still robust. We continue to evaluate a number of opportunities. But we really didn’t like anything that we saw that came to market in the first half of the year. We either had an issue from a technological perspective where they had multiple platforms that were not integrated or it didn’t fit us strategically or the valuations were out of line with the market today. So we look at all three of those criteria, but we’re going to keep looking. That’s our number one priority from a capital allocation perspective. We have plenty of liquidity. We have $352 million of cash. We’re generating over $50 million of cash a quarter, $96 million in the first half of the year. So if you think about the stock buyback program, that’s only one quarter of cash flow. So over the next 90 days we’ll generate enough to pay for all of that and still have the cash on our balance sheet. We have $100 million unused revolver and our leverage is under 1x. So we have plenty of flexibility. We have a great balance sheet and M&A remains a very, very high priority.

Okay. And then for some of your earlier comment about customers seeing kind of continued growth in hiring demand, but at a more normalized level. Could you elaborate a little bit more on that? What do you mean kind of like normalized specifically in specific areas, into industries or just any general thoughts about that.

Yes, so if you look at our guidance models, we’ve always said normal growth in our – you know for First Advantage is in that 8% to 10% range and obviously you know with the numbers we’re projecting for the year over that target. But we’re literally hearing from our customers that they are getting back to normal business as usual type growth and demand in the job market, which has obviously been a great number in the past. So we’ve gotten over that massive hiring that happened post COVID when everyone was rehiring people and now we’re getting back into just the rhythm of normalized growth, normalized hiring, you know which we’ve already factored into our guidance and communicated today.

Okay, thanks.

[Operator Instructions] Our next question is from Ronan Kennedy from Barclays. Your line is open. Please go ahead.

Alright, good morning and thank you for taking the questions. Apologies for the difficulty with the audio earlier. I’m calling in on behalf of Manav. May I just ask, and apologies if this has been covered, so I’m happy to refer to the transcript. Can you just, you know given the dollar numbers for the various components of the organic growth with regards to new business wins, upsell, cross-sell growth, etc. And then how you think that would look or potentially change should there be a downturn? You know would it primarily impact base for which GDP would be a proxy or any other consideration in light of the changes in the macro outlook.

So as we said earlier, we grew 10.5% organically in the quarter, 15.3% in total, 16.6% on a constant currency basis and $9.6 million of that was from our existing customer base, $8.8 million were from new customers and $8.3 million from acquisitions; that’s pretty consistent with our long-term targets. Our model that we’ve communicated all along is really kind of base growth between 2% and 4%, upsell cross-sell between 4% and 5%, new logo between 5% and 7%, backing [Audio Gap] 15.3% in total, 16.6% on a constant currency basis, and $9.6 million of that was from our existing customer base, $8.8 million were from new customers and $8.3 million from acquisitions. That’s pretty consistent with their long-term targets. Our model that we’ve communicated all along is really kind of pipeline based on our discussions with their clients. We think that’s going to continue throughout the second half of the year. I’m sorry, we can’t hear you.

Ronan, do you have a follow-up question?

Yes, sorry. Can you hear me now?

Yes, that’s better.

Again, I apologize for the audio issues. So David, thank you for that with regards to the commentary for the expectations for the remainder of the year. In the event, if there were to be a further deterioration and you did see – you know because we get questions, what happens when you start to see the claims around unemployment rise and the tightness within the market weakening? And for instance, if you see in the news a client who we believe to be a marquee client announces that they over-hired or they’re lowering the pace of hiring or they’re doing layoffs. What does that look and feel like from a First Advantage standpoint?

Well, the way we think about that is impact on base growth, so it’s from our existing clients, and as you’ve seen over the past six to eight quarters, those have been through the roof from a base growth perspective. And what we’re seeing is -- it’s coming down to a normalized growth rate. So it’s coming down into this 2% to 4% base growth range. It’s been running 10% plus. In fact, in 2021, it was over 20% from a base growth perspective. So it’s normalizing back to where it was kind of 2019-ish, in that 2% to 4% range, and that’s what we’ve reflected in our guidance, that’s what we’re comfortable with in the second half of the year.

Okay, thank you.

Thank you, operator, and thanks everyone for your participation. Have a great day!