Good day, everyone. My name is Jess, and I will be your conference operator today. I would like to welcome you to the First Advantage Third Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. [Operator Instructions] Please note today's event is being recorded. It is now my pleasure to turn the conference over to Stephanie Gorman. You may begin.

Thank you, Jess. Good morning, everyone, and welcome to First Advantage's third quarter 2022 earnings conference call. In the Investors 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 third 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 efforts 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 third quarter 2022 earnings conference call. We are pleased with our third quarter results marked by 6.8% year-over-year revenue growth. Please note, foreign currency had a significant impact on our results this quarter. On a constant currency basis, our revenue would have been approximately $3.5 million higher, representing 8.6% year-over-year growth. Our performance was delivered by First Advantage team members across the globe who are doing an incredible job helping our customers' hire smarter and onboard faster, which is how we win in the marketplace. Our continued growth in the third quarter, albeit at more moderated levels, follows 8 consecutive quarters of extremely robust double-digit revenue growth and was achieved despite the difficult macro environment, foreign currency headwinds and cycling over the remarkable 41% revenue growth we experienced in the prior year period. We saw sustained resilience in our business in the face of broad macroeconomic pressures, including inflation, higher interest rates and geopolitical volatility. Looking at results for the last 12 months through September 30, we have grown revenues and adjusted EBITDA each by approximately 23% and achieved a very strong adjusted EBITDA margin of approximately 31%. This growth is in addition to the incredibly strong results we had during the prior year period. We have accomplished this by leveraging our digital initiatives, including automation, bots, machine learning and artificial intelligence, which allows us to do things better, faster and more cost effectively. On top of this, our growing in-house databases reaching 650 million records, continue to strengthen our value proposition to our customers who depend on the speed and quality of our solutions to help them succeed in today's dynamic and fast moving hiring environment. Turning to Slide 5 and a summary of our notable business…

Thank you, Scott, and good morning, everyone. Let's begin our financial review on Slide 8. Versus the prior year, our third quarter revenue grew 6.8% to $206 million or grew 8.6% to $209.4 million on a constant currency basis. This was on top of 41% revenue growth in the comparable quarter of 2021. Also, please note that the currency headwind, we experienced in Q3 was more severe than what we had anticipated heading into the quarter. In our Americas segment, revenues of $176.1 million were up 10.8% from Q3 2021, driven by strong new business growth and acquisitions. The third quarter of 2022 would have been even stronger except for a delayed start to seasonal hiring, which picked up in the beginning of October this year compared to mid-September in 2021 and which is more consistent with historical timing patterns. In total, Americas represented 85% of consolidated revenues in the quarter. In our International segment, revenues of $31.6 million were down 11.1% from Q3 2021. On a constant currency basis, our revenues would have been $3.3 million higher or only down 1.8% year-over-year. We were also lapping exceptionally strong 123% organic growth from the third quarter of 2021 as these regions rebounded from the impacts of the COVID-19 pandemic. This makes any type of year-over-year comparison difficult and less meaningful. Our 3-year third quarter international revenue growth CAGR is 26.4%. Additionally, economic slowdowns slightly positive. Revenues from new customers contributed $9.3 million or approximately 5% to our year-over-year growth. Revenues from our acquisitions contributed $8.4 million during the quarter. Adjusted EBITDA for the quarter was $64.2 million, an increase of 0.4% compared to Q3 of 2021, during which we grew adjusted EBITDA by a very high 47.7%. On a constant currency basis, our adjusted EBITDA would have been approximately $1.1…

Thanks, David. I will conclude our prepared remarks today by reiterating that I am excited about the opportunities ahead for First Advantage and that we are well positioned in our industry. Our focus continues to be on delivering outstanding service to our customers and long-term value to our shareholders. Thank you very much for your time today and your ongoing support. At this time, we will ask the Operator to open the call for your questions.

[Operator Instructions] Our first question will come from David Togut with Evercore ISI.

David, could you expand upon your commentary that you expect to achieve revenue growth for the full year 2023. To the extent, you have any view of what that growth might be, at least in broad ranges? And then second, what are your underlying assumptions about the economy in U.S. and your international exposures? And any thoughts on JOLTS?

So several questions there. Let's start with 2023. It's clearly very early, and we expect to give additional guidance relative to 2023 next quarter as is typical. What we expect so far and what we're currently anticipating is growth for the full year in 2023, although the first half will be somewhat dampened as we do have 30% comps that we have to grow over. We do believe that growth for the full year will be less than our long-term targets, which we have previously provided as being in the 8% to 10% organic range. Relative to what we're seeing in Q4 and currently, we are seeing a slowdown in international, both from a macroeconomic perspective and clearly, from an FX perspective. FX headwinds were greater than we anticipated. We have now baked that into our guidance. The North America segment while moderating has continued to grow. And let me give it to Scott relative to JOLTS data and other macroeconomic discussions.

Thanks, David. And David just real quick on international, I think most of the slowdown we're seeing is actually in APAC, EMEA. EMEA is actually doing okay. And one of the things to remember there is our international business is lapping like 123% organic growth from the third quarter of 2021. So it's big numbers to grow over. But clearly, from a softness standpoint, we're primarily seeing it only in APAC. From a JOLTS standpoint, the macro indicators are still favorable with openings of -- according to the September data, openings were 10.7 million higher, 6.1 million in quits and another month of 4 million in more quits. That now makes 18 straight months of over 4 million quits. So let's say, 73 million to 74 million people have quit their job in the last 18 months. When you look at the U.S. job market of only maybe 165 million workers, that's a pretty significant number and it's good for our business. So I think the job market continues to be resilient yet softening from the historic levels we saw earlier in the year. But we think that these numbers are still favorable to our business. And given this new era of high velocity hiring, we also feel these fundamental changes in the job market are here to stay.

[Operator Instructions] We'll go next to Andrew Steinerman with JPMorgan.

Could you just repeat what you said about organic growth, 9% to 10% for the year? Was that organic constant currency? And the math is a little hard. It would be helpful if you could just help us understand what the implied guide is for organic constant currency in the fourth quarter?

Andrew, we do have a chart that shows that in the presentation. That will be very clear and that will be able to take you through that. But the 9% to 10% was on an organic basis and was before constant currency adjustments.

We'll go next to Manav Patnaik with Barclays.

Yes. So I just want to understand the 2023 preliminary forecast that assumes basically current trends. So U.S. will still be, I guess, moderating, but positive and then just weakness in international. Is that what it is?

It's very early to be giving guidance around 2023, given the diversity of our client base, the focus on international customers, the split of approximately 85% North America and 15% international. We do believe that we're going to see continued growth in 2023, given all of the current conditions and conversations with their clients. But again, we'll give much more detailed guidance on that next quarter.

Okay. Fair enough. And then I was hoping you could just elaborate on the decline in the financial services and staffing verticals that you called out. I was hoping you could give us just a little bit more color around what exactly you're seeing there.

I don't think we want to go into details of vertical by vertical. Starting in 2023, we actually will provide much more granular detail on a vertical basis. But in general, you're also -- you're talking about two industries that did a lot of hiring in 2021 as COVID bounce back. So this is really those two industries sort of getting back to more moderated hiring levels and pulling back on hiring. But again, we'll provide more details when we get into 2023 and give you a more granular view.

We'll go next to Ashish Sabadra with RBC Capital Markets.

This is [Samir] calling in for Ashish. Just wanted to get a refresh on the technology program update and the proprietary software development, if you can share the latest thoughts on where you are and in terms of the releases and benefits you expect from the program, please?

Yes. I'm not sure what the specific question is there. But on the proprietary databases, we'll go there first. We've been very committed to building up our own databases and leveraging our experiential data to help improve margins and decrease turnaround time. It's been very effective, and it's a strategy that we'll obviously stick with. And right now, we're up to 650 million records, 50 million of them are in our verified database and 600 million are in our criminal records database. On the technology platform, I think the most exciting stuff about the platform is all the things I talked about around the digital identity verification that we're seeing in the international market. It's getting a lot of buzz. It's got a great pipeline. We are predicting a nice impact on growth from that product. And obviously, it's still early days with the regulations just going into effect actually this month in the U.K. But as we see other European countries adopt the digital regulations, we think it gives a nice growth opportunity for us in international, especially in EMEA.

Got it. And just a quick one on pricing trends, you mentioned some increases from verification partners. Is that having any impact on customer behavior? Or it is still pretty reasonable right now?

Well, a couple of things there. Keep in mind, we can pass through third-party price increases, so all our contracts have that. So we passed any increases we get from third-parties, we do pass through. We -- the area that's most affected is verification. And we do have some customer unhappiness with price increases on third-party data providers for verifications, which is why we've been moving to alternative solutions for quite some time now. So the first place we'd like them to go is our own database called Verified. But as you remember from last quarter, we announced new integration partners with Plaid, and we've got other earlier announcements around instant verification of current employer with partners like [Truce]. And I think it's an interesting segment in the market today to keep an eye on the verification goes, because the price points have gotten very high. So our customers are asking us to come up with alternatives. And I think we're way ahead of the game here. We're the only ones with a proprietary database. We've been announcing these new alternatives for months and months now. So we are a bit ahead of the game compared to the rest of the industry. But this is definitely an area of concern for us because it's an area of concern for our customers. And as I mentioned, we'll continue to provide alternatives and show leadership in this area.

Our next question comes from Shlomo Rosenbaum with Stifel.

Adam on for Shlomo. Compare with yours recently you pointed the broad-based volume declines in the base in the second half of 3Q '22. But the person is saying that the weakness is clearly more in the international and APAC specifically. Can you clarify what you're seeing in the Americas segment currently? And how it played out through the quarter?

David?

So international, clearly, as Scott said earlier, we've seen some slowdown in APAC. We're anticipating that, that's going to continue through Q4. We saw a little bit of a pullback in India, but to a lesser extent, in EMEA is still pretty strong for us, put the FX impact on top of that. And it's clearly a drag on our earnings and our growth rate. And as we said earlier, North America, while it's moderating has continued to grow. The other part that you have to keep in mind is, we had phenomenal growth last year, as it had a COVID rebound with 123% organic growth rate, and we're still having to grow over those types of numbers.

Yes. I think just also keeping in mind our vertical go-to-market strategy has proven the resilience in the past, especially during COVID as we grew -- actually grew there in COVID. So I think a lot of that also points to our go-to-market strategy of diversifying cost, what we consider high-volume, high-velocity customers. So I think that helps us with our numbers.

Okay. Other question is, how is the company adjusting its cost base to deal with the anticipated lower revenue volume besides flexibility on the purchase cost. Is the company slowing any hiring or delaying in its internal project?

So we have a very variable cost structure and very flexible. 70% of our cost of sales are third-party cost. If we don't do a search, we have none of those costs. So that's a huge component that we can 100% control, and we do. Then when you get to staffing from an operations perspective, we have the ability to flex up and down a good tenor 20% by adding shifts, reducing shifts and through overtime, and we manage volume demand and headcount correspondingly. Additionally, we monitor FTEs all the time. We look at that very closely. We did ramp up for our peak season. We'll be taking headcount out as we always do when peak ends. So we're constantly monitoring those costs and adjusting them as necessary.

We'll go next to Kyle Peterson with Needham.

I just wanted to reconcile, I mean, it seems like at least in EMEA and North America, things are holding up pretty well here. Just want to see, are you guys seeing anything with some of the existing clients kind of lowering volumes a little bit and you guys are making up for that you called out the 11 new vertical wins? Or is this under the hood kind of on a same-store sales basis type of thing? Are things still just holding up pretty well throughout with all your key clients in both of those regions?

Well…

No, go ahead, David. Yes, I'll jump in after.

Okay. I was going to say, in North America, we did see our peak season start a little bit later this year, but it did pick up in early October as opposed to mid-September. Last year, it ran all the way through the end of December. This year, we think it's going to end earlier, probably between December 10 and December 15. That's also why our guidance reflects that by the way. But we're still seeing our clients hiring, we're still getting a good flow of orders. There is still seasonal demand. It's just been moderated somewhat.

Yes, I would say, we're -- I would just add to that. What we're hearing from our customers is a return to somewhere between moderated and normal hiring. We're getting strong, buying signals from our customers. But obviously, you have to overlay the macro potential headwinds there. But we're still -- like I said, I think we see a return to moderated yet still positive growth over the next couple of quarters based on what our customers are saying today.

It makes sense. That's really helpful. And I just wanted to get an update on the M&A pipeline here. Just if -- how is that pipeline for you guys kind of the buyback this quarter and you guys are generating plenty of cash here, but how are discussions going or valuations kind of reasonable? Or are they still a little disconnected from what we're seeing in the public markets?

I think, we're still seeing a little bit of unreasonable disconnected valuations. So that's certainly a factor to consider -- M&A pipeline is actually still pretty good in certain areas that we're looking. But I'd say, overall, there's less deals that we're looking at, primarily because of either the valuation or people are just being patient and just sort of going to wait the economy out. But there still is deal flow, and there still are opportunities that we are looking at. And we'll keep you posted as to where that goes. But definitely, I guess, lower on the volumes, but still some attractive opportunities out there.

[Operator Instructions] We will go to Stephanie Moore with Jefferies.

I just want to touch a bit on any impact of seasonality in your business. Could you maybe talk through, as you look at some of your largest verticals, do you find that in the fourth quarter, you have a higher portion of more seasonal workers that tend to be kind of seasonal type great workers just given retail and transportation concentration versus kind of other quarters of the year?

We do see that. Absolutely. Our Q4 is generally our largest quarter because of that seasonal hiring. As I mentioned, it did start a little bit later this year, and we think it's going to end a little bit earlier this year, but there is some seasonality in Q4.

Got it. That's helpful. And then maybe also kind of touching through exposure to SMBs and kind of how you view your new -- pretty impressive new logo wins. Are you finding that as kind of broad-based in business sizes? Or just any color you can provide on kind of general SMB to larger enterprises that you're seeing kind of demand trends from?

Yes. I think from -- I think our positioning in the market has always been around enterprise. We focus on enterprise customers. So we don't have a lot of exposure to SMB, which we think is a benefit, especially in a down economy. So all of those wins that we announced are from enterprise companies, so these are larger companies, larger hiring volumes. Again, we define enterprise as a customer that's going to spend $500,000 or more annually with us. So those are large companies, large deals, and that is the focus of the company.

Over to Shlomo Rosenbaum with Stifel.

This is Adam, again. One more quick follow-on question. How should we think about interest expense going forward?

Interest expense.

So interest expense should be pretty flat going forward, pretty consistent. We are now generating with our excess cash, a lot of interest income that is offsetting quite a bit of that. So I think what you're seeing in Q3 will be very consistent. Keep in mind we have a hedge in place that covers about 50% of our long-term debt. So we think we're really well positioned from that perspective.

And I see no further questions in the queue. I'll now turn the conference back over to Mr. Staples for closing remarks. Please go ahead.

Great. So I just want to thank everybody today for joining the call. We appreciate the continued interest in First Advantage. Thanks again, and have a great day.

Thank you. This concludes the First Advantage third quarter 2022 earnings conference call. Thank you all for your participation. At this time, you may disconnect your lines, and have a wonderful day.