Good day, everyone. My name is Todd, and I will be your conference operator today. I would like to welcome you to the First Advantage First Quarter 2023 Earnings Conference Call and Webcast. Hosting the call from First Advantage is Stephanie Gorman, Vice President of Investor Relations. [Operator Instructions]. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.

Thank you, Todd. Good morning, everyone, and welcome to First Advantage's first quarter 2023 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 is due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2022 Form 10-K and our Form 10-Q for the first quarter 2023 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 the 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 first quarter 2023 earnings conference call. I would like to start by thanking our First Advantage team members across the globe for their ongoing dedication to helping our customers truly put their applicants first. We have a great team who is constantly helping our clients hire smarter and onboard faster as they navigate these uncertain times. Since we became a public company, we've highlighted many aspects of our business that underpin the resilience of our operating model and the confidence we have in our ability to weather any economic environment and generate superior profitability. We had a solid first quarter, delivering as expected. We successfully leveraged our flexible and efficient cost structure as we remain laser-focused on operational excellence. Our approach to innovation and differentiated technology continue to win in the marketplace. Our customers value expertise in human capital, our focus on automation and quality and our successful track record of innovation. This is a winning formula for First Advantage. Our gross retention rate of 97% remains near record levels, and our 13-year average tenure for our top 100 customers are impressive metrics we pride ourselves on. These are big reasons we have been able to deliver consistent results. Our customer base is strong, broad-based and continues to expand. We booked 7 new logo enterprise customers in the first quarter and 30 new logo enterprise customers in the past 12 months. As a reminder, we define new logo enterprise customers as those with $500,000 or greater in annual expected revenues. Turning to our first quarter results, revenues came in just above the upper end of our expectations, and adjusted EBITDA was in line with our expectations despite the ongoing uncertainty from the economic environment that began to impact…

Thank you, Scott, and good morning, everyone. Let's begin our financial review on Slide 8. Versus the prior year, our first quarter revenue decreased 7.6% to $175.5 million or 6.4% to $178 million on a constant currency basis. It is important to note this is versus very robust revenue growth of 44% in the comparable quarter of 2022 and was slightly better than we originally expected. This results in a 3-year revenue CAGR of just over 18%, substantially higher than our long-term targets. In our Americas segment, revenues of $152 million were down a modest 5% from Q1 2022 as our customers continue to hire, although at a slightly lower rate than Q1 of last year. Our Americas segment held up relatively well given overall market conditions, which is attributable to our broad-based resilient enterprise customers. In total, our Americas segment represented 86% of consolidated revenues in the quarter. In our International segment, revenues of $25 million were down 22% from Q1 2022. On a constant currency basis, revenues would have been $27 million or down 15% year-over-year. The decrease in revenue was due primarily to weakness in India, given the region's exposure to BPO and IT services-related businesses. In APAC, while still down, we are starting to see positive signs of trends moving in the right direction across China, Hong Kong and Singapore as lockdown restrictions have been lifted. Additionally, we are cycling over a very strong double-digit growth in the first quarter of 2022. Our EMEA operations have proven more resilient in the face of macro headwinds with the new digital identity products contributing to their sustained success. In total, international represented 14% of consolidated revenues in the quarter. In the first quarter, the year-over-year revenue decline from existing customers was $22 million net of upsell, cross-sell, which…

Thank you, David. I will conclude our prepared remarks today by reiterating my confidence that the future of First Advantage is as bright as it has ever been. We have our playbook to navigate the challenges that are ahead. We are a global leader in a large market with significant long-term growth potential, and our employees continue to work tirelessly to enable us to better serve our customers. Our strategic investments in technology, machine learning, proprietary databases, automation and the actions we've taken to enable our customers to hire smarter and onboard faster will continue to drive our success in the future. 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.

[Operator Instructions]. Our first question comes from Shlomo Rosenbaum with Stifel.

[Indiscernible] for Shlomo. With regards to the 2023 guidance, what are your expectations for existing client volumes, new client volumes, cross-sell, upsell and attrition?

So , it's very consistent with what we've been saying all along. Upsell, cross-sell has averaged 4% to 5%. It was 4.9% in Q1. Our new logo sales tend to run between 5% and 6%. It was slightly below that at 4% in Q1. Our attrition was at 3.1%. So that remains very positive. And our existing base, which was down slightly over 13%, excluding upsell, cross-sell, we expect that to get better throughout the year.

Okay. How are you thinking about the high cash balance given the current interest rate environment and sort of the high cash levels due to continued interest in M&A?

M&A is a very high priority of ours. We remain actively looking at transactions. There are a lot of quality opportunities that we have seen lately. Several of that are not going through our process that have called us directly, it remains a very high priority, but we will continue to be selective and we're going to be very prudent from a valuation perspective.

Our next question comes from Ashish Sabadra with RBC.

This is David on for Ashish. Just wanted to get a little bit more color, you mentioned in the prepared remarks about controlling what you can control. Is there anything on the cost side that you're monitoring to help increase margins throughout the year and maybe early look into 2024. Anything you should be thinking about there?

From a cost perspective, we do a lot of contingency modeling, and we know which levers to pull. We've demonstrated that now pretty consistently over the past 3 years. We do have the highest margins in the industry. We have a very variable and flexible cost structure. As we said in the prepared remarks, substantial portion of our cost of sales are third-party costs. If we don't do searches, we don't incur those costs. We also have the opportunity to flex headcount within our operations, plus we can run 2 or 3 shifts and we can manage overtime. We continue to automate. We continue to rationalize facilities. We will and have selectively reduced headcount to keep it in line with demands. And we will continue to prioritize and selectively make new investments. We were fortunate in the fact that upon our insurance renewal on March 1, we were able to lower some of those costs. And in fact, on the other side of that, we have selectively been able to pass on some price increases. So there are a lot of levers, and we're managing all of those.

Our next question comes from David Togut with Evercore ISI.

Scott, could you dig into the India weakness in greater detail, particularly given your background in India IT services?

Yes, David, happy to. So yes, if you think about our customer base in India, as we mentioned in the prepared statements, our large customer in India tends to be the large BPO and IT services company and our theory is that those companies, the demand for their services has been scaled back a bit. So they're hiring less people. In general, we feel the India market for us will lag the U.S. recovery by a quarter or so. So as the U.S. recovers, the India market will also recover. But keep in mind, international revenue for us was only 14%. So it's not a huge exposure. India is about 1/3 of that 14%, but that business obviously will come back when the demand for those services and products for those companies comes back. And again, those companies are primarily servicing the large MNCs around the world, and that's where the softness is in the Indian market.

Got it. And then just as a follow-up, you've long used robotics process automation in your business over 3,000 bots in Q1, I mean, to what extent would incorporating artificial intelligence help you reduce the labor intensity even more, and particularly lift margins going forward?

Yes. I think, AI can probably be used in multiple places. We're actually seeing the bigger impact more on the frontend of our technology. So using AI when it comes to the applicant experience and we're starting now to research some generative AI opportunities in our customer success and customer care offerings because that's where I think the AI impact will be more on the applicant and the customer versus the backend, which is where RPA, automation and ultimately, APIs will dominate the landscape. And that's, obviously, we've been investing in the backend automation and the APIs and robotics for years and years and years. We started that journey about 7 years ago. So we continue to invest on that back end. So that's giving us the automation, which leads to lower headcount, higher margins, faster turnaround times. So it's a little bit of both, AI on the frontend, automation on the backend.

Our next question comes from Stephanie Moore with Jefferies.

Thank you. Maybe following up on the original earlier question, I'd love to get a sense of what you're hearing from your customers or what you're seeing in your channels that gives you confidence that the base business will start to turnaround or get better throughout the year?

Yes. I think first of all, it's important to know that we're in constant dialogue with our large customers, with our managed enterprise accounts. These are discussions we're having daily, weekly, monthly formal QBRs. And so we're getting some good input from the field directly from customers. And the general sense we're getting is that they've done all the actions that they had planned to do primarily in 2022, and they're kind of in a holding pattern. And so I think what we're seeing from the macro standpoint, is that -- and certainly, in regards to the labor market, in regards to what we're hearing from our customers, the word that we keep coming back to is stability. We're seeing a lot of stability in our customers' ordering and in their hiring plans. And I think that's a good thing for us because they're starting now to plan the rest of 2023 and there's some positive signs there. And so while I think the macro and certainly the labor market have shown signs of stability. I think what it means for us is that we remain busy. So while that's stable. We've been very busy with product innovation, new product launches and investments in sales. So I think we're hopefully timing it right where our clients start coming back in terms of higher ordering volumes and we're ready with new products and additional sales strength and et cetera.

Great. That's certainly really helpful color. And maybe as you look at your new logo wins that include what you're seeing there, where do you feel like you're taking the low, and by first timers that are moving from smaller regional players? Or where do you think you're seeing the majority of those wins?

I love the question because we've been actually tracking this for quarters and quarters and it's the exact same data that's been playing out for the last couple of years is, when -- as we've been announcing our quarterly wins, we analyze where those wins have come from. And it's really 3 equal buckets. It's 1/3 from the mom-and-pops out there. It's 1/3 from the midsized players, and it's 1/3 from the large players. And that trend has not changed over the last year plus since we started really analyzing that and reporting that data. So we think that trend will continue. And obviously, if there's changes to it, we'll let you know, but it's really what I think is a good fact, because it means that -- it's a healthy competitive landscape and that our products and services and offerings are attractive in all 3 of those competitive buckets.

Our next question comes from Andrew Steinerman with J.P. Morgan.

This is Alex Hess on for Andrew. Just want to maybe return to the subject of base growth. My recollection is that you guys had indicated that base growth would be negative in the first half of 2023 on your previous call. Maybe can you tell us where the first quarter shook out versus your expectations?

Yes, Alex. It was very consistent with what we -- with the guidance that we had previously provided. Base was down about 13%. That's what we had anticipated. It was actually not as bad as we had anticipated. And then again, as I mentioned earlier, we got positive contributions from upsell, cross-sell and new logo of about 9% and attrition was 3%.

Got it. That's very helpful. And then maybe more on a strategic question. You guys have leading margins in the background screening industry, and you guys have a very, very strong balance sheet. I know there have been some questions about maybe some leverage you can pull on margins, but maybe why not pull some levers to accelerate investments at this juncture given your financial position. So any thoughts around why maybe not accelerating or putting more foot to the -- more pedal to the gas in this environment would be helpful?

We continue to invest back into the business, particularly in product development and automation. As Scott mentioned just a few minutes ago, we see this kind of lull in the business as a great opportunity to internally focus and get ready for the surge that will be coming back. So we are investing in our business, but we're also balancing margins and profitability at the same time. So we're being selective, but we are reinvesting.

Yes, Alex, I'd add just -- just keep in mind, as we continue to drive the automation journey, we are getting increased margins and savings from that. And we actually are turning that and putting that back into product, tech. We are increasing our pod strength. We're increasing our sales headcount. It's just not visible to you because we don't detail it out like that, but we're able to do that and produce the numbers that we're producing. So we're actually doing both at the same time.

[Operator Instructions]. Our next question comes from Kyle Peterson with Needham.

You guys have given some pretty good color specifically on some of the Indian IT services headwinds you guys are experiencing. It seems like Americas is, does it seems to be holding up better, but I wonder if you could give us some more color, at least on the vertical side, maybe kind of what is coming in as good or maybe even a little better than expected is offsetting some of these headwinds internationally?

Yes. So I'd say no vertical is coming in better than expected. But certainly, verticals are coming in as expected. And as we mentioned in our prepared statements, transportation and healthcare continue to drive good volumes for us. We're not going to go into like vertical-by-vertical breakdown. But at the end of the day, you've got a handful that are doing pretty well. You've got a handful that are sort of flat and you've got others that are negative. And the net result is exactly what we've put forward here in our earnings releases and in our guidance. So it's a bit of a mixed bag, and you got some offsetting others, but it's actually exactly where we thought it would be.

Got it. That makes sense. And maybe just a follow-up on proprietary data, I mean, it seems like you guys have been making a lot of efforts to kind of the user and data and cutout the middleman per se in some different areas. But maybe if you could give some more color on where you're seeing some of the most progress, whether that's around verifications or on the criminal side or maybe somewhere else completely?

Yes. Those are the two big buckets. That's where we're seeing the most progress. But in regard -- but the criminal side is really not about margins. That's more about the quality of the check and being able to use that data to increase accuracy and turnaround times and things like that. The margin impact is really on the verification side. So it's -- and it's not just only using our proprietary data, which certainly helps. But it's -- we're starting to be seen in the market as the place to go for alternative verification sources. And that's where the SmartHub technology shines. I mean, I would tell you right now, the SmartHub is actually the best tech we have in the entire company. It is a phenomenal piece of technology that's got proprietary algorithms in it that enable us to go to the market and say, we are the place for alternative verification sourcing. And it doesn't mean that we're just using our database or we're using somebody else's database, we're able to search multiple databases with that technology, and that's driving the total cost of ownership of doing a verification down at our customers, and it's helping us win business.

Our next question comes from Heather Balsky with Bank of America.

Just one question for you. Can you talk about the upsell, cross-sell, where you're kind of seeing the strength, what's driving that? And has it changed this year versus last year just as the macro environment has shifted?

Heather, it actually has changed a bit. And it's -- so you may have seen a press release from us recently where we released our annual trend data. So every year, we look at the previous year's ordering volume trends. What are customers thinking about? What are they ordering? So we did 100 million searches in 2022. So that's a lot of data. And what's come out of that data is that customers are now valuing risk or risk mitigation or risk aversion as their top priority or as one of their top priorities. And so what that -- and I think you could probably guess that if you just turn the news on it. We're clearly living in unprecedented times when it comes to violence and customers are worried about that. So what's driven upsell, cross-sell probably the most is what we call package density. So package density is, where customers are buying more and more protection. So this would go probably against what you would think about in a down macro or in a challenging macro, where you would think customers are looking to save costs and things like that. But they're actually buying more from us. So wallet share is increasing as customers look to protect themselves, so it's really driven a lot by risk.

Thank you. There are no further questions in queue at this time. I will now turn the call over to Scott Staples for closing comments.

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

Thank you. This concludes the First Advantage first quarter 2023 earnings conference call and webcast. Thank you all for your participation. At this time, you may disconnect your lines, and have a wonderful day.