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 2024 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 call over to Stephanie Gorman. You may begin.

Thank you, Todd. Good morning, everyone and welcome to First Advantage's first quarter 2024 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 would like 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 2023 Form 10-K and our Form 10-Q for the first quarter of 2024 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, our 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 call. It has been an exciting and productive few months since announcing our agreement to acquire Sterling. I am incredibly proud of what our team has accomplished thus far and for the dedication in keeping everything moving forward. This morning, I will provide an update on our first quarter results, our strategic initiatives and the Sterling acquisition. David will then provide a deeper dive into our results and additional color on our expectations for the year. Turning to an overview of our first quarter results on Slide 5. For the first quarter, we delivered financial results at or above what we communicated on our last earnings call, giving us additional confidence in achieving our full year 2024 guidance, which we are reaffirming today. From a vertical perspective, in the first quarter, we saw increased order volumes from 5 major verticals, including transportation, health care, industrials, staffing and hospitality with the remaining verticals down year-over-year. Importantly, we continue to maintain a strong customer retention rate of approximately 97%. In fact, our top 5 largest renewals for 2024 have already successfully renewed. Our up-sell, cross-sell, new logos and attrition rates continued to perform in line with our historical revenue growth algorithm, while our base growth continues to be more sensitive to changes in the macro environment and our mix of clients. While most macro indicators that we track are still down year-over-year, they have shown signs of stabilizing in recent months. As a reminder, our long-term organic revenue growth target of 8% to 10% anticipates a normalized base growth rate of 2% to 4% compared to the negative base performance we have been experiencing. Let me now update you on the significant progress our team continues to make on our…

Thank you, Scott and good morning, everyone. Turning to our first quarter results on Slide 9. Our first quarter revenues were $169.4 million, a decrease of 3.5% from the prior year. Currency had nearly no impact on results. For the quarter, Infinite ID contributed approximately $2.8 million. In our Americas segment, revenues of $149 million or 87% of consolidated revenues were down just 2% from the prior year, driven primarily by base weakness and substantially offset by strength in new business revenues and up-sell, cross-sell. In our International segment, revenues of $22 million or 13% of consolidated revenues were down 11% from the prior year. Macro factors impacting international base growth continue to be a headwind. For the total company, adjusted EBITDA was nearly $47 million and our adjusted EBITDA margin was 27.5%, which aligns with our historical first quarter performance trends. As a reminder, our first quarter adjusted EBITDA margin is typically the lowest quarter of the year. Adjusted EBITDA on an LTM basis has grown at a compounded annual growth rate of 14.7% over the last 3 years. Our adjusted effective tax rate was 24.4%. GAAP net loss was $2.9 million and is after $11.1 million in Sterling acquisition-related costs that we have added back on an adjusted basis. Adjusted net income was approximately $25 million. Adjusted diluted EPS was $0.17 for the quarter. On Slide 10, you will see our revenue growth algorithm, which is based on our historical performance and future expectations and supports our long-term revenue growth target. Revenue on an LTM basis has grown at a compounded annual growth rate of 12.6% over the last 3 years and remains above our long-term growth target of 8% to 10%. On Slide 11, you can see that our historical performance for up-sell, cross-sell, new customer logos…

Thank you, David. We have made significant progress on our strategic initiatives over the last several years as evidenced by our verticalized go-to-market approach, tech enablement, investments in automation, AI and machine learning, strategic partnerships and tuck-in acquisitions. We are seeing the return on our investments flow through our impressive adjusted EBITDA margin and cash flow generation. The acquisition of Sterling is another significant step forward in our value creation playbook and we are excited to continue to shape the future of First Advantage and to better serve our customers. With that, we will open the line for questions.

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

First, I just want to start out with, Scott, would you say that the environment is improving along the lines that you expected a little bit faster, a little bit slower? And then I have one follow-up after that.

Yes, Shlomo. I'd say from a macro standpoint, it's exactly where we thought it would be. So I wouldn't say it's faster or slower. I would say it's still a choppy macro. We are seeing our customers higher, obviously, look at our results for the quarter. But we're still seeing some cautiousness out of them. So they're not hiring ahead of time. They're not overhiring, but they certainly are hiring. And I think this is exactly as we sort of planned it would go and we're pretty happy where it is.

Okay. And then the other one is just Sterling put out their results this morning, obviously, at the same time as you guys and very good revenue, but the EBITDA was clearly below what the street was expecting. Now obviously, Sterling didn't give out any guidance or anything like that. But I want to ask you, once you acquire the company, how long does it take you to really cut them over on to your own kind of cost structure, in other words, migrating things over operationally, quickly cutting over to your own sources of information and being able to leverage kind of the scale that you have? If you could talk a little bit about that and then also just kind of merging the cultures, how do you think about that?

Yes. So obviously, we're doing a lot of planning, but we can't really get under the hood for -- to post close. We did mention in the earnings script how fast we expect to get synergies and as part of those synergies that's obviously eliminating the duplicative corporate overhead and public company expenses, but also starting to leverage our automation. It's really hard for me to sit here today and give you a specific time line because we're not at that point yet where we can get into detailed planning and stuff like that. But we will continue to provide updates as we get closer and closer to close date. But again, we're feeling very confident about the synergies number and the strategy and approach that we take into overall post-merger integration. Shlomo, sorry, I did not answer the last part of your question, which was on the culture. We're pretty excited about the 2 company cultures coming together because even though there's obviously going to be some differences, both companies are a high-performing organization. So I think it's a lot easier when you're merging 2 high-performance cultures together. Obviously, there will be some subtle differences and we will have a special track in our PMI integration plan just on culture to make sure that we nail it, we communicate it, we treat it like it's just as important as anything else. So I think we don't have any concerns at this point. And I think the other thing that as you could -- you've probably seen from both companies, we're very much aligned on the go-to-market and the product strategies. I think were the 2 companies that are out there talking about digital identification the most -- and we really are sort of, I think, at the forefront of the technology changes in this market. So that makes it a bit easier as well.

Our next question will come from Ashish Sabadra with RBC Capital Markets.

So the sequential growth in the base that you mentioned, I was wondering what -- how much visibility do you have there? What have you seen in April? And any early indications on that front? You obviously mentioned 5 verticals which have been growing. But I was just wondering the verticals which have been declining. Have you seen any progress on those fronts? And then even on the international front that 11% decline. I was just wondering if you could comment on what we are seeing on that front.

Yes. Thanks, Ashish. A lot there. So hopefully, I catch it all. And maybe work backwards on your question. So yes, obviously, International is still down, but it's not down as much. We were in previous quarters talking about year-on-year declines of 20-plus percent. We're not there anymore. We're half of that. So we are starting to see some stability in India and APAC. EMEA is as, if you recall, has always been performing, but India and APAC were the concerns over the last 18 months or so. And we really felt -- and I think we mentioned this on our earnings call for Q4 of 2023, we kind of felt that India was bottoming out and we're starting to realize that. So we're starting to see some improvement in both India and APAC. I think also what gives us some enthusiasm is the U.S. was only down 2% this quarter. So we're starting to see a little bit of stability there as well. And you asked about April and April, I would say, is exactly in line with what we thought it would be. So no surprises from April. And then your first part of the question was around the verticals. So we mentioned the 5 verticals that were up. Obviously, there's still some verticals that are down, most notably financial services and a few others, but they're not down as much. They certainly are still down, but they're just not down as much. So all of that kind of paints a little bit of a brighter picture for us, but obviously, there's still a lot of caution in the background.

That's great color. And if I could ask a quick follow-up on the technology front. Thanks for providing those details on the new initiatives on the Gen AI front. I was wondering, as you think about over the midterm, the next 3 to 5 years, how do we think about the efficiencies that these newer technologies can bring in?

Yes. No, we're very bullish on the efficiencies that the new technologies can bring. And I would add that it's not only efficiencies, but it's also quality improvement. And so we -- I think I mentioned this last earnings call, we are in the process of running multiple AI pilots across multiple components of our operations. And early signs are increase in quality, but also an increase in efficiency. And it's not only in the actual fulfillment of a background check, we actually just launched AI at work. And AI at work is our internal AI tool for helping all functional organizations use AI to improve their efficiency and their quality. As you know, when you use a public AI product like ChatGPT or whatever, whatever you put into that is available for all public to see. So we've created our own private AI tool and it's basically AI at work and we're in the process now of educating our marketing teams, our sales teams, even our finance team, gone to HR teams on to how to use this internally to find ways to do work better, faster, cheaper. So we think that the effect of AI across our internal functions and the processing of a background debt over the next 5-plus years, we'll have a pretty dramatic effect.

Our next question will come from Andrew Steinerman with JPMorgan.

I wanted to get a sense for kind of how your team is doing market sizing of the U.S. screening market. If you can mention like what solutions are included in your market sizing like such as drug testing and ID and stuff besides for criminal? How are you approaching market sizing? And what market share do you think First Advantage will have post-merger with Sterling?

We have been leveraging third parties. We haven't been doing the market sizing ourselves, Andrew. So we've been leveraging third parties who have been doing that. And we're really seeing sort of consistent results and numbers. I mean there's multiple sources have pegged this industry as a $13 billion TAM. So it's a large space. And as you know, it's a very fragmented space with so many competitors. So we haven't looked at the market sizing ourselves, but the third-party data is so consistent that we're pretty confident that it's fairly accurate. The one thing that we have not been able to do really any market rising on is digital identity because it's really a new space. The creation -- it's really the creation of new revenue streams in a new space and it's very hard to measure that. But what we are really going on is customer discussions. Customers are really loving the digital identity solution because they're seeing so much fraud in the recruiting cycle, people that they are hiring for, let's say, home-based jobs and they're interviewing over Zoom or something like that and they're claiming that their camera doesn't work and then it doesn't seem like the person they hired is the same person that shows up to do the work. And so digital identity can really take that fraud out of the equation for them. And we're hearing those stories, almost nightmare stories from so many customers. So there's not an official market sizing going on, but that sector is really driven by customer conversations and customer demand. And we're seeing very good demand in that sector.

[Operator Instructions] Our next question will come from Heather Balsky with Bank of America.

I wanted to ask, you mentioned your opportunity once you close the deal at Sterling about your ability to reduce some of the third-party pass-through costs. And I'm just curious if you can talk about your thoughts around the opportunity you have on the expense side as well as you're using kind of your own internal resources once you're a longer organization?

David, do you want that one?

Sure. Heather, they're really -- it's a multifaceted approach to that. So yes, there are third-party costs. We will be able to leverage volume from a procurement perspective to get more favorable pricing. We will be able to run more verifications through our own proprietary database. We will also be looking at other third-party costs like insurance and public company costs. So we're going to look at everything top to bottom, every single expense. As we said, we think we can go get $50 million. We're highly confident in that number and think it can be greater than that and we're going to go get it as quickly as we can.

I appreciate that. And then just a follow-up. You also talked about Sterling's international business. Can you just lay out for us what their business is focused on internationally in their key markets? And then -- I mean we know your international business, but kind of where maybe there might be similarities or where they're providing some new opportunities?

Yes. So from a footprint standpoint, their international business is almost identical to ours, which makes it very easy to work through synergies and combining the organizations. Obviously, each party will have strengths and weaknesses. And what we like about Sterling is they seem to have done very well in the gig space internationally, which is not a business that we've focused on too much. And they've also done extremely well in certain markets like Australia. So we'll have to look at where the strengths and weaknesses of each organization. But from a product standpoint, there's really not a lot of differences and it's really just a matter of go-to-market in certain regions. But we'll start, again, planning that as we get closer to close and post-close as to we're basically going to basically take the best-in-class approach. So whoever has got the best product or offering, that's what we're going to go with.

[Operator Instructions] Our next question comes from Andrew Nicholas with William Blair.

I wanted to follow up on the earlier question around kind of AI efforts and efficiency gains. One of the other things that seems to be a theme as people adopt center of AI or build products internally is the cost. So just kind of curious if that kind of those efforts around bringing AI into your work or even the private AI tool have any kind of negative impact to incremental margins? Or is the net-net of all that you're doing on that front expected to improve incremental margins over time?

Yes. So the near-term answer is that everything we're doing is in budget. So we're not going to be incurring any additional costs to do what we've got planned for 2024. And I think you've answered the question as to long term, which is we definitely feel that, yes, there will certainly be a cost of developing a solution, but the benefit and the business case behind it will be higher quality, more efficiency, probably the ability to essentially reduce head count in certain areas and things like that. So it certainly will offset. But we're taking each product in each project as like a separate business case. So everything that we're doing has to be business case-driven and have some sort of defined benefit that we can track and milestones that we can measure. So that's the approach we're taking. And again, we think there'll be a positive impact to the business over the next couple of years.

That's very helpful. And then maybe for my follow-up. Just curious what the customer reception has been like to the Sterling announcement thus far. I don't know if you've had a chance to speak to any of their customers. But just curious if your customers have come to you with any concerns, excitement, things of that sort, that would be helpful.

Yes. I mean, we can't speak to any of their customers. That's not loud, but our customers are pretty excited about it. They -- in some ways, it's also a nonevent for them. So when we announced it, we proactively reached out to all of our large customers and walked them through it and talked about, they were very excited obviously, they want to see what the Sterling products are like and things like that, which will show. But the -- as I mentioned, there's really no impact to them. So although they're excited for us, they don't really feel like it's going to change. It's going to be the First Advantage customer success team. Their customer care is not changing. Their product suites aren't changing and their platforms aren't changing and potentially, there could be additions to them that would benefit them, which also opens up up-sell, cross-sell for us. But when we had our customer collaboration event in April, it was almost not even mentioned by any customers. It was -- they were excited about it, obviously, when we first reach out, but it's really business as usual.

At this time, we have no further questions in queue. This will conclude today's First Advantage first quarter 2024 earnings conference call and webcast. Thank you all for your participation. At this time, you may disconnect your lines. Have a wonderful day.