First Advantage Corporation (FA) Q2 2026 Earnings Report, Transcript and Summary

Good morning, everyone. My name is Bo, and I will be your conference operator today. I would like to welcome you to the First Advantage Second Quarter 2026 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Ms. Stephanie Gorman, Vice President of Investor Relations. is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Ms. Stephanie Gorman. Please go ahead, ma'am.

Thank you, Bo. Good morning, everyone, and welcome to First Advantage's Second Quarter 2026 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 2025 Form 10-K and our Form 10-Q for the second quarter of 2026 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 am joined on our call today by Scott Staples, our Chief Executive Officer; Joelle Smith, our President; and Steven Marks, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now turn the call over to Scott.

Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. Today, we have 4 key messages. First, we delivered outstanding results in the second quarter with revenue growth of 15% year-over-year, adjusted EBITDA margins of 28.6% and adjusted diluted EPS growth of 30% year-over-year, meaningfully outperforming our previously communicated expectations. These results reflect the strength of our go-to-market performance, our state-of-the-art AI-driven proprietary technology platform and the durability of our diverse enterprise customer base and vertical mix. Second, we are making strong progress on our FA 5.0 growth strategy. Our focus on product innovation, platform capabilities and go-to-market execution is translating into tangible results, including robust enterprise bookings, strong upsell and cross-sell activity and continued customer adoption of our innovative products such as Digital Identity. As we expand the value we deliver to customers and further strengthen our capabilities, we believe we are well positioned to drive sustainable growth over the long term. Third, our strong cash flow generation continues to provide flexibility to execute our balanced and disciplined capital allocation strategy. We are constantly evaluating opportunities to create shareholder value and remain focused on deploying capital where it can have the greatest impact. Deleveraging remains a top priority. And in the second quarter, we made a previously announced $25 million voluntary debt repayment followed by an additional upsized $45 million voluntary prepayment this week, subsequent to quarter end. This brings our cumulative debt repayment since closing the Sterling acquisition to more than $165 million. We also continued to repurchase shares opportunistically, buying back nearly $19 million during the quarter with total repurchases through July 31 of $38 million or approximately 1.9% of total shares outstanding. And finally, we are raising our full year 2026 guidance across all metrics to reflect our strong first half performance, continuing go-to-market success, current labor market trends and our confidence in our growth outlook for the remainder of the year. Now turning to Slide 5. We delivered exceptional results in the second quarter with strong performance across revenue growth, adjusted EBITDA, adjusted EBITDA margin and adjusted diluted earnings per share. Our results in the quarter benefited from sustained momentum driven by our recent large contract wins and continued improvement in base revenue performance, reflecting our focus on controlling what we can control and executing consistently across our growth algorithm. At the same time, we are beginning to see encouraging signs of gradual improvement in the broader hiring market, which provided additional support to our results during the quarter. We believe the strength of our business, including our enterprise customer focus, diverse vertical mix, global footprint and balance across blue-collar and white-collar hiring with a strong go-to-market focus on high-volume enterprise hires continue to provide stability and reinforce our confidence in delivering durable growth across a variety of macro environments. One of First Advantage's key differentiators is our position as a global HR tech and data platform company, which is purposely built to help customers navigate the increasingly complex dynamics of human capital risk. Our team of data scientists and engineers are focused on transforming our products through the application of cutting-edge technologies, including AI. Equally important, our customers trust us because of our deep domain expertise across verticals and a wide range of regulatory frameworks, including the Fair Credit Reporting Act, or FCRA. In a rapidly evolving environment, this combination of AI-driven innovation and regulatory risk management and compliance leadership is what enables First Advantage to deliver high-quality, highly automated and high-volume screening globally at scale. Building on that point, we have spoken extensively about our strategy of applying AI to help our customers manage risk while preserving the speed, efficiency and user experience they expect. At the same time, we are also benefiting from AI across our own operations, leveraging our years of investment in automation, machine learning and AI. We have embedded these capabilities throughout our platform and proprietary data assets. Doing so has enabled us to strengthen our solutions such as SmartHub AI and Digital Identity fraud mitigation products, improve operational efficiency and support more scalable growth. A recent example is our shift from using third-party AI for the chat feature within our Click.Chat.Call customer care platform to a proprietary native AI chat experience that has been purposely built on our own infrastructure, trained by our own data and tailored to our needs. This transition enabled by the depth and expertise of our engineering teams creates a smoother handoff between AI and live agents, reduces our reliance on external platforms and allows us to deliver a better experience at a lower total cost. Across our operations, customer care, fulfillment, product development and engineering teams, AI is helping us enhance the customer experience, increase productivity and drive operating leverage while further strengthening our competitive differentiation. Before turning the call over to Joelle, I would like to highlight a few recent First Advantage recognitions and milestones. First, in June, we celebrated the fifth anniversary of First Advantage's initial public offering. I'm extremely proud of what we have accomplished as a public company on behalf of our stakeholders. We have delivered growth and profitability, successfully executed and integrated the transformational Sterling acquisition, innovated and led with best-in-class solutions, launched our FA 5.0 strategy and established long-term financial targets while making meaningful progress towards them. Second, we were added to the S&P Small Cap 600 Index on June 16, a milestone that reflects our expanded scale, strong financial performance and established track record as a public company. And third, we were ranked among TIME's America's Best Companies 2026 as the #1 Background Screening and Identity Verification company. We also placed in the top 25 nationwide in the professional services category and in the top 3 professional services companies ranked by financial performance. These recognitions reflect the excellence of our team as we continue competing and winning in our industry. With that, I will now turn the call over to Joelle, who will share more on our go-to-market execution, vertical performance, product innovation and customer engagement.

Thank you, Scott, and good morning, everyone. This morning, I will provide an update on our go-to-market performance and the underlying dynamics behind our strong results this quarter. I'll start with the drivers of our robust 15% year-over-year Q2 revenue growth, which well exceeded our previously stated expectations and long-term growth algorithm target of 7% to 9%. Combined upsell, cross-sell and new logo revenues continued to deliver robust growth, achieving 12.5% growth in the quarter. Performance was driven by the continued growth from the 3 large go-lives from the end of 2025 that we have discussed on previous calls as well as the contribution from the many other enterprise deals we've won in prior quarters. Overall, our sales engine continues to help. In addition, base growth for the quarter came in exceptionally strong at 6.7%. We believe this reflects the breadth and scale of our business model. Underlying base trends continue to improve. And notably, we supported meaningfully higher-than-expected volumes from several customer initiatives during the quarter, which contributed roughly half of the quarter's base growth. It's an excellent example of how our scale and AI-enabled platform enable us to absorb and deliver periodic volume surges from time to time across multiple industry verticals while maintaining top speed and service. Even without this benefit, our overall base growth this quarter was particularly strong at the high end to above our long-term growth algorithm target range. Now switching gears to our continued go-to-market success. Our sales teams delivered an impressive 20 enterprise bookings in Q2. This is up from 17 in Q1 with each deal having an expected annual contract value of at least $500,000. These wins, combined with the continued strength and expansion in our late-stage pipeline, particularly within new logo opportunities, reinforce our confidence in the durability of our new logo and upsell, cross-sell growth and support our positive outlook for the balance of the year. Customer engagement also remains strong with retention of 96%, which is in line with our long-term model. This represents another quarter of excellent performance and demonstrates the success of our high-caliber go-to-market team and the market impact of our continued investment in our state-of-the-art platform. Now looking at our verticals on Slide 8. Overall, we continue to hear a neutral to positive tone from our enterprise customers who generally expect current hiring activity to continue through the balance of the year. The diversity of our customer base continues to be a key differentiator, supporting the robust momentum we saw across many of our largest verticals in Q2 despite some of the mixed headlines around broader employment you may have read. Transportation and logistics as well as retail and e-commerce all benefited from a combination of sustained base volumes, healthy consumer activity supporting labor demand and some workforce initiatives driving higher volumes. Industrial and manufacturing has also demonstrated notable growth as aerospace and defense customers expanded capacity and increased hiring. Trends in general staffing also remained positive, particularly within blue-collar staffing, indicative of the overall improvement we are seeing in the hiring environment, which is manifesting within our base momentum. Our remaining verticals showed minimal declines or were flat, including healthcare, where strong new upsell and cross-sell activity offset some remaining base softness as uncertainty of federal healthcare funding remains. Turning to our international business. Q2 revenues were up 2.4% year-over-year. Our global scale and consistent delivery across regions uniquely position us to win, particularly as U.S. and European multinationals continue to centralize and globalize their hiring process. We continue to be a partner of choice for managing their expanded streaming needs across geographies, which supports our growth and reinforces our confidence in the long-term international opportunity. At the same time, we have seen softer volumes emerge in some of the markets, such as India as global conflicts have persisted longer than many initially expected and are driving impacts, including higher fuel prices and broader economic disruption. Underlying much of this positive momentum across our business is the strength of our product portfolio, which continues to differentiate us in the market. As identity fraud continues to rise in both frequency and sophistication, customers are increasingly turning to fraud mitigation solutions like our Digital Identity products to help them mitigate risk and maintain shock throughout the screening and verification process. This trend is underscored by a recent Equifax survey of HR professionals, which found that nearly 3/4 of respondents encounter challenges with fabricated or misleading candidate information. Digital Identity continues to be the tip of the spear in our go-to-market strategy. As we have discussed, we believe it is not a feature, but an essential solution ahead of the screening process and customers continue to ask about it with increasing frequency as they navigate the challenging world they operate in. While Digital Identity still represents a modest portion of overall contract value, it remains a key differentiator and decision driver and is standard in most of the deals we quote. In Q2, adoption continued to build with implementation trends in line with last quarter, reinforcing the importance of this product line. Digital identity is just one example of how our product innovation strategy is translating into differentiated solutions for customers and strengthening our competitive position. There are several additional promising initiatives in the works with focus areas such as new verification products and additional offerings leveraging our SmartHub AI routing technology. We believe initiatives like these help drive continued product leadership, support our go-to-market success and optimize our fulfillment cost structure. We look forward to providing further updates as these products come to market. Beyond our innovation efforts, staying closely connected to our customers remains a top priority, and our global Collaborate User Conferences continue to be a powerful platform for engagement worldwide. Following our successful U.S. Collaborate User Conference in April, we held regional events in Singapore in June and India in July, with additional events planned in EMEA, Hong Kong and Australia later this fall. Across these conferences, we have connected with hundreds of customers and prospects, deepening relationships, gathering valuable market insight and reinforcing our confidence in the opportunities ahead. With that, I will now turn the call over to Steven.

Thank you, Joelle, and good morning, everyone. I'll start with second quarter results on Slide 10. Our second quarter revenues were up an impressive 15% year-over-year, coming in at $449 million, marking our fifth consecutive quarter of positive year-over-year revenue growth. As Joelle discussed, the underlying business continued to perform very well in Q2. Excluding the benefits to base from Joelle's mentioned customer initiatives, we estimate Q2 total revenue growth was still a very robust 11% to 12%, above both our previously communicated expectations and long-term growth algorithm target range. Adjusted EBITDA for the second quarter was $128.5 million, up 13% year-over-year. Our adjusted EBITDA margin of 28.6% came in above our stated expectations and reflects sequential quarterly improvement of 130 basis points, driven by strong operating leverage. Notably, we efficiently fulfilled the incremental Q2 volume within our existing cost structure without having to make structural changes to our operating model. Margins benefited from our strong execution on synergies and cost discipline while flexing to adapt to the product mix changes as a result of the large deals we have previously -- we have discussed previously, particularly as the positive base trends have provided more broad-based revenue distribution compared to what we saw in late 2025. Our adjusted diluted EPS was $0.35 per share, a 30% increase year-over-year. Our per share earnings growth was supported by our overall outperformance in the quarter, share buybacks and synergy realization. Earnings growth also benefited from our disciplined expense and capital management, combined with lower interest expense as a result of our debt repricing and voluntary debt prepayment. We continue to action cost synergies from our Sterling acquisition, reflecting our disciplined execution and strong integration progress. We remain on track to achieve our synergy goal within 2 years post closing. And as of quarter end, we had actioned $63 million in run rate acquisition synergies, moving closer to our total synergy goal of $65 million to $80 million. Overall, our outstanding Q2 results were enabled by our go-to-market momentum and execution, combined with our ability to flex to meet our customers' demand. Now turning to cash flow, net leverage and capital allocation on Slide 11. During the quarter, we generated operating cash flows of $73.6 million, a substantial increase of $36.3 million or 97% on a year-over-year basis. This impressive performance was driven by our revenue outperformance in the quarter, the larger scale of our business, our overall focus on cash flow and the curtailment of acquisition-related outflows. Our cash balance as of June 30, 2026, was $238 million. We are constantly evaluating our capital allocation options for driving shareholder value creation, remaining focused on opportunistic capital deployment across both deleveraging and share repurchasing. Achieving our target net leverage level of less than 3x remains a top priority and the pace of our debt paydown reflects that commitment. In line with this, just this week, we prepaid $45 million of debt, well exceeding the voluntary prepayments we've made each quarter for the last year. This is in addition to the previously announced $25 million prepayment we made on May 6 and brings our total debt repayment to $165.5 million since closing on the Sterling acquisition. As a result, our synergized adjusted EBITDA net leverage ratio at quarter end was 3.7x and represents a 0.7x decrease from when we closed the Sterling acquisition. Additionally, during the quarter, we repurchased $18.7 million of our shares through the $100 million share repurchase authorization that we announced in February. Our repurchases through the end of July totaled approximately $38 million with an average purchase price of $11.78 per share. This represents 3.2 million shares in total or approximately 1.9% of total shares outstanding. $61.8 million remains on our authorization. Going forward, we will continue to analyze our capital allocation approach to ensure we are opportunistically actioning a plan that maximizes ROI and shareholder value. Moving to Slide 12 and our 2026 guidance. Today, we are raising our previously announced full year guidance, supported by our exceptional performance in the first half of the year and our outlook for stability in the hiring market for the remainder of the year. We now expect 2026 total revenues in the range of $1.67 billion to $1.71 billion, adjusted EBITDA of $472 million to $486 million, adjusted net income of $214 million to $225 million and adjusted diluted EPS of $1.23 to $1.29 per share. At the midpoint, this represents approximately 7% year-over-year revenue growth, 9% year-over-year adjusted EBITDA growth and 21% year-over-year adjusted diluted EPS growth. Our updated and tightened guidance range reflects a balanced posture on our short-term outlook that incorporates the healthy state of our underlying demand trends as well as the ongoing geopolitical and macro uncertainty. As a result, the continuation of current trends would support performance above the midpoint of our range. However, consistent with our historical approach towards guidance, we believe it is prudent to account for a broader range of outcomes given the factors outside of our control. As we think about the second half of the year, please remember that our 2026 growth rates are being measured against an exceptionally strong second half of 2025, during which we grew a notable 12% year-over-year in Q4 2025. Notably, in Q3 of this year, we begin to lap the 12-month anniversary of the large 2025 go-lives we have discussed previously. And by Q4, those wins will be fully annualized. As we progress through the second half of the year, we expect that this will result in moderating growth rates compared to the exceptional start to this year. Zooming out, while growth rates may fluctuate from quarter-to-quarter, we expect to deliver full year results above our original expectations and in line with our long-term growth algorithm. Looking specifically at Q3, we saw revenue momentum continuing from Q2 into July, and we expect base to be slightly positive for the full quarter. Taken together with the new logo and upsell cross-sell trends we've discussed, we expect total revenue growth rates for Q3 in the mid- to high single digits, consistent with the expectations we shared last quarter. Looking ahead at Q4, we expect base to be neutral with our overall base momentum continuing into Q4, but partially offset by prior year's Q4 new logo and upsell cross-sell revenue being more evenly distributed across 2026, the dynamic we've been discussing with you for several quarters. For Q4, we also have a more modest level of expected new logo and upsell cross-sell contribution models as we comp against the strong Q4 2025 17% growth and navigate some instances of recent win implementations now extending into early 2027. As a result, we expect Q4 total revenue growth rate in the low to mid-single digits. Turning to adjusted EBITDA. Overall, we expect adjusted EBITDA margins to remain largely consistent with Q2 for the remainder of the year. And similarly, for adjusted diluted EPS, we expect meaningful year-over-year expansion, increasing versus prior year to the low to mid-$0.30 range in both Q3 and Q4. Having walked through our updated 2026 guidance, I want to close on Slide 13. This slide puts our 2026 guidance in the context of our longer-term growth trend in adjusted diluted EPS. The growth implied by our updated 2026 guidance midpoint is consistent with our track record of adjusted diluted EPS growth of 20% or more since 2024. This is also consistent with the longer-term adjusted diluted EPS growth rate implied by the midpoint of our 2028 target. With that, let me turn it back to Scott for closing remarks before we open the line for your questions.

Thank you, Steven. In closing, Q2 was our strongest quarter yet, and we expect our solid momentum to continue in the second half of 2026. We are focused on winning by providing best-in-class differentiated solutions for our customers. We remain confident in our ability to deliver consistent financial performance, and we are progressing well toward the 2028 financial targets we established during our Investor Day in May 2025. Thank you to the entire First Advantage team for the work you do to support our customers each day. With that, we will open the line for questions.

[Operator Instructions] We'll go first this morning to Shlomo Rosenbaum with Stifel.

I just want to make sure first that I'm understanding the tone on the overall environment. It sounds like the tone is better from your clients and you're seeing a better growth. And it sounds like it's more broad-based. I want to make sure I'm understanding that right. And then I also want to ask about the detail on those customer initiatives, where it's something that was a pull forward or it was an episodic project that kind of came out of the blue. Just trying to understand what that is. And maybe you could give us the nature of it. Is that something that's indicative of an improving environment? Or is it just something else?

Yes. Thanks, Shlomo. I'll take the first part of your question, and then I'll have Joelle answer the second part of your question. So basically, your first part of the question is on the macro. What are we hearing? What are we seeing? And obviously, 6.7% growth in the base is great, slightly unexpected, but obviously, we love it. I think there's a couple of things going on. One, if you just look at job data, where you're seeing a lot of stabilization. You're seeing hires and quits absolutely flat for the last 6 months, and that's fine, right? Job openings continue to be really strong. Pre-pandemic, it was about $7 million, and now you're looking at $7.4 million. So that's all really good for base and for our business. Unemployment remains steady at 4.2% and job openings to unemployment is also favorable. So I think just pure labor statistics, you're seeing good numbers. And also, over the last couple of weeks, there's just been some really great articles in Wall Street Journal and other places around what's really going on in the labor market. And I think the impact of AI was highly overblown. And I think we're seeing -- as you used -- I'll use your exact term, we are seeing broad-based improvement. And I think it would go back to what we said over the last couple of quarters. We are continuing to hear, I would say, neutral to positive. The same comments I've given for the last 2 quarters, neutral to positive projections on hiring from our customers. And you know we talk to our customers all the time. So we are in front of literally hundreds and hundreds of our large customers and hearing a very consistent tone. And I think when you say broad-based, it's true geographically, and it's also true vertical-wise. If you look at our vertical performance, we got really nice growth out of retail and e-com, transportation and logistics, industrials, general staffing, especially the blue-collar staffing. The blue-collar staffers are doing extremely well. But all the other verticals were basically flat or just barely negative. So we're not getting these wide swings in verticals. And I think the only place geographically, we're seeing some slowdown is actually in India, and that's a direct reflection of the Iran war. Oil prices, gas prices are definitely affecting India economy and our customers in India. But as you know, it's not a huge piece of our business. So we're definitely seeing a combination of vertical -- broad-based vertical, broad-based geographic, really nice stabilization and obviously, even improvement in base. I'll turn it over to Joelle to talk about the customers.

Awesome. Thanks, Scott. Hey, Shlomo. Yes, so the customer initiatives that we saw, which is roughly half of the base growth that was created, it created elevating screening activity. And these are really enterprise-wide labor reshaping programs. These programs created churn in their labor force and labor churn is always good for our business. We're also seeing a continuation of job stacking, which, as a reminder, is someone who's working 2 or more jobs at the same time. And we're seeing this across verticals, which is also good for our business. So these are the things that we've really kind of seen from customers. They're doing a lot of this work because they're large enterprises and large enterprises do these types of changes from time to time.

Okay. So it was not something you were expecting. It was not -- it was kind of an episodic thing that just came up in the quarter is the way to understand, just to clarify that the customer initiatives.

Yes. It did accelerate through Q2. We do anticipate it continuing into Q3, but probably will normalize into Q4. But these programs do happen, and it wasn't just one group. It definitely happened across transportation, retail and e-com.

Okay. Great. And just to sneak in one other thing. Can you just talk a little bit more about what's going on with package density, how that might be helping the growth? And how much of a factor is Digital ID in terms of helping to improve the cross-sell and upsell? I don't know if you have metrics for that, and then I'll pass it off to someone else.

Yes. I'll take the package density, and then I'll again flip it back to Joelle to talk about Digital Identity and sort of our tip of spear go-to-market approach with Digital Identity. Package density continues to be strong. I mean if you look at the numbers, I'll give you sort of the color on it in a second. But I mean, if you look even back, go back and look at our results for even the last 5 years, and we've been public for 5 years. Upsell, cross-sell has been just a really good consistent driver of growth for us and package density is the #1 driver of that. So if you look at 2025, for example, upsell, cross-sell was 7% growth. And in Q1, it's 8%. And now in Q2, it's another 8%. The key component of package density, which is driving a lot of this growth is this whole focus on risk, risk mitigation, fraud prevention, and again, just unfortunately, the challenging world that we live in. Customers are continuously looking for more protection, more types of screens, deeper searches. There's just -- as we've talked about before, AI, what we call bad AI is enabling fraudsters and basically all levels of fraud to enter into the recruiting process. And we're fighting that bad AI with good AI. But that's just a piece of it. It's also can you go deeper on county searches, state searches, federal. We're continuously hearing this from our customers, and this is a great thing for our business. It's driving a lot of our cross-sell growth for many years now, and we don't see an end to it. The world, again, keeps getting more and more challenged, not less and less challenged, which is really good for our business. I'll flip it over to Joelle now to talk about Digital ID.

Yes, absolutely. We are definitely seeing a lot of activity around Digital ID for the same reasons that Scott talked about with regards to just kind of the state of the world that we live in. We do -- we are seeing a significant increase in fraud, especially in the hiring market in workforce within the interview stage, the hiring stage and then even day 1. So the Digital Identity offerings that we have that are embedded into our screening process are creating a lot of opportunity for us, which is naturally just making the ACV and the size of deals larger. So that's also contributing to the package density increase that we're seeing. But it's changing the game with regards to how we are going to market. As Scott said, it really is the tip of the spear, and it's opening up all kinds of doors and conversations with people because it's reaching an elevated level within our customers. It's no longer just an HR conversation. The conversation is moving up to the other C-suite and even board levels because of the threat of some of these bad actors and the risk that it creates within these enterprise organizations. So we're definitely seeing a large attach rate with the Digital Identity, and it's obviously driving larger deal sizes for us.

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

Congrats on such a strong result. Maybe just a quick follow-up on the base growth. You mentioned the customer initiative, but the other half seems to be pretty broad-based across multiple industries. And it seems like that momentum continued in July. So should we expect that momentum going forward based on what you've seen so far and your conversations with your customers?

Steven, do you want to?

Yes. Ashish, it's a good question. I think certainly, it was broad-based growth in the second quarter, retail, e-com, transportation, logistics, but we also saw industrials and defense and those types of sectors that Scott mentioned before, staffing and certainly on the blue collar doing really well. July is obviously a good start, but there's still 2 more months in the quarter and a little bit of unknown, but we certainly think base will be positive for the quarter. Slightly positive that is. Before we were saying negative -- 0 to negative 2%, we're probably on the positive side of those numbers, which is a healthy step change in progression. And I think that reflects the customer sentiment and the volumes that we're seeing. So obviously, we've got a range of outcomes. And as Scott mentioned, a sustained kind of conflict in Iran and the Middle East could drag a little bit on consumer confidence and fuel prices. But overall, we're pretty confident in the base, and we like where the momentum started the quarter out in July.

That's great color. And just maybe on the margin front, obviously, really great progress on the cost takeout initiative. You expect -- you mentioned second half margins more in line with the first. As we think about the puts and takes going forward, can you highlight some of the investments that may be weighing on the margins?

Yes. I think a couple of things there, Ashish. I mean, a, we're somewhat expecting our vertical mix to stay constant for the rest of the year, which means you're not going to see that large fluctuation in gross margins that we saw last year where we kind of shifted a little bit heavier towards some of the transportation type verticals where you just have a different mix of services. So that's why you're seeing that consistency there. And then as I mentioned on the prepared remarks, we're making very good progress on the synergies. It's still a little back of the year weighted. So you'll see more of that progression. If you looked in the slide deck, we've actioned $63 million, but we've only realized $51 million. So there's still $12 million that's going to flow through and a lot more of that is weighted towards the very end of the year or early next year when you kind of look at the pacing and flowing of that. So we're still very confident about overall getting leverage and accretion out of gross margins. We are making some targeted reinvestments in the business on sales and product as we talked about with you guys over the years, those are great investments for us and certainly return well. But overall, we think margins will be very consistent through the end of the year, which is still good year-on-year positive momentum, which we like in the model.

Ashish, Yes, I'll add one more thing. If you remember in last quarter's earnings call, we said that we would put a ribbon and bow on the synergy efforts and the integration efforts by December 31 of this year, and we are still on target to do that. So it doesn't mean we will fully realize everything by December 31, but we will fully action everything by December 31. So going into 2027, we will be done with all the integration and synergies for the Sterling acquisition, which is almost now approaching a 2-year anniversary. We will get some of the realization of those synergies, obviously, flowing into 2027, but we are definitely on target to wrapping it up December 31.

Congrats for that.

We'll go next now to Andrew Nicholas with William Blair.

First, I wanted to just kind of ask on share gains. Obviously, upsell, cross-sell, new logos all remain pretty impressive. Just curious from a vertical perspective or even a geographic perspective, if there are specific kind of markets where your momentum is pronounced and maybe any thoughts on why that would be if that's the case?

Hey, Andrew. We're seeing great momentum anywhere you can classify something regardless of vertical, can classify it as high-volume hiring. There's still a tremendous demand for blue-collar workers, even white-collar workers where there's high turnover. We don't -- it's hard for us to actually break down like what's a corporate job versus some other job. But we know what's a trucker, what's a warehouse worker, what's a store clerk worker. And those jobs are just still in tremendous demand. So it actually -- that lends to transportation, it lends to retail e-com. It certainly lends to -- we're seeing great growth out of the healthcare staffers. We're seeing great growth out of blue-collar staffers and even hospitality, things like that where it's high volume. But even within things like industrials and manufacturing, there's tremendous growth in aerospace and defense right now. So our industrials business is doing extremely well. And you would obviously expect that given the results of the industrial companies, and we're benefiting from that as well. But even some of our financial services companies and things like that do have high-volume hiring components of them. And so we're getting just really nice growth across a lot of our large verticals. And the key is high-volume hiring, and that's our focus. As you know, for going on almost 10 years now, our focus vertically has been on the high-volume hires and the enterprise. And I think we're reaping the benefits of that.

Got it. And then for my follow-up, just a quick one on margins. Are there any kind of nuances to the custom initiatives from a margin perspective? Are there higher or lower pass-throughs? Are there bulk discounts? Anything for us to thinking about in terms of that impact on Q2, and it sounds like Q3 as well?

Andrew, no, I mean, those initiatives are really just running more volume through their existing programs. I think the only real gross margin impact would be if it changes kind of the vertical chemistry a little bit. And if there's more volume, obviously, from a vertical that's more transportation-oriented or healthcare-oriented, it could have to move the needle a little bit. But overall, they're running core packages at normal terms and conditions.

We'll go next now to Andrew Steinerman of JPMorgan.

I just wanted to unpack this customer initiatives call out again. Maybe we can sort of cut through and I recognize there's certain things you can say about what your customers are doing and certain things you can't say. term enterprise reshaping was used. But just in plain English, what did your customers do? What segment was it in? Because as we look at the beat and the guide increase, obviously, there's a little gap there. I'm trying to understand that given you sound more positive. And then I have a follow-up on capital allocation.

Yes. [ Alex ], so think of it this way. First of all, it was multiple customers, and it was obviously great news. As Joelle mentioned, about half of the base increase in the quarter was attributed to these customers basically doing large-scale, whether it be rescreening or hiring. So it was a combination of both. We had some large customers across multiple verticals launched some large rescreening initiatives. And again, that goes back to the fact that we live in a challenging world and customers are very worried about what potentially existing employees have done since they've been hired. So doing some large rescreening on large employee bases is a great revenue lift for us. It doesn't mean they'll do it again next year. They may do it 2 years from now, but we're starting to see rescreening become a little bit more of a factor. We're starting to see monitoring become a little bit more of a factor. Again, it showcases the world that we're living in. And we also had some large customers doing some restructuring. So they were consolidating divisions or they were changing things and that led to actually more turnover and more hiring. So again, it's really hard to like say it was 1 or 2 things. It was a little bit across multiple customers, across multiple industries, but obviously, we're happy to take the business.

Understood. Then maybe peeling back the envelope on capital allocation. This is one for Steven. You mentioned that you guys are being very thoughtful around capital allocation going forward from here. Obviously, your stock price has done well. Obviously, you've deleveraged in a pretty orderly way. Are you planning to change at all how you're thinking about capital allocation at this juncture? Do the priorities change at all? Is there potential for more organic reinvestment, inorganic investments, thinking about other ways to return capital to shareholders? My ears perked up a bit when you said that, but I just wanted to dig in on the capital allocation thoughts that you guys are having with the team.

Yes. Alex, it's a good question. It's not really change of posture at all. I think we've been saying since we kind of announced the share repurchase program back in February that our plan was always to be opportunistic. Certainly, we're pleased with the upward momentum in the stock price and obviously, still bought back some shares during the quarter, and we still feel that there may be an option there. But certainly, as you could tell by the upsized debt paydown we made this week, deleveraging is certainly a top priority and remains the top priority. We've always organically invested in the business, and there's no step change in what our plans are there. We'll continue to put some money behind the product and sales and marketing and making sure that we're successful in continuing the momentum that we have. So I think ultimately, we'll keep our eyes on the market. It's obviously very fluid these days and put our capital to where we believe the highest ROI for our shareholders are. Given where interest rates are heading and things like that, it could change just the composition from Q1 to Q2 and Q3 may look a little more different. But certainly, we feel good about where cash flow is, upsize the debt repayment, and that will remain a priority in terms of getting deleveraging down to have the right interest for our shareholders.

We'll go next now to Jeff Silber with BMO Capital Markets.

I wanted to go back to the updated guidance for the year. Maybe I'm misreading this a bit, but it seems to be that now the second half may be a little bit more tempered specifically at the top line compared to what you might have expected beforehand. I don't know if that's correct or not. Was there any front running maybe in the second quarter, some of these initiatives you thought might have come in the back half of the year came in the second quarter?

Yes, Jeff, good question. And no, none of it was a pull forward per se. I think we have a little bit maybe a touch more conservatism towards the second half, the prolonged geopolitical uncertainty and how that impacts consumer confidence. Our Retail and Transportation segment, we had an exceptional peak performance last year, and we have to comp against that. As this conflict drags on as fuel prices remain higher for longer and kind of drain the American consumer, we want to make sure that we can account for that range of outcomes in our base volumes and how we comp against last year. So I think that's the primary driver for, I would say, just a touch of conservatism maybe more than was there a quarter or 2 ago. But zoom out, we're still -- we've raised the bottom end of guidance by $45 million, raised the top end as well. I feel really good about where the year is heading.

Okay. That's great. And Joelle, in your remarks, when you were talking about international, you talked about some softer volume trends. Can we just get a little bit more color exactly what's going on there?

Sure. Yes. So that was really focused on India per se, and it's not really kind of across the broader international numbers. We're actually seeing some good growth in the other regions, EMEA and APAC. So India is really the one that's being heavily impacted, and that's mostly with the Iran conflict, fuel prices and just some of the general macro challenges that that region is seeing. We're not losing any large customers. There's not a major change. It's just really about kind of the macro effect with India.

Okay. Can you just remind us how large India is as a relative percentage of revenues?

When you look at overall international these days, Jeff, international is roughly 12%. India is probably in the neighborhood of 1/4 of that. It's -- the whole company, it's not a big piece of the picture.

We go next now to Manav Patnaik at Barclays.

This is Ronan Kennedy on for Manav. Combined new logo upsell, cross-sell contribution remained quite strong, I think, driven in part by the 3 large go-lives from late '25 and other enterprise wins. As these become fully annualized in 2H '26, how much of the growth rate is being supported by implementations reaching run rate versus your underlying sales productivity from new bookings, pipeline, ongoing share gains. So trying to understand the repeatable sales productivity versus run rate impact and those dynamics, please.

Ron, I'll take that. So as Joelle said in her prepared remarks, the sales engine is humming. There's no question about it. You are right in the fact that we had some really nice wins in 2025. So I think the only thing we're saying here is that, that creates some large grow-over challenges. It doesn't mean the sales engine is not performing well. In fact, it's performing the best it's probably ever performed. The number of go-lives that we have lined up for Q3 is an exceptional number. We're not prepared to give that number out. But we have a lot of deals that have been won that will be going live in Q3. But I think the only thing that we're saying here is that 2025 was so exceptional with -- especially with those large wins. It just makes the comp a little bit more challenging. And we still expect to have really good performance in Q3 and Q4. It's just comps that we're talking about. And again, sales engine continues to hum. Go-lives for Q3 look amazing. And the pipeline is literally the largest it's ever been, especially with late-stage pipeline. Those are all very promising signs. So again, probably just more of a comp issue.

Got it. And then from a margin standpoint, I think Q2 demonstrated the ability to absorb that elevated customer volumes within the existing operating structure. Anything -- did you learn anything about the normalized incremental margin profile of the business when revenue growth accelerates? And as we move into '27 with integration winding down, can you remind us how we should think about margin expansion from, say, package density, Digital ID, fulfillment productivity, other initiatives that you're doing and that mix?

Yes. I think we've talked about this a lot over the years, how scalable our fulfillment structure is and how good our ops and our platform is of being able to account for volume increases and decreases and scale up and down. And I think we certainly put that to the test in Q2. And I think we're incredibly proud of how the platform responded, how our teams responded. And it's not like we had to go out there and hire a ton of people to handle the volume. As I mentioned in the prepared remarks, we're able to absorb it within the cost structure. Probably caused a little stress on some of our departments, but overall performed incredibly well. So we're really excited about that. And I think you're right, we've talked about this too over time. Some of the newer products that we talked about, Digital Identity and monitoring do have a slightly different data cost model to them since it does generate net higher unit profitability percentages. As we get more momentum there, that will become a part of the story. I think today, obviously, we're mainly focused on getting those implemented and getting those customers live on those new tools, and then we'll talk about the upside to net dollar profitability down the road.

We'll go next now to Stephanie Moore of Jefferies.

I wanted to maybe touch a little bit on some of the large contract wins that you've announced. Maybe just talk a little bit about what you view the TAM to be within that market, your overall share in that market as well? And then I think high level, what are you hearing from your clients as the key reason why they're choosing you to perform these services?

Stephanie, so there's a lot there. So I'll touch on a few things. And if I miss anything, Joelle, please jump in. If you look at our Investor Day deck from May of 2025, we've spelled out a pretty significant TAM within our core business, but we also spell out the additional TAM that Digital Identity and identity fraud represents, which is another $10 billion on top of our TAM. So the opportunity and the TAM is quite large. We still maintain about a 25% market share in the core business space. And that obviously is an encouraging thing for us because of all the sales momentum we have and our ability to take market share and even to add share of wallet within existing customers has been a big driver of growth for us. So I think some of the key drivers of our success, a lot of it is the verticalization. We've always said that verticalization is the secret sauce in this business, and it continues to be. And why is verticalization so important? It's because every industry is different, especially in our regulated industries such as financial services, healthcare, transportation. I think that a lot of people don't understand how all these transportation and logistics companies need to adhere to Department of Transportation rules and regulations, and we're great at it. And a lot of it -- the compliance is built, is hard coded into our platform. so that when a large transportation company is hiring a driver, they can feel safe and secure that First Advantage is doing everything possible to protect them. So I think verticalization is one. The proprietary data is also a big one. We have 1 billion proprietary records. We have 135 million in our verified database, which is prior work and education backgrounds. And we have $900 million in our national criminal record file, which is prior criminal data. And I think that gives us an advantage, the fact that we can leverage our own proprietary data on a very state-of-the-art user experience. We -- if you recall, over the last year plus, we've been launching a new candidate experience, and we're getting rave reviews on the user experience. So customers are very happy with our state-of-the-art tech platform. They're very happy with our proprietary data. And I think another thing that's been driving a lot of growth, and we talked about it earlier around package density with the whole world being a very challenging environment, that really helps us sell more, and we've got -- as you know, the First Advantage story, we've been leading the charge in automation. So we're using automation, APIs, AI to help us get data, make a faster interpretation of data, get results back to our customers with fast turnaround times. And that's also really important. So all the investments we've literally made over the last 10 years are making a significant difference in our selling ability. And then the last thing I'll add is that there's a pretty strong trend, and this started maybe 18 months ago, maybe 2 years ago in the industry around vendor consolidation and global expansion. So a lot of these multinationals, these big U.S. and European corporations who do business all over the world have been going under vendor consolidation programs and also looking for vendors like First Advantage who can do global screening. And there's very few of us. And that gives us a significant competitive advantage in the market. And if you look at our upsell, cross-sell, the biggest driver of our upsell cross-sell is definitely package density and the second biggest driver is global expansion. We have just done really well in winning more business, more share of wallet within existing customers. So for example, if we have their U.S. business or the EMEA business, we're now winning their APAC business. We're winning their business in Australia. We're winning their business in India or wherever it might be. That's been a big driver of upsell, cross-sell.

We'll go next now to Scott Wurtzel of Wolfe Research.

I just wanted to go back to the comments you made around implementations maybe kind of taking a little bit longer going into 2027. Just wondering if you can give a little bit more color on what might be driving that.

Well, I think the good news that's driving it is volume. There's lots of them. So it's a good problem to have, and we're obviously working on ways to accelerate that and speed that up. But I think that's the only driver of it is that we've got a lot of go-lives. We've won a lot of business. It's a good problem to have, and we'll figure out a way to revenue faster and automate as much as we can around the implementation and onboarding process.

Got it. That's helpful. And then just a quick follow-up going back to capital allocation around the debt prepayment levels. It's good to see the upsized prepayment that you guys announced. I'm just wondering if -- I know these things can be a little bit fluid, but if you talked about in your guidance commentary around if trends remain consistent, you would be towards the higher end of the guide, could that potentially be indicative of a continued elevated level of debt prepayment going forward?

Yes, Scott, I think the good news is we've got a lot of free cash flow, and we have the ability to be opportunistic and flexible with our approach. So certainly, if interest rates trend higher and stock price stays higher, we will obviously probably lean more towards debt repayment. But we'll keep our options open as it comes around. But we are generating really good free cash flow. And as revenue ramps up, it continues to stay strong, our margins stay strong. We've curtailed a lot of the acquisition expenses. So -- we've seen a lot of that cash flow right to the bank account. And then at the end of the quarter, we'll make sure that we have a balanced approach and what to do with it.

We'll go next now to Kyle Peterson of Needham.

Just one quick follow-up for me on the capital allocation discussion, particularly as it relates to M&A here. It sounds like you guys are getting towards the finish line of at least actioning out a lot of the synergies with Sterling, and that's been a really successful transaction for you guys. So I just wanted to see, would -- sometime like next year, would you guys be open to going back in the market with the balance sheet and the synergies actioned in a good spot? Or I guess, do you guys feel that you largely have everything you guys need from like a capability and platform perspective? Just any more color on how that could potentially fit in the strategy once all of the synergies have been actioned would be really helpful.

Yes. Kyle, good question. And I'll kind of go back to the last question, like we got the luxury of having good cash flow, and I'll let Scott provide some comment here in a second. But the good news is, for now, our focus is taking that cash flow and getting our leverage where it needs to be, being opportunistic if the market creates the right opportunity to buy back shares at a very appreciative amount for First Advantage. As we shared at our Investor Day last year, once our leverage range come down, we kind of have a little bit of a wider playbook. Certainly, over the short term, our focus is maximizing shareholder returns, getting leverage down to where it needs to be. I'll let Scott chime in a little bit, but on where he feels we are from a capability standpoint. But certainly on the short term, that's kind of our core focus is probably going to be on one of those 2 [ capital ].

Kyle, I would just add, and Steven is spot on. First, let's pivot back to the 2028 Investor Day financials that we put out there. And we put out there revenue ranges of $1.8 billion to $2.0 billion, $560 million to $630 million of EBITDA, 31% to 32% of EBITDA margin, $1.65 to $2 of EPS. Those are phenomenal numbers. And we feel we're on a path to achieve those numbers without any M&A. So that's the good news is that we don't need -- we don't feel like we need help M&A-wise to achieve anything that we want to achieve. And we love the results that we announced today and the guidance that we've given today puts us on the path to achieving those numbers. I will say, though, that we'll always be opportunistic about M&A. If something falls in our lap, if something that looks appealing, becomes available, I think it would -- giving -- knowing how good our sales team is and the 80,000 customers we have, if we could add on something that would give us more to sell to same buyer, and it's more of like a plug on or a plug-in, that makes a lot of sense for us. Now financially, we're not even looking because we're clearly focused on deleveraging. But as we get into 2027 and certainly into 2028, I think we'll be opportunistic. I'm not sure we'll be hunting for stuff, but if something becomes available, we'll take a look. We're just laser-focused on delivering those 2028 Investor Day numbers that we had given, and we don't need M&A to get there.

Thank you, ladies and gentlemen. That will bring us to the conclusion of our question-and-answer session and also bring us to the conclusion of today's conference call. We'd like to thank you all so much for joining the First Advantage Second Quarter 2026 Earnings Conference Call and Webcast. And again, thank you for joining us, and have a great day. Goodbye.