First Advantage Corporation

Q2 2023 Earnings Conference Call

8/9/2023

spk10: 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 second quarter 2023 earnings conference call and webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. At this time, all participants have been placed in listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Lastly, if you should require operator assistance, please press star zero. Please note today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.
spk01: Thank you, Todd. Good morning, everyone, and welcome to First Advantage's second quarter 2023 earnings conference call. In the investor section of our website, you will find the earnings press release and slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on our investor relations website. Before we begin our prepared remarks, I 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 2022 Form 10-K and our Form 10-Q for the second quarter of 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 their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our investor relations website. I am joined on our call today by Scott Staples, our Chief Executive Officer, and David Gamzee, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.
spk10: Thank you, Stephanie, and good morning, everyone. Thank you for joining our second quarter 2023 earnings conference call. There are several highlights and updates that I am looking forward to sharing with you today. To start, We are very proud of our second quarter performance. Both revenue and adjusted EBITDA results were in line with the expectations we communicated during our first quarter earnings call, with our industry-leading adjusted EBITDA margin exceeding 30%. We achieved these impressive results despite the challenging macro environment, particularly within our international operations. we have once again demonstrated the financial discipline that we have built into the business and our ability to match expenditures with fluctuating volumes while maintaining impressive margins. In the second quarter, we again generated strong cash flow from operations. This, along with our current cash position, enables us to continue to selectively reinvest in our business, pursue acquisitions, buy back shares, and consider other uses of capital that maximize shareholder value. As a result of our current cash position, sustainable and stable operating cash flow, and commitment to a balanced capital allocation strategy, today we are pleased to announce that our Board has declared a one-time special dividend of $1.50 per share which represents a greater than 10% return of capital to our shareholders. This is in addition to our ongoing share buyback efforts. Even after taking the one-time special dividend into consideration, we are still able to maintain a strong balance sheet and modest net leverage position of approximately 1.6 times on a pro forma basis. Additionally, we will still have ample cash and liquidity, which will continue to give us flexibility to invest in our business. We pride ourselves in providing a compelling value proposition to our customers. I am proud of our team's ongoing dedication as we all continue to operate in an uncertain macro environment. In the U.S., consumer confidence remains high and the inflation outlook is improving. However, fears of ongoing economic weakness, and the likelihood of additional interest rate hikes continue to impact corporate spending. That being said, our customer base remains strong and continues to grow across our diverse range of verticals. Over the last 12 months, we booked 31 new logo enterprise customers, with seven of them booked in the second quarter. As a reminder, we define new logo enterprise customers as those with $500,000 or greater in annual expected revenues. Additionally, we continue to see solid new logo growth opportunities, and in fact, our RFP volume is extremely high. Turning now to our second quarter highlights on slide five in our earnings presentation, David will provide additional color on our financial performance and full year outlook in a few minutes. In the second quarter, we generated purely organic revenues of $185 million, down 8% year-over-year, while cycling over double-digit growth from prior year quarter. We also grew sequentially compared to Q1 and sequentially month-over-month every month in the second quarter. Additionally, our three-year organic revenue CAGR of 18% remains substantially higher than our long-term target. In our America segment, demand remains tempered but continues to be augmented by our positive new logo, upsell, and cross-sell achievements. Our international markets continue to face challenges that have resulted in significant year-over-year revenue and adjusted EBITDA declines, driven primarily by India and APAC, while our European operations, which are still down year over year, have proven more resilient. From a vertical perspective, we continue to see stable hiring demand across transportation, healthcare, and retail and e-commerce, while technology, financial services, and business services continue to experience a decline in hiring volumes. Adjusted EBITDA was $56 million, and adjusted EBITDA margin was 30.2%, both improvements sequentially from Q1. Our flexible cost structure, along with investments in automation and digitization, continue to drive our industry-leading adjusted EBITDA margins, despite lower year-over-year revenues in the quarter. we remain focused on our solid execution track record and operational excellence initiatives and continue to expect our adjusted EBITDA margins to remain over 30% in the second half of the year. Let me now take a moment to discuss some of our strategic highlights in greater detail. First, we continue to maintain a balanced and disciplined approach to capital allocation to return value to our shareholders while also investing in growth. As I mentioned in my opening remarks, our Board of Directors has declared a one-time special dividend of $1.50 per share, which reflects our strong cash position and low net leverage, as well as our commitment to shareholders. This return of capital to shareholders is in addition to our ongoing share buyback program. We are also committed to driving long-term profitable growth through investments in our technology and solutions such as AI, which I will speak to in a moment, and through M&A, which remains a high priority for us. Over the last two years plus, we have successfully executed four strategic acquisitions. Each has exceeded our expectations and resulted in accelerated profitable growth. We continue to seek to optimize our portfolio and actively evaluating M&A opportunities. Our balance sheet remains strong and continues to provide flexibility to support future strategic growth initiatives. Second, with respect to the macro environment, overall hiring remains generally stable despite the elevated degree of uncertainty. Recent macro jobs data specifically related to new hires and quits, while down from prior year, remain relatively consistent. Additionally, we meet with our enterprise customers on a regular basis. While they continue to monitor the impact of the macro environment on their businesses, we are not hearing any reported major changes, upward or downward, in their hiring trends. Many have had measures in place since early in the year to best offset the impacts of inflation and interest rate hikes and do not anticipate material changes to their already adjusted hiring plans. Our clients, like ourselves, continue to closely monitor and control their costs. And third, I would like to highlight how we are leveraging AI in our business. A notable example of this is within our customer care organization. Over the last two years, we have made investments in tools from leading technology partners with powerful AI capabilities to enable our agents to provide a higher level of service and improve efficiency. From reporting enhancements to data analysis optimization to a chatbot and knowledge base that continues to learn and improve with every transaction, we can leverage not only the innovation offered by our technology partners, but also easily plug in new vendors and technologies directly into our platform as the AI market matures. These advancements have transformed the way we work with our customers and them with us. It has allowed us to do more at a lower cost, provide a better applicant experience, and without sacrificing our high standard of customer service. Our AI efforts will continue to evolve and expand, and I look forward to updating you on our efforts in the future. I will now turn the call over to David for more details on our financial results and outlook.
spk06: David? Thank you, Scott, and good morning, everyone. Turning to slide seven. Our second quarter revenues were $185.3 million, a decrease of 8% from the prior year, or on a constant currency basis, $186.4 million, a decrease of 7.5% from the prior year. As a reminder, these results are against strong double-digit revenue growth of 15% in the prior year quarter. revenue grew sequentially and in line with their expectations for the quarter. In our Americas segment, revenues of $163 million were down just 4.6% from prior year, as our customers continue to hire, although at a slightly lower rate than in Q2 of last year. Our America segment held up relatively well given overall market conditions, which is attributable to our broad-based, resilient enterprise customers. In total, our America segment represented 87% of consolidated revenues in the quarter. In our international segment, revenues of $24 million were down 27% from Q2 2022. On a constant currency basis, revenues were $25 million, or down 24% year over year. The decrease was due primarily to weakness in India, given the region's exposure to BPO and IT services-related businesses, and an APAC, given the tepid recovery in China and other regional market dynamics. Our European operations, while still down on a comparative basis, have proven more resilient in the face of macro headwinds, with the new digital identity products contributing to their results. In total, international represented 13% of consolidated revenues in the quarter. In the second quarter, the year-over-year revenue decline from existing customers was $25.6 million net of upsell-cross-sell, which contributed $7.1 million, or 3.5% to our revenues. We are anticipating an increase in upsell-cross-sell in the second half of the year based on our current pipeline. We continue to see strong customer retention coming in at approximately 97% for the second quarter. Revenues from new customers contributed an incremental $9.4 million, adding 4.7% to our results. America's new logo sales outpaced international in both dollars and percentage. Contributions from new customer sales and upsell cross-sell remain encouraging. Our operating expenses decreased year over year, which was possible because of our highly variable usage-based cost structure and disciplined approach to managing expenses. We also continue to focus on improving productivity, leveraging our historical organic investments in technology, and managing controllable costs. We are recognizing the benefits from our efforts, which include reducing our facilities footprint, leveraging procurement savings, and selectively adjusting headcount to align with demand. Adjusted EBITDA for the second quarter was $56 million, a decrease of 8% compared to Q2 2022. Our three-year adjusted EBITDA CAGR was 24.4%. Our adjusted EBITDA margin of 30.2% was in line with our expectations, and we continue to expect this to remain above 30% in the second half of this year. For Q2, our adjusted effective tax rate was 23.5%, adjusted net income was $35 million, and adjusted diluted EPS was 24 cents. Turning now to capital allocation and our balance sheet on slide eight. Our capital allocation approach remains disciplined and balanced between M&A, internal investments to drive profitable growth, returning capital to shareholders, and maintaining our attractive net leverage profile. Our excess cash and low net leverage provided flexibility and acted as catalysts for our recent strategic capital allocation initiatives. Our one-time special dividend of $1.50 per share, which equates to a greater than 10% return of capital to our shareholders, along with our ongoing share buybacks, reinforces our commitment to return value to shareholders. Even after the one-time special dividend announced today and the share buybacks through the end of the second quarter, we maintain the largest cash position and lowest net leverage amongst our public peers. In the second quarter, we continue to deliver strong and consistent cash flow generation with operating cash flows of $33 million. It is worth noting that this strong cash flow generation is after an incremental approximately $7 million of cash taxes paid in Q2, as we have now fully utilized our U.S. federal tax NOLs. During the quarter, we used cash to repurchase approximately $27 million of common stock, or approximately 2 million shares. Since the inception of our share authorization program last August and through August 3rd of this year, we have repurchased approximately 8.7 million shares for approximately $114 million. During the quarter, we also spent $7 million on purchases of property and equipment and capitalized software development costs. We ended the quarter with total debt of $565 million and cash and short-term investments of approximately $401 million. We also have $100 million in untapped borrowing capacity under a revolving credit facility with no outstanding balances. Based on our last 12 months adjusted EBITDA of $239 million, we had a net leverage ratio of approximately 0.7 times as of June 30th. Taking the approximately $218 million payout for the one-time special dividend into consideration, our pro forma net leverage ratio remains industry leading at approximately 1.6 times, and our pro forma cash position will still be a robust $183 million. As we have discussed in the past, our debt structure has us well positioned for the current interest rate environment. As you may recall, approximately 50% of our long-term debt is hedged utilizing an interest rate collar capped at a 1.47% one-month SOFR rate through February of 2024, and we strategically hedged another $100 million of long-term debt in the first quarter of this year. We also have no principal payments due before 2027. Even after the one-time special dividend, our interest rate exposure on the remaining unhedged portion of our debt will still be substantially offset by our interest income on interest-bearing cash deposits. Now, moving to slide nine. Today, we are reaffirming our guidance, however, at the lower end of our guidance ranges. This reflects the current hiring environment and our expectations that existing macroeconomic conditions and similar labor market trends will continue through the remainder of the year without significant changes. As a reminder, our guidance anticipated modest improvement in the second half of the year, which now does not appear to be materializing. We remain confident in our resilient business model and our ability to effectively manage those factors within our control. Accordingly, we have already taken measures to reduce our costs, to stay in line with previous guidance, and to maintain our adjusted EBITDA margins above the 30% level on a full year basis. For Q3, we expect sequential quarterly revenue and adjusted EBITDA growth, though revenue will still slightly decline on a year-over-year basis. It is also important to note that even after taking into account the one-time special dividend, which is expected to impact adjusted net income and adjusted diluted EPS by approximately $2.7 million and two cents, respectively, as a result of lower interest income. These metrics are still expected to be within the lower end of the guidance ranges. We are confident that the investments we are making in our business will allow us to grow and operate more efficiently in the future while also positioning us to improve margins and continue to generate strong cash flow. At the same time, our ability to further enhance our innovative technology and product solutions supports our commitment to our customers, especially in this dynamic environment. I will now turn the call back over to Scott. Thank you, David.
spk10: I would like to conclude our prepared remarks today by reiterating our areas of strategic focus and priorities to drive long-term profitable growth. We are a global leader in a large market with significant growth potential, and I am confident in our team's ability to execute to capture more of this market. While there are some near-term obstacles, we remain focused on our long-term growth opportunities and our continued strong cash flow, which allows us to invest and create value for our shareholders. We continue to focus on accelerating organic growth with investments in our products and solutions, including investments in machine learning and AI. We will continue to drive purposeful growth with acquisitions that expand our vertical capabilities geographical footprint and innovative solutions when available. We also continue to focus on our verticalized go to market strategy and leverage our flexible cost structure to enhance margins. And finally, everything we do centers around our corporate culture and values. Sustainability is fundamental to how we operate, and this is not only the right thing to maximize value for our business, but for all of our stakeholders, including customers, employees, partners, communities, and shareholders. Thank you very much for your time and your ongoing support. At this time, we will ask the operator to open the call for your questions. Thank you. We will now begin the question and answer session. At this time, if you have a question, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. If you are using a speakerphone, we request that you pick up your handset while asking your question to provide optimal sound quality. Thank you. We'll take our first question from Shlomo Rosenbaum with Stiefel. Please go ahead. Your line is open.
spk09: hi thank you for taking my questions um you're talking you um are talking about the strength in the pipeline and new logo activity and you know it's supposed to show up a lot in the second half of the year um we're hearing that similarly with some of the competitors as well and i was wondering what's driving this i mean we're having kind of a tepid existing you know uh volume you know levels And are you seeing clients that are looking for more vendor consolidation? Like what's driving the pipeline, the strength in the RFPs?
spk10: Yeah, Salomo, you know, great question. And it's correct. We are seeing historic highs in our total pipeline and in our late stage pipeline. So obviously those are very encouraging signs. And we also – I think your theory is correct, and it's probably two areas. One is we are seeing procurement-led deals which are looking for vendor consolidation, optimized pricing, et cetera. So that's obviously good for all three of the big guys. But we're also seeing a lot of deals just driven by the need for more automation and better applicant experience and better technology. And I think that is really just the maturity of the space. And that's also obviously good for us and all three of the public companies. So I think your theory is spot on, but I would add in the second piece of it where people are really looking for a better tech experience.
spk09: Great, thanks. If I could just squeeze in one other one. Sterling announced an exclusive agreement with Yodi for some ID services. I know you guys also have a Yodi relationship. Is there anything there? Can you talk about what you do with Yodi, and do you feel like you're going to be crimped at all by their exclusive arrangement?
spk10: No, I don't believe their arrangement is exclusive, by the way, and Yodi would tell you that. So if you talk to Yodi directly, they would say that. We were actually the first background screener to sign up with Yodi, and others have followed. I think Yodi is an amazing tech, and it's primarily for the U.K. market. So this would be the digital identity platform. services within the UK. And it is a great tech engine that we have built into our workflow and our tech experience. But Yodi is an open technology that they obviously have to approve it, but other background screeners are also partners with Yodi. So this is not exclusive arrangement, but this is a great opportunity for the entire space for, you know, background screeners with good tech to provide digital identity to the UK market, and then ultimately that should expand to Europe and other countries as well. Okay, thank you. Thank you. We'll take our next question from David Togut with Evercore ISI. Thank you. Good morning. Just bridging to Shlomo's question, can you talk a bit about sales pipelines? Are you seeing not just the pipeline but closing times? Are you seeing any change in sales cycles versus prior quarters? Sales cycles seem to be about the same. You know, as we mentioned, clearly more deals in the pipeline. Sales cycles typically run about six months in this space, and there hasn't been too much change to that. What we are seeing, which is very encouraging, is the post-close integration and onboarding cycles have dramatically decreased. So that means once you get the contract in place, we're finding our customers are going live much faster than they have in the past. And there's probably a financial reason for them to do that. If the deal is saving them money, it's in their best interest to get it up and running as fast as possible and start saving that money. So that's the only place that we've seen cycle times improve, but sales cycle times themselves are relatively unchanged. Appreciate that. Just as a quick follow-up, given your extensive experience with offshoring prior to leading first advantage, do you see additional opportunities to offshore some of your own headcount? Yeah, absolutely, and we continue to do that. So As you know, most of our initial offshoring strategies focused around India, but we have branched out. We announced a few quarters back, I think maybe Q4 of last year, opening up a tech center in Poland. We've had a great experience with our tech center in Poland. So not only getting cost savings, but we're getting access to incredible talent And not only are we using Poland for tech, but we're also using it for customer care and some operations. And as you may remember, we acquired a company in Latin America called Multilatin. And Multilatin has been extremely helpful in helping us come up with strategies around what jobs and what roles can be based in Mexico and other components of LATAM. So our outsourcing strategy has really become sort of a right-shoring strategy where we're finding replacing roles where they make sense, both from a customer standpoint and from a company standpoint. and that has expanded then our footprint outside of India to the places I mentioned, and we're considering other areas as well. We're expanding our footprint in the Philippines, for example, primarily for our APAC customers. So I think between India, Philippines, Mexico, and Poland, we're coming up with a very comprehensive right-shoring strategy. Understood. Thank you. Thank you. We'll take our next question from Ashish Sabandra with RBC Capital Markets.
spk08: Hi, good morning. This is actually David Page on for Ashish. I was wondering if you'd just provide a little bit more color on how you're sustaining the 30% plus EBITDA margin given some of the macro headwinds and maybe a little bit of lower year-over-year sales growth. And
spk06: the extent if ai is playing a role in that i know it's early days for ai but maybe some of the cost savings benefits from ai investing thank you well as you know we invested early and heavily into technology and automation we continue to do so we also have a very variable cost structure particularly from an operational perspective We can run five days, six days, seven days. We can run multiple shifts. We manage a lot of volume through overtime. And we are very disciplined about matching headcount with volume. And so that's number one. Number two, in today's macroeconomic environment, We are continuing to look at costs. We've been able to reduce some costs relative to software licenses, insurance costs. We've taken out selective SG&A headcount costs. So we're committed to maintaining a 30% plus EBITDA margin. We've proven that now time and time again over the past three years, and we're very confident that we can continue that.
spk10: And let me give it a little more color. I mentioned in my prepared marks, you know, the AI that we use in our customer care centers and operations. Just to give you an example of that and how it helped us, you know, maintain the 30% is we've launched a new program within our customer care called Click Chat Call. So Click Chat Call is our strategy in customer care where as you can You can see from the order in which I gave them, call is the last option. So we are giving AI-driven tools to our customers and their applicants on how to leverage click and chat through AI tools instead of call. This has been received so well by our customers and applicants, our customer satisfaction scores are great, you know, through this launch of this strategic change in customer care. And it has, again, not only driven higher CSAT scores, but it's allowed us to do more with less people and hence reducing headcount in our customer care centers. And that's helped us with the 30% as well. So we get the best of both worlds there with leveraging AI tools and saving money. Thank you. We'll go to our next question from Andrew Steinerman with J.P. Morgan.
spk04: Hi, it's Andrew. Could you just talk about cross-sell, up-sell again? I think the percentage in the quarter was about 3%, and I think you said that you expect second half in that cross-sell, up-sell revenue contribution to get better. Could you just discuss your confidence in that dynamic?
spk06: So, Andrew, just to give you the numbers, it was 3.5%. It was $7.1 million. And in Q2. We have some upsell, cross-sell in our pipeline that got deferred by a quarter or two, but it's from a major existing customer, obviously, and they have plans to move forward with it. It just got pushed back a quarter. Okay.
spk10: Thank you. Thank you. We'll take our next question from Stephanie Moore with Jeff Rees.
spk03: Hi. Good morning. Thank you. I wanted to touch on your new business wins that you saw in the quarter. Continue to see nice growth there. If you could talk a little bit about the competitive landscape and where you think you're seeing the majority of those new wins. Thank you.
spk10: So it's interesting. We've been actually tracking this data for a while now. And I think I've reported this on prior calls. We're getting the enterprise wins pretty evenly across what we call the three competitive buckets, one being the large public peers, two being midsize, and three being mom and pops. It's really a pretty equal percentage across all three buckets when you look at number of units. And that, we feel, is a very healthy sign because, as you know, this is still a very fragmented market. It's a $13 billion TAM with still lots of players. So the fact that we're taking equally across all three buckets is a trend that we want to see continue, and it's been happening that way for a good year or so. We are seeing it also fairly evenly across verticals. There's nothing that really stands out as a lot of winds coming from a vertical or two verticals. They're still pretty evenly across verticals, although we continue to have real good success in transportation and in retail e-commerce, which are two real strong verticals for us. But nothing really different about any of those trends other than what we mentioned to Shlomo's question, which is we are seeing more procurement-led deals with vendor consolidation. So we do expect the new logo pipeline to continue to remain strong.
spk03: Great, thank you so much.
spk10: Thank you. We'll take our next question from Manav Patnik with Barclays.
spk07: Hi, good morning. This is Roni Kennedy from Manav. Thank you for taking my questions.
spk02: The reference to the historic high and total pipeline, and I think the responses to the previous questions on new bids, cross and upsell, A couple of guiding to the low end of the range, the comments that initially anticipated improvement, 2H doesn't appear to be materializing.
spk07: Can I confirm that this implies further deceleration for what has been referred to as the wild card of pure base growth?
spk02: And what are the drivers, you know, whether it's regions, specific verticals, Because it sounds like the macro seems to be consistent with your expectations. So, Roman, what that implies is base growth will remain negative in the second half of the year. We do believe that. But base growth was also slightly negative in the second half of 2022. So you now have a negative and a negative. Sequentially, we are seeing quarter over quarter growth and seeing improvement.
spk06: But we are being dragged down right now by our international operations, and we need India and APAC to bounce back.
spk02: But we feel good about the U.S., and we think base growth will be improving while still being negative. Okay, thank you. Can I just reconfirm the rationale around special dividend? I know you said, you know, the expectation is for capital allocation to remain balanced and consistent.
spk07: But are there, you know, any implications for this is the type of thing that can happen in such a dynamic or, you know, obviously a function of share price with regards to the buyback? If there's any implications for long-term capital allocations,
spk06: then also on on m a just if you can comment on on the pipeline and what you're seeing from a valuation standpoint well first from a special yeah from a special dividend perspective we just had a lot of cash sitting on our balance sheet and very low leverage This special dividend isn't going to preclude us from doing anything else. It's not going to preclude us from pursuing M&A opportunities.
spk02: In fact, we are actively pursuing M&A opportunities, and Scott will comment on that momentarily. But even after this dividend, our leverage is only going to be 1.6 times. We're still going to have have $183 million of cash on the balance sheet. We're not borrowing any money to fund it. We're still going to have the strongest balance sheet by far of any of our public peers.
spk06: So we just felt it was the right thing to do.
spk02: The other point was we're continuing to buy shares, but we didn't want to move this more into the share buyback program because the float's starting to get a little difficult. We've already bought back 8.7 million shares. It's becoming a little more difficult to accumulate a big position. and we didn't want to do that to our existing investors. So we thought this was the right allocation. Yeah, and on the M&A side, just to answer your question there, and I think we've been talking about this for the last couple of quarters because we certainly started to see change in the pipeline maybe six months back or so so the overall you know high level is that there are certainly less deals in the pipeline But those deals tend now, for some reason, which we can't explain, but the deals tend to be a little higher quality companies that we're seeing now. But valuations are still high. So our M&A strategy has not changed. um you know and we as we mentioned in the prepared marks you know we've done you know four deals uh in the last two years and they've all been home runs um because we stick to our strategy um and we're looking for good strategic fits that could be growth accelerators and as I mentioned in the prepared marks either enhancing our vertical story expanding our geographical footprint or giving us you know a product or tech you know that That will help us grow. We'll continue to look for that, and we certainly are talking to companies, and we certainly are looking at things, but overall pipeline is definitely lower. But there are still some high-quality companies out there, but valuations are still a challenge. Thank you. Appreciate it. Thank you. As a reminder, if you would like to ask a question, please press star one at this time. Our next question comes from Kyle Peterson with Needham.
spk05: Great. Thanks. Good morning, guys. I wanted to start off as kind of a piggyback on Ronan's question on the special dividend. Obviously, you guys said this business seems to generate quite a bit of cash. You guys have a strong balance sheet. Would something maybe a more recurring regular dividend be something you guys would consider as another way to deploy capital and potentially open up the investor base a little bit down the road? Or do you think that given kind of the more volume sensitivity of the business, that special dividends are kind of the way to go, at least for the foreseeable future.
spk02: Well, what we can tell you right now, Kyle, is this was a one-time special dividend. We always look for ways to maximize shareholder value. What you're asking in regard to an ongoing dividend is really a board-level kind of conversation. We consider all ways to maximize shareholder value, but it's, you know, nothing imminent. Understood. That's clear. And just as a follow-up on, you know, the revision of the guidance, I know you're kind of steering us a little bit more towards kind of the lower end, I guess. Is the direction can change in the outlook? You know, is that mostly due to some of the softness? I know you guys called out Indian IT services and BPO providers. Indian IT services and BPO providers, is it mostly hiring and that? arena, or is this a little more broad-based that just makes you guys kind of direct us a little bit more towards the low end of the guide? Well, keep in mind, we didn't change the guidance, right? We are directing you towards the lower end, but part of the factoring in that arena Original guidance was the fact that we could have some softness in certain areas. At the upper end of the guidance, we anticipated improvement in the second half of the year. Keep in mind, this was given back in February, right? And there are a lot of uncertainties. Now they have continued to evolve. have seen sluggishness internationally. America's hanging in there. But we are still experiencing some base growth. So we feel pretty good that we're still staying within our original guidance ranges, even though we are pointing you towards that lower end. All right, fair enough. Thanks, guys. Thank you. Our next question comes from Pete Christensen with Citigroup. Good morning. Thanks for the question.
spk07: Scott, I wanted to dig a little bit into the comments on BTO IT services in India.
spk02: We know that that space at least has been hampered a little bit by the AI scene. Just curious if there's any read-through there for generative AI, perhaps taking over more and more tasks as Do you see that as an input to the global higher-end growth coming from that specific vertical? Thank you.
spk10: Pete, I don't think so yet. Obviously, that is something to keep an eye on for that space, especially the BPO space. You know, we're many, many, many years away from, you know, AI, you know, writing code and things like that. But certainly it should and could impact the BPO space, just as we've proven with our own call center rollouts. But I still think we're way early days. And I think what's dragging the IT services and BPO companies down is not AI, but it's the macro. They're still doing okay. because just think about who their customers are.
spk02: They're primarily the big M&Cs from the U.S. and Europe, and those companies are still sending work there because that's obviously low cost for them. But what's really interesting hitting them is that those companies or their customers aren't actually, they're delaying new projects, and they're delaying ramp-ups. So if you talk to the IT services and BPO companies, especially out of India, a lot of of them have delayed their annual hiring of freshers out of college. And most have pushed them to late fall. So that's good indicator that their customers, the big MNCs, are delaying projects and ramp-ups. But business is still pretty good for them because the existing projects aren't being canceled, but it's the new projects that aren't being ramped up. And that's where, you know, then it comes downstream to us where they're just not bringing on as many people as they had in the past. But I think, you know, once the macro, you know, swings back, you know, their business will swing back pretty quickly. But I would expect that to be a delay to the U.S. macro because the U.S. macro has to come back first for India IT services and BPO to come back. So there should be a quarter or so delay in that. But, again, their businesses are still pretty good. It's just the new projects that are being delayed. Yeah, I appreciate that. That's a really helpful call. I know it's way off. Just curious how you think strategically about your client mix and their exposure to AI in the future. And if you're thinking about strategically altering your client mix, given that. Thank you. Love the question. And actually, we're feeling really good about this because if you think about our customer base and our go-to-market, you know, we're really sort of positioned for high-volume hirers. And high-volume hirers primarily – you know, in the hourly worker space and things like that. And I think AI's impact on, you know, the hourly worker, you know, a distribution center worker, a forklift driver, a truck driver is going to be minimal. You know, AI is certainly going to affect, you know, tech and other full-time employment sectors, which isn't as big of a footprint for us.
spk10: So we actually are in the, you know, we're actually in a double-down strategy on our existing strategy. because we love it, because high-volume hires in our space with a lot of turnover, a lot of volume, and they love our automation and our speed, and that's why we win. And I don't think AI will have a huge impact on our customer base. Obviously, we've got lots of customers, so it will affect some down the road, but the majority of our go-to market is spot on where AI won't have an impact.
spk02: That's super helpful. Thank you, Scott. Thank you. At this time, we have no further questions in queue. I will now turn the call back to Scott Staples for closing. Thank you, Operator, and thanks, everyone, for your participation today. Have a great day. This does conclude today's call. We thank you for your participation. You may disconnect.
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Q2FA 2023

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