First Advantage Corporation

Good day, everyone. My name is Ashley, and I'll be your conference operator today. I would like to welcome you to the First Advantage third 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 a 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 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. 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.

Thank you, Ashley. Good morning, everyone, and welcome to First Advantage's third 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 guaranteed for 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 FEC, including our 2022 Form 10-K and our Form 10-Q for the third quarter of 2023 to be filed with the FEC. Such factors may be updated from time to time in our periodic filings with the FEC, 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'm 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.

Thank you, Stephanie, and good morning, everyone. Thank you for joining our third quarter 2023 earnings conference call. Beginning on slide four, we had a very productive quarter, and I want to thank our team for their continuous dedication in delivering value to all our stakeholders. During the quarter, we achieved many financial objectives and strategic goals. Our third quarter results were in line with the expectations that we previously communicated, with both revenue and adjusted EBITDA improving sequentially. Our disciplined cost management, along with our flexible business model, enabled us to maintain our industry-leading adjusted EBITDA margins and to continue to generate strong operating cash flows. Our robust cash flow and healthy balance sheet allow us to continue to execute our long-term growth strategy centered around value creation through further automation, data ownership, and new products, even in a challenging macroeconomic period. We remain committed to our disciplined and balanced capital allocation strategy, as evidenced this quarter with our acquisition of Infinite ID, payment of our one-time special dividend, and ongoing share repurchases under our existing program, which was recently extended through December 2024. Even after taking our capital deployment actions into consideration, our balance sheet remains strong with industry leading leverage of just 1.7 times and cash of $167 million. We continue to have ample liquidity to fund future investments in our business. I am proud of our team's ongoing commitment to providing our customers with the latest in market leading technology and solutions, which has enabled us to maintain our strong customer retention rate of 97% across our diverse range of verticals. We also continue to expand our network of strategic referral partners, both domestically and internationally, with more than 75 current integrations and partnerships. Our overall pipeline remains robust, including both new customer and upsell cross-sell opportunities. During Q3, we booked eight enterprise deals representing nearly $13 million in annual contract value, several of which already started to generate revenue. This momentum is further evidence of our customers' continued confidence and trust in us. Turning now to our business highlights on slide five. In the third quarter, we generated revenues of approximately $200 million, down a modest 2.7% from last year, which is a significant improvement in the year-over-year trend from our first half results. We grew quarterly revenue dollars sequentially and saw month-over-month sequential improvement throughout the third quarter. Additionally, our three-year LTM organic revenue CAGR of 17%, remains substantially higher than our long-term target of 8% to 10% growth. In our Americas segment, total revenues were flat compared to prior year and continue to benefit from positive growth in new customer, upsell, and cross-sell. In the U.S., consumer confidence continues to be above last year's level, and consumer spending remains robust going into the holiday season. Job openings to unemployment numbers remain relatively high by historical standards. Hires have been stable, and quits, particularly as it relates to the salaried workforce, have been slowly decreasing. Higher interest rates and higher unemployment are also partially mitigating these trends. In our international segment, we experienced a revenue decline of over 18 percent, driven by APAC and India. Our European operations, which experienced positive revenue growth in Q3, have shown more resiliency. It is also worth noting that our direct exposure to China at less than 1% of our total revenues has little impact on our business. David will elaborate on our segment performance shortly. From a vertical perspective, we are seeing increased hiring demand in transportation and healthcare and continued stable demand in retail and e-commerce. Similar to last quarter, technology, financial services, and business service sectors have continued to experience a decline in hiring volumes. Adjusted EBITDA was nearly $65 million, and our adjusted EBITDA margin was 32.3%, both outperforming Q3 of 2022 and significantly higher than our first two quarters of this year. We are very proud of these results and remain focused on managing our costs and flexing our operations with demand while also expanding our industry leading automation efforts and driving further margin expansion. We continue to expect adjusted EBITDA margins above 31% for the full year while maintaining a high quality of earnings. This quarter, We made great progress on our strategic priorities, including investing organically in our products, data, and automation solutions, strengthening our portfolio with M&A, and maintaining a balanced capital allocation strategy. Collectively, these initiatives enhance our customer value proposition, drive our sustainable competitive advantage, and fuel our long-term growth objectives. Now, let me take a moment to discuss each of these three areas in greater detail. First, we continue to invest in our AI technology, data, and automation initiatives to grow our competitive advantage and drive adjusted EBITDA margin expansion. Our smart hub, click chat call, next gen profile advantage, and instant employment verification solutions are excellent examples of this. With smart hub, we are seeing an acceleration in customer adoption. This technology is our proprietary AI-driven intelligent router that essentially sits on top of our large and growing verified database. SmartHub enables us to quickly search across multiple data sources to determine the optimal verification source based on speed, data quality, and cost effectiveness. Through AI and machine learning, this technology delivers a great experience and cost savings to our customers. Our AI efforts also continue to evolve and expand with customer care. In the third quarter, we rolled out our innovative click chat call offering globally, which provides customers with one user-friendly common portal and uses predictive intelligence for support. This initiative has driven operating leverage through process automation and headcount reductions while enabling higher customer satisfaction scores. Additionally, We are in the early stages of rolling out our next-gen Cofile Advantage platform in the US, which is our API-first technology interface used by applicants through either a computer, tablet, or mobile device. With a redesigned user experience and interface built from the ground up, responsible generative AI, it provides a personalized applicant experience tailored to the specific job screening requirements. In addition to these solutions, we are constantly looking for innovative ways to enable our customers to hire smarter and onboard faster. For example, we recently launched an instant employment verification service in the UK and India markets. This digital-first, fully integrated solution reduces friction in the applicant process and reduces the time required to perform checks, leading to quicker onboarding. Through our investments and upgrades in technology, automation, and AI, we are creating solutions that are faster and easier for our customers and their applicants. These investments also enhance our customer value proposition, benefit how we operate, and are a major driver of our long-term profitable growth. We see this as a win-win-win for our customers, their applicants, and for First Advantage. Second, We continue to build on our solid foundation and expand our portfolio through M&A. Over the past two years plus, we have successfully completed five acquisitions, including the latest and largest, Infinite ID, which we closed on September 1st. These acquisitions align with our strategic goals by expanding our product offerings, vertical exposure, geographic reach, and technology capabilities. Each of our prior year acquisitions has outperformed our financial objectives and outpaced their growth plans by being part of First Vantage. This is evidence that our M&A strategy is providing returns and creating value. Taking a closer look at Infinite ID, this business is a U.S.-based digital identity solutions provider that supports our product innovation and digital strategies.

This addition allows us to better serve our enterprise customers in regulated markets like healthcare, financial services, and not-for-profit. these technology complements our other identity verification and