HireRight Holdings Corporation

Good afternoon, ladies and gentlemen, and welcome to the Higher Right Third Quarter 2021 Conference Call. Joining today's call is the company's President and Chief Executive Officer, Guy Abramo, and Chief Financial Officer, Tom Spaeth, and other members of the Senior Management Team. At this time, all participants are in listen-only mode. I remind everyone that management will refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures is included in the press release issued today, which is available in the Investor Relations section of Higher Rights website. Also during this call, management's remarks will include forward-looking statements related to higher rights market opportunity, customer retention, competitive differentiation, pandemic recovery, strategies including technology investment to increase revenue and margins, growth potential for specific customers, and industry sectors in our international business, future cash flows, operational improvements, and guidance for 2021 revenue and adjusted EBITDA and 2022 adjusted EBITDA service margin improvement. Such statements are predictions and actual results may differ materially. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the prospectus S-1 filed with the Securities and Exchange Commission in connection with the company's initial public offering, in particular in the sections of that document entitled Risk Factors, Forward-Looking Statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations. Now it's my pleasure to turn the call over to Guy Abramo.

Thank you, Operator. Good afternoon, everyone. We're pleased to have you with us for our first conference call as a new public company. With the IPO behind us, the entire higher-rate team is now focused on the creation of long-term shareholder value. For those of you not familiar with us or our industry, let me begin with an overview. First, what we do is highly valued by our customers. Our main role is to ensure that their prospective and current employees and contractors don't pose a potential safety risk to the company, the people employed by them, or the assets they have been charged with safeguarding. In addition, we also help our customers maintain compliance with the ever-changing local, state, federal, and international laws and regulations surrounding background screening and hiring practices. Our systems are tightly coupled with their human capital management systems, and our services are securely embedded in their everyday workflow. We have a world leader in size, capability, and global delivery. Our scale and scope enables us to conduct global screens, compete in the fastest-growing regions of the world against small local players, and invest in the comprehensive solutions and account management demanded by enterprise customers. We serve a large vented market, estimated at over $5 billion, and have an even larger under-penetrated white space opportunity in terms of further geographic adoption and product expansion. We have a long history of mid-to-upper single-digit growth with a compound annual growth rate of just over 7%. That foundation of growth is built on a reoccurring revenue model, exceptionally strong customer retention rates, and an average customer tenure of a bit more than nine years. But the best part of the HiRite story is what sets us apart, what differentiates us from other players in our industry. Let me explain. First, we have several proprietary databases that allow us to provide more comprehensive searches than any of our peers. These provide a unique competitive advantage in many ways. One of them manifests itself in customers telling us that we find more hits in the background screenings we conduct. In fact, when a leading gig economy transport network company pitted us against other industry players, they found that we identified materially more hits in the backgrounds of the drivers we screened. The combination of the databases we have built and the processes we use led to that result. We're the only player with a single and unified global platform that allows our customers one point and one point only for integration in any country we serve them. This allows them to unify their screening programs no matter where in the world they operate. That same platform also allows customers to take advantage of unique local requirements as well as our global breadth. Because of that, we are willing to share with large multinational companies that seek to consolidate screening providers into a company like HireRight that can provide the expansiveness of the global solution and the on-the-ground knowledge of local and in-region account management. Third, we have the industry-leading API Connect platform for applicant tracking systems, or ATSs, integrations. We support over 75 ATSs, and that number is growing every year. These companies are critical solution providers that support our customers' entire human capital management supply chain. These ATSs, in combination with our own cloud-enabled SaaS products, form the means of how data and information flow between us and our customers. In fact, it was 20 years ago just this year that HiRite pioneered the first such integration with PeopleSoft on behalf of one of our large global technology customers. Today, we maintain that leadership position for the industry, and our current market-leading providers like Workday, UKG, SAP, ServiceNow, and to this day, Oracle, who acquired PeopleSoft in 2005, and their recruiting cloud platform. Fourth, from a go-to-market perspective, we focus on and target industries that require the most complex screening programs, tend to be heavily regulated, and place an emphasis on compliance and applicant experience. While we have customers across all industries, our investments in platform, product, and technology offer a unique value proposition for global technology leaders, including gig players. financial services companies, transportation providers, and healthcare companies. Our industry vertical teams are experts in our customers' businesses, the nuances of how they operate, and the unique traits required for pre-employment and post-employment screening. And in keeping with the theme of complexity, we also specialize in serving the needs of the highly fragmented small and medium business community. To serve them, we have built an e-commerce online self-service platform called backgroundchecks.com. This platform allows us to provide unique solutions to SMBs and others in the segment that, as you will likely already know, hire half of all US workers. And fifth, and yet another industry first, we developed a unique and innovative product called Compliance Workbench that customers rely on to track, follow, and adhere to the rapidly changing regulatory environment surrounding hiring and what they can and cannot ask in the screening process. With that background, let me turn my attention to our performance during the third quarter of this year and our first quarter to be reported as a public company. I'll then turn to our vision for HireRight, describe how our strategies are yielding results, and discuss why we're so enthusiastic about the opportunities ahead. Tom will then provide more detail on our third quarter results and present our full year outlook. During the third quarter, we generated total revenue of $205 million, up a robust 57% over the corresponding prior year period, which was pandemic-impacted. Service revenue was $152 million, an increase of 55% over the third quarter of 2020. We continue to see broad global improvement in business conditions, and higher ed is actively capitalizing on the opportunities. During the quarter, we achieved meaningful growth in our new revenue bookings and further improved our already strong retention metrics. Now, more than halfway through the fourth quarter, these favorable trends have continued. The strength is widespread across the industries and markets we serve and significantly in every region of the world. In terms of profitability, we generated adjusted EBITDA of $51.6 million, up 84% relative to the prior year third quarter, and reflecting a healthy 34% margin on service revenue. We see strong potential for further upside, as I'll discuss in a moment. Taking a look at our key metrics, new customer bookings were strong during the quarter at $23 million benefiting from the continued investments we've made in technology and our customer and applicant-facing platforms. These investments have helped us establish a unified global platform that we believe is competitively differentiated and that is directly helping to drive these new wins. In addition, our customer retention rates continued to trend higher with net revenue retention at 134% year-to-date, reflecting the strength of our offering and and our ability to continue to expand our wallet share with our existing enterprise customer base. Let me now turn my attention to our vision for the future, our specific growth and margin enhancement strategies, and how our goals align perfectly with the secular trends and the opportunities that have been building over the past year. Although HiRite is a diverse international customer base spanning every major industry, as I discussed in my opening remarks, Our key target industries continue to be healthcare, technology, financial services, and transportation. These are all industries that tend to have highly complex screening needs driven by the diversity of the jobs in their employee bases, the need to source candidates from across the globe, the complexity and reach of regulations that govern their businesses and associated hiring practices, and the need to deploy screening solutions that are very broad in scope and depth. These challenging criteria are where we excel, hence making us a leader in these demanding markets. As testimony to our success in satisfying these needs, during the third quarter, we continued to ramp one of the world's leading healthcare service providers, as well as several pharmaceutical firms. These new customers reflect our continued growth in serving the broader healthcare community, whether in support of hiring related to patient care, research, development, vaccine distribution. We are pleased to add these marquee customers to our portfolio and have begun to see meaningful incremental order volumes that contributed to our record third quarter results. Another point I would like to emphasize from my earlier comments is that we are the only major global background screening company to have a purpose-built e-commerce solution to easily and efficiently serve the hiring needs of small and medium businesses. SMBs hire nearly half the labor in the U.S. and are a critical engine fueling the economy. As a category, SMBs were the hardest hit during the pandemic and are also the slowest to recover. As improvements in their business environments begin to accrue, we expect to see improving volumes from them and are encouraged by their growth potential. As for more emerging customer industries, we continue to make progress with the gig economy leaders as well. As more and more of the workforce opts for gig work, we are well positioned to service the companies that depend on such workers. During the past quarter, we announced a partnership with Uber and Lyft and their groundbreaking industry-sharing safety program designed to enhance customer safety in the ride-sharing industry. We look forward to a long-lasting and beneficial partnership with these industry leaders. Another area of focus is to further accelerate our international expansion. HiRite is truly a global player, serving customers in over 200 countries and territories. Our investments in Europe, Asia Pacific, India and Latin America are driving strong growth in these regions. In fact, our international orders are growing more than twice as fast as U.S. orders, and we expect that to continue as we expand with our large multinational customer base. An example of this is our new large healthcare customer I mentioned earlier that is already expanding with us in Europe, India, the Philippines, and soon-to-be Latin America. And you're pleased to announce the opening of our Latin American headquarters based in Mexico City. Our ability to service our global customers with one unified platform creates what will continue to be a competitive differentiator for us. Lastly, I also want to cover our plans to significantly improve gross margins over the next two years through continued investment in technology solutions that streamline and automate the fulfillment process while improving the customer and candidate experience. Our investment priorities up until this year were focused on completing the build-out of our unified global platform creating industry-leading customer and candidate-facing applications, and migrating customers brought onto our platform through acquisitions. Now, our focus is turned toward technology investments aimed specifically at automating more of our back-office processes and maximizing the usage of our industry-leading data assets. Our emphasis is on driving automation and process improvement with the continued use of robotic processing automation, natural language processing, and other cloud delivered technologies that will reduce the cost of our back office researchers. Combined with our growth strategies, we believe these margin enhancement strategies will allow our profitability growth to nearly double our revenue growth going forward. In closing, I'd like to reiterate how excited we are to have completed our IPO and to capitalize on the positive momentum now building for our business. We're in an attractive growth industry with the broadest suite of services and operational expertise and a strong financial foundation that allows us to execute on our strategic business plan and create meaningful long-term shareholder value. With that, I'll turn the call over to Tom for a closer look at our third quarter financial performance and our outlook for the balance of the year. Tom?

Thank you, Guy. Good afternoon, everyone, and thank you for joining our call today. I will echo Guy's remarks that we are excited to be reporting our first quarter as a public company and appreciate you being with us today. Starting with an overview of third quarter results, revenue was up a robust 57% year over year as business continues to rebound. While the year-ago quarter was pandemic-affected, I'll also note that third quarter revenue was up more than 23% relative to 2019 third quarter and represented a new record high for the company. In addition, our service revenue was up 55% over the same period last year and also was at an all-time high. From an industry perspective, we continue to see strength in our largest industries, such as healthcare, which grew 35% sequentially in the quarter. In addition, this quarter, we saw improvement in government, education, and nonprofit, which grew 50% sequentially. And while our transportation industry has begun to recover, it generally remains below its pre-pandemic levels, offering continued growth potential as the recovery will come. As we all know, the country depends on this industry. Geographically speaking, Indian APAC customers continued on their torrid pace with sequential growth exceeding 20%. LATAM and EMEA also grew sequentially at 20%. Our new business bookings have been strong throughout the year, and the associated new revenue has started to pick up, reflected in the full year outlook I'll discuss in a moment. New business revenue was nearly $11 million in the quarter. Our cost of service, excluding depreciation and amortization, at 54.3%, increased 100 basis points year over year, largely driven by increased data costs. The accelerated ramp in the economic recovery placed demands on our operational teams, and now with the added capacity, we are confident that we are getting ahead of that curve and expect to see continued gains in this area. Our SG&A expense improved by $1 million on lower merger integration costs related to the higher IGIS merger, partially offset by costs associated with going public. These merger-related costs are largely behind us as we maintain our focus on cost management. Our adjusted EBITDA of $51.6 million was up 84% in comparison to third quarter 2020. The strong performance largely stems from the significant recovery in volumes coupled with improving leverage in our cost of sales. Our balance sheet is now a source of strength, allowing us to grow the business and capitalize on opportunities as they arise. With the IPO proceeds, we've reduced our net debt position from $1 billion to approximately $650 million. Subsequent to the IPO, we repaid our $215 million second lien loan in full and are evaluating the retirement of a portion of our first lien debt. There were $10 million in outstanding borrowings on the revolver at the end of the quarter, which have subsequently been repaid. According to our outlook for full year 2021, While the recovery from the global pandemic remains fluid, we expect our strong operational and financial performance to continue. In spite of the fact that the fourth quarter tends to have some seasonal slowdown due to the holidays, with about half the quarter behind us, we've seen a continuation of favorable trends with strength across the markets we serve and revenue surpassing pre-pandemic levels. This includes strength in our international markets, which we expect to continue. Based on the current expectations and current market conditions, we expect full year revenues to be in the range of $713 million to $716 million, and we expect full year adjusted EBITDA to be in the range of $157 million to $160 million. While we are not officially providing our 2022 outlook yet, Over the next few years, we expect to deliver high single-digit organic growth augmented with our M&A efforts. And given our margin enhancement strategies detailed by Guy earlier in the call, we expect our adjusted EBITDA to grow 15% or more annually over the next three to five years. We look forward to finishing the year strong and keeping you posted on our progress. With that, I'll turn the call back to Guy for closing remarks.

Thanks, Tom. I want to thank everyone for joining us today. To close out our call, let me just highlight a few key points worth remembering about HireRite. What we do is highly valued by our customers and deeply integrated into their HCM supply chain. We're the world leader in size, capability, and scope, and serve a large vended market of over $5 billion. We have exceptionally strong customer retention rates and average tenure over nine years. Our proprietary databases allow us to find materially more hits in our background searches. We pioneered the first major integrated screening program 20 years ago this year and continue to lead with partnerships with over 75 ATS providers. The technology behind our unified single global platform and its benefits to global customers is helping us to win share on large multinational deals. We succeed in industries that require difficult, complex, and diverse solutions that are the hallmarks of large global technology, healthcare, financial services, and transportation companies. We use that same expertise to provide an easy-to-use e-commerce solution to serve the highly fragmented SMB market. Lastly, we delivered very strong performance during the third quarter, born from a recovering economy, new customer wins, and success in increasing wallet share with our existing customers. As Tom mentioned, we expect to see our strong operational and financial performance to continue in the fourth quarter. With that, and from our entire team at HireRight, we appreciate your support and want you to know that we're working hard on behalf of our shareholders each and every day. We look forward to updating you on our progress next quarter and hope that you remain safe in the months ahead. Thanks for being with us, and please don't hesitate to reach out with any additional questions. Have a great evening.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.