HireRight Holdings Corporation

Good afternoon, ladies and gentlemen, and welcome to the HireRight first quarter 2022 conference call. Joining today's call is the company's President and Chief Executive Officer, Guy Abramo, and Chief Financial Officer, Tom Spaeth. At this time, all participants are in a 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 2022 revenue, adjusted EBITDA, and adjusted EBITDA 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 statement is contained in Form 10-K, filed with the Securities and Exchange Commission, 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, and good afternoon, everyone. We're pleased to have you with us today to discuss our strong first quarter results. While there is plenty of turbulence in the global economy these days, one thing that has remained consistent is demand for talent and the increasing options of employment for candidates. With more than 11 million job openings in the U.S. alone, the competition for people has never been higher. This demand, coupled with an ever-increasing mobile workforce, continues to drive the need for efficient and effective talent acquisition and management solutions. We feel HiRite provides the best partnership and solution to the global market through our united global platform, proprietary databases, compliance-centric approach, and industry-leading customer support. Our customers rely on us to deliver for them with speed, precision, and innovation, and this industry leadership is reflected in our strong financial performance. During the first quarter, we generated total revenues of $199 million, up a robust 33% over the corresponding prior year period. We continue to see strong demand for our high-quality solutions across all of our regions and verticals. During the quarter, we not only retained and expanded relationships with our existing customer base, but also had a strong quarter for new customer revenue and new customer contract signings as well. In terms of profitability, we generated adjusted diluted earnings per share of 37 cents. Adjusted EBITDA was 41.7 million, up 55% relative to the prior year and reflecting a 21% margin, up more than 300 basis points. We see strong potential for further upside as we'll discuss in a moment. Taking a look at our go-to-market success, New customer bookings were strong during the quarter, benefiting from the continued investments we've made in technology and our customer and applicant-facing unified global platform. New clients tell us that our single platform, along with our unified global account management, are clear differentiators that appeal to them and are directly helping to drive these new wins. In addition, our customer retention rates remain very strong, both on a gross basis and net basis for the quarter, reflecting the organic growth of our customers, the strength of our offering, and our ability to expand wallet share with our existing enterprise customer base. Additionally, we have even seen some former customers return this past quarter. We had a Fortune 100 customer in technology and one in financial services, among others, returned to us after spending some time with a few other global players. One of the reasons we are maintaining such high retention rates and see more and more customers coming back to HireRight is our clear leadership in quality and compliance. In multiple customer case studies with either new or returning customers, we have offered our version of the Pepsi Challenge. We offer to rescreen customers' employees who had been previously screened by another provider. In each case where our customers have accepted this challenge, we have found extensive missed hits by the prior background screening firm. In one case, we found more than 500 felonies missed by the previous globally recognized provider. In another, it was more than 1,200. As I have said before, at our heart, we are investigators, and it is incumbent upon us to provide the most thorough background screen possible. We do this through a combination of our extensive databases, quality, our compliance programs, extensive training, and ever-increasing levels of automation, which I will address in a moment. Now turning back to our success during the quarter. While we have seen strength across the globe and across all industries, It is particularly true in some of our key target industries, such as healthcare and technology, which both grew more than 40% over the prior year. We focus on these and other industries like transportation and financial services because they 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, we continue to add new large global enterprise customers in these industries during the quarter. Another area of focus is to accelerate our international expansion. High-rate 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. Our international revenue continues to grow significantly faster than the U.S., as revenue derived from international applicants exceeded 15% for the quarter. We are seeing growth in these international markets driven by both large multinational companies as well as large local companies in these countries. We have made investments in Mexico, Brazil, Malaysia, the Philippines, India, and other countries to provide the best local support with the power of our global platform behind it. Our ability to service customers with one unified platform creates what is a strong competitive differentiator for us. Now turning back to automation and technology initiatives. Our investments are designed to expand our reputation as the industry benchmark in terms of precision and innovation. To recap from our previous call, we have partnered with a leading global IT services firm to streamline and automate the fulfillment process while improving the customer and candidate experience. As we have discussed, this is a two-year journey that we expect to complete at the end of 2023. Our focus is on technology investments and specifically 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 robotics process automation, natural language processing, and other cloud-delivered technologies that will reduce the cost and improve quality and efficiency of our back office researchers. We believe these margin enhancement strategies will drive double-digit profitability growth. I am pleased to report we are testing the first modules of this program as we speak and are very happy with the results. It is also important to note that the program will be delivered in phases that will add incremental benefits along the way, rather than waiting for the completion of the program. To that end, we are looking forward to realizing some of these initial benefits in the second half of this year and building on that success through 2023. In closing, we're excited about the positive momentum now building for our business and the progress we are making in technology and with our expanding customer base. We're 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 first 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 such strong results and appreciate you being with us today. Starting with an overview of first quarter results, revenue was up 33% year over year as strength in the hiring market continues and we continue to win new customers while expanding wallet share with existing customers. I also note that our revenue growth is 100% organic. The strength in our top line coupled with our continued focus on productivity improvements led to our adjusted net income and corresponding diluted earnings per share to more than triple over the prior period. In addition, adjusted EBITDA increased 55% over the prior year period, while adjusted EBITDA margin improved by more than 300 basis points to 21%. I'll now walk through some of the drivers of this strong financial performance. From a revenue perspective, we continue to see strength in our largest industries, such as healthcare and technology, which grew more than 40% over the prior year. And while technology and healthcare continue to stand out, each of our tracked markets grew in excess of 20% versus the prior year. As is typical for us, international markets outpaced the U.S. with a 47% growth rate. Strength in international markets was widespread, but led by India, Latin America, and Canada. All of this momentum contributed to our overall top line, which again grew organically 33% over the prior year. This outperformance helps demonstrate the leverage in our operating model as we saw significant margin expansion. In addition to the inherent leverage in our model, we made progress in our productivity and offshoring initiatives that further contribute to our strong bottom line. As Guy mentioned earlier, we are still in the early stages of our margin improvement plans and look to continue to outperform the industry in terms of earnings growth. Part of this improvement was delivered through reductions in our cost of service, excluding depreciation and amortization, which at 56.6% was 100 basis points better than the prior year period, primarily driven by increased productivity and international mix. Our SG&A expense was higher by $9 million, which reflects a 200 basis point improvement as a percent of revenue. Excluding stock comp increases, SG&A would have reflected nearly a 300 basis point improvement from 26% of revenue to 23% this quarter. And more than $3 million of the increase in SG&A was related to new public company costs, including accounting and legal fees, as well as insurance. Now turning to adjusted net income, which increased by 320% from $7 million to nearly $30 million in the quarter. In addition to the improvements we saw in our operating performance, we benefited from a $10 million reduction in interest expense, largely driven by our improved capital structure, and as with previous quarters, we continue to see the benefit of our tax assets reducing our income tax expense. Next, I would like to provide some color on our cash flow and balance sheet. One notable item that we mentioned on our previous call is that we terminate our swap agreement on our interest rate hedge. The swap agreement had been put in place back in 2018 and amended in 2019, which fixed our LIBOR base rate at 2.874% on $700 million of our borrowings. The cost to unwind that swap was approximately $18 million in the use of cash during the quarter. Even in this rising rate environment, we expect to benefit from this termination over what would have been the remainder of the swap term through the end of 2023. As of the end of the quarter, we had no draws against our revolver and had approximately $706 million outstanding on our first-year loan. Our leverage ratio now sits at 3.5 times down from 7.9 times last year and down from 3.7 times at the end of 2021. And we ended the quarter with more than $87 million of cash on the balance sheet. Turning to our updated outlook for full year 2022, while global markets remain choppy and geopolitical concerns continue, we see strength in the demand for talent and expect our strong operational and financial performance to continue. And I would like to note that while we do not have operations based in Russia or the Ukraine, we have operations in Eastern Europe and are watching the situation there carefully. But to date, there has been no material impact on our business. Therefore, based on current expectations and current market conditions, we are raising our full-year revenue guidance from $805 to $820 million to $815 to $825 million. We are raising our full-year adjusted EBITDA guidance from $180 to $190 million to $188 to $195 million. We are raising our adjusted net income guidance from 105 to 115 million to 120 to 130 million. And we are raising the corresponding adjusted diluted earnings per share range from $1.32 to $1.45 to a range of $1.51 to $1.64 per share. And just to reiterate my comments from last quarter, we would expect to see Q2 and Q3 as our slightly stronger seasonal quarters compared to Q1 and Q4. We look forward to finishing the year strong and keeping you posted on our progress. With that, operator, we can open the call for questions.