HireRight Holdings Corporation

Good afternoon ladies and gentlemen and welcome to the higher right second 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 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 HireRight's website. Also during this call, management's remarks will include forward-looking statements related to HireRight's market opportunities, customer retention, competitive differentiation, growth expectations, operational improvements, strategies to increase revenue and margins, Growth prospects for industry sectors and our international business labor market and economic trends future cash flows and financial performance, including 2022 guidance such improvements such statements are predictions and actual results may different materially. Additionally. Information concerning factors that could cause actual results to material differ from those in forward-looking statement is contained in Form 10-K, filed with Securities and Exchange Commission, in particular, in the sections of that document entitled Risk Factors, Forward-Looking Statements, and Management Discussion. Analysis of Financial Condition and Results of Operations. Now, it is 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 another set of strong quarterly results. I'll hit the highlights, and Tom will walk through the details as usual. Second quarter revenue was up a robust 26% over the corresponding prior year period, reaching a record $222 million. This strength reflects our continued high client retention and upsell rates, new logo wins, and secular trends resulting in continued strong demand for labor in our targeted end markets. Our strong performance over the last four quarters reflects our full recovery from the pandemic-impacted periods of 2020 and early 2021, and we expect solid but more normalized growth over the medium to longer term. We also continue to deliver on our commitment to improving profitability, delivering more than a 240 basis point gain in adjusted EBITDA margin, showing growth of 40% over the prior year period. The efficiency improvements and increasing automation that drove these gains flowed through to adjusted net income, which more than doubled over the prior year, reaching $43 million for the quarter. Our results showed continued strong demand for our high-quality solutions across all of our regions and verticals. While we certainly recognize the challenges of the macro environment with inflation at multi-decade highs, rising interest rates, and recessionary concerns, The demand for talent remains higher than historic norms, and the churn in the labor market continues at elevated levels compared to historical periods. Quality and thoroughness remain key selling points and differentiators for us, particularly in our core markets. Last quarter, we talked about our early success in our version of the Pepsi Challenge. If you'll recall, this is where we rescreened candidates previously screened by a competitor only to find hundreds and hundreds of missed felony convictions. The key point here is that we are willing to stack up our solution against anyone in the market and show that not all background checks are created equal. As such, we are continuing to offer this challenge up to key prospects, and it is continuing to deliver the results we expect. Most recently, we extended a major client relationship with a Fortune 500 business services organization into the Latin America region. As a result of the client putting us to the challenge of going side by side with the incumbent to measure both quality and turnaround time, we demonstrated a turnaround time at nearly 50% lower than this top global competitor, all while maintaining the high level of quality we demonstrate to this client across all global regions. We took over 100% of their LATAM business immediately following that test. Additionally, our other key differentiator continues to be our global platform. This quarter, for example, we extended a global relationship with a Fortune 100 technology company into India, replacing a top-tier competitor and further solidifying our relationship with this client. Similar to last quarter, we have once again solidified our coverage with some of the largest technology companies in the world by rounding out our global footprint. Reflecting on our go-to-market success, new customer bookings were strong yet again during the quarter, and our onboarding pipeline of new customers continues to grow. New clients continue to tell us that our unified platform, our highly coordinated global account management structure, our quality service, and geographic reach are clear differentiators that appeal to them and are directly helping to drive these new wins. Regarding our vertical and geographic success, as has been the case for quite a few quarters now, healthcare has led our vertical strength growing nearly 50% over the prior year. The remaining core verticals all delivered 20% plus growth rates. We're also excited to announce our first vertical-oriented solution on our e-commerce platform, backgroundchecks.com. As a reminder, we're the only major background screening firm with a purpose-built e-commerce platform targeting the small-medium business market. Now we look to capitalize on our leadership in the transportation industry by building an easy-to-use e-commerce solution targeted specifically at small and mid-sized trucking firms. There are over 1.2 million drivers in the U.S. working for companies that have fewer than 20 trucks. making this an exciting opportunity. Our extensive experience with DOT regulations combined with the fact that we are the only background screening service provider in the industry with connections to the motor vehicle record sources in all 50 states makes this an ideal target market for backgroundchecks.com. Now let me turn to our international markets where growth continues to be quite strong. Second quarter performance in our non-US markets showed a growth rate of 30% over prior year. While we saw strength in every single region, LATAM and India had particularly impressive results. Revenue derived from applicants outside the U.S. now represents 16% of our total, and we expect this to further expand. We will continue to make investments in these international markets to provide the best local support with the power of our global platform. Two notable examples of this are Mexico and India. In the past nine months, we have ramped our Mexico operations from less than 10 team members to more than 100, And similarly, in India, where we have strong BPO partnerships, we've expanded our own team from less than 100 employees to nearly 500. As I've said repeatedly, our ability to service customers with our unified platform continues to be a strong competitive differentiator for us. Lastly, I would like to provide an update on our platform and fulfillment technology initiatives. As a reminder, we have partnered with a leading global IT services firm to streamline and automate the fulfillment process for while improving the customer and candidate experience. This is a two-year journey that we expect to complete at the end of 2023. Our focus is on 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 robotics processing automation, natural language processing, and other cloud-delivered technologies that will reduce the cost and improve quality and efficiency of our researchers. We believe this margin enhancement strategy will drive double-digit profitability growth. I am pleased to report we have moved the first modules of the program into production. Since this is the first phase of the program, we are rolling volume in a measured manner, are pleased with the results we're seeing, and are excited about the opportunity to broaden the deployment and yield the long-term improvements we're expecting. Simultaneous to this rollout, we are planning for the next modules to be delivered in the second half of the year. As previously stated, we expect only modest financial benefit this year, with a ramping of savings beginning next year and fully yielding the benefits by the end of 2023. So in closing, we're very pleased with the results we've been able to deliver in the first half of the year, and while there remains significant uncertainty around the broader macro environment, the underlying demand for talent and our ability to cross-sell and add new customers gives us great confidence in the long-term outlook for this business. With that, I'll turn the call over to Tom for a closer look at our second 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. As Guy mentioned, we experienced another strong quarter, in fact, a record quarter with revenues of $222 million, reflecting a 26% growth rate over the prior year period. This growth rate reflects the strength in the overall hiring market that's benefiting from secular trends, our leadership position in the industry, as well as a favorable comparison to a partially pandemic-impacted quarter last year. We continue to benefit from high retention rates and our ability to upsell existing customers, all while adding new customers at the same time. Our implementation pipeline is the strongest it has been in some time after a very good bookings quarter. I also note that our revenue growth is 100% organic. While we are actively evaluating M&A opportunities in the market, we continue to be disciplined in our approach, and as of this time, have not executed any transactions. Turning back to Q2 revenue, we continue to see strength across our core verticals, particularly healthcare, which grew nearly 50% during the quarter, and now represents our second largest vertical next to technology. Our core four verticals of technology, healthcare, transportation, and financial services now comprise nearly 60% of our total revenue. We will continue to focus on these core verticals as our quality solutions are ideally suited to these highly demanding customers. Our international markets are growing even faster than our US business, with international driven screens now representing 16% of overall revenue. International strength continues to be widespread, but was led this quarter by Canada, Latin America, and India, each of which grew in excess of 40%. FX fluctuations had a minimal impact overall in the quarter. The strength in our top line, coupled with our continued focus on productivity improvements, led our adjusted net income to more than double over the prior year period from $17 million to $43 million, which is also a sequential increase of more than 40% from Q1. In addition, adjusted EBITDA increased 40% or more over the prior year period for the second quarter in a row, while adjusted EBITDA margin improved by more than 240 basis points to 24.1%. We are pleased with our margin improvement efforts, especially as we are now carrying over $3 million of incremental public company costs versus the prior year period. The vast majority of our improvement is being driven at the gross profit or cost of service level. While we have important technology automation project that Guy touched on earlier, there are many other initiatives underway or being completed that could continue to drive cost improvements on the cost of service line. There are four primary categories of these improvements. One, smaller automation projects that focus on specific repeatable tasks. Two, labor optimization, including offshoring. Three, general process improvements. And four, a focus on data cost acquisition reduction through vendor management and elimination. The combination of these efforts has already resulted in a reduction of cost of service as a percent of revenue from 55.6% to 54% over the past year. These four elements will continue to be a focus for us as the larger technology transformation continues, in which Guy has already mentioned won't provide material margin contribution until 2023. The improvements in our cost of service more than overcame our rising costs of SG&A, which are largely driven by the addition of public company costs in 2022. Our SG&A expense was higher by $11 million, but still generally flat as a percentage of revenue compared to the prior year. Excluding stock comp increases, SG&A would have reflected nearly 100 basis point improvement from 13% of revenue to 11.9% this quarter. 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. Lastly, like many companies, we are dealing with a tight labor market and increasing wages. now turning to adjusted net income, which increased by 152% from $17 million to more than $43 million in the quarter. In addition to the improvements we saw in our operating performance, we benefited from a $13 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. Please note, with our improved financial performance, we are carefully reviewing our valuation allowance on our tax assets, and we may reverse that allowance at some point in the future. Next, I would like to provide some color on our cash flow and balance sheet. This is another area we have delivered exceptional results with year-to-date operating cash flow of nearly $36 million, up from a usage of cash of $300,000 the year earlier. Excluding our technology transformation project, operating cash flow year-to-date would be more than $52 million. Year-to-date free cash flow was approximately $28 million. As of quarter end, we had no draws against our revolver and had approximately $704 million outstanding on our first lien loan. Our leverage ratio now sits at 3.1 times, down from 9.1 times last year at this time, and down from 3.7 times at the end of 2021. And we ended the quarter with more than $118 million of unrestricted cash on the balance sheet. Additionally, during the quarter, we amended and extended our revolver to move the maturity out to June of 2027 and increase the size from $100 million to $145 million. Turning to our updated outlook for full year 2022, while our year-to-day performance has been strong and the demand for talent remains robust, We cannot ignore the macro signs around inflation, rising interest rates, and the potential impact of a recession. This is truly an unprecedented environment for labor markets. I cannot think of a similar time when we had this type of demand for labor, all while on the cusp or even in the midst of a recession. The labor market dynamics are different than anything we have seen in a prior downturn. And while we are well aware that this can impact the demand for our solutions and the growth rates we have seen over the past year are likely not sustainable, we do feel that the level of hiring and demand for our services will continue at levels higher than pre-pandemic. With that backdrop, we are raising our full-year revenue guidance from a range of $815 million to $825 million to a new range of $820 million to $830 million. We are raising our adjusted net income guidance from a range of $120 million to $130 million to a new range of $130 to $140 million. We are raising our full year adjusted EBITDA guidance from a range of $188 million to $195 million to a new range of $190 to $197 million. We are also raising the corresponding adjusted diluted earnings per share from a range of $1.51 to $1.64 to a new range of $1.64 to $1.76 per share. And finally, a comment about seasonality. As previously indicated, Q2 and Q3 are our seasonally stronger quarters. This year, Q2 was particularly robust, and we would not expect Q3 to be as strong as Q2, given Q2's strength and the economic trend cited earlier. With that, we look forward to continuing our momentum in the second half of the year and keeping you posted on our progress. With that, operator, we can open up the call to questions. Thank you.