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spk09: 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.
spk11: 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?
spk12: 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.
spk09: Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question comes from Manav Patniak with Barclays. Please go ahead.
spk05: Thank you. Good evening. I just wanted to inquire, you know, about the, you know, kind of outperformance this quarter versus your expectations. You know, you beat the street obviously by 20 million, but you're only raising by five. I think you kind of address why you're doing that, even the uncertainty. So I just wanted to understand maybe relative, you know, to, you know, what you guys expected, how things are shaking out.
spk11: Sure, I'll start and then, Tom, you can finish it. So some of it is related to a couple of things. First, some of it is just related to timing. Typically, we anticipated some revenue in Q3, you know, the latter half of the summer, we often do re-screenings for financial services clients and some of our healthcare clients. Just an interesting thing this year was some of that revenue got pushed into Q3, so you had a little bit more overperformance in Q3 that won't I'm sorry, in Q2 that won't flush through to Q3.
spk12: Yeah, so, I mean, generally, Manav, yeah, that's one of the primary reasons is certainly timing. Some of the revenue we had expected in Q3 came in a little bit earlier on some of our annual rescreening programs. And then generally, again, you know, per my comments, you know, it's hard to read anything in the news today and not have some level of cautiousness in terms of the outlook. So that's what's reflected in the guidance.
spk11: Yeah, no, obviously we raised, you know, we raised guidance for the full year and we're, you know, very confident.
spk12: Yeah, I mean, as we sit here today, I think it's important to note that there's been nothing, no fundamental change in the current demand levels that we're seeing over the last first seven months of the year.
spk11: Yeah, I think it's worth saying, because I said it, you know, during the last call, actually, you know, we survey our clients all the time, and, you know, we are still continuing to see a very robust hiring, and they're seeing the same thing we all are. Their quits are up. Even if they're out in the market stating that they're that they may be doing layoffs. You see some prominent companies who are clients of us make those statements, yet it's not reflected at all in what their hiring trends have been and what they expect them to be over the course of the next couple of quarters.
spk05: Okay, got it. Yeah, I was going to ask you about the surveys that you do, but perhaps maybe just as a follow-up. So, you know, can you talk about what the base growth versus, you know, new customer growth perhaps has been for the first half of the year and what you're assuming for the second half?
spk12: Yeah, I mean, we're not going to disaggregate the growth percentages, but I can tell you that, you know, the first half of the year, our new business ads were very strong, as were our upsell sell-throughs to our largest clients, who I think we've talked about this, you know, quarter over quarter. We've got a dedicated sales team that focuses on upsells to our top 1,000 clients, and they continue to outperform us. But generally, it's broad-based, Manav. We saw just general organic growth as well as solid contributions from new revenue as well as upsells. And the last piece of the equation there is retention. Our retention for the last 18 months has just been phenomenal.
spk11: Yeah, just adding to that real quick, on the back of what we're seeing with new business that was implemented in the first half of this year, our pipeline – of clients yet to be implemented is also very strong. Yeah.
spk05: Okay. Thank you, guys.
spk09: The next question is from Hamza Mazari with Jefferies. Please go ahead.
spk08: Hi. This is Hans filling in for Hamza. Could you just talk a little bit, you know, how labor availability issues are impacting your business directly and maybe indirectly as well? And then just what are your plans around headcount growth over the next 12 months?
spk11: So, I mean, we're finding the same. It's a great question, by the way. We're finding the same, you know, challenges that everyone in the world is finding on getting talent. We've done a good job retaining talent, especially staying in front of, you know, high potential talent. And, you know, we've got a good mix of, white-collar talent, and then a bunch in operations. We beefed up our recruiting team before the beginning of the year and keep a good pipeline of operations researchers and customer service folks, which tend to be the higher turnover types of labor in our business. But we're keeping up with it pretty well for now, but it's a challenge. There's no question. And as Tom pointed out earlier, it will lead to some higher labor costs to make sure we're dealing with retention and the lack of attrition from our employees.
spk12: Yeah, and one thing we're doing to combat that is, and it's kind of indicative in some of the numbers that Guy quoted in his section, is we're diversifying our geographies in terms of, and again, this is a good thing for the overall industry. Guy talks about this a lot, about the ability for people to take jobs in different geographies. We're doing the exact same thing. Part of the ramp that we've seen in our India office as well as our Mexico City office, part of it is operational nature. Part of it's back in office support. I've got finance people in Mexico City and India now where I didn't a year ago. We're trying to offset some of the pressures we're seeing here from a retention perspective in the U.S. by diversifying our geographies with some of our support personnel.
spk08: Got it. Appreciate the color there. And then can you just talk about how you're thinking about capital allocation, specifically M&A and the pipeline there?
spk11: Yes. I've spoken a lot about our M&A strategy is very much oriented at companies that can add value to our business, either in new products or new geographies. We've got a good pipeline of potential opportunities. We've passed on a few. Our traditionally Doing small tuck-ins with pure background screening companies doesn't make a lot of sense to me, given that we're continuing to take share from that part of the market. So I don't want to pay a need-bit multiple to get that business when I can win it for free in the marketplace. But, you know, you'll continue to see some activity with us, but, again, it'll be companies that provide us either niche capabilities or geographic presence that we want to bolster up.
spk08: Got it. Thanks, and congrats on the strong quarter. Thank you.
spk09: The next question is from Ashish Sabhadra with RBC Capital Markets. Please go ahead.
spk04: Thanks for taking my question. I just wanted to focus on the healthcare vertical. Obviously, really strong growth there, and it looks like pretty good momentum. I was just wondering if you could drill down further on the pipeline, particularly on the healthcare side, and more opportunities out there.
spk11: Yeah, so another good question. So one of the things that we're seeing, especially with global healthcare providers, is our global platform has become quite a competitive advantage. That and the fact that we staff our healthcare vertical teams with experts in doing business with healthcare companies. We've had an emphasis in particular on pharma companies and have had some great recent wins there. And a lot of that growth that you're seeing in our reported numbers Some of that is coming from our international markets where, you know, we're filling out that portfolio. But the general comment would be there's good broad base of wins for us for all kinds of healthcare companies with particular emphasis on the companies manufacturing pharmaceuticals.
spk12: Yeah, I think it's an important vertical for us. I mean, you saw the JOLTS numbers come out the other day. You know, while there was kind of a backup a little bit from a – job openings perspective, certainly one of the strongest, if not the strongest, I don't have the numbers right in front of me, performing sectors in the overall U.S. economy was healthcare. And that's why it's such an important vertical for us and why we're really pleased that we continue to grow and take share in that vertical.
spk04: Yeah, no, that's very helpful. And then maybe on the EBITDA margins, pretty strong margin expansion there on a year-on-year basis, but also sequentially. And I was just wondering, as you continue to execute on all the projects that you talked about, the automation projects, the labor and operational improvement, how should we think about, at IPO, you talked about margin expansion. So how's that coming along? It seems like you might be tracking ahead of it. And so I was just wondering if you, as you've made some progress on that front, how are you thinking about the margin expansion opportunity? Thanks.
spk12: Yeah, no problem. And that's why I really wanted to kind of... you know, line item, you know, the different projects that we're working on. It's not just all about one big bang project, you know, kind of the automation project that, you know, Guy talks about. There's a lot of other projects ongoing from an operational improvement perspective that we're always looking to take advantage of. And we'll continue to focus on those, and I don't even want to call it in the background, but, you know, we do have the major automation project going on that will start to provide, you know, material results in 2023. But in the meantime, we still think we can expand margins just from our day-to-day operating efficiency programs. And that's where most of that came from. Yeah.
spk04: That's great. And congrats once again for a solid move.
spk09: Thank you, Ashish. Next question comes from Andrew Nicholas with William Blair. Please go ahead.
spk07: Hi, good afternoon. Thanks for taking my questions. I wanted to follow up on margins a bit more. Obviously, it seems like Business momentum is quite good, but you're talking about, you know, the potential for an economic slowdown or, you know, a normalization in certain hiring trends. So I'm just wondering if you could talk to kind of protecting margins or even growing margins in a more challenging environment for hiring and how we should kind of think about profitability sensitivity to that type of slowdown.
spk11: Sure, Andrew. I'll answer the first part of that. So, you know, a big part of the technology initiative that we have is what we call the back office automation project. It is one of those insulating effects, right, where that is going to work to take out good chunks of labor going forward, regardless of the macro environment that we have. As we start to implement that technology, our ability to remove labor from the system is is very impressive. So, you know, that will certainly continue to provide positive momentum on margin. And then the other half is really, you know, has to do with the variable nature of the cost of our business, Bella. Tom?
spk12: Yeah, that's exactly what I was going to say. I mean, we've said this in the previous quarters that, you know, roughly 80% of our cost of service is variable today. Part of that is driven by, you know, the third-party data costs and things of that nature, but it's also the mix of labor we have and our use of you know, contract labor resources as well as our own labor and really optimizing that mix is what we continue to look at. Optimizing that mix between our own labor and contract labor as well as our geographic spread of labor and where we're allocating the work. So, we think, you know, dialing all those dials allows us some flexibility in terms of any fluctuations we may see in demand levels.
spk07: Great, thank you. And then for my follow-up, in the slide deck, you referenced incremental upsell. I'm sure part of that is a conversation about expanding relationships internationally with existing clients. But are you also seeing upsells in the form of kind of new products, whether it's post-hire monitoring, social media monitoring, that sort of thing? Any momentum there to call out? We are. Actually, it's all across the board.
spk11: So part of that is the international expansion, but most of what we see is is continuing to sell some new products. Some of it's drug and health screening. Social media monitoring is taking off at a pretty good clip. We're doing and implementing more monitoring products, which also follow through with our vertical strategy in both transportation and health care. Those are two good markets for us to be doing monitoring. So it's been a good performance across the board. Thank you.
spk09: The next question is from George Tong with OpenText. Please go ahead.
spk06: Hi, thanks. Good afternoon. You mentioned some rescreening revenue was pulled forward from 3Q to 2Q. Can you quantify approximately how much that was?
spk11: No, we won't get that specific, but it's just material.
spk12: Single-digit million is all we'd say, not get the specific number.
spk06: Okay, got it. And maybe just stepping back at a more high level, you mentioned that you're not really seeing any fundamental change in current demand levels really over the past seven months. How would you explain that? Is that just a function of the labor trends out there, or is it a function of your mix or your internal initiatives, or it's a function of churn versus new job creation and a net basis? How would you explain that disconnect between what we're seeing more broadly and in the headlines versus what you're seeing at the business level?
spk11: Yes, and frankly, George, it's a little bit of everything, right? First of all, if you just look at the numbers, you know, if you look at jobs and quits, even though the jobs came down a little bit in the June numbers from the May numbers, they're still huge. I mean, way bigger than they were pre-pandemic. Second is if you look at the industry, you know, a lot of the drop came from retail. So we're not very retail heavy. You know, the companies that we specialize in, healthcare, technology, financial services, transportation, they're all struggling still to hire people. And that is supported by the conversations we have for planning for the remainder of the year with all of those clients. So it's, you know, that's a big part of it. And then one of the things that we've talked about a lot before is is the competition for labor also continues to show the number of screens per job being above one for sure. More global hiring is continuing. We continue to see that trend. I can't speak to a major client of ours who says to us that, okay, thankfully now our hiring patterns are starting to slow down. It just continues to.
spk13: heat up now can that change of course of course it can for all the reasons that we all know and can talk about great very helpful thank you the next question is from andrew jeffrey with truest securities please go ahead hey guys this is got stepping on for andrew um just wanted to unpack the healthcare points even a little more uh I want to understand, was UnitedHealthcare part of the lift in this quarter? I thought they were onboarded. And if not, I just want to understand, what is driving that strength? Is it upsells? Is it cross-sells with the new logos? And understand the sustainability of that growth. I don't expect it to continue growing nearly 50%, but where in the double digits can we kind of peg it?
spk11: Yeah, so first we won't, you know, obviously we won't address any specific clients and the revenue that we're getting, but what I can tell you is that our performance does not, you know, it was not dependent on any single client. It is, in particular, new wins. As I commented on before, some are new pharma companies that we've been onboarding and been successful marketing to. We have a very good track record of onboarding healthcare companies, and then even completing upsells before we launch the very first background screen. So we find them very receptive to some of the products that we have that they do internally, and then they outsource to us. A good example of that that I've used before is a lot of healthcare companies will manage your own immunization and inoculation scheduling, and they might outsource their drug testing to a background screener, but they're doing their immunization and oculation checks in-house. Well, we're finding that because we've built capabilities to do that and manage that for some clients, we're finding a good upsell rate on that. So it is across the board. It's the momentum that will continue. I mean, certainly winning a very large client has an impact on the numbers, but it's broad. It's very broad.
spk09: Next question comes from Mark Marcon with Baird. Please go ahead.
spk10: Hey, good afternoon. Most of my questions have been answered, but I just wanted to delve a little bit more in terms of the opportunities to further expand what you're doing in terms of some of the challenges and to get the recognition for how strong your screening capabilities are relative to the competition. What are some of the programs that you can put in place in order to accelerate that and get even more wins?
spk11: You mean in terms of what I call the Pepsi challenge, Mark? Exactly. So it's been a big part of our sales and marketing team's efforts is to get clients to see that because one of the challenges that we have in our industry is you don't know that your background screener may have missed a lot of things until you have a problem. That's when you discover it. And our pitch to them is don't wait to find out that you have a problem sitting in there. And we pitch it to compliance teams as well as the HR functions and security teams, depending on who owns the background screening program. So we're continuing to build materials on that. We're continuing to build comps that we have and are continuing to push that and will continue. be vocal about it. So that's the best that we're doing is to do it, you know, right across the table from a prospect as we're sitting there and showing them the actual data. And then putting, as I said, our money where our mouth is, you know, we will pay for the screening absent any, you know, data costs that are required. And we're seeing, you know, pretty good acceptance rate of that. But we also see skepticism, right? I mean, you see, I think part of it is some clients don't want to know, you know.
spk10: Yeah, that makes sense. And then with regards to the macro factors that you talked about, how different are the conditions that you're seeing today relative to when you ended up reporting the first quarter and you had done a nice beat but were guiding fairly conservatively have you seen any sort of change at all in terms of the tone of business or on a monthly basis? Is there, are there any verticals that are, that are shifting at all?
spk11: No, Mark, no, no, no difference. You know, and as I said, I think part of that is because of, I like our mix, you know, we don't have, you know, large dependency on any single client or any single industry, but the four target industries that we have are still struggling to keep up with, with labor demand. despite even some very, very large clients of ours publicly stating that they were going to be, you know, cutting back on hiring, that's not what their on-the-ground recruiting teams are telling us who are filling in the pipeline of jobs. So it's a little bit mind-boggling, to be honest with you, and, you know, it's hard to imagine that that's just going to continue the way it is. But when you look at the, you know, the openings and the quits just continue to, you know, to push.
spk10: Yeah, and then with regards to the healthcare vertical, you obviously had tremendous success there. How much of that was just due to that one big win that you ended up taking on recently?
spk11: Well, some of it, but not all of it is what I could tell you. Obviously, any big client is helpful, but that was – combination of a bunch of wins on the back of that as well.
spk10: The gross margin performance was nice. What was the core driver there and how would you characterize pricing in the industry at this point?
spk12: Yeah, again, as I alluded to, we're always looking at ways to improve margin, and that does include price, right? And as we've talked about in the past, we will be opportunistic in pushing price increases through at a very targeted basis. We don't do any kind of peanut butter spread price increases, but we're always looking at that as a toolbox, a tool in our toolbox. But the primary drivers, I would say, this past quarter were really some of just operational efficiencies, Again, minor automation projects that eliminate a repeatable task that maybe 30 people were doing onshore, or moving some of that labor offshore that can be moved offshore, or just looking at different ways to flow work through the system and create efficiencies there. We'll continue to make those tweaks that give us $100,000, $500,000, $1 million here and there. But enough of those programs add up over a quarter to drive some nice improvement.
spk10: Terrific. Great job.
spk12: Thanks.
spk10: Thanks, Mark.
spk09: The next question, Evan McVey with Credit Suisse. Please go ahead.
spk01: Great. Thanks so much. Hey, are you seeing any change at the margin in the attrition rates of your clients? So said another way, are you starting to see the churn move one way or the other? that's impacting, you know, the screens that they're incurring?
spk12: I mean, their employee terms. Kevin, is that what you're talking about? Yes. Yep, that's right. Yep. I haven't honestly, you know, again, it goes to the overall kind of ordering patterns. And with the exception of a little seasonality, you get a little bit of a slowdown over the summer sometimes when people are on holidays. Generally, the ordering patterns have been, you know, pretty consistent. Great.
spk01: And then I know you had a lot of success recently with winning some clients back. Has that kind of been at the same pace or, you know, just help us frame out how the momentum around that has been more recently?
spk11: Yeah, so remember I think the last quarter I talked about some of the win-backs came, you know, some international win-backs came from us re-implementing products that we had removed when we rolled out the global platform. We've seen a continuation of that trend. I talked specifically about a large technology client in India. India was the only business of theirs we don't have, which I think that's true. And, again, because we rolled out, you know, these new products and now we have that, global platform, they came back to us. So that's yet another win back that I got in Q2. So I think I noted two of them in Q1. There was another two in Q2. Great.
spk09: Thanks, Kevin. The next question is from Shlomo Rosenbaum with Stifel. Please go ahead.
spk02: Hi. Thank you for taking my questions. Hey, Guy, how far up organization, are you pulling your clients about plans? In other words, how tight are these clients that you're talking to with the ultimate decision makers in terms of the hiring? In other words, right, would they really find out what the manager is starting to think back and forth or come around one day and just find that all of a sudden, you know, the C-level suite came back, you know, complete change of plans and all of a sudden everyone's going to get some
spk11: Yeah, great question, Shlomo. They absolutely could do that, right? I mean, the people that we're talking to, you know, it depends on the client, right, who runs the screening program. You know, more times than not, it's the talent acquisition organization, and they know the pipeline and demand they have for people. It doesn't mean the management can't just all of a sudden say, that's it, we're in an iron freeze, right? So, you know, we take, you know, every piece of that data one day at a time, and we keep in continual conversation with them. And I can tell you just the tone between the first quarter and the second quarter did not change much.
spk12: And I think it's also important to note, I mean, there's been a lot of, you know, high profile comments about hiring freezes. And I think there are some semantics involved there with certain companies saying they're in a hiring freeze, but does that mean they're not expanding their workforce or are they literally not hiring anybody? Because that churn factor comes in there. I can tell you the The same thing applies to us, right? You know, if I lose somebody on my accounting team, I definitely have to go out and replace that person. And that churn level remains high. And so somebody may say they have a hiring freeze, but that more often than not doesn't mean they're not backfilling.
spk02: Got it. Okay. And what tax rate are you assuming now for the EPS guidance? And what were you assuming last quarter? It seems like there were Almost no taxes paid this quarter, and you guys use an actual tax rate versus kind of a structural tax rate. So I'm just trying to understand what might have changed between last quarter's guidance and this quarter's guidance.
spk12: Yeah, our tax rate's always going to be, you know, at least for the foreseeable future, going to be driven by our foreign income, right? We're generally not a U.S. taxpayer tax. So it's a much more complicated tax calculation because you're doing a tax calculation across numerous different countries. So it is going to fluctuate based on our income by country, which we're obviously not going to break out. So we are giving you an actual rate based on what we're seeing on our income at the country level, and it's a blended rate. And, yeah, I made a comment on the call about the reversal of our tax allowance You know, our tax assets have been, we've had a full allowance against them for the last few years. But now that we've reached a point where we're generating consistent profitability, you're likely to see that allowance reverse here in the next couple of quarters.
spk02: Was there a change in the tax rate, though? In other words, was there a change in the assumption of the amount of taxes you're going to pay between last quarter and this quarter?
spk12: It's recalculated every quarter based on our income by country. because it's not driven by the U.S. But yes, I don't have the blended rate, but it's going to be different by country.
spk02: Okay, I'll follow up with you on that offline. Okay, sure thing.
spk09: The next question is from Jason Salino with KeyBank Capital Markets. Please go ahead.
spk03: Hey, Guy. Hey, Tom. This is actually Devin on for Jason today. Thanks for taking our questions. Um, first one I have is, you know, international business, you know, continues to post really strong growth. Good to hear. Just want to double click on, on Europe. I don't know how big of a exposure you have over there, but, um, it's been the key focus from investors. Just want to ask about if you've seen any sort of changes in sales cycle in that region, um, or any changes around customer's willingness to spend there.
spk11: Uh, no, not at all. Uh, the EMEA business overall. has done very well, it continues to do well, it's growing well, and it's broad-based, right? It's not just, it's UK, it's, you know, the continental Europe. We've seen some, you know, good and have good progress in the Middle East. We have not seen any slowdowns or cautions at all.
spk03: Yeah. Got it. Okay. That's good to hear. And then just quickly on the four-year guide, Not sure if you mentioned it already, but in terms of the assumptions around macro for a second half of the guide, are you sort of baking in any deterioration in macro? Um, um, yeah.
spk12: Yeah, well, you can read, you can go back and look at my comments basically. Um, you know, we, we are very aware of what the macro challenges out there are and what the headlines are. Um, I think we've been consistent in terms of what we've been saying in terms of what we're seeing at our ordering level. And, you know, we factored that into our second half guidance. And you can see relative to where the first half came out. Again, it's not that far off from where we were from a first half perspective, but you can definitely see that there's a little bit more caution in the second half.
spk03: Got it. Okay. Appreciate it.
spk09: Thanks, Devin. It appears we have no further questions. I'll turn the call back to Guy Abramo for closing remarks.
spk11: Thank you all. We'll follow up shortly. Take care. Bye.
spk09: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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