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spk07: is just general nervousness and outlook on macroeconomic conditions is making people adjust their hiring for perhaps the rest of this year. So that would certainly have an impact on the background screening industry as a whole.
spk08: Right. And you mentioned that certain verticals like healthcare, transportation, they're outperforming and doing really well. Are there any particular verticals that are doing less well and are lagging in performance?
spk07: So the one we highlighted was technology. And it's interesting because as I said on the call after Q2, we weren't, even though there were reports in the media that technology was going to slow hiring, we were not seeing that in our volumes in the second quarter. But in the third, in this quarter reported, we started to see a slowdown in ordering patterns. Again, across the board, I would tell you, all the major technology players are clients of ours. and every single one of them had dips in their volumes.
spk09: Great. Thank you.
spk03: Our next question comes from the line of Ashish Sabhadra with RBC Capital Markets. Please proceed with your question.
spk00: Thanks for taking my question. I just wanted to focus on that $6 million impact. What I want to understand is, is that a quarterly or an annual impact? And is the right way to think about the annual impact? Would that be like multiplying it by four times?
spk10: Yeah, that was a quarterly impact, Ashish. You can't necessarily annualize it multiplying it by four because this particular customer has a little bit more volume weighted towards the second half of the year, including the third quarter. So their peak tends to be Q3, Q4. So while you can't necessarily multiply it by four, you could probably multiply it by three in terms of an overall impact.
spk07: And there is some uncertainty involved in this as well, Ashish, in that they could start ordering verifications. We're clearly working with them on alternative solutions. It's not that that business is going to someplace else. They just decided to stop. So that's why it would be difficult to project that moving forward. But we do believe... that that will be the case in the fourth quarter. Yeah.
spk00: Okay, thanks for that, Kalar. And if I back in, even if I take the high end of your guidance range, both for revenue and EBITDA, on the revenue, and even if I add back that $6 million of one-time impact and $2 million of effects, I get revenues being down 8%. And I understand you talked about some of the slowdown at the end of the quarter and slowdown in volume. But is my math right? Is that the right way to think about it? 12.5% or 8% excluding? Okay. And then maybe just on a margin, sorry, one more on margins. Like when I back it in, I get margins of 20.5%, which is down 100 basis point year on year. I would think that that 6 million would be mostly passed through revenue. So you shouldn't have impacted margins as much. Is that because of the revenue weakness that we are seeing the impact on margins as well?
spk10: Yeah, so there's really two things going on there. One, historically, Q4 margins tend to be a little bit softer based on just the way the holidays, our staffing levels work, and the volumes flow through. So that's clearly a driver of what you're seeing there. And the second impact is just the overall volume decline that we're forecasting for Q4 based on the guidance and the implied guidance for Q4.
spk00: Okay, that's helpful. Thanks for the call-out.
spk03: Our next question comes from the line of Kevin McVey with Credit Suisse. Please proceed to the question.
spk01: Great. Thanks so much. You know, as we think about, I know you're not giving formal 2023 guidance, but is it fair to maybe annualize what the Q4 is kind of implied for 2023? And I know there's some seasonality in there, things like that, but if we wanted to think about a potential range, Or, you know, are there other things to just call out? You know, obviously you've got the one client, some FX in there. I'd imagine the FX probably is a little bit more of a headwind beyond the $2 million. But just, you know, again, I know it's not kind of formal guidance, but is there any way to think about other puts and takes? And just to follow up with that, you know, if the client, how are they doing it now? So is it, you know, how are they doing those screens now?
spk07: So it's a full package that we have with this client, Kevin. Thanks for the question. And so they just decided to just stop doing verification. We're still doing background screening and all the other things that we do. But verifying employment specifically has been stopped because of the significant price increase by a very well-known vendor. But what they're doing is they're stopping it and then looking for an alternative solution that would likely run through us anyway. You know, your question on long-term guidance, there's a reason why we're not getting long-term guidance, right? And the reason why, you know, what you see reflected in our rest-of-year guidance is us trying to trendline a phenomenon that's only existed for about five or six weeks, right? So as I characterized it as, you know, maybe it's a half-inch deep and a mile wide, Um, and it's just difficult to say what, what that trend will be, um, you know, going out, heck, even going out the next several months. Right.
spk01: Right. And is, is there risk that other clients, like, are there any other clients, obviously with, with this particular vendor, is there any other risk potentially of any other, maybe $6 million clients out there or anything like that? Or, and is there that the, well, you talked about the margin. No. Okay.
spk07: No, no on the verifications question.
spk01: Okay, thank you. Thank you, Kevin.
spk03: Our next question comes from the line of Kyle Peterson with Needham. Please proceed to the question.
spk12: Hey, good afternoon, guys. Thanks for taking the questions. I just want to get some clarity on the implied 4Q guide. It seems like at least in 3Q, a lot of the weakness was kind of in the technology vertical. Is that where a lot of the kind of fallout in the guide, at least on the top line, is concentrated for 4Q? Or have you guys forecasted, you know, a more broad-based headwind in areas, you know, like healthcare, transportation, where they seem to be holding in pretty well right now?
spk07: Hi, Kyle. Appreciate the question. So if you look at all of our verticals, and I mean everyone, everything from energy, manufacturing, distribution, financial services, technology, the reason why I characterize this as an inch deep and a mile wide is we're seeing drops, modest drops in volume from almost everybody. Obviously, there's some clients that are up and some that are down, but as industries go, it's a very small number, but because it's across every industry, there's obviously going to be an impact. So there's no trend in a specific industry other than, of course, quarter over quarter for the third quarter, some industries outperform others, but that was the third quarter. You don't know what we're going to see in the fourth quarter.
spk10: And it's generally broad-based geographically as well. We're seeing it overseas as well.
spk12: Okay. That's helpful, and that makes sense. And Just a quick follow-up. I know you guys called out the one client on the verification side. Are you guys seeing really any other signs of trading down in screens, whether it's going shorter duration or less comprehensive outside of that one instance, kind of a lower ARPU, or is this purely a base growth volumes type of headwind?
spk07: It's purely that. It's purely base growth.
spk12: All right, that's helpful. Thanks, guys.
spk07: Thanks, Carl.
spk03: Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question.
spk02: Hey, this is Andre Childresson for Mark Marcon. Thank you for taking our questions. So my first question is, you've said several times that you saw a modest drop that was pretty broad. I just want to clarify, I assume that's sequentially, but the year-over-year rate is obviously exacerbated given the incredible comps as we rebounded from COVID last year. And is there any way to quantify that by either order volume or hiring trends, whatever it may be, throughout the quarter and into October thus far?
spk07: Yes, I'll answer the first part of the question. So that modest drop I talked about is sequentially. So think of it ending the third quarter coming into the fourth quarter.
spk10: Yeah, and certainly the guidance that we've indicated earlier on the call reflects our latest thinking, obviously, through October results, right? So that is certainly baked into our guidance. And so it's reflected on a sequential, you know, basis from what we saw in Q3, you know, going into Q4.
spk02: Great. Thank you. And so my other question, I know this is kind of a tough question because It's going to be around historical recessions, and each one varies dramatically. But you gave some perspective in terms of how you're going to manage your expenses. But we only have the financials in terms of what happened over COVID, and that was obviously a very unique recession. So assuming this environment continues and we do go into recession, how should we expect the revenue to trend? Would it be kind of maybe less deep but longer lasting than we experienced during COVID? Or is there any way we should think about that?
spk10: I think when we get asked that question quite a bit, you know, Andre, and, you know, I think what one of the answers we say to those people is when you've seen one recession, you've seen one recession, right? So it certainly can't correlate this to something that we saw in COVID. We think that's an extreme. We certainly look back at the great financial crisis, but there was a very different business back in 2008 and 2009. So, you know, I think we're looking at when we go through our forecasting and budgeting for 2023, we're going to certainly do some sensitivity planning. We certainly think by the time that we provide guidance, you know, sometime around the March framework, we'll have much better insight into how the year is going to shape up.
spk02: Thank you. That's great context. And actually, just one more on top of that. So you talked about it from an expense perspective, but how should we think about the go-to-market and sales environment? I know you said that you haven't seen a slowdown in terms of booking to the pipeline, but assuming that happens among your enterprise clients and prospects, would you lean more heavily on cross-sell, up-sell, or what kind of is the go-to-market in a more challenged macro environment?
spk07: So interesting. The one proxy we have is the pandemic. And in pandemic, we had a very, very strong sales pipeline and new wins even during that time. We're not seeing a slowdown, certainly, in the opportunities that are in front of us. There's no slowdowns in the RFPs. There's no slowdowns in the wins that we have. We've got a very, very robust pipeline that is adding almost literally weekly. And when I say pipeline, I mean both new logos, cross-sells, upsells. We continue to have good, strong performance, and we've made some investments on those teams over the last year to grow their numbers. And we don't see that that necessarily will be an impact. Great. Thank you so much for all the answers.
spk03: Our next question comes from the line of Andrew Nicholas with William Blair. Please proceed to the question.
spk05: Hi, good afternoon. I wanted to hone in a bit further on fourth quarter guidance. Understand that there were a modest decline sequentially as you moved through the quarter and you're embedding October results into that number. Is there anything you could say about kind of what you're assuming for the remaining two months of this quarter? Are you expecting continued deterioration or just trying to get a sense for maybe the conservatism of what's in the outlook for fourth quarter or if things could kind of accelerate to the downside if conditions don't improve?
spk10: Thanks, Andrew. We typically see some real seasonal impact in November and December anyway, so that's reflected clearly in the guidance, particularly because of the holiday seasons coming up. And year-end activities, people tend to slow down hiring. So that's certainly reflected in that. But historically, you know, what we've done is taken a look at kind of the month-over-month seasonal trending that we typically see year-over-year from our customers and really are taking a look at that and basing it off of what we've seen in October so far and kind of extrapolating that into November, December is generally the way we're coming up with the guidance.
spk07: The other side of that, Andrew, that I would tell you that in our conversations with our clients, the decisions to slow the pace of hiring seem to be more associated with just general uncertainty and nervousness about their business, not necessarily the actual performance of their business. So I would just classify the markets for our clients to just be uncertain. And that uncertainty, as it might with most companies, generally the first thing people do is maybe pause or slow down the pace of hiring because it's the ultimate controllable expense. But it doesn't necessarily have to be long-lasting. So I guess it's a roundabout way for us both to say we don't know, but we used the trends that we have to make the best estimate we could. Absolutely. That's helpful.
spk05: And then for my follow-up, I just want to ask about capital allocation. given the interest rate environment and the debt schedule, the debt balances. Just wondering if that has evolved at all. Recognizing you also want to probably keep some cushion given the macro headwinds. Just if you could update us on how you're thinking about leverage at this point in time, that'd be helpful. Thanks.
spk10: No problem. No real change there. We continue to be very cost-conscious when it comes to investing capital in the terms of acquisitions. Obviously, we haven't been terribly acquisitive. We'll continue to keep that type of discipline. We do certainly have a pipeline of opportunities we're looking at, but we are going to be very mindful of the overall leverage ratio. You can see we're under three now, and I would expect to keep it in that level or under that level for the time being. and don't foresee that changing. So really no change in our kind of focus in terms of capital allocation. Our single biggest capital priority right now relates to our technology automation program, and that is going full steam ahead.
spk05: Thank you.
spk03: Our next question comes from the line of Andrew Jeffrey. Please proceed to the question.
spk09: Hey, guys. It's Gus on for Andrew. Appreciate you taking our question. This question's for Guy. Appreciate the great color on margins and expense control, but on the top line, would it kind of be fair to say that we need to revisit that long-term goal of 8% to 10% growth? I appreciate this is likely an industry thing, but how do you think about this internally? Are we starting to realize the elevated employment velocity like the checks for applicant, like quit levels, that will normalize the pre-pandemic levels or just, I want to parse out some of the drivers there.
spk07: Yeah, so maybe let me talk about that from two points of view. One is just the fundamentals for our industry. None of that has changed, right? You still see the job openings and the quit rates and, you know, in the long term, those will continue to drive, we think, you know, good, healthy growth, you know, beyond what, you know, traditional growth for the industry is. The big unknown, though, clearly for forward growth rates is just this recession and what impact it's going to have.
spk10: Yeah, I think long term, we don't change our view at all in terms of fundamental changes in the labor market. Certainly, they're going to be disrupted for a period of time if people are uncertain about the outlook over the next number of quarters. And who knows if that's one quarter or five quarters? We don't know. but we still feel really good about the long-term growth prospects. We know historically that this industry and this business grew at a nice, solid 7% clip, and that was before all the fundamental secular changes that we've seen in the labor market that we think are only going to be additive in the next cycle.
spk09: Great. Appreciate it. And then on the, you know, it seems there's some share-taking in healthcare and transportation, which is great to hear. Is any of that coming from larger competitors, or are we, again, just mostly coming from Tier 2 and Tier 3?
spk07: We don't talk about where we take business from, but it's generally coming from the whole industry. Got it. Thank you.
spk03: Our next question comes from the line of Stephanie Moore with Jefferies. Please proceed to the question.
spk04: Hi, good afternoon. Thank you. I guess touching on the fourth quarter guidance, I appreciate the, I think the puts and takes, particularly with the one customer and kind of that expected $6 billion headwind. But if you just take the, maybe the midpoint of the guidance and the implied, you know, let's just say high single digit top line decline, can you kind of break out how you got to that number in terms of baking in? new logos, cross-sell, you know, you were very clear that the base business, you know, has deteriorated just given the macro environment, but I'm trying to understand kind of some of the other offsets, you know, more so on the cross-selling and new logo front that's remained, I think, pretty consistent here.
spk10: Yeah, sure, Stephanie. We're not going to deconstruct our guidance quarter by quarter in terms of kind of the growth algorithm. But as Guy remarked, we are very comfortable and actually pretty excited about how our pipeline looks going into 2023. Some of that will close and go live in Q4, but 2023 is shaping up as a pretty strong year from a new logo perspective. So excited about that, not only from a new logo, but also from an upsell opportunity.
spk04: Great. And then pushing gears, you noted, you know, continue to look into the M&A market as opportunities. In your opinion, and I know you said, you know, one recession is one recession, but would you view that a potential slowdown might actually be a favorable opportunity for maybe you can acquire a business that's smaller and struggling a bit more, but has still, you know, good assets and good customer contracts? Is that something that we could think that this could actually be a positive from an M&A standpoint if we do hit a slowdown?
spk07: I don't know that it's positive or negative in terms of our approach at M&A, Stephanie, is we continue to look for businesses that fit either a product capability that we think is better to buy than build or a geographic market where we want to expand some presence or some unique adjacency. Then just do the math on whether or not it's the right purchase for us. But I don't know that you could you would expect any more or less M&A activity out of us because of the moderate slowdown.
spk04: Understood. Thank you.
spk03: Our next question comes from the line of Devon O. with KeyBank Capital Markets. Please proceed with the question.
spk11: Great. Thanks for taking our question here. I'm curious to hear about backgroundchecks.com and what you're seeing in the SMB market. How has that platform performed in the past quarter? And are you seeing the same type of nervousness from that SMB customer segment?
spk10: The SMB market, as we had mentioned on previous quarters, had been one of the slower ones to recover and, frankly, was still kind of in recovery mode. So what I would say is that nothing's really changed there. We still are slightly up on that sector of our business. But it's definitely been a lagging sector for us, frankly, for the last 18 months. It's been the slowest to recover from the pandemic, and that hasn't changed.
spk11: Okay, no, that's helpful. And maybe just one more. I want to ask about the pipeline that you're seeing. I know you said that it's still shaping up really nicely for 2023, and you expect some to go live in 4Q, are there certain industries that you're seeing maybe stronger pipeline development than other verticals at this point?
spk07: So, for the most part, it's well within our wheelhouse, the core verticals that we focus on between, you know, tech, transportation, financial services, and healthcare. Pretty flat drop. It is, yeah, pretty evened out.
spk11: Okay, got it. Thanks for the call, Eric.
spk03: Once again, as a reminder to register for a question, please press the one followed by the four. Our next question comes from the line of Manav Patnak with Barclays. Please proceed with your question.
spk06: Hi, Jorge. This is actually Ronan Kennedy. I'm from Manav. May I confirm, you said that you don't feel that the fundamentals have changed. What's happened?
spk10: Because it seems to have happened. I'm sorry, you're breaking up. I can't hear you.
spk06: Hi, is that better? Yeah, much better.
spk07: Thank you.
spk06: Apologies. Thank you. You had said, based on what you've seen, you don't think the fundamentals within the industry have changed with regards to the secular drivers. Has it changed your view on your visibility and what you see from the leading indicators? And how does that kind of reconcile with what we have been seeing from the jobs, the JOLTS data, et cetera?
spk07: Yeah, it's a good question. But I think As I said earlier, our view of the long-term fundamentals on the employment market are very bullish for the reasons we discussed. And what we're seeing right now, which is really a six-week trend, right? And it's a lumpy one, right? So it's not necessarily just precipitous decline by any stretch of the imagination. But the softness seems to be reflected in general nervousness about our clients' businesses. And in prudence, in them managing costs, they're slowing down their pace of hiring. It doesn't mean that the demand for jobs for those businesses isn't still there. It just means they're not filling those jobs for some period of time here. And it may be temporary. It may be a few quarters. Who knows? But right now, the visibility that we have is only born of the last six weeks and the conversations we've had with our top 100 enterprise clients who are all reflecting just that sense of uncertainty.
spk06: Okay, thank you. And then as a follow-up, if I may, what about in terms of the different products, whether I know you had commented on the one client, the six million no longer doing verifications, but what about, say, in terms of annual rescreens or the continuous monitoring or other things that there was good trends behind, such as inoculation management, immunization management? Are you seeing, you know, different rates of use of certain products and services, and has there been any change to the economics or pricing of those?
spk07: Yeah, no, not at all. In fact, all the products you just mentioned are part of the reason why our pipeline is as robust as it is, and no impact on pricing that we've seen.
spk10: The situation we described is very, very isolated. And the only reason why we mention it is because with a larger customer, it had an impact.
spk06: Got it. Thank you very much.
spk03: Mr. Abramo, there are no further questions at this time. I'll now turn the call back to you.
spk07: All right. So thanks, operator. We appreciate everyone joining the call. Please don't hesitate to reach out with any additional questions. We look forward to keeping you posted on our progress in the coming months. So thanks again. Everybody stay safe and have a great night.
spk03: That does conclude the conference call for today. We thank you for your participation and ask you please disconnect your lines. Thank you and have a great day.
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