Q3 2021 First Advantage Corp Earnings Call

November 8, 2021

Good day and thank you for standing by welcome to the first advantage third quarter 2021 financial results Conference call.

All participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session to ask a question during that session you will need to press star one on your telephone.

If you require any assistance during the call. Please press star zero.

I would now like to hand, the conference over to your speaker today, Ms. Stephanie Gorman Vice President of Investor Relations Ms. Goldman you may begin.

Thank you Chris Good morning, everyone and welcome to first advantages third quarter 2021 earnings Conference call.

The investors section of our website you will find the earnings press release and slide presentation to accompany today's discussion.

This webcast is being recorded and will be available for replay on our Investor Relations website.

Before we begin our prepared remarks, I need to remind everyone that our discussion today will include forward looking statements such forward looking statements are not guarantees of future performance actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. These factors are discussed in more.

And in our filings with the SEC, including our initial public offering perspective dated June 22nd 2021, and our second quarter 2021 Form 10-Q, such factors may be updated from time to time in our periodic filings with the SEC and we do not undertake any obligation to update forward looking statements.

Throughout this conference call, we will also present and discuss non-GAAP financial measures.

Filiation of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website at investors HGV Dot Com I'm joined on our call today by Scott Staples first advantages.

He and David <unk>, our CFO.

We will take your questions. After our prepared remarks, I will now hand, the call over to Scott.

Thank you Stephanie and good morning, everyone welcome to the first advantages third quarter conference call.

For those of you who are new to our story. We have included a company overview on slide four.

We are a leading global global provider of technology solutions for screening Verifications safety and compliance related to human capital.

Our technology and delivery capabilities stand out in a fragmented market, allowing us to grow business with existing and new customers alike.

We accomplished this through our one core global technology platform or.

Our growing in house proprietary databases that now include more than 600 million criminal education and work history Records.

Our API integrations with more than 603rd party data providers.

Our laser focus on specific industry verticals and our global capabilities.

We serve a large total addressable market of $13 billion, which offers us a tremendous amount of white space, allowing us to further differentiate and capture additional market share.

Our customers include 55 of the Fortune 100 companies and among our customer base, we enjoy long tenured relationships, averaging 12 years across our top 100 customers as well as a high gross retention rate of 95%.

In 'twenty 'twenty alone, we completed more than 75 million screenings, which demonstrates our ability to handle scale and underscores the importance of our solutions to help improve company's risk management and compliance practices.

Over the 12 month period ended September 30th 2021 we grew revenues, 37% to $656 million of which approximately 85% were from North American markets and 15% from international.

Over the same 12 month period, we grew adjusted EBITDA, 50% year over year to $202 million and achieved an adjusted EBIT margin of 31%.

Moving on to slide five.

Let me share some additional highlights from the third quarter.

Our exceptional third quarter performance included a 41% year over year increase in revenues and a 48% increase in adjusted EBITDA driven by broad based increases in hiring and screening growth globally and across our key verticals as the economy continued.

To recover from the impacts of the COVID-19 pandemic.

These results reflect strong demand for our existing customers, new customer wins and growth in our international business.

Let's look deeper into our performance.

Number one.

Demand for our solution continues to grow supported by favorable macroeconomic tailwind and job trends, including hiring growth.

Increasing turnover greater worker mobility growing quit rates and new job creation.

Number two.

We experienced strong demand from our existing customers with robust base growth and continued upsell and cross sell momentum driven by broad based hiring and screening growth across key verticals and geographies.

Number three.

We also are pleased to report continued new customer growth fueled by our vertical is go to market teams differentiated technology solutions and global capabilities.

In the third quarter, we added new customers across all key verticals.

Number four.

Revenues in our international markets have continued to recover nicely on an organic basis. This is in addition to the strong performance to date of the UK screening business, we acquired in March.

Number five.

We also continued to expand margins due to investments in robotic process automation proprietary databases.

New product innovation, and our focus on improving operating efficiencies.

We remain focused on these areas to improve margins in the future.

We are.

Number six and finally today, we announced the signing of definitive purchase agreements for two acquisitions that are well aligned with our M&A strategy.

Corporate screening a health care and higher education focused screening and compliant solution provider in North America, and multilateral a screening and verifications provider in Latin America.

I'll discuss these more in a few moments.

Let's move onto slide six.

Summary of our vertical is go to market approach, which differentiate first advantage in the marketplace.

And as a key enabler of our growth strategy by driving customer expansion upsell and cross sell opportunities.

About four years ago.

We rolled out a new transformational go to market strategy focused on specific verticals or industry sectors and aligned our sales and product teams accordingly.

This strategy enables us to be subject matter experts in these industry segments.

And use industry specific data to advise our customers on best practices hiring data onboarding benchmarking and product optimization.

Vertical integration also drives our product development road maps to help us better developed products that are aligned with specific customer verticals.

We are thrilled with how our vertical go to market strategy has successfully fueled growth in our business over the past four years.

Moving to slide seven.

Let's take a closer look at the two definitive purchase agreements we announced this morning.

Both of which we expect to close during the first quarter.

Fourth quarter <unk>.

Corporate screening and multi Latin aligned with our capital allocation priorities and will provide us with accelerated vertical expertise product innovation and in the case of multi Latin international expansion.

Corporate screening will strengthen first advantage is health care and higher education solutions in North America with its comprehensive screening and compliance offerings that are tailored to these customers.

It will bring health care, and higher education expertise and technology and impressive customer base and an experienced management team while also expanding our share in this strategic vertical.

Moving now to multilateral.

This business is headquartered in Mexico City, providing services across Latin America, and will expand our presence in that region.

It will supplement our existing international expansion initiatives, including the U K screening business, we acquired in March of this year.

By adding local market operations compliance and sales and customer success teams.

Multi Latin also has a diverse international and local customer base as well as an experienced management team.

Both acquisitions will be funded with cash from our balance sheet together the two businesses generate in the area of $15 million in annual revenues with multi latins revenues in the low single digit millions with the remainder comprising corporate screening.

Each company is expected to have a positive financial contribution on our business and the senior management teams for both of these businesses will join first advantage upon closing.

We are excited to welcome corporate screening and multilateral two the first advantage team.

In addition to our M&A strategy, we remain focused on organic growth through investments in technology, human capital and new products to support our business as we scale.

As part of these investments in human capital to build our team IMAX.

I'm excited to share that we have recently added two new positions to our senior leadership team to support our efforts and delivering an industry, leading customer experience across our global footprint.

Our new Chief operations Officer International has more than 20 years of experience expertise and will reside in Hong Kong.

Leading our operations and customer care in international markets.

Our new senior Vice President of customer care Americas has more than 25 years of customer experience technology expertise and will reside in the U S.

Leading our customer experience for the Americas.

We are confident that both of these new leaders will lead our teams in delivering innovative solutions and insights that help our customers higher smarter and onboard faster.

Turning to slide eight.

I would like to spend a few minutes on robotic process automation and our proprietary databases.

Robotic process automation or RPE, eh and artificial intelligence are core to our product strategy.

We have been pioneers and using both these technologies to do things better faster and more cost effectively resulting in improved customer experiences faster turnaround times and ultimately benefiting our bottom line.

We currently have more than 2000 and 750 box in operation.

Our product strategy.

Includes the building out of proprietary databases, which give us a competitive advantage as we deliver faster and more efficient screens.

And drives cost savings for our customers and margin improvement for us.

These databases leverage artificial intelligence and machine learning to increase the value and usability of the data.

This helps improve our insights and drive business value for customers.

I am pleased to share that since the beginning of the year the size of our repository of education and work history Records has increased by nearly three times and the size of our criminal record database has increased by nearly 50% to over 550 million Records.

Growth in both our P E and our proprietary databases drive faster turnaround times improved quality increased accuracy and enhanced efficiency for our customers, while also improving our operating efficiencies and supporting robust growth and margin expansion.

Let's now turn to slide nine.

We continue to prioritize investments in new product innovation technology automation and the cloud to help us maintain and enhance our industry leadership position and increased customer penetration.

Our product strategy mirrors, our cloud strategy, which focuses on innovation and the applicant experience.

By leveraging the cloud we have created flexible architectures through API and micro services. This.

This helps drive best in class speed and turnaround times with customers.

Our entire applicant experience is cloud enabled with an API first design, which allows us to add new state of the art technologies easily to help our customers onboard applicants faster.

Now, let me illustrate with three product innovation that we have recently developed and begun launching to give you a sense of some of the things we are working on.

First I'll start with our identification product right I D.

Right I D was developed to help our customers mitigate risks related to I D fraud <unk>.

Originally in the residential market, but now this product is being used in other verticals as well.

Right I D is fully integrated into our mobile workflow and provides our customers with a seamless applicant experience.

This product Leverages artificial intelligence and facial recognition technology to analyze the likeness.

A selfie and the digital information on the government issued I D.

If the I D appears to be counterfeit or the self he is not live than the technology will flag as such.

Process takes less than two minutes and can be done anywhere.

When used alongside other solutions this works to help mitigate fraud.

Right I D is cloud native with a flexible API first architecture that enables us to leverage artificial intelligence technologies, resulting in one of the most robust I'd fraud mitigation tools in the market.

Second is our instant verification technology.

Instant verification is a revolutionary product that addresses our customers' need for fast turnaround times and enhanced accuracy.

We are able to use our API first design in the cloud for nearly instant automated verification of current employment.

With instant verification customers can verify current employment information literally in seconds.

Customers experienced faster turnaround times and higher confidence in Apple can provided information.

We launched this product in September of this year and I'm proud of our team's execution and further establishing first advantages leadership and innovation in employment Verifications.

Third is extended force.

Extended force was developed to help detect and mitigate risks related to customers extended workforce.

We utilized industry, leading API first design to enable our customers to screen high volumes of contingent contract and temporary workers.

Our customers save time with our mobile enabled streamlined on boarding application, which returns rapid screening results and even create digital badges.

Which provide confirmation of an active clear background checks for their contractors and contingent workers.

We have received great feedback praising its ease of use and we are happy to see new wins have nearly tripled this year with this product.

Next I will turn the call over to our CFO, David Ganzi to give you more detail on our results for the quarter and discuss full year 2021 guidance David.

Thank you Scott good morning.

Turning to slide 11, we reported revenues of $192 $9 million for the quarter, a 41% increase over the prior year period of like 34, 5% represents organic growth.

It is worth noting that the third quarter of 2020 was also a strong quarter up over 10% compared to the third quarter of 2019, despite the broader impacts of the Covid pandemic.

Results have continued to benefit from hiring trends that picked up in late 2020.

And that growth has continued through Q3 2021 and into Q4 to date.

Early reads on October shows solid revenues, continuing the strong performance and trends we have seen this year.

Revenue increases from our existing customers made up $39 $9 million off of our growth driven by robust base growth and continued upsell and cross sell momentum, which was strong and broad based across key verticals and geographies.

Revenues from new customers contributed $7 $4 million driven by our vertical is go to market strategy and differentiated global technology solutions.

Revenues from our U K screening business acquisition contributed $8 $8 million to the quarterly growth.

Also included in our revenues was minimal foreign currency benefit of $400000 in the quarter.

Adjusted EBITDA for the quarter was $63 $9 million, a 48% year over year increase reflecting higher revenues as well as margin expansion due in part to increased investments in robotic process automation and proprietary databases.

Cost discipline and operating leverage this resulted in an adjusted EBITDA margin of 33, 2%, a 160 basis point increase versus the prior year quarter.

We had adjusted net income of $42 $2 million or 28 cents per diluted share in the third quarter of 2021 compared to $22 $3 million or <unk> 17 cents per diluted share in the third quarter of 2020.

This growth was positively impacted by all of the factors just mentioned along with the additional favorable impact of lower out lower outstanding debt and lower interest rates, which together lowered our interest expense to $4 $7 million in the third quarter of 2021.

Our adjusted effective tax rates were 24, 2% and 25, 7% in Q3 2021 in Q3 2020, respectively.

The lower rate in Q3, 2021 was driven primarily by favorable R&D tax credit estimates and adjustments and other discrete items.

Next we wanted to give you a sense of our consistent track record of growth over time, and some of the seasonality in our business.

On Slide 12, you will see our quarterly revenues going back to 2019.

In 2020, we demonstrated the resiliency of our business model by drilling revenues adjusted EBITDA and margins, despite the economic and hiring challenges created by the pandemic.

As in past years and in 2021 to date, we maintained and grew our business due to deep customer relationships, our focus on enterprise customers and the success of our vertical sales force.

Our seasonal trend typically says higher revenues from September through November as many companies ramp up their hiring ahead of the holiday season.

We expect this trend to continue with a slightly different quarterly distribution.

This year, we anticipate the sequential third to fourth quarter trend will be impacted by the acceleration of seasonal hiring which ramped up earlier this year during the third quarter.

We continue to expect strong year over year growth in the fourth quarter. However, the growth rate will also be tempered partially as a result of an exceptionally strong fourth quarter of 2020.

We are still anticipating double digit full year year over year growth rate in the range of 34% to 35%.

Moving to slide 13.

You will see our excellent track record of expanding adjusted EBITDA margins.

Our margins have benefited from expanded utilization of our proprietary databases and increased automation with third party data providers.

Additionally, as Scott mentioned robotic process automation and other technology innovations have driven operational efficiencies increased accuracy and enhanced customer turnaround times. We also continue to leverage our G&A infrastructure.

We have an intense focus on operational excellence and we tightly control operational costs and associated head counts to achieve cost efficiencies, while maintaining a variable cost structure to accommodate demand fluctuations.

We employ a disciplined balance between cost efficiencies and strategic investments as we continue to leverage G&A costs, while investing in technology and sales.

Turning now to cash flows balance sheet and capital allocation on slide 14.

In the third quarter of 2021 operating cash flows increased 95% versus the prior year quarter to $27 $8 million, which includes the impact of IPO and public company related costs.

During the third quarter, we spent $6 $4 million on purchases of property and equipment and capitalized software development costs.

We ended the third quarter with total debt of $564 $7 million in cash of $275 $5 million.

With LTM adjusted EBITDA of $201 $5 million, we lowered our net leverage ratio to one four times.

We also have $100 million in borrowing capacity under our revolving credit facility with no outstanding balances under this facility.

Now, let me remind you of our capital allocation priorities.

First we continue to evaluate additional acquisition opportunities that are expected to be accretive and align with our strategic priorities, including adding vertical expertise expanding internationally or into adjacent solutions are adding complementary data or technologies.

Our recently announced acquisitions of corporate screening and multi Latin, which Scott spoke about earlier are both excellent examples of acquisitions aligned with key pillars of our M&A strategy.

Both of these will be funded from cash on the balance sheet.

In addition, we pursue opportunities to increase organic growth through investments in new product development technology and automation as well as their sales solution engineering and customer success functions.

And finally, we continue to focus on maintaining a strong balance sheet conservative capital structure, and a flexible leverage profile.

Next on Slide 15 is our updated guidance for full year 2021.

Based on our strong third quarter results October revenue performance and the anticipation of ongoing positive trends for the remainder of the fourth quarter. We are increasing our full year 2021 guidance for revenues adjusted EBITDA and adjusted net income.

We now expect to generate 2021 revenues in the range of $680 million to $686 million, resulting in 34% to 35% revenue growth for full year 2021 compared to 2020.

This revised range reflects continuing favorable macroeconomic tailwind broad based hiring in screening demand across our existing and new customers high customer retention, continuing new customer upsell and cross sell wins and contribution from our U K <unk>.

Meaning business acquisition.

Additionally, we anticipate our 2021 adjusted EBITDA will be in the range of $208 million to $211 million driven by continued strong flow through from incremental revenues increased automation additional efficiencies and <unk>.

Operating leverage.

Offset by new public company costs, and additional investments in product technology and sales.

We expect our 2021 adjusted net income to be between 125 and $128 million due to all of the factors I. Just mentioned in addition to the positive impact of lower outstanding debt and lower interest rates.

We also anticipate capital expenditures will remain unchanged since our previous guidance in the range of 25% to $26 million, which includes purchases of property and equipment and capitalized software development costs.

We believe that our adjusted effective tax rate for full year 2021 will be in the range of 25, 5% to 26, 5% a slight improvement from our previous expectations.

This adjusted effective tax rate is the ongoing rate that would apply to our adjusted pre tax income based on geographic mix and expected discrete items.

We had U S. Federal net operating loss carry forwards of approximately $168 million as of September 32021.

And we expect our cash tax payments to be approximately $9 $5 million for the full year 2021.

Please note that our guidance does not include results from corporate screening and multi Latin businesses for which the signing of definitive purchase agreements was announced this morning.

We expect to close both of these acquisitions during the fourth quarter of this year.

Now on Slide 16, we show our company's long term organic annual growth targets.

We believe we can achieve organic revenue growth rate of 8% to 10% in the long term based on our proven growth formula of base growth upsell cross sell and new customer wins as well as our performance track record and they are identified market opportunity. Additionally.

Additionally, we target long term adjusted EBITDA growth of 11% to 14% based on the incremental revenues generated continued automation and further operating efficiencies we have a long term target of 14% to 18% growth for adjusted net income.

Based on all the factors I, just described plus leveraging non operating expenses.

Based on discussions with our clients around their 2022 outlooks, we expect 2022 to be another year with successful top line growth.

While we are still in the midst of our planning discussions we believe that our 2020 to top line revenue growth will be generally in line with our long term target.

Before the impact of acquisitions.

We intend to continue to achieve operating leverage in order to drive bottom line results consistent with our long term goals, we have a great historical track record of accomplishing this.

We plan to provide full 2022 guidance when we report our Q4 and full year 2021 results.

With that I will turn the call back over to Scott.

Thank you Dave.

For the moving to slide 18 for the key reasons, we summarized on this slide.

We are very excited about the bright future that we see for first advantage.

We are a global leader in a large fragmented and growing market.

With growth that continues to be fueled by macroeconomic tailwind that are driving a robust hiring environment.

Our differentiated and embedded technology platform provides mission critical solutions to diversified industries and highly loyal customers. Thanks to our vertical is go to market strategy.

We continue to expand our proprietary databases, extending our competitive advantage through product differentiation faster turnaround times and cost efficiencies.

For investors, our bright future is reinforced by our performance over time, we've demonstrated our resilient financial model consistent track record and ability to grow revenues margins and cash flow.

At this time, we will ask the operator to open the line for your questions.

Yes.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.

Our first question comes from Hamzah <unk> of Jefferies. Your line is open.

Hey, Good morning, this is actually Ryan gunning filling in for Hamzah.

My first question I guess is in terms of vertical exposure.

End markets are seeing greater growth relative to others and are there any verticals you think you're underpenetrated in where there's more white space opportunity.

David do you want that one.

Sure what I would tell you is we've seen growth across all verticals, we don't break that out and disclose that separately.

The acquisitions that we just did with corporate screening will really help enhance our health care vertical but.

But we're seeing really broad based growth from all segments.

Got it. Thank you that's helpful. And then for my follow up I guess could you just talk about whether any supply chain issues that your customers are impacting hiring plans at all maybe any specific verticals or.

What we've seen is our clients are trying to hire anyone and everyone that they can and they started earlier and it's a constant effort.

To get talent and to get employees. We've also seen a lot of churn and turnover, which also adds to more screening as well.

Got it that's very helpful. Thanks, a lot.

Thank you.

Our next comes from Ashish <unk>.

Uh huh.

<unk> capital markets. Your line is open.

Yes, Thanks for taking my question and congrats on such a strong quarter also thanks for providing an early look into the 2022 top line growth I was just wondering if you could help parse what are the assumptions that are going into your.

Guidance for preliminary guidance for 'twenty 2022 top line, how much of it is coming from a strong job market and and.

The benefit that you're going to see from increased cross sell upsell increased back as you didn't city. So any color there would be helpful. Thanks.

Again, we're in very early stages relative to 2022, and we'll be giving full guidance. When we report on Q4, but based on discussions with our clients. We are optimistic that there will be another successful growth year for us.

Okay. That's very helpful. And then maybe just a quick question on the proprietary database, we have seen significant increase in red card in 2021.

Talked about the very fight in the National criminal trial.

My question was is that an opportunity to also move some of the third party data sources in house and how should we think about the growth in the proprietary database is also going forward. Thanks.

Yes, I mean.

First of all you know.

As we use more and more of our proprietary data.

We are.

Third party data costs are trending down obviously.

It's obviously, it's more profitable for us to use our own data, but our data strategy really varies across geographies and across industries and so it's really hard to sort of give a blanket statement as to what we would do regarding data we're always looking for ways to.

To optimize our data.

So we'll continue to look at that strategy as we go forward.

Thanks, and congrats again on the strong business. Thank you.

Thank you.

Our next question comes from David.

Evercore ISI your line is open.

Thank you good morning could you help dimension for us what the outlook for.

SG&A expenses might be over the next few quarters, especially.

Travel and entertainment expenses kind of come back into the cost structure, the salesforce gets out and starts meeting.

You know more with clients in person.

So we have clearly factored that in.

To all of our forecasts going forward. In addition to public company costs that we're gonna have to grow over so that will flatten G&A.

Leverage that we get from it which should start up again in the second half of 2022.

Got it thanks for that and then.

As a follow up.

Could you talk about your international expansion plans clearly with the hiring of a new COO to run your international business what are the major new geographies you're focused on internationally.

And what are.

How much can you expand your Tam as you become a little bit more international focused.

Yeah, absolutely. So if you look at the at the Tam of this hole.

Industry, we are obviously intrigued by the potential for international growth.

I think our international go to market strategy is not that far off from our domestic go to market strategy, whereas the first priority is always going to be organic growth.

We are looking for expansion in the regions, we are through potential M&A, but we'll be opportunistic about it.

So focusing on organic growth and focusing on the industries I'm sorry, the geographies that we're in is going to be priority number one.

But we do obviously see a nice expansion opportunities in certain geographies and hence the the acquisition that we did that we announced this morning.

In Latin America, it's a sign of that and the acquisition that we announced back in March in the U K is also a sign of that.

Understood. Thank you.

Thank you.

And we have Shlomo Rosenbaum of Stifel. Your line is open.

Hi, Good morning, Thank you for taking my questions.

You guys had some pretty good margin expansion and I want to focus a little bit on how much of that is coming from some of the increases youre talking about in terms of the proprietary databases.

Or is it really just a very small factor at this point in time and it really it's coming from the other items that you talked about in just a little bit discussion and given the success that youre having in building the database doesn't makes sense to try to accelerate the build over there.

So clearly we had large margin expansion in the quarter most of that was driven through the incremental revenue fall through in the way that we were able to leverages incremental revenues, we did get some additional benefits through automation and trumps some from our proprietary databases.

But we're really good expanding margins through the incremental revenue fall through.

So that's the primary thing that we should think about its the its the what you call. It. It's the revenue fall through less taking out some of the.

From the proprietary data and the databases. Okay. That's helpful. And then just one other thing that's interesting there's actually a wall Street Journal article I believe it's out today in terms of Theres, such a tough time that clients are having now in terms of getting people into positions that a lot of them are loosening up are dropping some of the background screening.

New requirements and.

So I want to ask you if you could comment on that what are you seeing in your client base I mean your results seem to indicate that either that's really not something that youre seeing or despite some of that happening. There is such a wave of positive momentum that it doesn't really make a difference. So maybe you can just kind of give us some color on that.

Yeah, I really think theres two pieces to it we also saw the article as well.

One we are not seeing our customers.

Asking for that in fact, we're probably seeing the opposite where our.

Our customers are really asking for more risk mitigation heavier focus on compliance and safety.

And that's really driven the concept of the package density, which we've mentioned before as a company is doing actually more and more screens. So that's point number one, but I think point number two.

<unk> is really important because through the automation that we've been talking to you about and through the AI and machine learning that we've rolled out we are just becoming faster and faster. So we can actually return background screens very quickly.

With high levels of accuracy based off of the automation that we brought in so companies really don't have to move to that model that you saw in the Wall Street Journal with first advantage because we can provide fast check to begin with.

Great. Thank you very much so good quarter.

Thank you.

Next we have Andrew Steinman of Jpmorgan. Your line is open.

Hi, Scott.

You've been really kind of what's quite enthusiastic about the prospect post hiring.

Background monitoring and.

It kind of always wonder why hasn't this market already kind of adopted and penetrated.

And.

Why do you feel like it will some time on the let's say reasonable horizon.

Yes, you are right I really think it's a great product.

It's a it's great technology, a great great product in the past, we have mentioned continuous monitoring which is our post hire monitoring product. It allows customers to continuously screen and monitor their employee base, which you know as.

As you can imagine that that should be something that customers should want to do versus a single snapshot in time that looks backwards historically.

It still represents a very small percentage of our revenues today as you stated, but we still believe this product.

Represent meaningful growth and opportunity for first advantage in the future.

But Scott did you say what is going to change to get client adoption.

I'm, just not sure what's going to change.

It's a longer sales cycle are longer sales process because quite honestly.

It involves change management on the client side, they have to think differently about how they do background checks and what theyre going to do with this new data in this new information once they receive it right companies companies today, just haven't thought through those processes. So it's the combination of HR.

And legal working internally to figure out okay. What is it that we're going to screen for what is it that we're going to monitor how are we going to ingest that data how are we going to react on that data and that's just been a little bit slow because that just is obviously a lot you know a lot more complicated than just hiring a company do.

Do a historical snapshot in time background check, but this is we think a superior product and we think it's a great product for the future, but it's just going to take while for for market adoption. Okay. Thank you.

Thank you.

Again to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.

Next question comes from Gary Disney of Banc of America Securities. Your line is open.

Hey, guys. Good morning, So the first question.

Obviously very strong labor markets at the moment I Wonder if you could help us just think through how much of this.

Pretty tremendous revenue growth is coming from.

Sort of base business growth as you described it.

Prior to the IPO and also just benefits from tight labor market, so harder to get employees through doing more screens per job you fill that that kind of stuff versus versus.

Just the underlying factors you can control more like new business wins like upsell of additional solutions et cetera.

How much if you could divide those down roughly or just some color would be helpful. Thank you.

I think the best way to think about that Gary is there are a number of levers right that we've always talked about base growth up sell cross sell new logo all of that have been very positive contributors international really came back strong this year, particularly in Q3.

That's been very robust, we're seeing all of those markets.

With tremendous growth and then relative to the base growth. It clearly has been higher this year than it has been historically.

Maybe it's the new norm, we like it a lot the clients are extremely active in trying to hire everyone that they possibly can because of the turnover. The mobility. The great resignation. If you will we're seeing a lot of that churn results and more and more screens and.

And that's driving our base growth.

Is there any way to think about the concept of tough comps next year.

And when some of these factors normalize I mean I heard you on the early 'twenty two commentary certainly.

Sounds like you expect to continue to deliver quite robust growth, but how do you think about that and I guess is there anything you can do if and when.

It gets tougher from a macro perspective.

Well, if you look at our long term targets those basically have gone back to historical norms ultimately in our model, we see that happening.

We could be wrong, and the fact that it could be.

A permanent change, which would just add to that growth, but we are <unk>.

Forecasting that it will return to a more historical normal rate long term.

Okay alright, thank you.

Okay.

Thank you.

Yeah.

And I see no further questions in the queue I will turn it back over to Scott Staples for closing comments.

Thank you operator, and thanks, everyone for your questions.

Obviously, we're very proud of our accomplishments and are excited about what's ahead. We believe first advantage is very well positioned for future growth and we will continue to focus on delivering value for our shareholders. Thank you for joining us and have a great day.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

[music].

Good day and thank you for standing by welcome to the first advantage third quarter 2021 financial results Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during that session you will need to press star one on your telephone.

Require any assistance during the call. Please press star zero.

I would now like to hand, the conference over to your speak today, Stephanie Gorman Vice President of Investor Relations.

Goldman you may begin.

Thank you Chris Good morning, everyone and welcome to first advantages third quarter 2021 earnings conference call in the investors section of our website you will find the earnings press release and slide presentation to accompany today's discussion.

This webcast is being recorded and will be available for replay on our Investor Relations website.

And in our filings with the SEC, including our initial public offering perspective dated June 22021, and our second quarter 2021 Form 10-Q, such factors may be updated from time to time in our periodic filings with the SEC and we do not undertake any obligation to update forward looking statements.

Throughout this conference call. We will also present and discuss non-GAAP financial measures reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website at investors thought.

Adv Dot com I'm joined on our call today by Scott Staples first advantages CEO and David Ganzi, Our CFO, we will take your questions. After our prepared remarks, I will now hand, the call over to Scott.

Yeah.

Thank you Stephanie and good morning, everyone welcome to the first advantages third quarter conference call.

For those of you who are new to our story. We have included a company overview on slide four.

We are a leading global global provider of technology solutions for screening Verifications safety and compliance related to human capital.

Our technology and delivery capabilities stand out in a fragmented market, allowing us to grow business with existing and new customers alike.

We accomplished this through our one core global technology platform.

Our growing in house proprietary databases that now include more than 600 million criminal education and work history Records.

Our API integrations with more than 603rd party data providers.

Our laser focus on specific industry verticals and our global capabilities.

We serve a large total addressable market of $13 billion, which offers us a tremendous amount of white space, allowing us to further differentiate and capture additional market share.

In 2020 alone, we completed more than 75 million screenings, which demonstrates our ability to handle scale and underscores the importance of our solutions to help improve company's risk management and compliance practices.

Over the 12 month period ended September 30th 2021, we grew revenues, 37% to $656 million of which approximately 85% were from North American markets and 15% from international.

Over the same 12 month period, we grew adjusted EBITDA, 50% year over year to $202 million and achieved an adjusted EBIT margin of 31%.

Moving on to slide five.

Let me share some additional highlights from the third quarter.

To recover from the impacts of the COVID-19 pandemic.

These results reflect strong demand for our existing customers, new customer wins and growth in our international business.

Let's look deeper into our performance.

Number one demand for our solution continues to grow supported by favorable macroeconomic tailwind and job trends, including hiring growth.

Increasing turnover greater worker mobility grew.

Growing quit rates and new job creation.

Number two.

We experienced strong demand from our existing customers with robust base growth and continued upsell and cross sell momentum driven by broad based hiring in screening growth across key verticals and geographies.

Number three.

We also are pleased to report continued new customer growth fueled by our vertical is go to market teams differentiated technology solutions and global capabilities.

In the third quarter, we added new customers across all key verticals.

Number four.

Revenues in our international markets have continued to recover nicely on an organic basis. This is in addition to the strong performance to date of the UK screening business, we acquired in March.

Number five.

We also continued to expand margins due to investments in robotic process automation proprietary databases.

New product innovation.

And our focus on improving operating efficiencies.

We remain focused on these areas to improve margins in the future.

We are.

Number six and finally today, we announced the signing of definitive purchase agreements for two acquisitions that are well aligned with our M&A strategy.

Corporate screening a health care and higher education focused screening and compliant solution provider in North America, and multi Latin a screening and verifications provider in Latin America.

I'll discuss these more in a few moments.

Let's move onto slide six.

A summary of our vertical is go to market approach, which differentiate first advantage in the marketplace and is a key enabler of our growth strategy by driving customer expansion upsell and cross sell opportunities.

About four years ago, we rolled out a new transformational go to market strategy focused on specific verticals or industry sectors and aligned our sales and product teams accordingly.

This strategy enables us to be subject matter experts and these industry segments.

And use industry specific data to advise our customers on best practices hiring data.

Onboarding benchmarking and product optimization.

Vertical integration also drives our product development road maps to help us better developed products.

Lined with specific customer verticals.

We are thrilled with how our vertical go to market strategy has successfully fueled growth in our business over the past four years.

Moving to slide seven.

Let's take a closer look at the two definitive purchase agreements we announced this morning.

Both of which we expect to close during the first quarter.

Fourth quarter.

Both corporate screening and multi Latin aligned with our capital allocation priorities and will provide us with accelerated vertical expertise product innovation and in the case of multi Latin international expansion.

Corporate screening will strengthen first advantages health care and higher education solutions in North America with its comprehensive screening and compliance offerings that are tailored to these customers.

Bring health care, and higher education expertise and technology and impressive customer base and an experienced management team while also expanding our share in this strategic vertical.

Moving now to multilateral.

This business is headquartered in Mexico City, providing services across Latin America, and will expand our presence in that region.

It will supplement our existing international expansion initiatives, including the U K screening business, we acquired in March of this year.

By adding local market operations compliance and sales and customer success teams.

Multi Latin also has a diverse international and local customer base as well as an experienced management team.

Each company is expected to have a positive financial contribution on our business and the senior management teams for both of these businesses will join first advantage upon closing.

We are excited to welcome corporate screening and multi Latin two the first advantage team.

In addition to our M&A strategy, we remained focused on organic growth through investments in technology, human capital and new products to support our business as we scale.

As part of these investments in human capital to build our team IMAX.

I am excited to share that we have recently added two new positions to our senior leadership team to support our efforts and delivering an industry, leading customer experience across our global footprint.

Our new Chief operations Officer International has more than 20 years of experience expertise and will reside in Hong Kong.

Leading our operations and customer care in international markets.

Our new senior Vice President of customer care Americas has more than 25 years of customer experience technology expertise and will reside in the U S leading.

Leading our customer experience for the Americas.

We are confident that both of these new leaders will lead our teams in delivering innovative solutions and insights that help our customers higher smarter and onboard faster.

Turning to slide eight.

I would like to spend a few minutes on robotic process automation and our proprietary databases.

Robotic process automation or RPE, eh and artificial intelligence are core to our product strategy.

We currently have more than 2000 and 750 box in operation.

Our product strategy.

Includes the building out of proprietary databases, which give us a competitive advantage as we deliver faster and more efficient screens and.

And drives cost savings for our customers and margin improvement for us.

These databases leverage artificial intelligence and machine learning to increase the value and usability of the data.

This helps improve our insights and drive business value for customers.

Growth in both our P E and our proprietary databases drive faster turnaround times and improved quality increased accuracy and enhanced efficiency for our customers, while also improving our operating efficiencies and supporting robust growth and margin expansion.

Let's now turn to slide nine.

Our product strategy mirrors, our cloud strategy, which focuses on innovation and the applicant experience.

By leveraging the cloud we have created flexible architectures through API and micro services. This.

This helps drive best in class speed and turnaround times with customers.

Our entire applicant experience is cloud enabled with an API first design, which allows us to add new state of the art technology is easily to help our customers onboard applicants faster.

Now, let me illustrate with three product innovation that we have recently developed and begun launching to give you a sense of some of the things we are working on.

First I'll start with our identification product right I D.

Right I D was developed to help our customers mitigate risks related to I D fraud <unk>.

Originally in the residential market, but now this product is being used in other verticals as well.

Right I D is fully integrated into our mobile workflow and provides our customers with a seamless applicant experience.

This product Leverages artificial intelligence and facial recognition technology to analyze the likeness of.

A selfie and the digital information on the government issued I D.

If the I D appears to be counterfeit or the self he is not live than the technology will flag is such that.

The process takes less than two minutes and can be done anywhere.

When used alongside other solutions this works to help mitigate fraud.

Second is our instant verification technology.

Instant verification is a revolutionary product that addresses our customers' need for fast turnaround times and enhanced accuracy.

We are able to use our API first design in the cloud for nearly instant automated verification of current employment.

With instant verification customers can verify current employment information literally in seconds.

Customers experienced faster turnaround times and higher confidence in Apple can provided information.

We launched this product in September of this year and I'm proud of our team's execution and further establishing first advantages leadership and innovation and employment Verifications.

Third is extended force.

Extended force was developed to help detect and mitigate risks related to customers extended workforce.

We utilized industry, leading API first design to enable our customers to screen high volumes of contingent contract and temporary workers.

Our customers save time with our mobile enabled streamlined onboarding application, which returns rapid screening results and even create digital badges.

Which provide confirmation of an active clear background checks for their contractors and contingent workers.

We have received great feedback praising its ease of use and we are happy to see new wins have nearly tripled this year with this product.

Next I will turn the call over to our CFO, David <unk> to give you more detail on our results for the quarter and discuss full year 2021 guidance David.

Thank you Scott good morning.

Turning to slide 11, we reported revenues of $192 $9 million for the quarter, a 41% increase over the prior year period of like 34, 5% represents organic growth.

It is worth noting that the third quarter of 2020 was also a strong quarter up over 10% compared to the third quarter of 2019, despite the broader impacts of the Covid pandemic.

Results have continued to benefit from hiring trends that picked up in late 2020.

And that growth has continued through Q3 2021 and into Q4 to date.

Early reads on October shows solid revenues, continuing the strong performance and trends we have seen this year.

Revenue increases from our existing customers made up $39 $9 million of our growth driven by robust base growth and continued upsell and cross sell momentum, which was strong and broad based across key verticals and geographies.

Revenues from new customers contributed $7 $4 million driven by our Verticalizing, our go to market strategy and differentiated global technology solutions.

Revenues from our U K screening business acquisition contributed $8 $8 million to the quarterly growth.

Also included in our revenues was minimal foreign currency benefit of $400000 in the quarter.

Adjusted EBITDA for the quarter was $63 $9 million, a 48% year over year increase.

Selecting higher revenues as well as margin expansion due in part to increased investments in robotic process automation and proprietary databases.

Cost discipline and operating leverage this resulted in an adjusted EBITDA margin of 33, 2%, a 160 basis point increase versus the prior year quarter.

We had adjusted net income of $42 $2 million or 28 cents per diluted share in the third quarter of 2021 compared to $22 $3 million or <unk> 17 per diluted share in the third quarter of 2020.

Our adjusted effective tax rate or 24, 2% and 25, 7% in Q3 2021 in Q3 2020, respectively.

The lower rate in Q3, 2021 was driven primarily by favorable R&D tax credit estimates and adjustments and other discrete items.

Next we wanted to give you a sense of our consistent track record of growth over time, and some of the seasonality in our business.

On Slide 12, you will see our quarterly revenues going back to 2019.

In 2020, we demonstrated the resiliency of our business model by drilling revenues adjusted EBITDA and margins, despite the economic and hiring challenges created by the pandemic.

As in past years and in 2021 to date, we maintained and grew our business due to deep customer relationships, our focus on enterprise customers and the success of our vertical on Salesforce.

Our seasonal trend typically says higher revenues from September through November as many companies ramp up their hiring ahead of the holiday season.

We expect this trend to continue with a slightly different quarterly distribution.

This year, we anticipate the sequential third to fourth quarter trend will be impacted by the acceleration of seasonal hiring which ramped up earlier this year during the third quarter.

We continue to expect strong year over year growth in the fourth quarter. However, the growth rate will also be tempered partially as a result of an exceptionally strong fourth quarter of 2020.

We are still anticipating double digit full year year over year growth rate in the range of 34% to 35%.

Moving to slide 13.

You will see our excellent track record of expanding adjusted EBITDA margins.

Our margins have benefited from expanded utilization of our proprietary databases and increased automation with third party data providers.

We have an intense focus on operational excellence and we tightly control operational cost and associated head counts to achieve cost efficiencies, while maintaining a variable cost structure to accommodate demand fluctuations.