Q2 2022 First Advantage Corp Earnings Call
We continue to look for ways to reduce and minimize our impact.
We are also committed to strong governance, and we take our responsibility to our shareholders our customers and the people they seek to hire very seriously we.
We are committed to maintaining a strong and independent board as evidenced by our well qualified directors of diverse backgrounds, who oversee the audit compensation and nominating and corporate governance committees.
During the second quarter, we were pleased to welcome Bridgette price as an independent director and a member of our Audit Committee bridge.
Bridget impressive experience as a human resources leader provides her with valuable perspective on how clients use first advantage solutions as well as how our sector will continue to evolve and grow.
We are excited about our collective efforts to embrace ESG.
Our work will continue to develop as we identify relevant metrics and goals to monitor and measure our ESG performance and progress in the future.
I will now turn the call over to our Chief Financial Officer, David <unk> for more details on our financial results David.
Thank you Scott and good morning, everyone. We are very proud of our results from another excellent quarter, marking our eighth consecutive quarter of double digit revenue growth now.
Now turning to slide nine.
Versus the prior year, our second quarter revenues grew 15, 3% to $201 $6 million of which 10, 5% was organic.
On a constant currency basis, our revenues would have been approximately $2 $2 million higher representing 16, 6% growth year over year.
Our international segment with revenues of $33 million was up approximately 10% from Q2 2021, even with the foreign exchange rate headwinds.
In total international represented 16% of consolidated revenues in the quarter.
In Q2 revenues from our existing customer base contributed $9 $6 million to our year over year growth.
Revenues from new customers contributed $8 $8 million or 5% to our year over year growth.
Revenues from acquisitions contributed $8 $3 million in total during the quarter.
Adjusted EBITDA for the quarter grew 8% to $68 million as expected our adjusted EBITDA margin of 32% was below the prior year, primarily as a result of incremental public company costs increased insurance.
Premiums increased third party verification cost additional investments in technology and sales and lower margin results from our acquisitions.
All of which were included in our prior guidance.
On a constant currency basis, our adjusted EBITDA would have been approximately $700000 higher or 61 $5 million.
We continue to be pleased with the high quality of our earnings and a small number of add backs included in our adjusted results.
I will also note that inflation is having only a modest impact on our cost structure and margins and has already been reflected in our guidance for 2022.
Yeah.
Adjusted net income increased 14, 5% to $38 million from $33 $2 million in Q2 2021.
Adjusted diluted EPS was <unk> 25 per diluted share for the quarter.
Please note that the prior year quarter was before our IPO and at that time, the share count was materially lower.
Excluded from the second quarter adjusted net income calculation is the $2 $1 million gain associated with our interest rate swap.
This is on top of our $5 $3 million gain in Q1.
As a reminder, with our interest rate collar approximately 50% of our long term debt is capped with a one 5% one month LIBOR rate through February 2024, which benefits us in the current rate environment.
The adjusted effective tax rate for the quarter was approximately 25% consistent with the Q1 2022 rate of 25, 1%.
Slide 10 is included to illustrate our consistent track record of delivering growth throughout the business cycle.
This is our fifth reporting quarter as a public company and we are very pleased that we have exceeded revenue growth expectations in each of these quarters.
Certainly we are subject to macroeconomic factors, but the pandemic in 2020 demonstrated our ability to weather a downturn well and continue to grow.
Despite the uncertain economic outlook today, the current jobs data and feedback from conversations with their clients are indicating continued strength in the jobs and hiring market and a return to normalized hiring growth.
This has been reflected in our outlook for the remainder of the year and is consistent with our long term model.
On Slide 11, you can see our track record of growing adjusted EBITDA and consistently delivering industry, leading margins over many quarters as we constantly strive to increase operational efficiencies and automation as well as expand their usage of proprietary.
Databases.
While in line with the commentary we previously provided around quarterly phasing of our guidance. We did face some margin headwinds in Q2 that I described a few moments ago, yet we still grew over these items and produced adjusted EBITDA margins of over 30%.
<unk>.
I'll remind you that this quarter is the last where we will be facing headwinds from new public company costs as we have cycled over our first anniversary of going public in June .
Next turning to slide 12.
In the second quarter operating cash flows increased 69, 3% to $54 $8 million. This is a substantial increase driven by our revenue growth and profitability.
It also reflects our strong cash flow conversion, which we expect will continue throughout the year.
On a year to date basis cash flow from operations was over $96 million.
Yeah.
During the quarter, we spent $7 $8 million on purchases of property and equipment and capitalized software development cost.
We ended the quarter with total debt of $565 million in cash of $352 million.
Based on our last 12 months adjusted EBITDA of $248 million, we had a net leverage ratio of 0.9 times as of June 32022.
We also have a $100 million in untapped borrowing capacity under our revolving credit facility with no outstanding balances.
Our balance sheet strength current cash and liquidity position modest leverage and expectations for continued free cash flow generation provide us with flexibility in our approach to capital allocation, including the execution of an up to 50 million.
Share repurchase program that we announced today.
As context, we generated operating cash flow of $54 $8 million in Q2 alone.
$96 $4 million on a year to date basis, and a $189 million over the last 12 months.
Theres still leaves us with significant flexibility and liquidity.
We expect that these share repurchases will be accretive to EPS.
The company is not obligated to repurchase any specific number of shares and the timing manner value in actual number of shares repurchase will depend on a variety of factors, including the company's stock price other business considerations and general market and economic conditions.
It is worth noting that as part of this repurchase program.
No shares will be purchased from silverlake or its affiliates.
Consistent with our overall capital allocation priorities, we are constantly evaluating acquisitions targeting opportunities aligned with our strategic priorities, including adding vertical capabilities, expanding internationally or acquiring complementary solutions data or <unk>.
Acknowledges.
Since 2021, we have closed on four strategic acquisitions, which continued to perform ahead of our expectations.
As a result of our very strong and liquid balance sheet consistent cash flow generation and a seasoned leadership team with deep M&A execution experience, we are well positioned to capitalize on future M&A opportunities.
Over the past two quarters, we evaluated numerous targets, but ultimately elected to pass as they did not meet our strategic technological <unk> evaluation criteria.
We also continue to drive organic growth through investments in technology automation and product innovation as well as initiatives through our sales solution engineering and customer success functions.
We believe it is important to maintain a strong balance sheet with a conservative capital structure and a flexible leverage profile.
We expect to fund potential future acquisitions first from available cash on the balance sheet.
Our strong cash generation allows us to also consider paying down debt and to execute on the share repurchase program without any incremental borrowings.
We continually evaluate our capital allocation priorities and believe that a balanced between M&A and returning capital to our stockholders and investing in the continued growth of the company will maximize shareholder value.
Next slide 13 summarizes our guidance for the full year 2022 today, we are raising the low end of guidance ranges for revenues adjusted EBITDA and adjusted net income to reflect our second quarter performance.
We now expect to generate full year 2022 revenues in the range of $823 million to $835 million representing.
Approximately 16% to 17% year over year growth, including the negative impact of FX rates.
This is on top of the significant revenue growth, we experienced in 2021, including the 38% growth in the second half of 2021.
We also anticipate continued incremental flow through from our increased revenues and expect 2022, adjusted EBITDA to be in a range of $254 million to $259 million.
This will result in further expansion of our adjusted EBITDA high quality of earnings and significant cash flow generation.
We expect our 2022 adjusted net income to be between 158 and $161 million, primarily due to the previously discussed factors.
We have included additional color on other assumptions in the footnote on slide 13.
So in current trends in our business close dialogue with our customers regarding their growth plans and hiring forecast.
And our internal growth initiatives and outlook, we maintain a high level of confidence and our full year 2022 guidance ranges.
I will now turn the call back over to Scott.
Thank you David.
In summary, we are excited about the opportunities ahead, and we think first advantage is well positioned for continued growth.
Our focus continues to be on delivering value for our shareholders.
Thank you very much for your time and your.
Your ongoing support.
At this time, we will ask the operator to open the call for your questions.
Thank you Scott at this time, we will conduct a Q&A session. As a reminder to ask a question you will need to press star one on your phone and wait for your name to be announced.
He standby, while we compile the Q&A roster.
Our first question comes from Ashes Savada.
From RBC. Please go ahead.
Thanks for taking my question.
Scott Congrats on the on the large win.
Our steady pipeline of three really strong wins.
I was just wondering if you could talk about.
The pipeline for new opportunities going forward, but also.
Discuss what drove that.
The new win that you highlighted was that from another large player smelter smaller players in the space.
Opportunity further opportunity for first advantage to consolidate the market.
Yes. Thanks. This is a great question so pipeline first.
The pipeline is strong.
We are looking at are.
Our largest pipeline in company history.
I think that is reflective of our vertical go to market strategy, our product innovation and investments that we have made and and just pure sales execution.
On the win.
Absolutely delighted.
Phenomenal win for the company, but it was not a new logo win just to be clear it was the renewal from an existing customer.
But we are really excited about the fact that it was a five year contract renewal, which is not normal in our industry typically three year contracts.
And obviously large in scale, so I think as I highlighted in my comments.
It came down to the.
The technology. The account teams that are working with that customer customer care customer support.
All the things that we put in place to help that customer as we like to say you know higher smarter and onboard faster.
That's really helpful color and one of the questions that we've been asking all the companies in our coverage universe is about good downturn playbook.
The economic environment were to slow down significantly I was just wondering how should we think about any impact on the EBITDA and also what levers you could potentially pull in order to protect the margins. So any color on that would be helpful. Thanks, Yes. So I'll give you a high level overview of where we see the macro and then let David.
Talk about the levers.
Yes, as we said in our statements just a few minutes ago.
We're still seeing a strong demand for our products and services.
I've been saying this for maybe the last year or so more of this is this is a different job market than we've ever seen this is a generational shift that's going on and it's been obviously good for our business.
Keep pushing people back to.
Looking at data and jolts data is a great source to go I mean again July quits data of $4 2 million I believe that's now 16 straight months of over $4 million.
And quits.
If you do simple math, that's over 60 million people quitting their jobs.
In the a and.
The last 16 months, so I think we're seeing generational shifts we're seeing.
More people come back into the workforce on retiring because of inflation, we're seeing job turnover.
Our customers are expecting that job turnover to continue because people are not just making job selection based on traditional social economic factors theres more to play here. It's work life balance, it's changing location due to other reasons whether it's.
High tax state to a low tax states changing changing of whether quality of Hawaii's.
Political reasons, there's a lot of reasons people are moving and changing jobs and thats all good for our business and I think it's showing up in our results and its been further.
Clarified in our guidance and I'll, let David talk about the levers.
So to Echo what Scott just said if you look at our implied guidance that would suggest that our adjusted EBITDA margins will remain over 30% for the balance of the year.
We are staffed up and prepared for our seasonal peak, which generally run September October November they are our strongest months of the year.
Our flexible relative to our staffing.
Look at that constantly we are in touch with their clients and we have grown over our public company costs.
We have now lapped that so we feel very confident that we can maintain industry leading margins.
Thank you now.
Our next question is.
As for non us Patrick from Barclays.
Second one is widening opening.
Please go ahead.
My nephew our lines of please go ahead.
Okay.
Right.
Alright.
I'm not hearing the question.
Yes.
We're just going to jump.
Your line just because he can I just ask you to try again.
In the interest of time almost on queue. Our next question.
Just a reminder for everyone.
Can I ask a question. Please press star one on your phone and then Ali screening to Aneel.
Our next question will be from Andrew Steinman from J P. Morgan.
It is just opening Andrew Please go ahead.
Yes, Hi, this is Alex on for Andrew Steinman.
I wanted to briefly review, maybe what youre seeing in your largest verticals and especially with retail.
We've seen some notable deterioration in head count.
A couple of the large retailers nationwide.
It would just be helpful. If you give any color around what youre seeing and maybe why that might be marketing.
Thank you.
Yeah, Alex good to hear your voice.
So.
In general it's just a quick reminder, on our retail footprint to our retail footprint is really not that strong in what we'd call traditional brick and mortar.
So most of our retail footprint is really more of an e-commerce footprint or or a discounter.
And we have not seen a.
Hiring slowdowns in that sector.
We know there have been some announcements of of potential slowdowns or even lay offset maybe corporate functions or things like that but in the high volume high velocity hiring aspects of those businesses.
We are still seeing a very strong demand.
For.
Our services and ordering volume.
So.
Obviously, we're monitoring that and we'll keep an eye on that but as of right now are our vertical footprint in that space is.
We're still seeing very good growth.
Got it and then maybe just a quick follow up can you provide a little bit more color on the relationship with Plaid.
You sort of envision that creating a distinctive offering with respect to verification.
What are sort of the mechanics of that arrangement.
Yeah.
Perhaps got incredible technology.
We see a shift in the verification space toward.
Faster.
Near instant types of Verifications.
And that shift.
Being enabled through technology partners like Plaid.
Where you can verify president employer.
Iteratively in seconds.
So.
With the job market. The way. It is customers are are frantically searching for anything that will reduce their onboarding times.
And verification tends to be the long pole in the tent when it comes to background screening.
So the ability to tap into applied who can do near instant verification of president appointment will certainly help our customers.
Onboard faster.
And and hit their business goals that they're trying to achieve.
Yeah.
Thank you so much.
Thank you for the question.
Just a reminder, every one is to ask a question. Please press star one on your phone.
Okay.
Okay.
Yes.
Our next question.
From Shlomo Rosenbaum from Stifel.
<unk> is I appreciate that last name there.
Second why open your line.
Please go ahead.
Hi, This is Adam on for Shlomo.
What does the M&A environment look like giving your previously communicated desire to continue to pursue M&A have valuations come down to a more reasonable level and how does that $50 million share repurchase impact the company's ability to potentially do a larger deal.
David you want that one.
Sure.
So that the M&A market is still robust we continue to evaluate a number of opportunities.
But we really didn't like anything that we saw that came to market in the first half of the year, we either had an issue from a technological perspective of where they had multiple platforms that were not integrated or it didnt fit us strategically.
Or the valuations were at a line with the market today. So.
So we look at all three of those criteria, but we're going to keep walking that's our number one priority from a capital allocation perspective.
We have plenty of liquidity, we have $352 million of cash we're generating over $50 million of cash a quarter.
$96 million in the first half of the year. So if you think about the stock buyback program. That's the only one quarter of cash flow. So over the next 90 days, we'll generate enough to pay for all of that and still have the cash on our balance sheet, we have $100 million unused revolver.
And in our Leverages under Onex. So we have plenty of flexibility we have a great balance sheet and M&A remains a very very high priority.
Okay.
And then for.
Some of your earlier comment about.
Cosmos, Dan kind of continued growth in hiring demand, but at a more normalized level could you elaborate a little bit more on a.
Normalized and typically it can take areas industry interest.
Any general thoughts.
Pat.
Yeah. So if you if you look at our our guidance models you know we've always said you know.
Normal growth in our <unk>.
Preferred advantages in that 8% to 10% range.
And.
Obviously with numbers, where we're projecting for the year over over that target, but we're we're literally hearing from our customers there.
They're going they're getting back to normal normal business as usual type growth and demand in the in the job market.
Which has obviously been.
A great number in the past so we've gotten over that.
Massive hiring that happened post COVID-19 whenever it was re hiring people and now we're getting back into just the rhythm of normalized <unk>.
Growth normalized hiring.
You know, which we've we've already factored into our guidance and and communicated today.
Okay. Thanks.
Yes.
Yeah.
Thank you.
Apologies everyone necessary just standing by here to compile the Q&A roster. Just a reminder, again if you do have a question. Please press star one language soon.
Okay.
Okay.
Our next question is from Newnan Ronan Kennedy <unk> from Barclays. Your line is open. Please go ahead.
Alright, good morning, and thank you for taking the question apologies for the.
The audit earlier comment about morale.
It just happened this week.
Can cover itself I'm happy to refer to the transcript can you just.
Theaters, and we give them the dollar numbers from the various components of the organic growth with regards to new.
New business wins upsell cross sell growth et cetera, and then how you think that would look like.
Potentially change should there be a downturn would primarily impact base.
Oh, yeah wait for which GDP would be a proxy or any other considerations.
In light of the changes in the macro outlook.
So as we said earlier.
We grew 10, 5% organically in the quarter 15, 3% in total 16, 6% on a constant currency basis.
And $9 6 million of that was from our existing customer base eight.
$8 8 million or from new customers and $8 3 million from acquisitions, that's pretty consistent with our long term targets. Our model that we've communicated all along is really kind of base growth between two and 4% upsell cross sell between four and five.
5% new logo between five and 7% backing.
For 15, 3% in total 16, 6% on a constant currency basis.
<unk> $9.6 million of that was from our existing customer base.
$8 8 million or from new customers and $8 3 million from acquisitions, that's pretty consistent with our long term targets. Our model that we've communicated all along is really kind of decline based on our discussions with our clients, we think thats going to continue throughout the <unk>.
Second half of the year.
Okay.
Okay.
The procedure.
Okay.
Okay.
Thanks Lynn.
Matt.
I'm, sorry, we can't hear you.
Okay.
Okay.
Brendan do you have us one lat question.
Yes, sorry can you hear me now.
Yes, that's better.
Again for the audio issues.
So.
David Thank you for that with regards to the commentary for the expectations for the remainder of the year in the event. If there were to be any further deterioration that you did see who's.
Who's got questions what happens when you start to see the clinker unemployment rise and the tightness within the market weakening and for instance, if you see in the news.
Our client.
Who we believe to be a marquee client announces that there didn't over hired under slowing the pace of hiring or they're doing layoffs.
What does that look and feel like from a vendor standpoint.
Well the way, we think about that is impact on base growth credit so it's from our existing clients.
And as you've seen over the past six to eight quarters those with an <unk>.
Through the roof from our base growth perspective.
Yes.
And what we're what we're seeing is.
Hey, it's coming down to normalized growth rates, so it's coming down into this 2% to 4% base growth range, it's been running 10% plus in fact in 2021. It was over 20% from our base growth perspective, So it's normalizing back to where it was kind of 20%.
19 ish in that 2% to 4% range and that's what we've reflected in our guidance. That's what we're comfortable with in the second half of the year.
Okay. Thank you.
Thank you that was all at 2019 ish and closing remarks.
Thank you operator, and thanks, everyone for your participation have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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