Q2 2023 HireRight Holdings Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to a higher rate second Cot 2023 conference call.
Joining today's cool, what's the company's president and Chief Executive Officer, Sky, abdominal Chief Financial Officer pumped space.
Treasury and Investor Relations, Andrew Hey.
At this time, all participants alright listen only mode.
I remind everyone that managements, where five to such a non-GAAP financial measures and.
Explanation and reconciliation of these measures to the most comparable comparable GAAP financial measures is included in the press release issued today, which is available in the Investor Relations section of pyrites websites.
Also during this cool management's remarks will include forward looking statements.
Related to macroeconomic conditions demand for the company's services and the company's technology improvement and cost reduction initiative as long as all updated guidance.
Such statements all predictions and actual results may differ materially.
Additional information concerning factors that could cause actual results to materially differ from those in the forward. Looking statements is contained informed 10-K filed with the Securities Exchange Commission Securities and Exchange Commission and the sections off the documents entitled.
<unk> forward looking statements and management's discussion and analysis of financial condition unresolved operation.
Now it is my pleasure to turn the call over to guide a primo he's goes hetzel.
Thank you operator, and good afternoon I appreciate everyone's taking the time with us as we share our second quarter of 2023 results.
And the current global economic environment as much as things change they seem to stay the same.
In spite of inconsistent conflicting economic signals hiring reports and projections our customers seasonal hiring patterns were consistent with prior years, albeit at a lower volume.
For the quarter, we generated revenues of 192.1 million.
While revenues were down 13.6% compared to the same period in 2022.
Justin EBITDA margin grew over 300 basis points to 27.4 per cent.
Cause I have discussed many times since our I P. O. We have invested in developing a more automated back office fulfillment system leveraging various AI technologies.
The result is it this increases our degree of automation and completing a search for example automatically matching our customer search guidelines with our databases and public records.
Our platform is now operational and being implemented across our global footprint we've.
We have maintained our precision while improving speed are improved workflow and cost savings already increasing productivity and improving margins on search results.
And we've recently expanded our development team in India to drive additional cloud base functionality and enhancements working side by side with our engineering teams in Estonia.
Increased automation has enabled us to streamline our domestic workforce and transition to more cost effective offshore markets and.
In addition, we've significantly reduced onboarding in training time for these new associates, improving productivity and operating leverage in other words more output with fewer resources.
Even though we have made great progress to date, we will continue to invest in software development driving additional margin improvement beyond the 300 basis points achieved over the past year.
We continue to have success with new business concentrating on what we can control such as Upsells package expansion of new logos.
I would go to market teams in account executives added nine new enterprise logos in the quarter with combined projected annual revenue of $8 million are strong pipeline conversion in the quarter was cross all of our verticals.
Existing customer retention of our enterprise accounts remained very strong at 97.4%.
And the quarter, we saw up sales increase over 70% sequentially from Q1, 2000 twenty-three demonstrating our teams growing ability to increase our average order size and services provided.
This in turn allows our customers to consolidate their pre and post hiring activities with one provider.
Additionally, our pipeline remains robust across all verticals.
We implemented approximately $13 million worth of new business during the quarter and have more than $20 million of annual contract value in late stage pipeline that we expect to close by the end of the year.
We've discussed are disciplined approach to M&A aimed at expanding our geographic reach as well as adding complimentary services and products to our comprehensive offerings.
In July we announced the acquisition of a majority share of digital trusted identity services or D. T. I S and F. B I approved Chandler specializing in collecting and processing biometric and biographical data.
This investment expands our commitment to biometric based screening is a critical component for customers and highly regulated industries, such as health care financial services and transportation.
This acquisition improves our native fingerprinting capabilities to use in connection with background screening services that require this component.
D T. I S. Also opens up a new revenue stream for us as it operates the transportation security clearinghouse on behalf of the American Association of airport executives to fulfill their obligations as a TSA designated aviation channel or facilitating fingerprint and other security services for more than 300 airports.
And 75, an air carriers.
Another important area of investment for US has been Latin America.
Our ongoing investment in Mexico has enabled us to improve margins through the offshoring of many of our back office functions with exceptional local talent and leadership.
In April we announced the acquisition of inquiry of I'd say in Argentina, and the establishment of operations in Brazil, which provides direct access to local data reducing costs. In addition to increasing our ability to service, our global enterprise customers and their local operating markets.
Our all inclusive presence in Latin American markets continues to set us apart opening the door for new global business expansion.
Turning to profitability to further enhanced margins, we continue our efforts to streamline costs, including reducing global head count.
<unk>, our real estate footprint in managing discretionary expenses.
We are reviewing and will implement options to further reduce costs and outsource non essential corporate functions throughout the remainder of the year and into 2024.
These self-help actions are within our control designed to improve operating leverage with the smaller operating footprint, regardless of the economic environment.
Looking at current market trends I want to remind everyone that many of the market hiring indicators are backwards looking and have limited predictive value on future hiring trends.
Even though the recent BLS and quit state of our weaker they're still stronger than pre pandemic levels and there remains more open positions available candidates.
From our standpoint, there is still strong demand for talent in hiring continues across all verticals. We continued to see hiring patterns during Q2, which were consistent with our previous commentary and our core verticals continue to show seasonal improvement.
In closing, we're pleased with our results, especially given the backdrop of the broader macro environment.
More importantly, we believe that the favorable fundamental changes in hiring and employment practices are here to stay and discretionary hiring will increase as the economic outlook improves.
Our business has been resilient for the last 25 plus years, regardless of the cycles that are often pronounced for one particular sector. We recognize that it's a marathon not a sprint and we are positioning ourselves to further expand margins, while continuing to be a global leader in providing reliable cost effective technology driven verification services.
With that I'll turn the call over to Tom for a closer look at our second quarter financial performance and our outlook for 2023 Tom.
Thank you Guy good afternoon, everyone and thank you for joining our call today is Guy mentioned, our second quarter revenue was $192 $1 million down 13.6% versus the prior year, primarily related to uncertainty and the hiring environment.
The results are consistent with our prior commentary on headwinds impacting non essential hiring.
The results were also consistent with our historical seasonal patterns as we saw our customary queue to uplift in demand.
Our high retention rate of 97.4% and the steady conversion of our pipeline to revenue generating customers supported or positive results.
In other words, even during a slower hiring environment, a retention remains strong and we continue to add new customers.
Specifically, while revenue from existing customers was down approximately 16% revenue from new customers was up more than 36% from the prior year.
Our core verticals accounted for 55% of the revenue this quarter fairly consistent with prior periods.
Technology and services are primarily responsible for the decline versus Q2 2022. However, both vertical showed sequential seasonal improvement versus Q1 of this year.
Ah remaining vertical we're down 70% when compared to Q2 2022.
Looking at our geographic split International revenue based on African location was approximately 14% of revenue in.
Mia posted a 14% decline while APAC in India continued to be impacted by the softness in technology and services, we're down a combined 32% from the prior year.
Turning to expenses and profitability for the quarter, we continue to improve our delivery cost of service, helping to drive gross margins, which were up more than 260 basis points year over year, excluding depreciation and amortization to 49%.
Or sequential margin growth was consistent with our historical quarterly patterns and our target of 200 basis point improvement over last year.
We reported $52.7 million of adjusted EBITDA, just $1 million lower than last year. Despite.
Reduced revenues.
Our adjusted EBITDA margin grew over 300 basis points to 27, 4%.
This growth is indicative are improved operating efficiency, driven by our technology investments as well as optimizing our geographic footprint.
In the quarter, we continued to execute on a restructuring plan, which was primarily targeted on our global SG&A positions of expenses, including our real estate portfolio.
As I mentioned, we are evaluating in finalizing implementation plans to further increase our offshoring teams and outsource non essential corporate functions.
We have recently visited and toured our new facility in India and are very pleased with the impressive teams and the rapid adoption of our operating platform and our technology roadmap.
These targeted margin expansion initiatives began to show benefit in the current quarter and we will have a positive impact on overall 20 twenty-three results and beyond.
We remain focused on delivering longterm adjusted EBITDA margins of 30% and even though we have made great progress we have more work to do.
We will monitor performance and take timely actions to further expand our margins through the reduction of unwarranted costs and streamlining our operational footprint.
Digging deeper into SG&A expenses in the quarter, excluding stock based compensation and restructuring charges.
Floyd costs decreased 3.8% to $27.5 million driven largely by reduction in variable compensation.
Additionally, non employee related expenses, excluding restructuring and other one time items decreased by $3 $4 million compared to the prior year, including a 1 million dollar reduction in Baghdad expense.
Just the net income for the quarter was $25.5 million compared to $31.8 million in Q2 2022.
The reduction as a result of higher adjusted net interest expense of $6 $8 million, driven by or floating rate debt and lower operating income from lower volumes.
I'll also note that we have changed our methodology on adjusted net income tax rate presentation in order to provide more consistency and compare ability across periods. We've begun using an estimated blended statutory rate of 26 per cent two.
To be clear, though both are estimated statutory rape and our gap effective rate will differ from our actual cash taxes paid which are primarily based on revenue generated outside of the U S do to our tax assets and the U S.
We expect to continue to be a nominal cash taxpayer through 2025, however, with are improving profitability will now be reporting at higher effective tax rate on our GAAP results as well as our adjusted net income.
For comparison purposes, we have provided a slide in the presentation.
Illustrates the change of the tax rate for adjusted net income and adjusted diluted EPS purposes.
Finally, adjusted diluted EPS for the quarter was 34 cents compared to 40 cents in the prior year period.
The weighted average share count for the quarter was $74 million, reflecting the shares purchase through the share buyback program versus 79.5 million in Q2 2022.
Outstanding shares at the end of the quarter, where $70.3 million.
Turning to cash flow, we generated $12.6 million of cash flow from operations in the first half of the year and expect to continue to generate operating cash the remainder of the year historically, the second half of our year generates a majority of our operating cash flow.
Total cash decrease for the quarter was $50 million, reflecting $61 million in cash used in our share repurchase program.
At the end of the quarter, we had no draws against the revolver and had just over $695 million outstanding on our first lien loan.
Our leverage ratio ended the quarter at three and a half times and we also ended the quarter with 77 and a half million of unrestricted cash on the balance sheet compared to $127.4 million as of March 31 2023.
The decrease in cash was primarily related to our share repurchase program during.
During the second quarter, we exhausted the original 100 million dollar program and in June the board authorized an additional $25 million.
As we've previously stated we are confident and highlights ability to generate cash flow, enabling us to invest in the long term future of the business investing in geographic expansion acquiring complimentary assets and repurchasing chairs.
The intermediate and long term strategic decisions, we are making today will generate increased shareholder value over time looking.
Looking ahead, we do not assume the significant change in the economic outlook. We have operated in this softer labor market for the better part of the last year and we have continued to deliver improved gross and adjusted EBITDA margins and positive free cash flow.
In the near term certain Novell verticals may continue differ some hiring decisions hit our plans and efforts are aimed at producing sustainable long term growth and profitability.
R 2000 twenty-three guidance reflects are unchanged economic outlook vertical performance to date and conversations with our key customers <unk>.
Additionally, we have updated our adjusted net income and EPS guidance to reflect our share repurchases and a blended statutory tax rate based on the tax methodology I mentioned earlier.
Again, while we expect to be a nominal cash taxpayer through at least 2025 consistency and compare ability purposes. We will now provide our guidance with this adjusted blended statutory rape, 26%.
With this in mind, we are updating our guidance as follows.
Narrowing the revenue forecast to a range of $720 million to $735 million.
Raising our adjusted EBITDA guidance to arrange a $172 million to $177 million.
Updating our adjusted tax rate such that adjusted net income moves to a range of 75 million to $80 million and therefore adjusting diluted earnings per share to arrange a one dollar and five to one dollar and 10 cents based on a weighted average fully diluted share count of $73 million.
All economic cycles impact industry segments differently performance in our core vertical will vary and down cycles will always be replaced by periods of growth.
As a management team, we monitor both short and long term trends implement actions to capitalize regardless of where we are in the economic cycle. We remain focused on growing revenues through our key strategic initiatives, while maintaining strict financial discipline with that operator, we can open the call for questions.
Thank you Sir.
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Last question, we have comes from Andrew Nakedness from William Black. Please go ahead.
Hi, good afternoon. Thanks for taking my questions I wanted to start on some of the positive pipeline commentary I think you mentioned $8 million of revenue from from new clients or enterprise logos and then.
I think it was $20 million in late stage pipeline, just kind of curious is that something that once it is one layers in over time is that something that comes in pretty quickly obviously not the full year amount, but but just trying to think of the the kind of cadence of of how it layers into revenue once it's.
One.
Yeah, Hi, Andrew How're, you it it's sort of difficult to predict because it largely depends on the on the client the size of the client and where they are sort of in the complexity of of the of the change over to a new provider. So it's hard to just give you that number and be able to give you a sort of a smooth rateable.
A sense of how much revenue would flow through forgiven period of time.
But generally speaking that's in ACB angle contract value number that we would expect to achieve within the next no later than the next 12 months typically sooner.
Okay. So if if you closed 20 million tomorrow, I'm, not saying that that's what you're saying, but if you're close to 20 million tomorrow that the 24 contribution.
Borrowing anything fun proceed.
Typically again, depending on the size of the of the client Rebecca.
Deals that go right to right to contract right to implementation, if it's not that complex.
Anywhere from literally days to month two months, if it's a large global implementation.
That's that's helpful. Thank you and then for my follow up you talk I think on several occasions in your prepared remarks about essentially outsourcing certain non essential corporate action streamlining certain operational efforts.
Is that all included in kind of a 50 million dollar cost savings plan, you talked about last quarter or is any of that incremental to that target. Thank you know it's included in that Andrew.
Got it thank you very much.
Yeah, you bet.
Thank you. The next question we have comes from Cal Pizza Centrum Needham and call. Please go ahead.
Hey, guys, that's actually Sam on fertile today, thanks for taking my questions here and.
Good quarter could you guys give us a little bit more tolerant to how we should think about both growth and margins in both the third and fourth quarters, maybe relative to to have a second quarter <unk>.
<unk> Yeah sure we talk about our seasonality, we we got a little bit more proscriptive on it last quarter on our call and what we've always said is Q2 and Q3 are stronger two quarters from a revenue and profitability perspective, and depending on the year, they are kind of plus or minus.
You know a percent or two away from each other certainly some sometimes it falls how the calendar falls during a given year. How many production days, we have but Q2 and Q3 are typically in around each other Q1, and Q4 tend to be more aligned and we would expect that same seasonal patterns that.
We've seen historically to hold out this year as you saw by the results in Q2, we're pretty pleased with the way. The results came in we would expect the second half of the year to follow suit.
As to what we saw in the first half of the year.
Got it okay.
Helpful. And then just a quick follow up on the competitive landscape have you guys noticed any <unk>.
Changes in terms of when rates or any changes in the competitive landscape. Given this kind of prolonged period of softness we've been on.
No you know not really Sam you saw we had a pretty significant increase in new business quarter over year over year. We continue to I think do a good job.
Winning the business opportunities are in front of us I would say.
Anecdotally I don't see the dynamics changing that much even though again when reason, we're calling his softness but.
A lot of the deals that we're winning or larger global deals some international deals and is limited number of.
Of competitors that can provide what we do and a lot of those markets.
Alright, thanks, guys.
Thank you, ladies and gentlemen, just bear in mind that if you would like to ask a question. Please.
<unk> and then one now.
The next question we have comes from Georgetown from Goldman Sachs. Please go ahead.
Alright, Thanks, good afternoon <unk>.
Revenues from existing clients declined 16 per cent in the quarter can you talk about trends on revenue from existing customers over the course of the quarter did find stabilization. We're the trend the worst thing over the course of the quarter any color there would be helpful. And then it can you also confirm your full year <unk>.
<unk> does that assume stable trends from the exit re being into Q.
Hey, George <unk>. Thanks for the questions. So yeah, I mean, we're seeing we would call normal seasonal trends, so even though we're talking about revenue being down from existing clients quarter over quarter. It was up.
We've spoken a lot about our tech sector Tech and services.
Are down most significantly of all clients yeah, both of those sectors were up quarter over quarter. So those those trends normal will be would call normal seasonal trends are holding despite them being you know muted relative to year over year.
Yeah, I I I just have to add onto that you know the the guidance reflects what we've seen up through today, obviously, yeah right. So we are updating the script as of last night. So.
We feel comfortable in the stability Lotta noise in the market about.
Changing environments and when the recession is gonna come in fact of the matter is that the hiring market's been soft for a year now right and in certain sectors. Like we said in technology, you know volumes down you know 40% so.
While we think there could still be some choppiness and the rest of the year. We do think are diversified nature of our revenue base and are diversified customer base is you know we're going to hold from Ah kind of stability perspective, and the second half of the year and that's what our guidance reflect reflect the bus.
Got it that's helpful and just to follow up on the on the an appointment mentioned earlier on on the Tech sector could you remind us what your latest tech vertical mixes and then you noticed that on a quarter reporter basis the.
The tech vertical improved can you talk a little bit about customer.
Customer spending patterns, and overall budget and the spelling environment and and the tech vertical specifically, yeah, Jordan when when we when we say tech vertical what we largely talking about are the largest big Tech brand names that are out there they comprise the bulk.
Of the vertical we of course don't don't talk about them individually, but you you know all the <unk> you know all the names and you've seen those logos before.
The second part of your question I'm not sure I quite understood.
Just the overall selling environment.
For the tech critical.
Is it getting better than <unk>, it sounds like it's getting better.
So, it's getting better quarter over quarter, but that's normal seasonal behavior.
So that's you know, it's still down year over year, but Q2 was better than Q1 right.
As we connect so we're at the <unk>. It's it sounds like we're at the point, where normal seasonal patterns apply and the technical and we're not at this point trying to find the bottom.
That's correct that is absolutely correct, that's a great way to put it.
Perfect. Thanks, very much very helpful.
You bet.
Operator next question.
Thank you Sir.
<unk> from stifle.
Yeah, just just a little bit of just clarification of what changed in the guidance here I Miss you talked about the tax rate and the share count but is there some kind of acquisition contribution now and the revenue and EBITDA with some.
Acquisition announcement and also is there a change in the interesting expense and they won't you were assuming from last quarter.
And then I'd like to ask you more about kind of what's going on in the industry, a little and and you know what are you assuming a little bit more in terms of your guidance in terms of wiggle room, if if anything goes steps down again.
Okay couple parts to that question. The first one is regarding you know acquisitions, and obviously, we announced the D. G. I F acquisition. After the quarter ended we expect some modest contribution to that in the second half of the year low single digit millions of dollars so not not.
Material.
Your second part of your question I think around interest expense and obviously, yes, and you can see that in the investor deck, we've updated Shlomo the.
The modeling assumptions for interest rate expense you can see it's higher than it was two quarters ago. When we originally gave guidance I I don't have the number right in front of me, but it's circuit $10 million, it's pretty meaningful.
From from an interest rate interest cost perspective on the outlook.
And then what was the last one.
It was wiggle room, like where if we see another step down in hiring is that going to result in you know your your cottons, having to come down on the low end on the revenue side or did you do you have enough in your pipeline and the wins you know it seems like you're you're pretty enthusiastic about the cross they'll upsell and the new wins cause that'd be able to absorb.
If there were another kind of like June July type of stepped down in hiring you know.
Would we be it would would you have to adjust the guys again.
Yeah, it's like I mean, sloma, we really.
We really don't know I mean, we have no reason to think that that's the case as we sit here today August six weeks into the quarter or whatever we are yeah. Everything you know we were very comfortable with the guidance. We provided we're very comfortable with a pipeline that we have now.
What happened last year sort of in one in one month the entire the entire world.
Stopped hiring for a little bit and we saw that that downturn, but there's nothing that we see in either the macro environment conversations with clients. The current trends and momentum that we have in the business that would make us think that that's the case.
Okay, Great and just can you comment on vendor consolidation and it'll give it up but like are you seeing more vendor consolidation as clients are trying to get like kind of a discounts from volume discounts.
Definitely seeing a good uptake in rfps for more global Rfps, frankly, which which generally points too.
A general consolidation of of companies wanting to pick a single provider rather than have multiple providers even in multiple countries from our standpoint, we love those rfps because.
We're the only one in the in the industry with a single global platform. So we think it gives us a competitive advantage in that case. So I would say anecdotally. Yes. We are seeing we are seeing trends like that and I think those are often driven by larger H T M implementations, whether somebody's going to.
Oracle implementation or S. A P or UK G or work day or harbor may be we when we tend to see those large global ACM implementations.
It creates an opportunity for us.
Thank you so much [noise].
Thanks <unk>.
Thank you. The next question we have <unk> <unk>. Please go ahead.
Hey, good afternoon, and thanks for taking my questions.
So just as the quarter on folded did you see any variance with regards to you know either or pick up or slow down with regards to a level of hiring obviously, you're aware that you had a large competitor.
Talk this morning, and so I was just wondering whether or not you're seeing any of the same sort of dynamics there.
We're seeing what I would characterize as normal again normal quarterly behavior normal seasonal behavior. So obviously Q2 is a nice uptick relative to Q1, we generally expect that level of uptick year over year, given given arm mix boats verticals and geographies. So I.
I'd say that this year is definitely behaving.
Like a like a normal year from a seasonal pattern standpoint.
We we haven't seen any again the commentary Mark specifically is kind of a consistent trends and patterns, we see now for.
Three four months, yeah, yeah, and even six weeks into the quarter.
Great and and and.
That tech vertical is the is.
Is the percentage decline within that tech vertical less than what it was during the first quarter.
No no. It was it was pretty consistent yeah. It was consistent or maybe even a hair higher you Gotta remember Q2 22 was or.
Peak quarter, the peak of the hiring frenzy last year, you know 222 million of revenue for us and technology was by far our biggest vertical in that quarter of last year. So.
While while the decline as a percentage made have been might've been a little bit higher but what was more important for US is that we saw Q2 of this year improve over Q1 of this year showing that it feels like we've kind of hit you know at least some some firmness from a bottom perspective.
Yep and tech right in specific.
And then can you talk a little bit more about I mean, it sounds like you've got some impressive wins coming along.
First of all with the ones that you did close can you talk about like what the incumbents were like whether it was some of the bigger players that everybody knows about or whether it was.
You know similar to you know a couple of quarters ago, where you ended up winning a really large client, but the the incumbent was a regional player can you just talk a little bit about that and and some of the drivers behind.
Those wins and then you mentioned you know what it.
It sounds like you're close to winning as opposed to have won some of those you mentioned the $20 million I just want to make sure I'm interpreting those comments correctly.
<unk> 20 million as late as late stage, but just overall mark.
We saw with a lot of the wins that we have again, we've seen him come from.
Multiple competitors, including one of them.
Of the big Big either too.
So it's sort of across the board I can tell you. The main reasons why the stated reasons why we won some of them. One is again accuracy. We talk about this all the time, but we know that we find more more hits an felony convictions in our competitors do because of the way we do searches we've.
We've been told that specifically by clients and we have been told that by at least two of the large enterprise wins that we've had have come from clients, who experienced missed hits from their from their incumbent provider. We also are seeing good traction again on the Tom pointed out the HTM provider. So in particular that we have pretty unique.
Relationships with UK G with Oracle recruiting clouded with work day, and we've seen some.
Some of the wins come from clients that are implementing those solutions.
And because we've got so many integrations and feature functionality within those integrations that they've become an advantage for us.
So I can't give you the names of specific competitors, but I can tell you. This this this last several wins have come from both smaller players and a few of the bigger players.
Right and then we just with regards to you know the pace of the buy backs and you know thinking about that visa B. Your interest expense you know how should we think about capital allocation on a go forward basis and and what is the <unk>.
<unk> interest rate Ah behind the interest expense assumption.
[noise] well, what we're sitting here right now at LIBOR, plus 375, correct me if I'm wrong on that one Andrew <unk>.
South of the rates gone up quite a bit over the last six months needless to say.
When we think about the capital allocation process.
Obviously, we and the board felt strongly about the value of our shares in the return on investment we could get there obviously as the interest costs gets higher that equation changes a bit.
As we mentioned we've already gone through you know $100 million of the original authorization.
The board is authorized an incremental $25 million so much smaller repurchase program.
So at this point I would think that over the next.
Few quarters will revisit it with the board whether or not we want to continue to extend the share repurchase program, but I think we made our investment there and will continue to look at other alternatives at this point.
Right and then if I could squeeze one last one and it.
It sounds like D. T. I S is going well can you talk a little bit more about you know some of the newer initiatives that you have in place and you know in some of the promising elements that you're seeing there.
Yeah D. J S. As a unique is a very unique asset and that it was you know.
The relationship.
It's triple eight E Airport employees Association always screw up the actual definition to that.
And their biometrics type searches and having the FBI channel or status sort of submitted two things for US one is where the clear leader and transportation sectors, including aviation and we loved that a large part.
Of their base and capability is run through TSA approved employees at airports, which provides us strong background background screening opportunities within all of those air carriers and employees that are around the major airports around around the U S.
We you know.
For a long time I've talked about.
The need to to have our own solution through the FBI channel or network. So T. T. I S check that box for us. So we're looking forward to the opportunities and growth.
That provides us over.
Over the course of the next year.
Great. Thank you very much.
Thanks Mark.
Thank you. The next question we have.
<unk> <unk> <unk> <unk>. Please go ahead.
Hi, This is ronen Kennedy offer Manav, you had referred to the back office automation being operational across the footprint can you confirm the role that implementation played in driving the 300 basis points of margin expansion and is there further upside from optimization.
And then can you talk about you also alluded to further software development investment opportunities to further expand margins can you talk about what those are and also where you know your new product pipeline and the recent launch of the screening analytic solution.
Yeah. So there's a lot there's a lot there. So we don't we haven't really deconstructed, which parts of which initiative has contributed to the margin improvement, but what I can tell you is the the investments that we've made in the new platform are bearing fruit and that the platform is life a couple of major modules on that.
Former alive and we're seeing.
Without question improve productivity as we sort of as we said.
During the call.
Which is definitely had a sizeable contribution on margin improvement the additional opportunities that we talked about <unk>.
Continue to be our efforts and just driving automation in all parts of our business. So it's a combination of using AI and proprietary algorithms that complete the searches that we do that we know adds to our accuracy all the way to just doing robotic process automation RPI work and.
Some discreet processes across the entire business so.
That is just an ongoing never will never stop those types of improvement initiatives.
And I know you had a couple of parts to that.
I think we've we've increased our investment in software development, both at the product level as well as the automation level and that is that the reference we made too are part of our new operation in India, where we've diversified our engineering talent and stood up by another engineering group in India over the last six months or so.
Thank you that's helpful and then could I reconfirm your.
Framework for acquisitions from you know economics, and financial standpoint, and also potential areas that.
Yeah. So the the our strategy is very much looks like what we announced you know in the last in the last couple of quarters. So DTI S provided as specific product capabilities and value and and a target vertical lavar since you know transportation via aviation.
<unk> gave us valuable assets in Argentina, which also allowed us to.
To.
Put an entity in Brazil again strengths in that part of Latin America and those are the types of of M&A opportunities that we that we look at we're not particularly interested in paying a multiple of EBITDA for revenue when we know what we're taking share in the market as it is.
So if it brings us unique capability or unique geographic location. That's the stuff that's on our existing M&A pipeline as evidenced by the things that we've executed.
Thank you appreciate it.
Okay.
Okay. Thank.
Thank you the.
The next question we have comes from Stephanie from Jeffrey. Please go ahead.
Hi, Good afternoon. Thank you Uhm, what clarification question on the garden and I apologize that Prime Minister.
Revenue guidance that kind of you know adjustment you know maybe let me look at at the midpoint lowered the high and what was the primary driver of just kind of be adjustment to the guidance from a revenue standpoint.
It it really is reflective of what we're seeing you know again as I mentioned up to date as as recently as this week, it's consistent with what we saw in Q2, we talked about our seasonal revenue ordering.
Ordering patterns that we typically see in a more normalised environment, we really started to see those come through this year and we started to see those even into Q3 here. So we felt you know positive about our ability to forecast the second half of the year based on what we've seen in the first half of the or even through like I said, the first five or six weeks of.
<unk>, so it's really reflective of the ordering patterns that we're seeing up today.
Uhm, Okay now.
That's very helpful and then.
Really strong adjusted EBITDA margin performance and improvement in the corner and yeah gravity pulling her directly or guidance, though he made a comment about no. Currently you number 30% EBITDA margin targeted it's still on track and looking to hit that over time. So could you talk a little bit about what is needed over time.
To get that 30% 30 per cent target I would assume at some level there there needs to be kind of a return your order some improvement at the top line.
So and you know further you know what's next for my emergency.
And just you know the leverage.
Hotline, Thank you <unk> <unk>.
<unk>. Thanks for the thanks for the questions are largely a good source of the improvement has been a combination of us as we talked about offshoring labor, it's been investments in software and automation, it's continuing to do those things continuing to light up more of the automation that we have.
In the pipeline.
In addition to continuing to do whatever we can.
To make operational improvements to the business.
We have a clear path to get the 30th.
The 300 basis point improvement hopefully.
How's our investors to have confidence in our ability to achieve those those numbers. It's certainly doing a lot of the same things that we've been we've been doing it now proven work.
That will lead to that to that 30 per cent and certainly bolsters our confidence in achieving it.
Okay, Sir thank you so much.
Mmm.
Thank you a final question we have comes from Jason can email from Keybanc capital market. Please go ahead.
Great. This is Ashley Devin on vacation today, thanks for putting a thin maybe just one question from US I know you mentioned macro as though.
You know uncertain, but it seems like new business and a quarter, but also the pipeline is still looking pretty good maybe just from your recent Rfps you have engaged in curious if you've seen any I'll take them customers I've decided to sort of stick.
Stick with their existing benders and sort of delay to upgrade them to down the road and any noticeable changes to sell cycle and close to a.
Versus the prior year and a quarter. Thanks.
No. Good good good question, we see continued to strengthen in the pipeline continued to strengthen not just the rfps. We don't just sit back here and wait for our peace come across the table.
There's certainly a lot of activity.
And we are sales teams also continued to.
The effective at unseating competitors because of the differences between us and the rest of the industry in particular on on accuracy and finding finding more hits.
It's been a good it's a strong competitive advantage for us and we liked the activity level of activity that we're that we're seeing and we also liked the level of activity that we're generating.
From just being president.
Large enterprise clients.
Thank you Sir.
Good evening gentlemen, there are no further questions at this time.
I would now like to turn the floor back out with a guy drama for closing comments. Please.
Yeah.
Thanks, Operator, we continue to be.
Route of the results delivered by our team, especially on the margin front. We're encouraged by the normal pattern of of orders that we're seeing seasonally and continue to be very very comfortable with the guidance that we provided and very much looking forward to the follow up calls that we have scheduled with with each.
Of you as we go out through the rest of the day with that thanks, everybody have a great rest of your day.
Thank you, Sir ladies and gentlemen conclude today's conference.
You for joining US you may now disconnect your lines.
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