Q3 2023 First Advantage Corp Earnings Call
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Good day, everyone. My name is Ashley and I'll be your conference operator today I would like to welcome you to the first advantage third quarter 2023 earnings conference call and webcast hosting the call today from first advantage is Stephanie Gorman Vice President of Investor Relations. At this time, all participants have been placed in a listen only mode.
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Note today's event is being recorded it is now my pleasure to turn the call over to Stephanie Gorman you may begin.
Thank you Ashley good morning, everyone and welcome to the first advantage is third quarter 2023 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.
That's what passes being recorded and will be available for replay on our Investor Relations website.
Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward looking statements.
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.
Factors are discussed in more detail in our filings with the SEC, including our 2020 to acquire 10-K and our Form 10-Q for the third quarter of 2023 to be filed with the SEC.
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 measure to make that available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website.
I'm joined on our call today by Scott people, our Chief Executive Officer, and David Kennedy, Our Chief Financial Officer. After our prepared remarks, we will take your questions I will now turn the call over to Scott.
Yeah.
Thank you Stephanie and good morning, everyone. Thank you for joining our third quarter 2023 earnings conference call.
Beginning on slide four.
We had a very productive quarter and I want to thank our team for their continuous dedication in delivering value to all our stakeholders.
During the quarter, we achieved many financial objectives and strategic goals, our third quarter results were in line with the expectations that we previously communicated with both revenue and adjusted EBITDA improving sequentially.
Our disciplined cost management, along with our flexible business model enabled us to maintain our industry, leading adjusted EBITDA margins and to continue to generate strong operating cash flows.
Our robust cash flow and healthy balance sheet allow us to continue to execute our long term growth strategy centered around value creation through further automation data ownership and new products, even in a challenging macroeconomic period.
We remain committed to our disciplined and balanced capital allocation strategy.
As evidenced this quarter with our acquisition of infinite I D.
Payment of our one time special dividend.
And ongoing share repurchases.
Under our existing program, which was recently extended through December 2024.
Even after taking our capital deployment actions into consideration our balance sheet remains strong with industry, leading leverage of just 1.7 times and cash of $167 million.
We continue to have ample liquidity to fund future investments in our business.
I am proud of our team's ongoing commitment to providing our customers with the latest in market, leading technology and solutions, which has enabled us to maintain our strong customer retention rate of 97% across our diverse range of verticals.
We also continue to expand our network of strategic referral partners, both domestically and internationally with more than 75 current integrations and partnerships.
Our overall pipeline remains robust, including both new customer and upsell cross sell opportunities.
During Q3, we booked eight enterprise deals representing nearly $13 million in annual contract value seller of which already started to generate revenue.
This momentum is further evidence of our customers' continued confidence and trust in us.
Turning now to our business highlights on slide five.
In the third quarter, we generated revenues of approximately $200 million down a modest 2.7% from last year, which is a significant improvement in the year over year trend from our first half results.
We grew quarterly revenue dollars sequentially and saw a month over month sequential improvement throughout the third quarter.
Additionally, our three year L. T M organic revenue CAGR of 17% remains substantially higher than our long term target of 8% to 10% growth.
In our Americas segment total revenues were flat compared to prior year and continued to benefit from positive growth in new customer upsell and cross sell.
In the U S consumer confidence continues to be above last year's levels and consumer spending remains robust going into the holiday season.
Job openings to unemployment numbers remained relatively high by historical standards.
<unk> had been stable and quits, particularly as it relates to the salaried workforce have been slowly decreasing higher.
Higher interest rates and higher unemployment are also partially mitigating these trends.
In our Internet International segment, we experienced a revenue decline of over 18% driven by APAC in India.
Our European operations, which experienced modest positive revenue growth in Q3 have shown more resiliency.
It is also worth noting that our direct exposure to China.
At less than 1% of our total revenues has little impact on our business Dave.
David will elaborate on our segment performance shortly.
From a vertical perspective, we are seeing increased hiring demand in transportation and health care and continued stable demand in retail and e-commerce.
Similar to last quarter technology financial services and business service sectors have continued to experience a decline in hiring volumes.
Adjusted EBITDA was nearly $65 million and our adjusted EBITDA margin was 32.3% both outperforming Q3 of 2022 and significantly higher than our first two quarters of this year.
We are very proud of these results and remain focused on managing our cost and flexing our operations with demand while also expanding our industry leading automation efforts.
And driving further margin expansion.
We continue to expect adjusted EBITDA margins above 31% for the full year, while maintaining a high quality of earnings.
This quarter, we made great progress on our strategic priorities, including investing organically in our products data and automation solutions.
Strengthening our portfolio with M&A and maintaining a balanced capital allocation strategy.
<unk> these initiatives enhance our customer value proposition drive our sustainable competitive advantage and fuel our long term growth objectives.
Now, let me take a moment to discuss each of these three areas in greater detail.
First we continue to invest in our AI AI technology data and automation initiatives to grow our competitive advantage and drive adjusted EBITDA margin expansion.
Our smart hub click chat call Nexgen profile advantage and instinet employment verification solutions are excellent examples of this.
With smart hub, we are seeing an acceleration in customer adoption.
This technology is our proprietary AI driven intelligent router that essentially sits on top of our large and growing verified database.
Smart hub enables us to quickly search across multiple data sources to determine the optimal verification source based on speed data quality and cost effectiveness.
Through AI and machine learning this technology delivers a great experience and cost savings to our customers.
Our AI efforts also continue to evolve and expand with customer care in.
In the third quarter, we rolled out our innovative click chat call offering globally.
It provides customers with one user friendly common portal and uses predictive intelligence for support.
This initiative has driven operating leverage through process automation and head count reductions, while enabling higher customer satisfaction scores.
Additionally, we are in the early stages of rolling out our Nextgen profile advantage platform in the U S, which is our API first technology interface used by applicants through either a computer tablet or mobile device.
With our redesigned user experience and interface built from the ground up responsible generative AI. It provides a personalized apple can experience tailored to the specific jobs screening requirements.
In addition to these solutions, we are constantly looking for innovative ways to enable our customers to higher smarter and onboard faster.
For example, we recently launched an instant employment verification service in the U K and India markets. This digital first fully integrated solution reduces friction in the applicant process and reduces the time required to perform checks leading to quicker onboarding.
Through our investments in upgrades and technology automation and AI, we are creating solutions that are faster and easier for our customers and their applicants. These investments also enhance our customer value proposition benefit how we operate and are a major driver of our long term profitable growth.
We see this as a win win win for our customers their applicants and for first advantage.
Second.
We continue to build on our solid foundation expand our portfolio through M&A.
Over the past two years, plus we have successfully completed five acquisitions, including the latest and largest infinite I D, which we closed on September one.
These acquisitions align with our strategic goals by expanding our product offerings vertical exposure geographic reach and technology capabilities.
Each of our prior year acquisitions has outperformed our financial objectives and outpaced their growth plans by being part of first advantage. This is evidenced that our M&A strategy is providing returns and creating value.
Taking a closer look at infinite I D. This business is a U S based digital identity solutions provider that supports our product innovation and digital strategy. This addition allows us to better serve our enterprise customers in regulated markets like health care financial services and not for profit.
Infinite Ids technology complements our other identity verification and identity fraud solutions, including right I D and digital identity, enabling us to continue to see rollout state of the art digital solutions to our customers.
We are excited to add infinite I D to our portfolio and welcome their team to first advantage.
And third we remain committed to a balanced capital allocation strategy in the third quarter, we returned approximately $218 million to shareholders through our one time special dividend, which represented a greater than 10% return of capital to shareholders. We also.
<unk> continued to repurchase shares with our board recently, extending our existing share repurchase program to December 2024.
Collecting confidence in executing against our long term objectives, and we are extremely proud of our healthy balance sheet as we continue to generate strong operating cash flow and maintain a low net leverage ratio of 1.7 times.
I will now turn the call over to David for more details on our financial results and outlook David.
Thank you Scott and good morning, everyone turning to slide seven as Scott mentioned, we had a productive quarter. We closed the infinite I D acquisition executed a one time special dividend continue to repurchase shares and expanded our industry, leading adjusted EBITDA margins.
All while navigating the uncertain macro environment and delivering results in line with the expectations, we communicated last quarter.
Our third quarter revenues were $204 million a decrease of just two 7% from the prior year currency had little impact on Q3 results with constant currency revenues of $199.9 million revenues have continued to grow sequentially.
Each quarter this year and grew each month within the third quarter and heading into our October peak in.
And the one month that we owned infinite IV during the third quarter. It contributed approximately $850000 to our revenues.
In our Americas segment revenues of $176 million or 87% of consolidated revenues were flat compared to the prior year. This segment held up well, which is primarily attributable to our broad based resilient enterprise customer base.
Yeah.
In our international segment revenues of $26 million or 13% of consolidated revenues were down 18, 4% from the prior year.
On a constant currency basis revenues were $25 million are down 20% year over year. The decrease was due primarily to base weakness in India in APAC in the third quarter and year to date, India was down approximately 45%.
Given our exposure to <unk> and it services related businesses and APAC was down over 25% driven by the financial services sector and other regional market dynamics. In response, we have lowered our cost structure in these regions to account for the shift in demand.
We believe that these geographies have bottomed out and comps will certainly be easier in 2020 for our European operations, which experienced modest positive revenue growth in Q3 have proven more resilient in the face of macro headwinds with our digital identity.
<unk> contributing to their results.
Turning now to slides eight and nine you will see our revenue growth algorithm. This algorithm is based on our historical performance and future expectations, which support our long term revenue growth targets of 8% to 10% as you may recall the four components of this algorithm include base.
Upsell cross sell new customers and attrition in.
In the presentation, we have provided a reference table of our results for each of these components over the last four quarters.
As you can see the results for up sell cross sell new customers and attrition had been very consistent with our growth algorithm.
This demonstrates that we are managing and delivering on what we can control with the variation being driven by the base component.
This result, which represent contributions from existing customers before upsell cross sell and attrition are much more sensitive to the macroeconomic environment.
Base improved in Q3 compared to the first two quarters of 2023, it was still negative, which we expected declining $17 $6 million or eight 6%.
We still believe that when the macro environment stabilizes base growth will resume that it hits at its historical rate of 2% to 4%.
The Q3 base decline was partially offset from upsell and cross sell which contributed $7 $7 million or nearly 4% to our performance.
Revenues from new customers contributed an additional $9.8 million or approximately 5%.
Across our business, we continue to see strong customer retention coming in at 97% for the third quarter in total when considering the resiliency of our Americas segment offset by the weakness from India in APAC, our overall growth declined by a modest two.
7% in the quarter.
Adjusted EBITDA for the third quarter was $64 $8 million, an increase of approximately 1% over the prior year.
Our three year LTM adjusted EBITDA CAGR was 21, 4%.
It is worth noting that if you back out the declines in India in APAC, we would've seen year over year adjusted EBITDA growth for the company on a year to date basis and in Q3.
Our adjusted EBITDA margin of 32, 3% continues to be industry, leading and represented an improvement of 110 basis points over prior year and 210 basis points sequentially.
Our business has proven to be very resilient in the face of topline headwinds.
In the third quarter, our adjusted EBITDA margin expansion was supported by lower operations customer care product and tech and SG&A cost compared to last year.
This was enabled by our highly variable usage based cost structure and continued discipline around managing expenses.
We continue to manage our controllable costs and recognize the benefits from our efforts over the last few quarters, including reducing our facilities footprint, leveraging procurement savings and selectively adjusting headcount to align with demand.
For the third quarter, our adjusted effective tax rate was 24, 5% adjusted net income was $40 million and adjusted diluted EPS was <unk> 28 cents as a result of paying our one time special dividend both adjusted net income and adjusted EPS were reduced by approximately <unk> <unk>.
$800000 in half a cent respectively in the third quarter because of lower interest income.
Turning now to capital allocation and our balance sheet on slide 11, as Scott discussed our capital allocation approach remains disciplined and balanced between internal investments to drive profitable organic growth M&A or returning capital to shareholders and maintaining our.
Tractive net leverage profile, our strong operating cash flow and low net leverage support our strategic initiatives.
During the quarter, we spent $7 $5 million on purchases of property and equipment and capitalized software development costs, bringing our total for the year to $26 million in capital related investments. Additionally.
Additionally, on September 1st we acquired infinite Iga for $41 million using cash from the balance sheet.
Infinite Iga brings valuable capabilities that we expect will enhance our growth and market position. This business as profitable and is expected to generate annual revenues of over $10 million taken.
Taking into account the impact on interest income from funding. The acquisition. This transaction is expected to be slightly accretive on a net adjusted net income basis. Once integrated it had no meaningful impact on adjusted EBITDA adjusted net income or adjusted.
<unk> EPS in the third quarter.
Our one time special dividend, along with our ongoing share buybacks reinforce our commitment to return value to shareholders. During the quarter, we used cash of approximately $218 million to pay a one time special dividend of $1 50 per share.
Which represented a greater than 10% return of capital to shareholders.
We also continue to repurchase shares using our cash to buy back approximately $3 $6 million of common stock in Q3.
Since the inception of our share buyback program in August 2022, and through November 6th of this year, we have repurchased approximately 9 million shares for approximately $118 million.
We have approximately $82 million remaining on our authorization, which has been extended through December 2024.
In the third quarter, we continued to maintain the largest cash position and lowest net leverage amongst our public peers.
We generated strong operating cash flows of $34 $4 million in Q3, and approximately a $106 million on a year to date basis.
Cash flow from operations declined year over year in Q3, primarily due to higher cash taxes paid and a temporary increase in working capital that we expect will normalize in Q4.
We ended the quarter with total debt of $565 million and a net leverage ratio of approximately one seven times. This is after the $218 million pay out for the one time special dividend.
And the $41 million infinite Ivie acquisition.
Further we have no debt maturities due before 2027.
Cash and short term investments were approximately $167 million and we have $100 million in untapped borrowing capacity under our revolving credit facility.
As you may recall, our debt structure positions us well for the current interest rate environment with approximately half of our long term debt hedged through February 2024.
Additionally, we strategically hedged another $100 million of long term debt in Q1 of this year.
Now moving to slide 12, and our outlook.
Today, we are reaffirming our previous guidance ranges expecting to perform at the low end of these ranges to remind you. The low end of these ranges represent revenues of $770 million adjusted EBITDA of $240 million adjusted net income of 145.
And adjusted diluted EPS of $1.
This reflects the current hiring environment and our expectations that existing macroeconomic conditions and similar labor market trends, including a seasonal increase in the duration of the seasonal peak will continue through the remainder of the year without significant changes.
Based on typical seasonality, we expect customers in our retail e-commerce and transportation verticals to ramp up hiring during the fourth quarter for the upcoming holiday season as compared to Q3, we have seen this play out so far in October but at a more modest rate.
And we experienced last year as we anticipated.
October revenues as is typical of our seasonal pattern are the highest of the year. All of this has already been captured in our guidance.
We remain confident in our resilient business model and our ability to effectively manage those factors within our control.
Accordingly, we continue to take measures to maintain our adjusted EBITDA margins above the 31% level on a full year basis.
For the fourth quarter, we expect sequential quarterly revenue and adjusted EBITDA growth, though revenue will still slightly decline on a year over year basis due to our international segment performance.
We anticipate base growth to remain negative, but improving <unk>.
Additionally, we expect our Q4 adjusted EBITDA margins to be approximately 33%.
Please note that our full year guidance ranges have not been adjusted upward or downward for the impact of the one time special dividend or the contribution from infinite I D.
The one time special dividend is expected to have a negative impact of approximately $2 $7 million on adjusted net income and <unk> <unk> on adjusted EPS, resulting from lower interest income.
Infinite which was acquired.
Wired effective September one 2023 is expected to have a nominal impact on full year results specifically.
Q3 revenues from infinite I D or approximately $850000 and we expect the business to contribute over $3 million in total during 2023.
The anticipated full year infinite I'd adjusted EBITDA contribution will be substantially offset by the loss in interest income, resulting in no expected impact on adjusted net income or adjusted diluted EPS for the year.
Yes.
While it's too early for us to provide formal guidance on 2024, we wanted to share some preliminary thoughts around next year.
Overall, we currently do not expect a meaningful change in the employment environment.
We remain confident in the controllable parts of air revenue as well as our ability to manage costs on a disciplined basis, both of which you can see in the results of the metrics we have provided.
These factors combined with easier year over year comps will be factored into our 2024 guidance. We look forward to sharing more about this on our Q4 results call early next year.
To summarize it has been a productive quarter for us here at first advantage, we remain highly focused on executing and delivering our Q4 result, which is our biggest quarter of the year.
We will continue to invest for long term growth as well as manage the business to maintain our industry, leading adjusted EBITDA margins.
We continue to deliver on what we say while navigating in an increasingly dynamic environment.
I'll now turn the call back over to Scott.
Thank you David.
I would like to conclude our prepared remarks today by reiterating our areas of strategic focus and value creation priorities are.
Our flexible business model enables us to manage cost and we continue to invest in automation for further optimization.
We are an innovator with a first mover advantage in this space, resulting in industry, leading adjusted EBITDA margins balance sheet metrics and cash flow generation.
We remain focused on our long term growth opportunities and building on our strong foundation organically and Inorganically. We continue to leverage our vertical is go to market strategy and enhance our long term relationships with our resilient enterprise customers.
Our customers want faster more automated screening solutions and are increasingly becoming more focused on risk mitigation. They look to us to provide solutions to help keep their brand employees and customers safe we have the solutions the team and the commitment to providing the best product offerings to meet our customers' needs we can.
Continue to invest in our technology and solutions to maintain our competitive advantage enhance our customer value proposition and drive profitable long term growth.
Our investments position us well to capture market share, particularly as the macro environment recovers or.
Our 97% gross retention rate and long standing tenure with our top 100 customers is further evidence of our outstanding team and product offerings. Thank.
Thank you very much for your time and for your ongoing support at this time, we will ask the operator to open the call for your questions.
Thank you we will now begin the question and answer session. At this time. If you have a question. Please press star one on your telephone keypad.
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Our first question is coming from David <unk> with Evercore ISI. Please go ahead. Your line is open.
Thank you good morning.
Morning, Scott David Good expense control overall, just the one call out is on SG&A, which was up 8% year over year versus revenue down three.
They're a currency mismatch between international revenue being incurred in foreign currencies.
SG&A being incurred in USD.
No David there the real answer there is change in stock comp.
That's really the driver.
Got it okay, and how should we think about that going forward well SG&A be outgrowing revenue for a while.
Only in stock comp, which we had a modification to the program in May of 2023 that will be continuing.
Got it and then just my final question Scott are you modifying the selling proposition at all for customers as the economy slows as the jolts numbers come down a bit is there a.
A bit more of a cost focus.
You know when you reach out to clients.
Uh huh.
I totally think there is.
And I think we've mentioned this before we're seeing a lot more procurement led deals.
And procurement led deals are actually good for large players like us because.
We've got scale and can help companies save money.
But also are our innovative offerings, when we talk about smart hub and our verified solutions, we are actually saving companies a lot of money on verifications.
And through our automated solutions.
These are our very fast turnaround.
The type of products, so also improving the customer experience.
So I think there is.
When you look at our product development and our go to market strategies, we're clearly focusing on helping companies.
Obviously higher smarter and onboard faster as our tagline says, but saving money also helps.
Understood. Thank you.
Thank you we'll take our next question from Ashish <unk> with RBC capital markets. Please go ahead.
Alright, Thanks for taking my question I, just wanted to drill down further on the last question.
And your reference to smart hub.
And to verify database, which now has 5 million debt cards. My question. There is how do you plan to increase that you've seen some pretty significant improvement that are increasing the number of databases.
How do you plan to continue to increase the number of records and have you seen any shift from your smart hub.
Tom's of Maine took those verifications happen using verified and other lower cost.
Items versus the more traditional verification.
Yes. So yes. Thanks for the question I don't think I'm going to give away the secret sauce on on that.
But I will give you sort of a high level answer is that.
Our customers and what I would think most most.
Companies our customers in this space are absolutely looking for alternatives in this in this are in the verification space and and.
Fin techs and new companies and new offerings do provide.
Some alternatives there.
But in general it's it's a it's the strategy is a combination of many things.
Increasing the database.
Through our own data acquisition efforts.
Partnerships, new tech providers et cetera, So I'd say.
It's a very detailed strategy, which I don't want to give away today, but this is a high area of focus for us.
That's very helpful color completely understand and then on the <unk>.
Enterprise deal wins.
<unk> eight new wins there.
<unk>.
Can you provide any more color on the pipeline as we get into the next year and also on <unk>.
Is it possible to provide color on how much of those were from public peer versus the long tail.
Yeah. So I'll take the question in reverse you know I think I've mentioned this before and.
We think it's very interesting data.
And this is this has been happening.
Literally for well over a year or maybe even 18 months as we've been tracking it.
But the wins.
Continue to be.
Divided equally between what we consider the three buckets of competition. So.
Roughly a third of the wins are coming from the you know the.
Many mom and Pops in this space another third from sort of the mid market players and a third from the from the large peers.
As you know this is a very fragmented market.
And it's.
A large competitive field.
With many players.
And and and and and as you know.
The the three large public companies, probably only have maybe 30, roughly 36% market share so.
They're they're this trend we expect to continue because of the fragmented nature nature of the industry.
So, we think that's healthy and and and and a good sign for us.
On the deals themselves I mean.
If you look at we've given this data before but if you look at our R. R out our revenue growth algorithm.
It's it's.
And let's.
Let's say in normal times, it's the base typically grows 2% to 4% upsell cross sell it's 4% to 5% new logos are 5% to 6% and then you back out attrition of 3% to 4%. So that gives you a long term growth of 8% to 10%.
If you look at our performance in Q3 were spot on we're right on it upsell cross sell at 4% new logos at 5% attrition at 3%.
It's just the base and it's always been the base for the last year plus.
But as David mentioned, we're starting to see some stabilization.
And that base. So base was only down eight 5% this quarter that that's very promising sign for us.
That's great color. Thanks, a lot.
Thank you we'll take our next question from Scott Wurtzel with Wolfe Research. Please go ahead.
Hey, good morning, and thanks.
For taking my questions.
The preliminary thoughts a little bit on 2024 and was just wondering if you could maybe expand a little bit I don't know if you've had any conversations you have with some of your clients and what youre hearing from them about hiring plans over the next year and how that is maybe trending relative to what we saw this year.
Yeah.
So again, we've said this in the past.
We manage our our large enterprise customers really well and have dedicated account teams are on them and this means we're having constant conversations with them.
So I think I think from a from a macro.
And again, the conversation changes depending on what industry that customers in you know who that customer is so there's a wide variety of responses, but when you look at the macro in general.
We've already seen customers in retail E comm and transportation verticals actually ramping up their hiring in <unk>.
October for the upcoming holiday season.
David mentioned U S consumer confidence remaining high.
And I think when you look at our verticals.
When you look at transportation.
Retail E Commerce and health care those are our top three verticals and those are the ones, we're actually seeing pretty good growth in those those those macro numbers are pretty good in those verticals like if you if you map that too quick data.
Transportation quits are not down healthcare quits are are you know our up retail quits are down so you've got pretty good macro indicators for whats happening in our largest verticals I think from a from an individual customer standpoint, there there's still a lot of uncertainty.
And there they are keeping things close divest because they themselves don't know.
But we are seeing for the first time in maybe well over a year that customers are starting to plan a little bit better.
You know for certainly for most of this year and definitely Q4 of last year. There was a great deal of uncertainty where they couldnt even predict their hiring demands now we're starting to see a little bit of that changing where they're starting to be able to plan a little better now I'm not we're not expecting that they can plan a full year of hiring.
But maybe there can plan a quarter and go quarter by quarter and that's great for us because we get that visibility.
Got it that's Super helpful. And then just as a follow up on sort of near term capital allocation look obviously, you like the leverage ratio at one seven times is still very strong, but obviously above the sort of sub one accident, we had seen over the past few quarters. So just wondering how you're sort of thinking about near term capital allocation are you looking to sort of get back to.
That sub onex level or are you comfortable where you're at right now.
Well first of all 1.7 X leverage is still very low.
We're very comfortable operating at that but by definition, it's going to continue to come down because we just generate so much cash flow from operations.
We are going to continue our stock buyback program, we will continue to pursue M&A, but we're very comfortable at 1.7 and again, we throw off a lot of cash every quarter.
Great. Thanks, guys I appreciate it.
Thank you we'll take our next question from Shlomo Rosenbaum with Stifel. Please go ahead.
Alright, well. Thank you for taking my questions, sorry, I didn't realize I was muted.
To start could you can you comment a little bit about kind of the trends through the quarter and maybe what youre seeing is the hiring cadence. If you adjusted for seasonality or are you seeing a little bit more stability, just maybe just some comments about where kind of the trajectory worked through the quarter.
Yeah, I think you have the exact word we've been using which is stability.
You know first of all it's great to see that.
Each month, we have sequentially grown.
And I think that that's obviously, great heading into the season and David mentioned.
October revenue being the highest of the year. So that's four months of sequential growth.
And I would say seasonal hiring is about right, where we thought it would be.
We're getting some good signals from customers.
And.
You know you again, the predictability of that.
Isn't what it's been in past years, but the order volumes obviously.
Are looking good and you even have some large companies I'm not saying. These are these are customers because we're never going just as we talk about a customer but you've got large.
Logistic and transportation companies announcing 60000 to 100000.
Tires in a weekend.
That kind of stuff and.
Obviously again.
Again, I'm not saying, that's a customer that's not a customer but those are the kinds of things that we love to hear.
Okay, Great and then David can you remind us what the working capital headwind in the quarter was the cash flow that impacted the cash flow and why you expect it to reverse just give us the color what's going on over there.
Yeah. It was pretty simple our dsos went up by a couple of days, we had a couple of large payments that came in the first week in October as opposed to the end of September.
Okay, great and if I could just squeeze in one more.
Maybe talk a little bit about what the infinite <unk> acquisition added to your existing capabilities and identity.
And.
Why you're excited about that.
Yeah, I think you've heard from us in and and others.
How.
How bullish.
We are on on the whole digital identity, and and and even fraud areas. We think these are <unk>.
High growth areas of the future of these are areas that are important.
To our customers.
And this also then maps really nicely to our our our product roadmaps around becoming more digital and more automated so when we looked at infinite I D.
This is basically an identity fraud and biometric company.
That focus is on on creating an actual physical network of third party locations. So think of it as like fingerprint collection.
And biometric collection be a state of the art kiosks. So similar to you go to the airport and you see the clear machines at the airports. So a similar type of experience around capturing that data.
This company was already a partner with us and in fact, I think we were their largest customer so we knew them and their technology really well.
And we just saw it as a great fit for expanding our our physical footprint around locations, where we could collect that data.
And then we also saw it as a really important piece of our future Road map as we as we see a lot of these products sort of merging together in the future. So when you think about digital identity, you think about overall broad protection.
And you and you and then you map that to the Onboarding process.
If you can have just think of like the great sort of candidate applicant experience you could have it.
That's all done seamlessly across multiple products. So you do get the biometric data, you're you're you're triggering a fraud protection, you're you're triggering the actual start of a of a background check on the criminal side, you can even loop in the <unk> process.
And all that stuff it all kind of co mingled together into what we think would be an eloquent.
The candidate experience into future as all these products and technologies come together.
Great. Thank you.
Thank you we'll take our next question from Andrew Steinman with J P. Morgan. Please go ahead.
Hi, Scott.
You take first advantage as clients current hiring volumes and they stayed at kind of current levels going into 'twenty four of course, adjusting for typical seasonal patterns, but without any kind of cyclical pick up.
And that kind of stable environment would first advantage have you know positive base revenue growth and 24, the course of the year over year comps.
Yeah again I.
I don't think we're ready to go to 2024, but you answered a big piece of that which is the comps gets so much easier in.
In 2024.
We'll obviously give you more color on that.
When we talk next.
And next quarter, but were thinking the same thing the comps get easier we've got a stable.
Hiring environment.
And then we just need to control our fire on the things that we fire on all cylinders on the things that we can control, which is new logo upsell cross sell retention stuff like that so we can't predict 'twenty 'twenty four right now, but youre thinking is in line with what we're thinking but we haven't actually.
We've gotten to a point, where we've modeled it yet and we're still talking to customers and trying to figure out what their 2024 plans are and it's still a little cloudy as to.
You know what what they can tell US right now so it's probably best that we wait a little bit on that.
Yes can I just ask one quick follow up when you talked about recent stability in hiring patterns. The recent stability in hiring patterns.
Were you referring to total company U S and non U S or perhaps you were just referring to U S.
No.
International is still down.
And still still struggling with the exception of EMEA as we mentioned EMEA is what I would say holding its own but.
But APAC and India are really down.
And.
Again, you know.
You know.
About 18%.
The decline in base.
Through international So that's still a big number.
And again, it's really just APAC and India, which we don't don't expect to bounce back for a while although we do believe they bottomed out.
But we think there are at least a couple of quarters away from from bouncing back and China will be a big big piece of that.
When it comes to APAC and China.
Reopens in Reagan and starts.
Influence in the region APAC should bounce back.
India, We don't think will bounce back until the U S has fully bounce back because our customer base in India is is really a lot of the <unk> and it services companies that serve the multinationals of U S and Europe.
And in the U S.
Again, we think that's very vertical specific.
So again a.
Transportation.
Health care.
Only showing increasing demand.
Retail E comm kind of holding its own but financial services business services Tech staffing all of those things are still down.
Although as you mentioned you know our Americas numbers R. R. R.
Pretty stable right now okay.
Okay, Great Scott Thanks for the details.
Okay.
Thank you we'll take our next question from Manav Patnaik with Barclays. Please go ahead.
Hi, Good morning. This is roni Kennedy off from me now. Thank you for taking my questions. Just wanted to cover margins and your take on the margin dynamics. When there is the return to the long term growth.
Although you know when base returns in assuming that new business and upsell Cross sell also expand can you talk about kind of the dynamics of margins will they.
Will they expand further is there going to be a potential pop there could they be potentially offset by further investments in automation AI et cetera, as you return to growth.
Yeah.
Well running particularly in the international marketplaces, there is a certain amount of fixed cost that we have in all of our operations. So as that incremental revenue comes back and starts to fall through that will enhance the margins in the international operations.
As Scott previously said, we are going to continue to invest organically.
We continue to invest in product and in technology, but look we're already driving industry, leading margins by far.
We're at 32, 3% we're implying.
Margins of 33% in Q4, but through automation and through incremental revenue, we think there's still room to expand on those as well.
Got it that's helpful. Thank you and then as a follow up to the question on capital allocation that was primarily from a near term standpoint and leverage.
Can you talk about M&A M&A in terms of the pipeline the valuations you're seeing to priorities and then also capital allocation from a longer term standpoint, with strong cash flow generation low leverage, but kind of a challenge of managing liquidity and flow as you did very well through the special dividend would you give consideration to a regular.
Dividend.
Well first relative to the dividend.
It's something that is discussed at the board level. This was a one time special dividend. It was a one time dividend at this point in time from a capital allocation perspective, we're going to remain disciplined and balanced we'll invest organically we are active in the M&A marketplace.
We are always looking at deals in the marketplace, we're not going to overpay for them valuations have gotten somewhat more reasonable, but theres still a little bit on the high side.
We will continue to look at every deal that comes out.
Thank you I appreciate it.
Thank you and again as a reminder to ask a question that is star one on your Touchtone phone, we will take our next question from Stephanie Morris Jeffries. Please go ahead.
Hi, good morning, Thank you.
I was hoping you could talk a little bit about your different sales.
<unk>.
The pipeline closing times change, maybe any change in sales cycle kind of person.
Sure.
Yes, Stephanie.
Overall pipeline has a total pipeline is great actually total pipeline is probably the highest we've ever had as a company.
So there are a lot of deals out there.
We are not seeing really any change in sales cycle duration.
In general most.
New logo deals take about six months.
And upsell cross sell it takes about three months.
So obviously, we love the sales cycle on the upsell cross sell because we're already there in contracts already in place and that kind of stuff.
I think the only.
The big difference that we've seen in deals this year and I think it started started Q4 of last year started but really.
Showed Q1 of this year is how many more procurement led deals there are.
And so like I said earlier I think companies are looking to save money and consolidate vendors and a lot of this stuff just makes sense.
And so I think the only change that we've seen in the sales process is more procurement led deals.
And I don't think that's necessarily a bad thing.
Because it.
It gives it gives you a chance to get into more rfps and obviously, we can provide scale and global reach and things like that.
Got it no. That's really helpful. And then I guess I have a follow up kind of more of a clarification on the guidance for 2023.
You noted you are now expecting to come in at the lower end of those ranges is that just a function of maybe kind of some of the lack of seasonality you've seen in the fourth quarter or just how year to date trend.
Panned out just trying to get a little bit of color on what drove that.
The expectation is to be more towards the low end.
So we're really reaffirming the guidance that we previously had in place we directed towards the low end last quarter. We're reaffirming that that is theyre accurate guidance relative to where we're ultimately going to.
And up and that's really a function of base growth.
That was really the wildcard all along it continues to be the most sensitive variable in the macroeconomic environment that we're operating in and.
Again, we're just reaffirming that guidance that we had previously had in place.
Got it no. That's my fault. Thanks, guys appreciate the color.
And once again as a reminder, that is star and one for your questions. We will take our next question from Kyle Peterson with Needham. Please go ahead.
Great. Thanks for squeezing me in guys good morning.
Wanted to start off on the international segment.
I appreciate some of the headwinds look the two services in <unk> face a bin bin going through but I guess thinking about.
Expectations for the for the fourth quarter.
Should we expect growth in that segment at least on a year over year basis.
To be fairly similar with what we saw in <unk> and then the Americas segment kind of makes up.
The delta since it seems to be holding up quite a bit better.
Sure.
Well, let's start in total in total Q4 by definition, if you look at low end of guidance.
Youll see that from a revenue perspective, it'll be slightly down year over year.
<unk> will continue to be.
Mid single digit negative.
And a lot of that is the result of international which is still way off so as Scott and I. Both said APAC was down 25%, India was down 45% we.
We expect that to continue in Q4 as well.
Got it.
That's helpful and then maybe a little bit more color on sort of the eight new deals you guys won was that pretty broad based across <unk>.
Verticals based on at least the.
The revenue mix you guys have today or was there any particular subsets of the client base that are worth calling out.
Strong side on some of these new wins.
So yeah, again, a pretty pretty broad across verticals.
So as I mentioned, a broad across you know competitive buckets brought across verticals.
There was one large deal in there in the transportation space.
But I don't want to you know, we're not going to go into more detail than that.
Okay Fair.
Fair enough that's good color thanks, guys.
And I see no further questions at this time in queue I will now turn the call back over to Mr. Staple for closing comments.
Thank you operator, and thank you everyone for your participation to recap we are very pleased with our performance through the third quarter, we continue to make great progress against our strategic the strategic initiatives and pride ourselves in providing a compelling value proposition to all of our stakeholders are sustainable competitive advantages.
Enable us to be the leader in this space and we are well positioned to capture further share and can you continue to create value. Thanks again, thanks, again and have a great day.
Thank you. This concludes the <unk> third quarter 2023 earnings conference call and webcast. Thank you all for your participation. At this time you may disconnect your line and have a wonderful day.
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