Q3 2024 First Advantage Corp Earnings Call
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Ashley: Good day, everyone. My name is Ashley and I will be your conference operator today I would like to welcome you to the first advantage third quarter 2024 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.
Ashley: We know to prevent any background noise. After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star one on your telephone keypad. If at any point. Your question has been answered you may have yourself from the queue by pressing star two lastly, fire operator assistance. Please.
Speaker Change: <unk> zero. Please note today's event is being recorded it is now my pleasure to turn the call over to Stephanie Coleman you may begin.
Stephanie Coleman: Thank you Ashley good morning, everyone and welcome to first advantages third quarter 2024 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.
Stephanie Coleman: This webcast is being recorded and will be available for replay on our Investor Relations website.
Stephanie Coleman: Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward looking statements such forward looking statements are not guarantees of future performance actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC.
Stephanie Coleman: SEC, including our 2023 Form 10-K, and our Form 10-Q for the third quarter of 2024 to be filed with the SEC.
Stephanie Coleman: Such factors may be updated from time to time in our periodic filings with the SEC.
Stephanie Coleman: Undertake any obligation to update forward looking statements.
Stephanie Coleman: This conference call. We will also present and discuss non-GAAP financial measures reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website.
On our call today by Scott <unk>, our Chief Executive Officer, Steven marks, our Chief Financial Officer, and David <unk>, Our outgoing Chief Financial Officer. After our prepared remarks, we will take your questions I will now hand the call.
Speaker Change: Thank you Stephanie and good morning, everyone.
Stephanie Coleman: Thank you for joining our call. This morning, I am pleased to provide you with an update on our business and our planned path forward with the addition of Sterling.
Stephanie Coleman: We are thrilled to have closed our $2 $2 billion acquisition of Sterling on October 31.
A tremendous opportunity for all of us now.
Stephanie Coleman: Now nearly twice as large we have over 10000 highly skilled motivated and excited employees.
Stephanie Coleman: On an LTM basis as of September 32024, we have combined revenues of approximately $1 5 billion.
Adjusted EBITDA of approximately $407 million or 457 to 477 million <unk>.
Stephanie Coleman: Including our targeted run rate synergies of $50 million to $70 million.
Stephanie Coleman: Which we expect to action within two years post closing.
Stephanie Coleman: I would like to thank our combined team for the great work they have done over the past several months to get us to this point.
Stephanie Coleman: Since closing the acquisition, we have hit the ground running focused on our products and customers, while endeavoring to conduct a smooth integration maintain customer continuity action synergies and reduced net leverage we have also unveiled our new logo and branding for our unified company, which you will see in our.
Stephanie Coleman: Presentation materials today.
Stephanie Coleman: We were pleased to deliver another quarter of strong financial performance and today, we are maintaining our full year 2024 first advantage standalone guidance ranges and providing new combined company guidance, David and Stephen will cover this in greater detail in the financial section.
Stephanie Coleman: Turning to slide five I'm excited to show the strong profile of our combined company and reiterate why Sterling is such an outstanding strategic fit and benchmarks first advantage well among our technology based info services peers.
Stephanie Coleman: Our combined capabilities position us as a leader offering differentiated technology platforms, and a broad range of innovative solutions.
Stephanie Coleman: With the Sterling acquisition completed we have essentially doubled in size by most measures, including the size of our combined sales forces and customer success organizations.
Combined we conduct over 200 million background screens annually for customers across more than 200 countries and territories and we have a robust average retention rate of over 96%.
Stephanie Coleman: We have been an early adopter of AI and utilize the strong tool throughout multiple areas of our organization. We believe that our large proprietary datasets and AI driven intelligent routing allow us to reduce our reliance on third party vendors and deliver cost effective solutions to our customers.
Stephanie Coleman: We expect that our now larger and more extensive network of automated and integrated third party data providers, we will continue to enable us to address each customers unique requirements with leading solutions.
Stephanie Coleman: With additional customers and capabilities from Sterling, we have increased the diversification of our verticals and geographies, reducing customer concentration and seasonality and increasing resilience. This helps to support our extremely diversified yet focused vertical go to market strategy centered around.
Stephanie Coleman: <unk> enterprise clients and specific industries, all supported by exceptional technology.
Stephanie Coleman: Going forward with increased resources dedicated to our targeted verticals. We believe that we will be able to provide deeper and more comprehensive industry level expertise to customers across the globe.
Leveraging our complimentary footprints, we have expanded both our U S and international presence and see tremendous opportunities to advance our growth outside the U S and attractive geographies like EMEA APAC Latam in India.
Stephanie Coleman: Our enhanced reach and diversification set us up to deliver a stronger more comprehensive value proposition to customers in a large growing and highly fragmented $13 billion total addressable market.
Stephanie Coleman: On top of this with greater capacity for investment we anticipate that the go forward company will further accelerate innovation focus on artificial intelligence and machine learning robotic process automation and next generation digital identification technologies building on our already robust foundation.
Stephanie Coleman: All of these factors enable first advantages position as a leading provider of critical high technology digitally enabled info services.
Stephanie Coleman: Turning to slide six.
Now that we're post close our focus is on delivering the strategic and financial benefits. We had been discussing with you since we announced the planned acquisition.
Stephanie Coleman: We have begun executing our detailed integration plan focused on a seamless process for our customers and employees.
Stephanie Coleman: <unk>, our synergy targets and deleveraging our balance sheet, while retaining customers and ensuring that they do not experienced disruptions remain our top priorities.
Stephanie Coleman: We are also uncovering ways to enhance our customer value proposition and unlock cross sell and up sell opportunities at the same time, we will continue to drive innovation and foster the high performing culture, we are known for.
Stephanie Coleman: In tandem with our work on the transaction, we have been developing an updated strategy that incorporates the sterling acquisition and is heavily focused on rapidly growing and innovating our business through new technology, AI and product initiatives. We are calling this FAA five dot O <unk>.
Stephanie Coleman: I'm excited to share the organizational part of this strategy with you today.
Stephanie Coleman: Yes.
Speaker Change: On slide seven.
Speaker Change: You will see the senior management team, who is responsible for executing our five FAA <unk> strategy.
Speaker Change: As recently announced Joe Smith has been promoted to the role of President to all knows our company very well, having held leadership roles within first advantage. Since 2017, most recently as president data technology and experience in this new role Gol will continue to strategically lead the Prada.
Speaker Change: Data and technology organizations and will also take on responsibility for our go to market teams, including sales customer success and marketing.
Speaker Change: Our new structure, which aligns product and technology organizations globally includes the introduction of general manager positions strategically aligned to verticals or regions reporting to joelle.
Speaker Change: We have combined the capabilities of our go to market teams, including our direct sales and customer success functions under our Gms.
Speaker Change: This organization is a blend of first advantage and Sterling incredible talent and his focus on customer retention and satisfaction, along with new business sales and up sell cross sell.
Speaker Change: Additionally, Doug <unk>, who joined first advantage in 2021 as international Chief Operations Officer.
Speaker Change: Following his time as CEO of an international screening company has been named to the expanded role of Chief Chief Operating officer, and which he is overseeing all of our U S and international operations customer care and customer Onboarding teams.
Speaker Change: As we noted last quarter. This will be David's last earnings call. As he is retiring with Stephen March taking over the role of CFO. Stephen is an accomplished finance professional and respected leader. He joined first advantage eight and a half years ago and has served as our chief accounting officer Since February 2022.
Speaker Change: Board composition is unchanged post acquisition.
Speaker Change: Overall, we believe that our new organizational structure will improve the applicant and customer experience through enhanced operational efficiency improve how we partner with and sell to our customers and set us up for success as we commence our Fas five Dato journey, we will share more about the Fas five.
Speaker Change: <unk> as we move into 2025.
Speaker Change: Turning to slide eight.
Speaker Change: Closing of our acquisition of Sterling not only provides a great opportunity to update our strategy, but to also rebrand. The company. This is an excellent example of our pre integration planning work coming to life as it represents a joint effort between the Sterling and first advantage teams over many months our new logo.
Speaker Change: Gives us a clean modern look and feel that represents our commitment to leading edge technology and the use of responsible AI and also symbolizes the joining of the two companies.
Speaker Change: The race track logo represents the interconnectivity of speed and quality, which is what separates us in the market.
Speaker Change: The continuous line that makes up the abstract of the logo reinforces the strength of the two companies coming together as one we are very excited to time the launch of our new branding with the close of this transaction.
Speaker Change: Yeah.
Speaker Change: Turning to slide nine as part of the Sterling acquisition, we are committed to delivering $50 million to $70 million of run rate cost synergies. We have already made significant progress towards this target with over $10 million of run rate cost synergies actions on day one.
These savings consists primarily of reductions from combining executive teams, removing duplicative public company costs and combining insurance programs.
Speaker Change: We have also already identified additional synergy opportunities that are expected to approximately double the action synergies within the next 100 days.
Speaker Change: We have a detailed plan in place to capture the full extent of synergies available.
Speaker Change: Key categories that we plan to address over time include international operations fulfillment product development and commercial costs with the objective of Actioning, our targeted run rate within 24 months.
In addition to these cost synergies. We believe there is also opportunity to uncover potential revenue synergies, we will continue to execute and plan to update you on our synergy progress on future earnings call.
Speaker Change: Finally to summarize our position post closing on the Sterling acquisition, we have a go forward organization with outstanding leadership, a fresh new brand identity that exemplifies the future of first advantage a tremendous combination of growth related resources and product offerings strong customer.
Speaker Change: Relationships diversified across verticals and geographies, resulting in lower customer concentration ambitious and achievable synergy targets and detailed integration plans, which are in place and being executed.
Speaker Change: We have a lot of work to do in the coming months and years and we are energized by our opportunity to accelerate growth and deliver value.
Speaker Change: Turning to slide 10, before I turn the call over to David I'd like to briefly comment on our Standalone third quarter results and the progress we have made on sustainability.
Speaker Change: We are very pleased to report that first advantaged combined upsell cross sell and new logo rates are where are.
Speaker Change: As well as retention rate again performed in line with our historical revenue growth algorithm.
Speaker Change: First advantage had 16 total enterprise bookings in the third quarter and 53 in the last 12 months, each with $500000 or more of expected annual contract value. Our sales engine continues to deliver consistent results.
Speaker Change: From a vertical perspective first advantage is transportation and staffing vertical saw positive growth versus the prior year, while financial services was flat.
Speaker Change: Our other verticals were down in the single digits year over year, except for technology, which while down slightly more only represents 2% of our standalone business.
Speaker Change: Third quarter Standalone results reflect a macroeconomic picture of continued normalization and stabilization within our business. We are also seeing this play out with key labor metrics, including quits hires and openings as job trends return to pre pandemic levels overall.
Speaker Change: Our customers continue to higher, albeit at a more modest level.
Speaker Change: Before switching gears I want to call attention to the recent release of first advantages third annual sustainability report. This report reiterates our commitment to our core values and demonstrates the progress we are making across ethical governance climate employee engagement and inclusion and bolstering.
Speaker Change: The resilience of our company.
Speaker Change: I encourage you to review the full report on our website.
Speaker Change: As this is David <unk> last earnings call I would like to sincerely. Thank him for his distinguished service to first advantage and for his partnership over the past eight plus years. We wish you the very best in his next chapter David and with David His well earned retirement, we are very excited to welcome Stephen who has now taken over as our CFO and with that.
Speaker Change: I will now turn the call over to David.
Thank you Scott and good morning, everyone. As Scott mentioned this will be my last earnings call. Prior to my retirement, but I promise you that I will be carefully following first advantages future success going forward and it's been an honor to have been a part of the first advantage management team we have.
Speaker Change: <unk> achieved much together and there is still much more to be accomplished.
Speaker Change: This quarter, Steven and I will be providing color on first advantage Standalone results legacy Sterling results in a combined deal to give you a clearer picture of our new profile before concluding with thoughts around our full year guidance.
Speaker Change: Turning to our stand alone third quarter results on slide 12.
Speaker Change: In line with our previously communicated expectations first advantages results for the third quarter improved sequentially over our second quarter results.
Speaker Change: Our third quarter revenues were $199 $1 million roughly in line with the prior year and $14 $6 million or 8% greater than in Q2.
Speaker Change: For comparison purposes note that.
Speaker Change: Q3 of 2023 includes a one time specific customer project, representing approximately $4 million.
Speaker Change: Our Americas segment was roughly flat as base growth was lower than anticipated primarily due to a later start than normal holiday hiring.
Speaker Change: International performed better than anticipated, increasing three 2% with green shoots across all regions.
Speaker Change: For the total stand alone company adjusted EBITDA was $64 million also roughly the same as in the prior year, but sequentially up $8 $2 million or 15% greater than Q2.
Speaker Change: Adjusted EBITDA margin improved sequentially 200 basis points to 32, 2% due to our highly variable flexible cost structure and disciplined approach to managing costs.
Speaker Change: We continue to carefully manage our business to match the current demand environment.
Speaker Change: As a reminder, our cost structure is highly flexible and over 70% of our cost of sales our third party costs, which are volume variable.
Speaker Change: We are constantly reviewing and adjusting our spending and modulating our investments to ensure that we are operating optimally and delivering results.
Adjusted diluted earnings per share was 26.
Speaker Change: Legacy Sterling results for the third quarter are shown on slide 13.
Speaker Change: Revenue for the quarter was $195 $5 million.
$14 $9 million or eight 3% versus prior year.
Speaker Change: Revenue growth was led by the Americas, which grew on an organic constant currency basis, and also benefited from the impact of the vault acquisition.
Speaker Change: International sales, excluding Canada were overall flattish in the quarter with strength in EMEA offset by softness in APAC.
Speaker Change: In terms of verticals healthcare retail tech media and industrials delivered growth year over year, while staffing and government saw declines.
Speaker Change: Adjusted EBITDA of $45 $3 million was down $2 $3 million versus the prior year comparable quarter, resulting in a margin of 23, 2%.
Speaker Change: Adjusted EBITDA margins for the third quarter were impacted by base declines and some attrition of higher margin customers as well as new business sales of lower margin products, such as drug in health care testing. Additionally.
Speaker Change: Additionally, overall margins were impacted by an organic vault revenues with margins in the teens, which is a legacy Sterling management team did not yet addressed through the execution of their initial synergy plans.
Speaker Change: Adjusted net income of $22 $7 million declined approximately $2 million versus Q3 of the prior year driven by lower adjusted EBITDA.
Speaker Change: Now turning to combined LTM results on slide 14.
Speaker Change: Giving effect to the acquisition of Sterling, we have essentially doubled our revenues and adjusted EBITDA, which reflects the significant scale, we have added to the business.
Speaker Change: While combined adjusted EBITDA margins of approximately 27% are lower than first advantage stand alone. We are confident that once your cost synergies are achieved and we executed on our integration plan over time, we will be able to return combined adjusted EBITDA margins back to above.
30% with potential for future upside.
Speaker Change: On Slide 15, you can see that our first advantage Standalone historical performance for up sell cross sell new customer logos and attrition has been consistent and demonstrates that we are managing and delivering on what we can control with the variation.
Speaker Change: And being driven by the base.
Speaker Change: Looking specifically at first advantage.
Speaker Change: Revenues from upsell and cross sell alone nearly offset our base decline for the quarter and contributed 7% to our Q3 growth.
Speaker Change: New customer logos contributed an additional 3% which was impacted by some delayed customer go lives, which have already partially cleared in the fourth quarter.
Attrition improved to three 6%.
Speaker Change: <unk> results driven primarily by our Americas segment declined, 8%, which was below our expectations and was driven by continued uncertainty in the macro related to inflation interest rate cuts the recent election and prolonged uncertainty in the geopolitical environment.
Speaker Change: We also experienced a delayed start to seasonal hiring in September but based on October results, we have seen seasonal hiring picks up.
Speaker Change: Looking at legacy Sterling.
Speaker Change: Overall, new and up sell cross sell growth drivers were strong offset by continued base headwinds.
Speaker Change: Sell cross sell contributed 10% to growth in Q3 with new logos contributing a another 7%.
Speaker Change: Both of these growth rates reflect some acceleration compared to Q2.
Speaker Change: Gross retention remained stable with attrition of less than 4%.
Speaker Change: <unk> growth remained negative at approximately 12%, though on printer Zhang versus prior quarters.
The base growth at legacy Sterling has lagged first advantages as there are verticals have been more impacted by the normalization of hiring patterns.
Speaker Change: I will now turn the call over to Steven to discuss our cash flow net leverage profile and outlook for the remainder of the year.
Steven: Thank you David and good morning, everyone.
Steven: I'd like to first take a moment to express my sincere gratitude to David I've had the honor to work with them for over eight years and have been able to learn from his exceptional leadership and dedication.
Steven: His contributions have laid a strong foundation for our success and first advantage is a far better company today. Thanks to his contributions.
Steven: I would also like to thank Scott and our board of directors for their trust as I stepped into this role.
Steven: Excited about the opportunity to work alongside such a talented team and to continue driving our company's growth.
Steven: And certainly to our investors I look forward to continuing to engage with you in the future as we work together to achieve our shared goals.
Steven: Now turning to cash flow and net leverage on slide 17.
Steven: Q3, 2024 first advantage stand alone generated strong adjusted operating cash flows of $45 3 million, a robust 32% increase versus prior year, driven by expense management and cash tax planning and year over year decreases in our receivables.
Steven: Sequentially adjusted operating cash flow increased 11% from Q2 <unk>.
Steven: First advantage of the cash balance at September 32024 was $307 4 million.
Steven: As we are building cash to help fund the Sterling flows.
Steven: Over the last 12 months, we generated adjusted operating cash flows of $181 8 million or.
Steven: A 3% increase on a year over year basis.
Steven: During the quarter first advantage of $7 $9 million for purchases of property and equipment and capitalized software development costs.
Steven: Legacy Sterling generated adjusted operating cash flows of $30 9 million in Q3 and at $75 million of cash at September 30, having prepaid $20 million of its outstanding debt in Q3.
Steven: Year over year trends in cash flow exceeded the trends in adjusted EBITDA due to Sterling as working capital management, especially related to cash collections. We are actively actively working on ways to further enhance cash cash flow from the Sterling business.
Steven: Turning to slide 18.
Steven: In support of the Sterling acquisition, we successfully procured amended financing up to $185 billion.
Steven: The amended financing in two $1 $85 billion in the form of a seven year term loan due in October 2031 of which approximately $1 1 billion was used to fund the Sterling acquisition and the balance was used to refinance the existing debt of both companies we.
Steven: We were very pleased that the company was able to maintain its existing credit ratings with the rating agencies on a refinance debt underscoring the strength of our business post closing.
Steven: After considering our cash at close we have approximately $2 billion of net debt and a pro forma synergize net leverage ratio of approximately 4.4 times in line with the expectations, we shared last quarter.
As part of our financing agreement, we upsized, our revolver availability to $250 million to provide additional liquidity and we extended the maturity date through October 2029, there are no amounts currently outstanding under the revolver.
Steven: We remain committed to our goal of reducing net leverage towards approximately three times run rate adjusted EBITDA within 24 months post close and to our long term net leverage ratio target range of two to three times. We believe that continued interest rate cuts will help us accomplish this goal.
Steven: Additionally, in August 1st advantage entered into a new $160 million swap agreement through the end of 2026 and just last week, we added an additional $275 million swap agreement through October 2027, as a result about 40% of our post.
Steven: The acquisition debt now has a fixed rate.
Steven: Moving to slide 19.
Steven: I want to talk about our combined company guidance, which maintains our previous lease provided first advantage standalone guidance and includes the expected Sterling contributions for November and December, including the benefit of action synergies and the capital structure impacts from the transaction.
Steven: For the combined company, we expect total revenues in the range of 858% to $918 million and adjusted EBITDA of $250 million to $274 million after accounting for the impact of the transaction financing and the new shares issued at <unk>.
Steven: We expect adjusted diluted EPS to be in the range of 83 to <unk> 95 for 2024.
Steven: While our SaaS Standalone guidance ranges are unchanged in light of the current macro conditions and base growth coming in lower than we had previously anticipated in the third quarter. We anticipate first advantage Standalone 2020 for revenues and adjusted EBITDA to come in above the.
Steven: The low end of the Standalone range Buffalo, the Standalone midpoint.
Steven: Looking at the fourth quarter on a standalone basis for first advantage, we still expect sequential quarter over quarter growth for revenues and adjusted EBITDA.
Steven: The lower half of our Standalone guidance range also assumes a macro driven base declines of around two 4% in Q4, representing an improvement over the trends we saw in the third quarter.
Steven: Our early read on Standalone October results gives us confidence in the fourth quarter is shaping up as I have outlined.
Steven: Looking closer at our expectations for Sterling contributions in Q4, we are expecting for full fourth quarter revenues to come in between $170 million and $185 million.
Of this only November and December are included in our combined company guidance range and are expected to deliver between 101 hundred $18 million of revenue monthly.
Steven: Monthly results are influenced by the typical seasonality of the business and holiday timing.
Steven: We are expecting November and December adjusted EBITDA for Sterling between $2, 22, and $26 million and adjusted diluted EPS between five to seven.
Steven: Moving to slide 20, which illustrates our bridge from first advantage a standalone adjusted diluted EPS guidance to our full year combined guidance.
Steven: First advantage Standalone adjusted diluted EPS guidance is maintained at 88% to 98.
Steven: With a midpoint of 93.
To that we add Sterling expected contribution for November and December and then account for the impact of additional share issuance and transaction financing resulted in our updated guidance midpoint of 89.
On slide 21, we illustrate a double digit adjusted diluted EPS accretion, we expect from the acquisition on a center Jive and pro forma LTM September 30 basis.
Steven: This basis, we estimate accretion of approximately 15% plus.
Steven: As a reminder, we expect to action our run rate synergy targets within two years post close of which only a portion is expected to be accident in the balance of 2024 and during 2025.
Steven: On this note as you model your future projections. Please keep in mind that as we consolidate sterling results and the capital structure impact of the acquisition as well as account for the pacing of synergy capture at achievement adjusted diluted EPS accretion in our actual reported results for 2025.
Steven: We'll be more neutral.
Steven: As the synergies are fully achieved we anticipate the expected adjusted diluted EPS accretion will be attained we plan to provide more reporting on this as part of our 2025 guidance, including a framework to understand synergy attainment overtime, which will be discussed on our next earnings call.
Speaker Change: We are incredibly proud of the results produced by first advantage in Q3 and are looking forward to the opportunity to create additional shareholder value as we execute our sterling integration plans and the FAA five data strategy with that let me turn it turn it back to Scott for closing remarks before we open the line for questions.
Speaker Change: Thanks.
Speaker Change: We continue delivered solid results and execute on our prior.
Speaker Change: Most notably we closed the Sterling acquisition and are moving ahead quickly to integrate and capture the benefits and synergies.
Speaker Change: We remain focused on delivering on our value creation playbook and shaping the future of first advantage to better serve our customers with that we will open the line for questions.
Speaker Change: Certainly 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. If at any point. Your question has been answered you may remove yourself from the queue by pressing star two.
Speaker Change: Using a speaker phone, we request that you pick up your handset will asking your question to provide optimal sound quality.
Speaker Change: Our first question is coming from Shlomo Rosenbaum with Stifel. Please go ahead.
Shlomo Rosenbaum: Hi, Thank you very much for taking my questions.
Shlomo Rosenbaum: I just wanted to ask you a little bit about the comment that you made about on Sterling some attrition of higher margin customers.
Speaker Change: Biggest risk.
Speaker Change: Discuss this is.
Speaker Change: The retention or the potential churn of some of these customers maybe you can give us a little bit more clarity as to what happened over there are you expecting that to continue or is there.
Speaker Change: Kind of anomalous and just how should we.
Speaker Change: Think about that and.
Speaker Change: After that have follow up.
Speaker Change: Yes, Shlomo nothing that I would say notable in terms of a change from historical trend Sterling retention in the last few quarters has actually been high in the historical record 90, 796% was 96% in Q3.
Speaker Change: It was really just a mix item.
<unk> been having a lot of upsell success in that drug in healthcare space, which is bringing margins down and the margin in a couple of attrition, which again I wouldn't categorize it as normal course, just happened to be more in that traditional screening space, which is higher margin relatively speaking with just pulled down.
Speaker Change: A handful of bps, if you will of margin.
Speaker Change: So youre, saying its not.
The change in the attrition.
Speaker Change: Leading with the attrition came from US I, just want to clarify that or go to the next one.
Speaker Change: Yes, exactly the mix of the lost business versus the mix of the added business kind of had a little bit of a margin headwind to it.
Speaker Change: Okay. Thanks, and then.
Speaker Change: If you don't mind just.
Speaker Change: You talked about some of the base business coming in lower than expected and maybe you could just talk about the operating environment in general how has it changed over the last quarter.
Speaker Change: What are clients, telling you about their hiring expectations and importantly does anything change with changes in administration in other words are you.
Speaker Change: We're thinking that debt.
Speaker Change: Increases the chance of more hiring decreases are really doesn't make a difference in the way that youre thinking about things.
Shlomo Rosenbaum: Yes Shlomo.
Speaker Change: So.
Speaker Change: Everybody is obviously focused on the macro and as you know.
Speaker Change: We are in constant communication with our customers. So our data points are what we're seeing from government data.
Speaker Change: But more importantly, what we're hearing from customers and I don't think.
Speaker Change: We're seeing anything different.
Speaker Change: A lot of more of the same so what we've been talking about maybe for the last couple of quarters, even even.
Speaker Change: Maybe last year, so as sort of a continued stabilization and normalization modeling in this quarter, but.
Speaker Change: In previous quarters as well.
Speaker Change: We do believe that now that the U S election is behind us and.
Speaker Change: All of these potential rate cuts are coming up that some of the uncertainty will go away.
Speaker Change: But.
Speaker Change: It's clear that job opening continued to decline and sort of going back to what we see is pre pandemic level.
Speaker Change: But that's sort of.
Speaker Change: A normal thing for us.
Speaker Change: And that sort of.
Speaker Change: It helps us with planning.
Speaker Change: And I think what we're hearing from customers is that.
Speaker Change: And I apologize.
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Speaker Change: Program will begin will resume in just wanted to add.
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Speaker Change: Bob.
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Speaker Change: Alright, we do have our speakers back with us.
Speaker Change: Which is we will continue on with a question from Shlomo.
Shlomo Rosenbaum: Shlomo Rosenbaum.
Speaker Change: This level, where we dropped off.
Speaker Change: And so although youre still connected and your line is open if you can hear us.
Speaker Change: Okay I do apologize.
Speaker Change: That does we will go next to Andrew Steinman with Jpmorgan. Please go ahead.
Speaker Change: Okay.
Speaker Change: Andrew Your line is open.
Speaker Change: Yeah.
Speaker Change: And we will take our next question from Nicolas or Andrew Nicholas with William Blair. Please go ahead.
Speaker Change: Andrew Your line is open.
Speaker Change: And we will take our next question from Manav Patnaik with Barclays. Please go ahead.
Speaker Change: If you would like to ask a question. Please press star one.
Speaker Change: Okay.
Speaker Change: We'll take our next question from Scott Wurtzel with Wolfe Research. Your line is open. Please go ahead.
Speaker Change: Okay.
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Robert.
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Speaker Change: Hi, Bob.
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Morning.
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Speaker Change: Hey, Matt.
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Speaker Change: Bruno.
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Speaker Change: Tom.
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Speaker Change: Good morning.
Speaker Change: No.
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Speaker Change: Scott.
Speaker Change: Mhm.
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Speaker Change: Good morning.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: To all sites on hold we do appreciate your patience. Please continue to standby.
Speaker Change: Yes.
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Speaker Change: Alright, and I do apologize there we had experienced technical difficulties I do apologize for that we are going to continue our question and answer queue with Shlomo Rosenbaum. Please go ahead.
Shlomo Rosenbaum: Hey, Scott are you there can you hear me.
Speaker Change: Yes, we can hear you can you hear me.
Speaker Change: Yes, I can hear you fine.
Speaker Change: I have a pop up question of whether some of the cost efficiencies came on the conference call hosting company open.
Speaker Change: Okay.
Shlomo Rosenbaum: Shlomo sorry.
Shlomo Rosenbaum: Okay.
Shlomo Rosenbaum: Perfect.
Shlomo Rosenbaum: Going forward your Shlomo.
Shlomo Rosenbaum: Okay.
Shlomo Rosenbaum: Alright.
Speaker Change: You were in the middle of just describing what customers are telling you and that's where that's where the audio went out.
Shlomo Rosenbaum: Okay great.
Shlomo Rosenbaum: So I won't go back over kind of the macro stuff what customers are telling us the same thing David Kelley with almost all year, so almost no change.
Again I mentioned.
Shlomo Rosenbaum: We believe with the U S election behind that some rate cuts coming that the macro will be true, but as of right now we're still.
Shlomo Rosenbaum: Seeing what we've been talking about all year stabilization normalization. It does continue so most of our most of our customers are still hiring, albeit at modest level.
Shlomo Rosenbaum: They are focused largely on backfill.
Shlomo Rosenbaum: James all year.
Shlomo Rosenbaum: You are still doing new hire.
Shlomo Rosenbaum: Hiring, but they're doing it I think I've said.
Shlomo Rosenbaum: Just the last couple of quarters, they really sharp turn to a just in time hiring model. So they're not going to hire ahead of the curve.
Shlomo Rosenbaum: And just in time hiring model Roth are not an issue because as you know.
Shlomo Rosenbaum: Technology and our market position is all around speed. So if our customers wanted to do just in time hiring find with US we get quick turnaround time.
Speaker Change: Thats correct.
Speaker Change: Okay I think the reason what I was trying to get at is just.
The midpoint of the guidance was where we reported last quarter and this quarter it seemed to come down a little bit and you talked about the volumes coming in base, a little bit lower so just trying to gather whether thats, an erosion of what's going on or.
Speaker Change: Just bouncing around the bottom that's the just as I was trying to get at the question.
Yes, I think.
Speaker Change: Bouncing around a little bit on the Bob.
The best way to view it.
Speaker Change: A couple of good data point for you is international.
Brian: <unk> is now back two quarters Brian.
Brian: Good.
Brian: Okay.
Brian: Okay.
Brian: Keep also in mind that we still are doing really good things.
Brian: Our cross sell.
Brian: Great.
Brian: And et cetera, so really just.
Brian: The base was lower than we thought it would be this quarter.
Okay.
It is also critical.
Brian: Certain vertical well doing well.
Brian: But yes, it's a little bit of bouncing around the bottom or anything like that analogy.
Speaker Change: Okay. Thanks, and just give you a heads up the audio is still a little choppy.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Thank you we'll take our next question from Andrew Steinman with Jpmorgan. Please go ahead.
Andrew Steinman: Hi, it's Andrew the comment about 25 big more neutral in terms of EPS.
Andrew Steinman: Christian.
Speaker Change: To me that sounds like a change.
Speaker Change: I remember 25, being accretive and kind of given the size of the deals.
Speaker Change: The opportunity I just wanted to confirm that that's a change and what drove that change to be more neutral in 'twenty five the combined organizations.
Speaker Change: And youre not really a change when we're talking about that we're talking about what will be realized and reported.
Speaker Change: And based on when reaction the synergy that obviously when your action. It you don't realize it all upfront it takes 12 months to have that.
<unk> become part of your reported results.
Speaker Change: We just wanted to make sure.
Speaker Change: Interest expense is out there today.
Speaker Change: The dilution is out there today and we just wanted to help start to build out some of those models I wouldn't really call. It a change at all we haven't changed our synergy outlook, we really haven't changed.
Speaker Change: Yes really anything.
Speaker Change: In a couple of swaps to help offset some of the interest expense items for next year.
Speaker Change: So really not a change or is it really just wanted to make sure we're kind of making the obvious point.
Speaker Change: A route.
The synergies will hit our actual P&L.
Speaker Change: On a pro forma Ed and thanks, Jim.
Speaker Change: Yes on a pro forma.
Speaker Change: It'd be helpful.
Speaker Change: Okay.
Speaker Change: And since you mentioned 25, yes, I know, it's in the context of EPS accretion.
Speaker Change: We have an underlying assumption for base revenues.
Speaker Change: For example, the Sterling side at <unk>.
Speaker Change: Base revenues, a higher base revenues.
Speaker Change: And then your model would it be.
Speaker Change: That effect, the EPS accretion assumption.
Speaker Change: Little early to get into exact science on 2025, Andrew I think again, we just wanted to make sure we got everyone's models oriented in the right direction.
Speaker Change: I mean, you're right obviously sterling.
Speaker Change: The volume and quantum of Sterling results impact that accretion.
Speaker Change: I think the biggest moving factors that we're trying to help models with today is just on the synergy pacing obviously some of the interest expense and dilution impacts.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you we will take our next question from Andrew Nicholas with William Blair. Please go ahead.
Speaker Change: Hi, Thank you and good morning, I wanted to ask a question on <unk>.
Speaker Change: Sell cross sell.
The metrics there.
Speaker Change: <unk>.
Speaker Change: First advantage and legacy Sterling.
Speaker Change: Pretty impressive accelerating sequentially is there anything that you can do to unpack that a little bit more for both entities.
Speaker Change: And maybe to the extent that there are growth drivers in there that can drive revenue synergies for the combined for two it'd be great to hear.
Speaker Change: Yes.
Speaker Change: We're obviously very happy where both companies are.
Speaker Change: In.
Speaker Change: Upsell cross sell.
Speaker Change: If you remember.
Speaker Change: Last quarter, we announced two very large deal that we won in the quarter that were both up sell cross sell.
Speaker Change: Those are revenue now and in fact, they both revenue.
Speaker Change: Within days of closing so we're riding.
Pretty nicely.
Speaker Change: Those two wins from last quarter.
Speaker Change: Sterling.
Speaker Change: We still need to get into more of the detail.
Speaker Change: The deal is only 12 days old.
Speaker Change: But they've had some success.
Speaker Change: With upsell cross sell as well.
From their results.
Speaker Change: So I think the.
Speaker Change: Highlights here Andrew is that.
Speaker Change: Customers are still prioritizing.
Speaker Change: Safety and compliance and shareholder value and brand protection.
Speaker Change: Over cost cutting.
Speaker Change: And that is leading to deeper deeper package density.
Speaker Change: And we think the.
Speaker Change: So cross sell numbers will not only continue to perform well in the future with.
Speaker Change: General package density.
On digital identity solution, which we think.
Speaker Change: We will be hot sellers in the market. So this is a number that we think is.
Speaker Change: It is going to be a strong number.
Speaker Change: For the next couple of quarters for sure.
Speaker Change: Great. Thank you and I realize it's early to talk about specific 25 numbers, but just as we think about kind of the integration here.
Speaker Change: Much.
Speaker Change: Distraction risk do you feel that there is with the sales force in particular is it is it fair for us to assume some sort of haircut.
Speaker Change: Two new logo growth your upsell cross sell youre asking the tailwind.
Speaker Change: Described.
Over the first couple of quarters of combined company or how are you thinking about that.
Speaker Change: That holistically.
Yes, I think we're doing a really good job.
Speaker Change: Coordinating the front end go to market team.
Speaker Change: <unk>.
Speaker Change: We've got daily standup calls in place where we are.
Speaker Change: We're mapping.
Speaker Change: Julian.
Speaker Change: RMP.
Speaker Change: Deals that were on where we're talking to customers I think what's really interesting.
Speaker Change: When we when the deal was closed.
Speaker Change: As we communicated to you all thoroughly customer and then we actually spoke.
Speaker Change: In person to all of their large customers and then there was just really good excitement.
Speaker Change: About the deal and.
Speaker Change: And customers are feeling really good about it so.
Youre right in that when you put things together.
Speaker Change: It does bring in some potential distraction from Brett I don't think we will see a deterioration of any of those key metrics.
Stable for awhile.
Speaker Change: But we actually think in the long run some of these should improve.
But I would say you could probably have a period of stabilization around that as we as you put them together.
Speaker Change: Great. Thank you.
Speaker Change: And once again as a reminder that is star one for any questions. We will take our next question from Manav Patnaik with Barclays. Please go ahead.
Manav Patnaik: Thank you good morning.
Manav Patnaik: Got it I just wanted to touch on the plans around the integration of the platforms and getting those multiple platform sure.
Manav Patnaik: So just what are your plans around that in August.
Speaker Change: New innovation front end integration et cetera, I am guessing thats not contingent on those backbones combining to one.
Speaker Change: Hey, Manav great to have you back.
Manav Patnaik: And great question. So obviously this is this is probably the number one.
Manav Patnaik: Focus area of the company.
Manav Patnaik: Is to make sure that we get this right.
Speaker Change: And I think you've heard.
<unk> from.
Speaker Change: Since we announced the deal that there.
Speaker Change: Our goal is to not disrupt.
Speaker Change: Existing client base with their platform selection.
Speaker Change: We've been out talking to customers.
Speaker Change: We're not going to force migrate.
Speaker Change: Customers on to a given platform because we don't need to our synergy numbers don't require that.
Speaker Change: We are also going to as we roll out new features and functionalities as we figure out.
Speaker Change: Which product stayed which products go.
Speaker Change: Use that at keeping the better of the two.
Speaker Change: And so ultimately what our customers.
Speaker Change: Our combined customers should feel is as an upgrade.
Observe it in an upgrade of products and we're going to be very very thoughtful.
Speaker Change: And cautious about how we do that.
No no timeline.
Speaker Change: It will take us many months to come up with.
What those strategies are because due to the HSR process, we could really get under the cover too much and now we are starting to do that and we're obviously liking what we're seeing.
Speaker Change: But we'll be very thoughtful as to how we roll that out.
Speaker Change: Okay fair enough.
Speaker Change: And then just you talked about I think you mentioned a few times about job trends getting back to pre pandemic levels.
Speaker Change: Just wondering.
Speaker Change: No.
Speaker Change: Thank you don't really have the history pre 2021, so you understand and for that matter. So just wondering.
Speaker Change: With the combined company, how you think can perform in that kind of a normal environment.
Speaker Change: <unk> algorithms and it changes a little bit.
Speaker Change: Yes, I think.
Speaker Change: The growth algorithm.
Which I will cover again, just real quickly so everybody's on the same page, but our growth algorithm.
R R.
Speaker Change: Typically you will receive based growth of 2% to 4% upsell cross sell reported 5% new logos to 5% or six 6% and then backing out attrition, 3% to 4% put you put us in that 8% to 10% growth range and really we are we are firing on all cylinders.
Speaker Change: Except pace right now.
Speaker Change: So.
For the last <unk>.
Speaker Change: Literally for the last two plus years, if you go back and look at that.
Speaker Change: I think this is our 14th earnings call. If you go back and look at the data. It's been so consistent on upsell cross sell new logo attrition and the only thing that fluctuate really abate.
Speaker Change: So as we look into future modeling.
We don't think as I mentioned just earlier, we don't think that there'll be any change to our growth algorithm on upsell cross sell new logo and Richard Shannon and again ultimately there should be accruing. It there although it should remain stable maybe for 2025, and then start to improve as we put things.
Speaker Change: Together. So it is just always coming down right now and again.
Speaker Change: Seeing that stabilization and normalization.
Speaker Change: Which which has us in the still in the low low single digit declines in base right now.
Scott: Okay. Thank you Scott.
Speaker Change: Thank you we will take our next question from Scott <unk> with Wolfe Research. Please go ahead.
Speaker Change: Hey, good morning, guys. Thank you for taking my question wanted to go back to some of the conversations that youre, having with customers specifically the ones that are coming over.
Speaker Change: From Sterling, maybe would love to just see your kind of maybe what they're most excited about being under the combined companies, whether that's products Theyre looking forward to.
Features are being able to rationalize cost anything there would be very helpful.
Speaker Change: Yeah. So.
Speaker Change: Again this is.
Speaker Change: This is.
Speaker Change: Fairly a non event for first advantage customers. So we did obviously reach out to talk to all our first advantage customers.
Speaker Change: There's not a lot changed.
Speaker Change: Okay service model back JJ. So most of the focus had been on the Sterling customers.
Speaker Change: And again, we wanted to be very proactive here introducing.
Speaker Change: New leadership team and reinforcing that there'll be no disruption in service.
Speaker Change: And product and I think some of the things that they are extremely excited to hear more about from first advantage.
One on the automation.
Speaker Change: You guys know, we've always felt were the most automated.
Speaker Change: The industry.
Speaker Change: And automation brings obviously speed speed is a big seller.
Speaker Change: So.
Speaker Change: Now they can lever, our robotics and our API our overall automation.
Speaker Change: And we will start mapping that as to how we can start bringing that.
Speaker Change: Okay.
One of the low hanging fruit, which they all really what is our is our chat feature and service. So quick chat call. We just talking about for almost a year now.
Speaker Change: <unk> did not have a chat feature.
So this is something that we will probably be the number one rollout that we will do this as part of the first thing that will bring sterling customers.
Speaker Change: Given their candidates and applicants and and the recruiters.
Speaker Change: Chance to just chat with customer care to find out that if I remember it might be so our customers are super excited to hear that that would be a feature that we put in their hands.
Speaker Change: Within maybe four to six months at maximum.
Speaker Change: Im period, so stuff like that.
Speaker Change: Yes.
Speaker Change: We will start rolling out, but there is overall just general excitement about what this potentially can bring to that.
Speaker Change: Got it that's helpful and just a just a reminder, on the capital allocation side. How you guys are thinking about debt paydown and cadence of that following the closing of the deal.
Speaker Change: Yes, Scott, we don't have a direct debt paydown schedule yet.
Speaker Change: New debt agreement does have 1% annual prepayment amortization to it.
Speaker Change: On our capital allocation approach.
Speaker Change: Number one priority is finishing the integration we just closed as Scott mentioned, a few minutes barely two weeks ago. So integrating the two businesses I'm going to get all those synergies are going to retain the customers and then we're going to be bringing down that net leverage number to our target range and that will be done through a combination of debt pay down cash flow generation et cetera.
Speaker Change: It's got Walmart thing.
This is not.
Speaker Change: Hello, everyone.
Speaker Change: <unk> customer base is also extremely excited to be able to attend our collaborate event, which we have every April.
Speaker Change: Sterling reps that have been talked about it.
Speaker Change: Sterling never had.
Speaker Change: And annual customer event in the Sterling customers are just really excited about getting together with other clients in their industry to share best practices and talk.
Speaker Change: About other learning so I think our.
Speaker Change: Our annual customer event in April.
Speaker Change: Miami this year is going to be extremely well with that.
Awesome. Thank you guys.
Okay.
Speaker Change: And I see that there are no further questions in the queue. At this time. This will conclude today's first advantage third quarter 2024 earnings conference call and webcast. Thank you all for your participation. At this time you may disconnect your line and have a wonderful day.
Speaker Change: Thanks.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Great.
Okay.
Speaker Change: Okay.
Speaker Change: [music].