Q2 2025 First Advantage Corp Earnings Call
Speaker #4: Good day, yone. My name is Niki, and I will be your conference operator today. I would like to welcome you to the FIRST ADVANTAGE second quarter 2025 earnings conference call and a webcast.
Speaker #4: Hosting the call today from FIRST ADVANTAGE is Stephanie Gorman, Vice President of Investor Relations. At this time, all participants have been placed in listen-only mode to prevent any background noise.
Speaker #4: After the speaker's 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.
Speaker #4: If at any point your question has been answered, you may remove ourself from the queue by pressing star two. Lastly, if you should require operator assistance, please press star zero.
Speaker #4: Please note, today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.
Speaker #5: Thank you, Niki. Good morning, everyone, and welcome to FIRST ADVANTAGE's second quarter 2025 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.
Speaker #5: This webcast is being recorded and will be available for replay on our investor relations website. Before we begin our prepared remarks, I like to remind everyone that our discussion today will include forward-looking statements.
Speaker #5: 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.
Speaker #5: These factors are discussed in more detail in our filings with the SEC, including our 2024 Form 10-K, and our Form 10-Q for the second quarter of 2025 to be filed with the SEC.
Speaker #5: 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.
Speaker #5: Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation which are available on our investor relations website.
Speaker #5: To facilitate comparability, we will also discuss pro forma combined company results. Consisting of FIRST ADVANTAGE and Sterling Check Corp historical results and certain pro forma adjustments, as if the acquisition of Sterling had occurred on January 1st, 2023.
Speaker #5: The pro forma information does not constitute Article 11 pro forma information. I am joined on our call today by Scott Staples, our ief Executive Officer.
Speaker #5: And Stephen Marks, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.
Speaker #6: Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. We have four key messages for today. First, we delivered solid results in the second quarter at the upper end of our expectations.
Speaker #6: Our revenue performance was supported by the strength of our sales engine and increased scale. We also continued to see the positive impact of our accelerated synergy realization efforts.
Speaker #6: This is evident in our Q2 adjusted EBITDA margins of over 29%. As well as in our nearly 30% year-over-year adjusted diluted EPS growth. Second, we are continuing to successfully deliver on our post-close priorities and are ahead of schedule on the integration of our 2.2 billion dollar Sterling acquisition.
Speaker #6: This includes a consistent emphasis on our products and customers while continuing the integration process. Focusing on customer retention, actioning synergies, and reducing net leverage.
Speaker #6: Third, we are executing on our FA 5.0 strategy with a focus on delivering results across three core elements. Increasing share in our target verticals, accelerating our international growth, and actioning our best-in-breed product and platform strategy to accelerate upsell and cross-sell.
Speaker #6: We are driving results while maintaining our relentless focus on cost discipline and carefully navigating the current uncertain macro environment. And fourth, today, we are reaffirming our full-year guidance, which Stephen will cover in more detail shortly.
Speaker #6: Now, turning to slide five, and a closer look at our results in the second quarter. We were very pleased with both our top and bottom line second quarter results.
Speaker #6: Reinforcing our conviction in our resilient business model. For Q2, combined upsell, cross-sell, and new logo rates continued to perform in line with our long-term growth algorithm targets.
Speaker #6: Retention remained high at over 96%, consistent with our past results. Demonstrating our team's strong customer-centric focus. Base saw sequential improvement from the first quarter in line with our expectations, all of this against an ever-changing macro backdrop.
Speaker #6: In Q2, two of the three large deals we discussed on previous earnings calls went live, and started generating revenue. As a reminder, these two deals include one with a significant retail customer in the retail gig economy, and one in Australia representing our largest international contract in the past number of years.
Speaker #6: We expect the third deal, which is a large healthcare deal, to go live in the near future. This success is further supported by our 18 enterprise bookings in the second quarter and 78 in the last 12 months.
Speaker #6: Each with 500,000 dollars or more of expected annual contract value. This gives us confidence in our ability to generate new logo and upsell cross-sell revenue, and is an encouraging sign of our sustained go-to-market momentum since closing the Sterling acquisition.
Speaker #6: Looking at our verticals, during the second quarter, we saw continued overall strength in our transportation vertical. Despite experiencing some macro-related slowing in base volumes, transportation was still able to generate positive growth by leveraging our upsell and cross-sell initiatives.
Speaker #6: The retail and e-commerce industry continued to see a decline in order volumes driven by the impacts of tariffs on US consumer and how our customers in that vertical are positioning their hiring plans.
Speaker #6: Hiring momentum in healthcare tapered a bit but we remained bullish on the industry overall. Most of our other verticals showed positive overall growth in Q2, partially powered by our success in our new logo and upsell cross-sell programs.
Speaker #6: Internationally, we are seeing good momentum and we continued and continued growth in our targeted geographies including Australia, and the UK. We also continue to see strong customer interest in our digital identity solutions.
Speaker #6: In fact, in conversations with customers, we often spend about half of our time addressing the increasing new challenge of identity fraud risk in the employment lifecycle.
Speaker #6: While our powerful competitive differentiator and indicative of the direction in which our industry is moving, when combined with our broad suite of services, we can offer an end-to-end background and digital identity solution covering multiple parts of the recruitment, hiring, and onboarding processes and creating a competitive advantage for FIRST DVANTAGE.
Speaker #6: Overall, as an early market leader with digital identity solutions, we are able to deepen our strategic dialogue customers strengthening our relationships and stickiness of our products.
Speaker #6: Looking the macro environment, we have continued to see some of the macro indicators around hiring volumes normalize versus last year. There is a consistent and notable tone of uncertainty as policy changes, including immigration, tariffs, and tax policy, continue to cause our customers to reconsider their business strategies resulting in many of them remaining in a wait-and-see posture as it relates to their hiring plans.
Speaker #6: Given the evolving macro backdrop, we have updated our second half base growth expectations to be slightly negative instead of modestly positive as we previously expected.
Speaker #6: Despite this base forecast, today, we are reaffirming our guidance. We feel confident in our business's ability to weather a variety of macroeconomic scenarios based on our diverse range of global verticals and customer segments.
Speaker #6: Our mix of hourly and sourly salary-focused customers are diligent focused on controlling the controllables. And our ability to generate upsell and cross-sell revenues as a base revenue stabilize.
Speaker #6: Turning to slide six, we remain laser-focused on our post-close strategic priorities. We continue to successfully execute our integration plans and provide a seamless experience for our ustomers.
Speaker #6: We are leveraging the best-of-breed product platform solutions from each of FIRST ADVANTAGE and Sterling, and increasing backend automation. Our customers continue to be excited about the benefits of this approach.
Speaker #6: And the resulting products, data, and AI-enabled technologies that are or will be available to them as a result of the acquisition. In May, we extended FIRST ADVANTAGE's award-winning Click Chat Call customer care solution to those FIRST ADVANTAGE customers that came from the Sterling acquisition.
Speaker #6: We likewise made available the higher-margin FIRST ADVANTAGE Work Opportunity Tax Credit product; these are examples of our best-of-breed product and platform strategy coming to light, which enables better customer experiences and incremental upsell cross-sell growth opportunities.
Speaker #6: We are staying closely connected with our ustomers and through our global collaborate customer user conferences, we have been able to deepen our strong relationships and enable more frequent opportunities for engagement.
Speaker #6: Following our successful April collaborate user conference in the US, we held regional events in India, and Singapore, in June and July, with EMEA, Hong Kong, and Australia events planned for this fall.
Speaker #6: Through these user conferences, we have hosted and met with hundreds of customers and prospects giving us greater visibility into our global markets and increasing our confidence in the opportunities ahead.
Speaker #6: And finally, in May, based on our strong progress, we further increased our synergy target range to 65 to 80 million dollars, we are executing well on this plan, and Stephen will provide more details on this shortly.
Speaker #6: Turning to slide seven, I want to thank everyone who joined us for our inaugural investor day on May 28th. We hope it enhanced your understanding of the FIRST ADVANTAGE story and our strategy for delivering long-term shareholder value.
Speaker #6: I would like to reinforce the key messages we were proud to highlight during our investor day. FIRST ADVANTAGE is a category-leading technology company. We deliver global software and data through our proprietary platform in an attractive, large, and growing HR tech market.
Speaker #6: Our industry TAM is over $24 billion and we are well-positioned to continue to capture growth among existing and new customers. Digital identity alone represents $10 billion of that TAM, and is growing faster than the traditional background screening market.
Speaker #6: Additionally, we were we are widening our itive advantage with our best-of-breed product and platform approach. Our proprietary data and the capabilities added through our acquisition of Sterling.
Speaker #6: We are executing our FA 5.0 strategy with differentiated solutions, strengthened by our investment in AI and automation, our verticalized go-to-market approach, and our focus approach to international growth.
Speaker #6: We are also building on our strong financial track record and are committed to achieving our long-term four-year financial targets. We are well-positioned to accelerate margin expansion and adjusted diluted EPS growth through our acquisition synergies and have already made substantial progress on actioning and realizing these synergy opportunities.
Speaker #6: Additionally, we are proactively managing our debt and in July we repriced our credit facility to reduce future interest expense. Then, in August, we made another voluntary principal debt repayment, showcasing our commitment to reaching our target net leverage range.
Speaker #6: For anyone who wasn't able to join us, I would encourage you to review our presentation and webcast from the event available on our investor relations website.
Speaker #6: With that, I now turn the call over to Stephen.
Speaker #7: Thank you, Scott, and good ning, everyone. Today I'll provide color on our Q2 results, our synergy progress, our deleveraging trends, and our reaffirmed 2025 guidance.
Speaker #7: Starting with second quarter results on slide nine, our second quarter revenues came in at the top end of our previously stated expectations at $391 million dollars up 1.5% versus the last year on a pro forma basis.
Speaker #7: In Q2, the trends in our base performance continue to moderate, remaining negative on a year-on-year basis, but on par with how we had forecasted the quarter.
Speaker #7: Our go-to-market success was in line with our long-term growth algorithm targets with the combined contribution of new logo and upsell cross-sell revenues delivering 9% growth in the quarter, and our retention remained at its high level of over 96%.
Speaker #7: Adjusted EBITDA for the second quarter was 114 million dollars, with an adjusted EBITDA margin of 29.2%. An improvement of 270 basis points versus the prior year on a pro forma basis.
Speaker #7: These results were enabled by our continued focus on accelerating synergies, our disciplined approach to cost management, and the scalable nature of our business. As part of the integration process, we are applying best-of-breed fulfillment execution which is bringing the combined company's operating margins in line with our historical expectations of our business.
Speaker #7: Adjusted diluted EPS was 27 cents, a 29% increase year over year, and well ahead of our expectations. The benefits of our greater scale, expense, capital management, and lowered interest expense as a result of our voluntary debt payment in May have allowed us to realize enhanced flow through a profitability to our per-share earnings and more than offset the impact of the incremental interest interest on the transaction financing and the dilutive impact of the new shares issued for the Sterling acquisition.
Speaker #7: On slide 10, you can see how we are making great progress on our synergy program. During our investor day in May, we announced an increased synergy target range, now targeting 65 to 80 million dollars within two years, of which we have actioned a total of 47 million dollars as of Q2.
Speaker #7: Additionally, we realized approximately 10 million dollars of the synergies in the second quarter, bringing our in-year realization to 18 million dollars. We are pleased to see the results of our integration and synergy execution come to fruition so quickly.
Speaker #7: And now, moving to slide 11, you can see our historical revenue growth algorithm results with combined company data beginning in 2025. As Scott mentioned, in the second quarter, our results were driven by strong upsell and cross-sell upsell cross-sell as well as new logos.
Speaker #7: Supported by consistently solid retention. Base results came in as expected with sequential improvement from Q1 despite remaining negative overall for Q2. Turning to cash flow net leverage and debt payment progress on slide 12.
Speaker #7: During the quarter, we generated adjusted operating cash flows of nearly 48 million dollars, an increase of 7 million dollars or 17% on a year-over-year basis, driven by the larger scale of our , our tight management of our working capital, and our focus on cash flow.
Speaker #7: Our cash balance at June 30th was 184 million dollars, with this ample liquidity and cash flow, subsequent to the end of the quarter in August, we made another voluntary principal debt repayment of 25 million dollars bringing our total year-to-date principal payments to over 45 million dollars, of which 40 million dollars has been voluntary using excess cash flow.
Speaker #7: Additionally, in July, as a result of our strong performance and synergy capture and cash flow, as well as a favorable rate environment, we were recently able to reprice our debt and reduce the borrowing rate on our credit facility by 50 basis points.
Speaker #7: Our synergized pro forma adjusted EBITDA net leverage ratio at quarter-end was 4.3 times. We remain focused on reducing our net leverage towards approximately three times synergized pro forma adjusted EBITDA within 24 months post-close and our long-term net leverage target remains two to three times.
Speaker #7: These actions demonstrate our capital allocation playbook coming to life and our commitment to swiftly reduce debt and take advantage capital market opportunities as they arise.
Speaker #7: Now, ing to slide 13, and our 2025 guidance. As a reminder, year-over-year comparisons are on a pro forma basis to allow for easier comparability.
Speaker #7: Today, as we have mentioned, we are reaffirming our full-year guidance. We are encouraged by the solid performance of the first half of the year and feel more confident in the middle of our full-year revenue guidance range.
Speaker #7: Our revenue outlook for the remainder of the year continues to assume a certain degree of macro stability while keeping in mind that our customers remain in wait-and-see mode as among many things, the impacts of increased tariffs and other policies remain key areas of uncertainty across the global economy.
Speaker #7: Given this evolving macro backdrop, we have updated our Q3 and Q4 base performance expectations to now be slightly negative instead of modestly positive as we had previously expected.
Speaker #7: We do, ever, anticipate continued productivity of upsell and cross-sell and new logo growth consistent historical trends, and our robust deal pipeline supports our expectations for the remainder of the year.
Speaker #7: Additionally, we also expect customer retention to remain in line with our historical performance of 96%. FX has also become lesser of a factor as the year has progressed.
Speaker #7: Even with this more muted base expectation for the second half of the year, based on our first half profitability performance, strong synergy execution, and continued focus on efficiently managing our business, we now expect to achieve full-year adjusted EBITDA margins of 28%, a meaningful expansion from 2024.
Speaker #7: This positions our expected full-year adjusted EBITDA and adjusted diluted EPS results at or slightly better than the midpoint of our guidance range. Looking at our quarterly phasing, in the second half, we will begin to lap somewhat easier comps as we anticipate sequential year-over-year revenue growth improvement from Q2 to Q3, with fourth quarter's growth rate about on par with or slightly ahead of the third.
Speaker #7: Of note, the revenue trends we saw in July were on par with the overall trends we saw in Q2. And give us confidence in our expectations for third quarter.
Speaker #7: For the third and fourth quarter, we now expect to achieve adjusted EBITDA margins of 28% or slightly above. We also anticipate that the adjusted diluted EPS momentum from Q2 will continue for the second half as revenue ramps and synergies are more fully realized.
Speaker #7: With our more balanced post-acquisition seasonality, we expect that quarterly adjusted diluted EPS will remain in the mid to high 20-cent range in each of the final two quarters of the year, consistent our strong Q2 trend.
Speaker #7: While the passing of the OBBBA tax law in July will not notably impact our effective tax rate, we will be able to utilize certain provisions within the new law to significantly reduce our 2025 required cash tax payments.
Speaker #7: We now anticipate meaningfully higher free cash flow for the year of 90 to 120 million dollars a 25 million dollar increase from our previous commentary.
Speaker #7: Keep in mind that embedded in our free cash flow assumptions are one, our efforts to actively manage and minimize one-time costs related to synergy achievement, two, the payout of deferred transaction proceeds tied to equity vesting, and three, our assumption for required working capital based on our revenue guidance and integration status.
Speaker #7: We have provided a full chart in the appendix to the earnings presentation with FX, CapEx, interest, and other modeling assumptions. And with that, let me turn the call back to Scott for closing remarks before we open the line for your estions.
Speaker #8: Thank you, Stephen. In closing, I would like to re-emphasize FIRST ADVANTAGE's position as an investment of choice. We are a market leader offering proprietary technology and data in a large and growing market.
Speaker #8: We have significant organic revenue growth potential accelerated by the Sterling acquisition. We are resilient with the flexible cost structure and high revenue diversity that comes from our balanced vertical strategy.
Speaker #8: We have industry-leading operating margins leading to strong and consistent free cash flow generation. And we have a track record of value-accretive capital deployment and balance sheet management.
Speaker #8: All of this supports our confidence in our ability to achieve consistently strong results including delivering on the four-year financial targets we established during our investor day.
Speaker #8: As I wrap up our call, I want to thank the entire FIRST DVANTAGE team for their hard work and consistent dedication to serving our customers.
Speaker #8: With that, we will open the line for questions.
Speaker #1: 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.
Speaker #1: If at any point your question has been answered, you may remove yourself from the queue by pressing star two. If you are using a speaker phone, we request that you pick up your handset while asking your question to provide optimal sound quality.
Speaker #1: Thank you. Our first question is coming from Ashish Subhadra with RBC Capital Markets. Your line is now open. Please go head.
Speaker #9: I'm taking my question. So the change in, the base growth, assumption for the back half, instead of a, a growth, a modest decline, is that broad-based across all verticals or given it's more, or more due to the tariff, and policy uncertainty?
Speaker #9: Is it much more focused on the retail and e-com vertical? So any color on that base will be helpful. Thanks.
Speaker #7: Yeah, Ashish, and good ning. it's a little bit more broad-based. You know, as Scott and I mentioned with the evolving policies, on tariffs, on immigration, we've just, there's been an overall tone of just that wait-and-see.
Speaker #7: And it's not really specific to one vertical. you know, with our assumptions going into the year, you know, we had base at, we'll call it modestly positive, but, you know, essentially flat for the second half of the year.
Speaker #7: and we're just, you ow, based on what we're aring, we're de-risking that a little bit. but it's nothing specific to an individual vertical. It's really just an overall market perception item.
Speaker #9: That's very helpful color. And I was just wondering have you heard from your clients anything on the Gen AI front? Have they pulled back on the hiring or slowed on the hiring because of the Gen AI initiative?
Speaker #9: So any color on that front will be helpful. Thanks.
Speaker #7: Yeah, Ashish. Yeah, we're just hearing a consistent message from our customers. And it's not specific to anything. It's, again, as Stephen said, a lot of wait-and-see.
Speaker #7: I think you hear this across all industries and all companies that, you know, it's wait-and-see as to what's going to happen in Washington with policy.
Speaker #7: It's not specifically tied to anything specific. It's more of just a general response. But in general, our customers are actually cautiously optimistic with their view of the macro.
Speaker #7: And the wait-and-see is more of a Washington policy byproduct versus anything specific.
Speaker #9: And then, Ashish, I guess on the Gen AI front, you know, I think what we're hearing from customers generally is they're still reviewing how they're ing to use it.
Speaker #9: And I think we've seen in some instances it hasn't, it's changed how they're hiring and where they're iring. But it's allowing them to save in some places and invest in others.
Speaker #9: But I think it's still a little too early to see kind of a larger macro trend out of that. That's great color. Very, very helpful.
Speaker #9: Thank you.
Speaker #1: Thank you. Our next question comes from Shlomo Rosenbaum with Stifel. Please go ahead. Your line is open.
Speaker #10: Hi. Thank you. I want to just dig a little bit more into the verticals. You talked a little about, you ow, transportation, and retail.
Speaker #10: Could you talk a little bit some of the other ones in , maybe the staffing and, you ow, a lot of times staffing is the leading, vertical.
Speaker #10: And if you can, you know, anything else where you thought there was a standout really upside or downside?
Speaker #7: I think a couple of ints here, Shlomo. As we've mentioned in the past, maybe two quarters or so, we really have seen an overall narrowing across our verticals of the swings in terms of positives and negatives.
Speaker #7: So when we're talking positives, you know, there's not any really any double digits positives and not any double digit negatives. So everyone's kind of moved into a tighter range.
Speaker #7: staffing, definitely held its own. in, in the quarter. financial services also did well. we mentioned healthcare. A slight tick down, but we're not too concerned about that.
Speaker #7: We just think it's a little bit of a blip. It's such a, it's such a strong, vertical. And, ou know, with the aging demographics in the US that will continue to perform well in our view, so no real big swings and no real callouts, in, in the verticals.
Speaker #7: But I ink maybe a little more color on transportation would be helpful because that's one of the areas you would think would be slightly affected by, you know, lower retail or tariffs or whatever it might be.
Speaker #7: But I think it's important to note that we have over a dozen products in the transportation space. And some of those products are completely resilient, to, you know, to the macros because they deal more with, the actual truck and not the driver.
Speaker #7: So we're ing things like handling, you know, registration and title. We're doing gas tax, submissions to the federal government. you know, we're ing a lot of compliance-related things on both the driver and the truck which aren't actually tied to, you know, the new hiring.
Speaker #7: So that's why transportation is just held up so beautifully for us, you know, over the past couple of years. but other than that, you ow, no real major callouts on the on the verticals.
Speaker #10: Okay. And then just piggybacking a little bit more off of, what Ashish was talking about, did the quarter in general play out, you know, in other words, the hesitation or, or, or what you're expecting from from the wait-and-see?
Speaker #10: Did that change in the quarter or is that like subsequent to quarter end? I'm just ying to understand the quarter seemed to be pretty good.
Speaker #10: And is it just, hey, we're looking at it, looking around and saying, you know, given the uncertainty we just want to kind of temper the back half?
Speaker #10: Or is there thing within the client's own actions that you're seeing that kind of warrants that? I guess is it client-driven or do you just try to get ahead of that?
Speaker #7: So I wouldn't say it's action-driven. I'd say it's client conversation-driven. So we haven't really seen any clients do anything specific here. It's more of the conversations with clients are there being cautious about their back half.
Speaker #7: The quarter panned out better than, ou know, we thought. The order volumes just, you ow, you know, you know, came along sort of, you know, consistent and nice throughout the quarters.
Speaker #7: And I think it's also important to call out and note that July did also very well. So instead of, you ow, six months of strong data, now we have seven months of strong data.
Speaker #7: So we are being a little cautious maybe on the back half. But again, the wild card is is less to do with our customers and our products and our services and our company and probably more to do with Washington policy.
Speaker #10: Great. Thank ou.
Speaker #1: Thank ou. Our xt question comes from Andrew Nicholas with William Blair. Please go ahead. Your line is open.
Speaker #11: Great. Thank you and good ning. I wanted to ask on international growth. You mentioned it in your release and in your comparative marks that you're seeing momentum there.
Speaker #11: Any metrics you could provide in terms of growth there? I ow in your queue you disclosed kind of the legacy businesses, international growth. But we'd ove to hear a little bit more about that.
Speaker #11: And somewhat relatedly, is there a difference in kind of the underlying growth algorithm in international right now? Compared to the Americas, are you seeing better or worse base growth there, better new logo growth?
Speaker #11: Any more color would be great.
Speaker #7: Yeah, let's Stephen cover the algorithm part of that question. And I'll just give you a broad view. So we're viously very happy with what's going on with international.
Speaker #7: The it was up 7.2% in the quarter. And I think, you know, if you remember, you know, going back over two years, ago, you know, international was was really the first region to, you know, take a dip.
Speaker #7: and it has come back, you ow, really nice over the last couple of quarters. So now this is, you know, three or four quarters of of really good growth internationally.
Speaker #7: so I ink there's a couple of things driving that, Andrew. One is, you know, we're kind of seeing the region, you know, stabilize and, and, and grow again.
Speaker #7: so customers are hiring in the region. two, a couple years ago, you know, we changed our go-to-market strategy in international and diversified, you know, by going after more of the high-volume, hirers.
Speaker #7: and, and they have really helped and, and we, of e, we landed them and, and have really helped, you know, diversify, that region in terms of a vertical strategy.
Speaker #7: and, we've had some new, you know, new logo big wins. and they're now live and contributing, you know, to the revenue. So I'll have Stephen, you know, give ou a little more detail on the algorithm.
Speaker #7: But overall, the, you know, the region has done well from a regional diversity, a vertical diversity, and obviously the sales engine is working. Yeah.
Speaker #7: No, and Andrew, everything Scott's saying is coming through on the numbers. Actually, in this quarter and arter two, our international segments outperformed our Americas.
Speaker #7: In fact, on every line item of our growth algorithm, like Scott mentioned, there's a lot of momentum in the go-to-market. So new logo and upsell cross-sell kind based on our vertical strategy.
Speaker #7: And it actually based it really well internationally in Q2. EMEA in the UK market in particular had a strong quarter. I ink some of that stability, there's probably a little pent-up demand there because they've had a few, a ew London policy items, get settled too over the last number of months.
Speaker #7: and then, of e, the FX stabilized. It didn't really get better. It wasn't obviously, it was a little headwind in the quarter, you ow, but less than 10 basis points.
Speaker #7: But, it really performed well. You know, kind of in all phases of the game, if you will.
Speaker #11: Great. That's helpful. And then, for my follow-up, I wanted to ask on on upsell cross-sell. So another, you ow, consistent quarter there. Within that 5% figure, is there any way for to think about how much the Sterling and FIRST ADVANTAGE cross-sell is contributing?
Speaker #11: I don't know if that's something that you can track or not. I'm just, I'm just curious if if you're eing early revenue synergies in that line or if that's ething that we would expect in the odd years.
Speaker #11: Thanks again.
Speaker #7: Yeah. And, , we really don't track it that way. I think, I think it's also a little early. Like, like Scott mentioned in his remarks, you know, one our big kind of recent milestones is now, you know, we're some of the the back-end platform work, our our t and tech teams are doing.
Speaker #7: We're now, we're able to offer that work opportunity tax credit WATSI services which was something traditionally only available on the FA platforms is now available on all platforms.
Speaker #7: and now we can go out and cross-sell that. You know, we've mentioned a couple of the other products that'll that'll be coming online on that same availability.
Speaker #7: So I think as more of that comes around, you'll start to see some of that potential kind incremental, but it just reinforces our long-term, you know, our long-term confidence in the growth algorithm.
Speaker #7: I mean, what you're seeing come through now is is kind of the fruits of the labor of the teams for the last 12 or 18 months of just building a strong pipeline and executing on it.
Speaker #8: Hey, Andrew, I would I would think, I think a lot of the of the revenue synergies are more of a 2026, outcome because our our initial focus from a product and and platform strategy was to deliver things that would improve the experience and, and that covers a lot of different things.
Speaker #8: Like, for example, we rolled out Click Chat Call to the Sterling install base in May. Obviously, with WATSI, we do have a potential revenue synergy there.
Speaker #8: But a lot of the back-end stuff that's been doing, we've been working , is just making, turnaround times faster, by bringing the FIRST ADVANTAGE automation, to the Sterling back-end, and taking some of the best-in-breed from the Sterling platform to the FIRST ADVANTAGE platform.
Speaker #8: So this is improving the candidate experience for our both sets of customers. And it's improving the performance from a turnaround time and, and, and quality standpoint.
Speaker #8: And that was primarily the goal of 2025. And it's ally 2026 where we'll to see more of the revenue synergies.
Speaker #11: Makes sense. Thank you.
Speaker #1: Thank you. Our next question comes from Andrew Steinerman with JP Morgan. Please go head. Your line is open.
Speaker #8: Okay. Just two quick ones. One, when you say July was on par in s of trends with the overall second quarter, is that a base revenue comment or a total organic revenue growth comment?
Speaker #8: And when you you have the slide about getting, to this is, oh, I can't find the slide. h, when you when you're getting to, the, I found it.
Speaker #8: Sorry. slide, slide 12. when you're getting to the net leverage, targets, of, three times or or under, does that assume any voluntary prepayment, or not assume it?
Speaker #8: And, you know, when would be other opportunities for voluntary prepayments?
Speaker #7: Andrew, great estion. So I think the July trends, ou're you're probably right on both regards. I think we're seeing the continued trend of that base normalization, occur.
Speaker #7: And we're also, at that same time, ou know, still still hitting on upsell cross-sell, still hitting on new logo, still hit, you know, still having strong retention.
Speaker #7: So it's it's just a real continuation and an evolving of that trend. And you recall, you ow, base really turned negative on both companies back in the second half of 2022.
Speaker #7: So ou get a little easier comp to go with it. So you got normalization trend, the continued success of the controllable go-to-markets, and then just that that a little bit easier comp.
Speaker #7: So we're starting to, it's starting to evolve a little bit how we, um, did it would. But, as Scott mentioned a couple of questions ago, it's always good to have, you know, to see that month come through the data and have one last month of risk to carry.
Speaker #7: on the net leverage comment, you ow, I think we talked about a little bit at the, the investor day in May. I think we would expect to continue to take some of our excess cash flow each quarter and make voluntary prepayments.
Speaker #7: the, you ow, as I mentioned, the new tax law will help bolster our free cash flow in the second half of the year. That that only passed July 4th.
Speaker #7: so that'll impact our our future, federal tax payments. So 'll have a little bit more cash on hand as we get into Q3 and Q4.
Speaker #7: And as as we get to those quarter ends and and, and take stock of our cash balances, I'd ect to make roughly a quarterly debt prepayment.
Speaker #8: Thank ou.
Speaker #1: Thank you. Our next question comes from Aminav with Barclays. Please go ahead. Your line is open.
Speaker #10: Hi. Good morning. This is Roni Kennedy. I'm from Aminav. Thank you for taking my questions. If I may, Scott, I have a two-part question on, h, labor market data.
Speaker #10: I think we understand that JOLTS and more specifically TERN have been the leading indicator. But cognizant of some potentially diminishing correlation. So JOLTS estimates for June, they declined relative to May, I think, as did weakened hiring separations.
Speaker #10: Data, our rates rather. So the first question on JOLTS is, does this reconcile to what you've been seeing? And then the second part of the question, I think the July jobs report was said to have flipped the labor market script to that hiring has been cooling faster than accelerating.
Speaker #10: and I think also outside of, COVID, it was the largest two-month downward revision since 1990. Which actually included three recessions. So how does how does this correlate?
Speaker #10: and how should we expect it to correlate if there is a further weakening in the labor market? And then, you know, contemplation of what you're considering for 2H outlook.
Speaker #7: Yeah. First of all, I'd say, you know, it's BLS and JOLTS data is a data point. it's not an exact correlation. So no, we we we did not see what, a correlation between our order volumes, and the BLS data.
Speaker #7: I I ink if we just maybe bubble it up to a higher level, BLS is is, you know, basically, you know, a little bit too late, a data point for us to understand like what the trends are.
Speaker #7: We we actually focus, we would actually focus on our order volumes and our customer conversations and what we tend to see is a very good correlation between BLS, JOLTS data, and SMB.
Speaker #7: and that's something we have seen, pan out over the last, you know, year or two is our SMB business tends to correlate fairly directly to BLS data.
Speaker #7: but keep in mind that SMB is only 6% of our revenue. and I think one of the, you know, great resiliency stories of FIRST ADVANTAGE is our focus enterprise.
Speaker #7: that's why we're, you know, always happy to announce, you know, enterprise wins, over the quarter and over the last 12 months because, you know, to us, that's the that's the better indicator.
Speaker #7: and also, ou know, BLS data is, is experiencing some issues. The response rates for BLS data have come down dramatically over the last couple of years.
Speaker #7: So it's not as reliable as it used to be. but again, I see it as, you know, one of the only, you know, government data points that's out there.
Speaker #7: But I would say just think of it as a data point. And what we would rather run our business on is actual order volumes and and conversations with customers.
Speaker #10: Got it. Thank you. And then with the revision of base performance for 2H, to slightly negative from modestly positive, I ink there's expectation for continued productivity on up and cross.
Yeah, Kyle. I mean the updates there. Yeah, kind of kind of 2. Real things 1. Well 3 right. 1, we we, you know, we made a voluntary payment after we kind of gave out the last, uh, the last guidance that, you know. So we we adjusted for that but certainly we've got the, the 50 bits, the, uh, drop in the rate of the rep price. Um, obviously that's on the end there for, for, uh, 5 months. Because that only happened, you know, last week, um, we've also yes, the counter for the 2500 and we prepaid last week, and then, in terms of rate environment, you know, in our internal model, we've got that pretty much stable through the year. I think we've kind of priced in 1 125 bips cut, but like in December and our internal model. So uh you know, we're we're I know there's there's varying points of view and and it's an elusive 1. So we kind of took a more conservative approach in our interest rates that they hold steady for for the most of the
Here.
Okay. Okay. That's uh, super helpful and then, um, you know, maybe just a follow-up particular in the the competitive environment. Now with another quarter of having, you know, Sterling under your belt, uh seems like the winds are are going. Well, obviously base growth is what it is. But um, I guess have you guys noticed now with, you know, significantly larger platforms. Do you guys does it easier to go to market? Do are you finding like win rates or or anything have improved or or gotten better now? Um just given you know, the scale you guys now have and are able to both just anything high level as to what you guys are are seeing in the market or based on client conversations would be uh, super helpful.
Um, and you know, our historical win rates, have always been good, um, and continue uh, to be good and continue to uh, improve. Um, but I I don't I don't we don't correlate it to anything but keeping our head down and focusing on what we can focus on. So, the way we do it is, you know, we don't spend a lot of time, you know, worrying about our competitors or thinking about our competitors. So, you know, while we're navigating a challenge, we're we're doing exactly what we said we would do. We consistently executing on our plans, we're winning deals. We're taking market share, we're innovating on our software and data strategies. We're delivering the synergies. And we're deleveraging, I mean, First Advantage is a really good story to tell to customers and Prospects. Um, and I think, you know, again I've always always felt that this is, this is a this is a software and data story, and and sell. And
And the more that we focus on AI and and improving our candidate experience, and client experiences through Tech Investments, that that is, what's going to drive, increase win rates and and higher retention. Um, and it has probably lot lot less to do with what, um, what's going on in the competitive space.
Okay. Um, awesome. Uh, that's really helpful. Uh, thanks guys and nice results.
Thank you.
Our next.
Question comes from Jeff Silver with BMO Capital Markets. Please go ahead. Your line is open.
Thanks so much. Um, your investor day, you talked a lot about the
The, uh, framework for, I guess, you can call it. Um, I know you just alluded to it in your prepared remarks, but if you can give us a little bit more color in terms of what's been going on in the past couple of months, that'll be great.
Yeah, um, we're not yet prepared to start talking about, uh, revenue and, and, and giving you some, you know, data on that. We will do that at some point.
Um, it's still early days for digital identity but it's the it's the hottest Topic in our space right now. Um, we continue to, you know, win new digital identity, uh, deals. Um, there's a lot of Education that's going on in the space right now because clients are going to understand it and what the solutions are. So, as I said in the prepared comments, it literally takes up probably 50% of client Communications and and meetings. Uh, now, um, we've got a, a great offering. Um, and we feel that first advantages, uh, is in a an attractive space in that, we're not a single solution Point provider.
Um, we we fit in the middle of a lot of potential digital identity uh, offerings um and and that that clients are starting to realize that. And that's that's why sales have been great in this space but can't give you any metrics yet, but we, we will in the future. Um, you know, once we once we get a better handle on on Trends and and sales metrics and things like that,
All right, fair enough. Um if I could switch gears, you mentioned the impact of the 1, big beautiful, bill act on your cash tax payments in the back half of the Year. This tax bill was obviously very broad Beyond just taxes. Um, I'm just wondering, was there anything in there that you think could help your business over the long term either positively or negatively?
Ya know, Jeff, it's a great question. I think it's it's still probably too early to tell I know there's still even pieces of the bill that are being uh, waiting for some guidance on clarifications, I think you probably pretty common for companies in our, in our kind of domain where, you know, you're getting a lot of accelerated advertising of your research and development expenses, um, which is kind of the immediate reaction to everyone. I think, you know, whether, you know, things like customers or, or, or are able to leverage certain Provisions to, um, to change how the market works over time tips, things like that. It's probably way too early to understand because even all of the guidance rules aren't there yet, but it's certainly something we have our eyes.
But I think I think for now, obviously we'll take the cash in pocket for 2025. You know, obviously it supports our deleveraging and accelerates that to an extent, allowing us to maybe make a couple more accelerated investments in the Synergy program. Just, you know, giving us a little more optionality there. I think that's how for now, that's the primary impact for us.
All right, thanks so much.
We will move next with Scott, Hartselle with wolf research, please go ahead. Your line is open.
Hey, good morning guys. Um, thank you for taking my question. Just wanted to ask 1. Um, you know, when you guys are doing these, uh, collaborate user conferences, especially in the new geographies and talking with Sterling customers, are you mostly spending time with them kind of educating them on the, you know, offerings that you guys have through First Advantage. And the combined entity, or is there um you know, or is it more kind of sales focused right now? Thanks.
Yeah, it's got we we we purposely do not make collaborate a sales focused event, um and I think that's why our customers love attending it. Uh it's a chance for them to discuss industry Trends, uh, vertical Trends geography, Trends compliance trends.
And what it really is, it's a, it's a beautiful opportunity for our product teams, uh, to spend time with our customers um to make sure that our products are are fitting their needs. Also, it really affects our future product roadmaps because we get to hear, you know, what they want, what what they're looking for, what their challenges are. Yes. Yes, there are sales opportunities in collaborate. Uh, don't get me wrong. It, it, it builds a, a very nice sales pipeline but it's not the intent of the event. Uh, the event is, is really too collaborate on um, on what their experience.
Ing. Um, and it's a great opportunity to get get them in a room for, you know, uh, number of hours or in the US number of days uh, to really spend time with them,
Great. Thanks guys.
Thank you.
We will move next with Harold, Anor with Jeffries. Please go ahead. Your line is open.
Good morning. This is Harold lanto on for Stephanie Moore. Uh, I guess just 1 question for me. You know, you're seeing um, I guess we could baseball, you know what I'm saying? Um, expected. So I guess it's on the sales force. Uh, are you reducing your sales force given the slightly weaker demand that you're seeing? Or are you, you know, keeping all of the the sales force from Sterling or are you building your sales force now to um take advantage of the expected demand, um, that comes along, you know, as this is my current attorney to be clear. So just anything that would be helpful. Thank you.
Stephen. Why don't you take the base part? And I'll take the sales team part.
Yeah, no Harold. You know I think I think when you think about it right, the base growth assumption is a little lower but our our our retention is still going to be 96%. Plus
You know, we're still going to have, you know, 80,000 customers to serve. Um, so it's it's not really a a we're we're losing, we're losing customer units. It's really just an expectation that there's just going to be some macro impact to the volumes that those customers higher. So there's really no planned cut back in terms of our account management team, or, or anywhere in the commercial team for that matter right now. Because, you know, I think we're, we're really bullish on where our customers are going to be at, um, our our and Scott will talk about a second but our, you know, our Pipeline on upsell cross sale. And we want to keep driving that pipeline to, you know, to drive future growth. And at the same time, you know, we still have all of our clients to serve. Uh, they'll our expectation is this, that, you know, on a, on a customer, Buy customer basis. They'll be ordering a slightly, a lower amount of Revenue than we had previously expected. Um, but that's just lower overall hiring volumes. Not, not not lower. Customer count, or anything like that.
Yeah, Harold. I mean, uh, so if you think about
Uh, our best in breed approach to technology, which we've been, you know, talking about for probably about a year now, um, about you know, how we were, our strategy was to put best of breed to the market. We're doing the same with teams and people. Um, so the beauty of uh, the best of breed approach on the go to market team was that we were able to take the top talent from both teams and put them together into a new team. Um and it really you know comes down to almost like a 50/50 split between Legacy Sterling and Legacy perseverance.
Teams into this new team. Um, so we're really happy with the size of our sales force, and the productivity of our Salesforce. We've got amazing talent and leadership in that space. Um, and where I'd say we're also investing, uh, we just brought on a new Chief marketing officer, um, and we're investing in, you know, the front end and in demand gen and, and
Branding and positioning. We also brought on a new uh CTO Chief product and Tech officer uh to you know pull this all together to make sure that our product and our platforms. Um,
To help help fuel the pipeline. But the, the pipeline's in great shape, the sales team is humming along as you can see from the numbers. It's extremely consistent, uh, performance out of the go to market team. So absolutely no cutbacks on the front end. I would say if anything more investment on the front end,
Yeah, Harold, what? You know, I think 1 last closing thought on the question too, right? You know, we still feel, you know, we've talked about this a lot in our investor day and other other forums, you know, we still have a very scalable p&l. So even if we have a little softer base, you know, so much of the of the cost of sales or volume variable. We could do a really good job of controlling them. We've already, you know, accounted for that in our, in our, in our fulfillment plans for the second half of the year. So, you know, I think when when you take everything Scott and I have talked about, you know, we still feel, you know, really good about the second half, IBA, IBA margins EPS results like we should, like we mentioned in the prepared remarks.
And Harold just 1 1. Last thing is, you know, don't, uh, don't correlate based to, you know, directly to growth because uh, base does not equal Revenue base, is 1 component of Revenue, um, and actually in the quarter, we had growth, we had 1 and a half percent, uh, growth in the quarter. Uh, so um, when you're growing year on year, 1 1 and a half percent in this challenging macro environment, you are you are not looking to cut. You are looking to invest
Perfect. I thank you for all the color.
Further questions. Thank you.
Day, and for your participation.
This concludes the First Advantage, second quarter, 2025 earnings conference call and webcast. At this time, you may disconnect your line have a wonderful day.