First Advantage Corp Q3 FY2023 Earnings Call

Good day, everyone. My name is Ashley, and I'll be your conference operator today. I would like to welcome you to the First Advantage Third Quarter 2023 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. At this time, all participants have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Please note today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman, you may begin.

Thank you, Ashley. Good morning, everyone. And welcome to First Advantage's Third Quarter 2023 Earnings Conference Call. In the investor section of our website, you will find an earnings press release and slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on our Investor Relations website. Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward-looking statements. The 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, including our 2022 Form 10-K and our Form 10-Q for the third quarter of 2023 to be filed with the SEC. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial 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. I'm joined on our call today by Scott Staples, our Chief Executive Officer, and David Gamsey, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now turn the call over to Scott.

Thank you, Stephanie, and good morning, everyone. Thank you for joining our Third Quarter 2023 Earnings Conference Call. Beginning on slide four, we had a very productive quarter, and I want to thank our team for their continuous dedication in delivering value to all our stakeholders. During the quarter, we achieved many financial objectives and strategic goals. Our third quarter results were in line with the expectations that we previously communicated, with both revenue and adjusted EBITDA improving sequentially. Our disciplined cost management, along with our flexible business model, enabled us to maintain our industry-leading adjusted EBITDA margins and to continue to generate strong operating cash flows. Our robust cash flow and healthy balance sheet allow us to continue to execute our long-term growth strategy centered around value creation through further automation, data ownership, and new products, even in a challenging macroeconomic environment. We remain committed to our disciplined and balanced capital allocation strategy, as evidenced this quarter with our acquisition of Infinite I.D., payment of our one-time special dividend, and ongoing share repurchases under our existing program, which was recently extended through December 2024. Even after taking our capital deployment actions into consideration, our balance sheet remains strong, with industry-leading leverage of just 1.7 times and cash of $167 million. We continue to have ample liquidity to fund future investments in our business. I am proud of our team's ongoing commitment to providing our customers with the latest in market-leading technology and solutions, which has enabled us to maintain our strong customer retention rate of 97% across our diverse range of verticals. We also continue to expand our network of strategic referral partners both domestically and internationally, with more than 75 current integrations and partnerships. Our overall pipeline remains robust, including both new customer and upsell cross-sell opportunities. During Q3, we booked eight enterprise deals representing nearly $13 million in annual contract value, several of which already started to generate revenue. This momentum is further evidence of our customers' continued confidence and trust in us. Turning now to our business highlights on slide five. In the third quarter, we generated revenues of approximately $200 million, down a modest 2.7% from last year, which is a significant improvement in the year-over-year trend from our first-half results. We grew quarterly revenue dollars sequentially and saw month-over-month sequential improvement throughout the third quarter. Additionally, our three-year LTM organic revenue CAGR of 70% remains substantially higher than our long-term target of 8% to 10% growth. In our America segment, total revenues were flat compared to prior year and continue to benefit from positive growth and new customer upsell and cross-sell. In the U.S., consumer confidence continues to be above last year's level, and consumer spending remains robust going into the holiday season. Job openings to unemployment numbers remain relatively high by historical standards. Hires have been stable, and quits, particularly as it relates to the salaried workforce, have been slowly decreasing. Higher interest rates and higher unemployment are also partially mitigating these trends. In our international segment, we experienced a revenue decline of over 18% driven by APAC and India. Our European operations, which experienced modest positive revenue growth in Q3, have shown more resiliency. It is also worth noting that our direct exposure to China, at less than 1% of our total revenues, has little impact on our business. David will elaborate on our segment performance shortly. From a vertical perspective, we are seeing increased hiring demand in transportation and healthcare, and continued stable demand in retail and e-commerce. Similar to last quarter, technology, financial services, and business service sectors have continued to experience a decline in hiring volumes. Adjusted EBITDA was nearly $65 million, and our adjusted EBITDA margin was 32.3%, both outperforming Q3 of 2022 and significantly higher than our first two quarters of this year. We are very proud of these results and remain focused on managing our costs and flexing our operations with demand, while also expanding our industry-leading automation efforts and driving further margin expansion. We continue to expect adjusted EBITDA margins above 31% for the full year while maintaining a high quality of earnings. This quarter, we made great progress on our strategic priorities, including investing organically in our products, data, and automation solutions, strengthening our portfolio with M&A, and maintaining a balanced capital allocation strategy. Collectively, these initiatives enhance our customer value proposition, drive our sustainable competitive advantage, and fuel our long-term growth objectives. Now, let me take a moment to discuss each of these three areas in greater detail. First, we continue to invest in our AI technology, data, and automation initiatives to grow our competitive advantage and drive adjusted EBITDA margin expansion. Our SmartHub, Click, Chat, Call, next-gen Profile Advantage, and Instant Employment Verification solutions are excellent examples of this. With SmartHub, we are seeing an acceleration in customer adoption. This technology is our proprietary AI-driven intelligent router that essentially sits on top of our large and growing verified database. SmartHub enables us to quickly search across multiple data sources to determine the optimal verification source based on speed, data quality, and cost-effectiveness. Through AI and machine learning, this technology delivers a great experience and cost savings to our customers. Our AI efforts also continue to evolve and expand with customer care. In the third quarter, we rolled out our innovative Click, Chat, Call offering globally, which provides customers with one user-friendly common portal and uses predictive intelligence for support. This initiative has driven operating leverage through process automation and headcount reductions while enabling higher customer satisfaction scores. Additionally, we are in the early stages of rolling out our next-gen profile advantage platform in the U.S., which is our API-first technology interface used by applicants through either a computer, tablet, or mobile device. With a redesigned user experience and interface built from the ground up, responsible generative AI, it provides a personalized applicant experience tailored to the specific job screening requirements. In addition to these solutions, we are constantly looking for innovative ways to enable our customers to hire smarter and onboard faster. For example, we recently launched an instant employment verification service in the U.K. and India markets. This digital-first, fully integrated solution reduces friction in the applicant process and reduces the time required to perform checks, leading to quicker onboarding. Through our investments and upgrades in technology, automation, and AI, we are creating solutions that are faster and easier for our customers and their applicants. These investments also enhance our customer value proposition, benefit how we operate, and are a major driver of our long-term profitable growth. We see this as a win-win-win for customers, their applicants, and for First Advantage. Second, we continue to build on our solid foundation and expand our portfolio through M&A. Over the past two years, we have successfully completed five acquisitions, including the latest and largest, Infinite I.D., which we closed on September 1st. These acquisitions align with our strategic goals by expanding our product offerings, vertical exposure, geographic reach, and technology capability. Each of our prior year acquisitions has outperformed our financial objectives and outpaced their growth plans by being part of First Advantage. This is evidence that our M&A strategy is providing returns and creating value. Taking a closer look at Infinite I.D., this business is a U.S.-based digital identity solutions provider that supports our product innovation and digital strategy. This addition allows us to better serve our enterprise customers in regulated markets like healthcare, financial services, and not-for-profit. Infinite I.D.'s technology complements our other identity verification and identity fraud solutions, including Right I.D. and digital identity, enabling us to continuously roll out state-of-the-art digital solutions to our customers. We are excited to add Infinite I.D. to our portfolio and welcome their team to First Advantage. And third, we remain committed to a balanced capital allocation strategy. In the third quarter, we returned approximately $218 million to shareholders through our one-time special dividend, which represented a greater than 10% return of capital to shareholders. We also continued to repurchase shares, with our board recently extending our existing share repurchase program to December 2024, reflecting confidence in executing against our long-term objectives. And we are extremely proud of our healthy balance sheet as we continue to generate strong operating cash flow and maintain a low net leverage ratio of 1.7 times. I will now turn the call over to David for more details on our financial results and outlook.

Thank you, Scott, and good morning, everyone. Turning to slide seven, as Scott mentioned, we had a productive quarter. We closed the Infinite I.D. acquisition, executed a one-time special dividend, continued to repurchase shares, and expanded our industry-leading adjusted EBITDA margins, all while navigating the uncertain macro environment and delivering results in line with the expectations we communicated last quarter. Our third quarter revenues were $200.4 million, a decrease of just 2.7% from the prior year. Currency had little impact on Q3 results with constant currency revenues of $199.9 million. Revenues have continued to grow sequentially each quarter this year and grew each month within the third quarter and heading into our October peak. In the one month that we owned Infinite I.D. during the third quarter, it contributed approximately $850,000 to our revenues. In our America's segment, revenues of $176 million, or 87% of consolidated revenues, were flat compared to the prior year. This segment held up well, which is primarily attributable to our broad-based resilient enterprise customer base. In our international segment, revenues of $26 million, or 13% of consolidated revenues, were down 18.4% from the prior year. On a constant currency basis, revenues were $25 million, or down 20% year over year. The decrease was due primarily to weakness in India and APAC. In the third quarter and year to date, India was down approximately 45% given our exposure to BPO and IT services related businesses. APAC was down over 25%, driven by the financial services sector and other regional market dynamics. In response, we have lowered our cost structure in these regions to account for the shift in demand. We believe that these geographies have bottomed out and comparisons will certainly be easier in 2024. Our European operations, which experienced modest positive revenue growth in Q3, have proven more resilient in the face of macro headwinds, with our digital identity products contributing to their results. Turning now to slides eight and nine, you will see our revenue growth algorithm. This algorithm is based on our historical performance and future expectations, which support our long-term revenue growth targets of 8% to 10%. As you may recall, the four components of this algorithm include base, upsell, cross-sell, new customers, and attrition. In the presentation, we have provided a reference table of our results for each of these components over the last four quarters. As you can see, the results for upsell, cross-sell, new customers, and attrition have been very consistent with their growth algorithm. This demonstrates that we are managing and delivering on what we can control, with the variation being driven by the base component. Base results, which represent contributions from existing customers before upsell, cross-sell, and attrition, are much more sensitive to the macroeconomic environment. While base improved in Q3 compared to the first two quarters of 2023, it was still negative, declining $17.6 million or 8.6%. We still believe that when the macro environment stabilizes, base growth will resume and hit its historical rates of 2% to 4%. The Q3 base decline was partially offset from upsell and cross-sell, which contributed $7.7 million or nearly 4% to our performance. Revenues from new customers contributed an additional $9.8 million or approximately 5%. Across our business, we continue to see strong customer retention coming in at 97% for the third quarter. In total, when considering the resiliency of our America segment offset by the weakness from India and APAC, our overall growth declined by a modest 2.7% in the quarter. Adjusted EBITDA for the third quarter was $64.8 million, an increase of approximately 1% over the prior year. Our three-year LTM adjusted EBITDA CAGR was 21.4%. It is worth noting that if you back out the declines in India and APAC, we would have seen year-over-year adjusted EBITDA growth for the company on a year-to-date basis and in Q3. Our adjusted EBITDA margin of 32.3% continues to be industry-leading and represented an improvement of 110 basis points over the prior year and 210 basis points sequentially. Our business has proven to be very resilient in the face of top-line headwinds. In the third quarter, our adjusted EBITDA margin expansion was supported by lower operations, customer care, product and tech, and SG&A costs compared to last year. This was enabled by our highly variable usage-based cost structure and continued discipline around managing expenses. We continue to manage your controllable costs and recognize the benefits from our efforts over the last few quarters, including reducing our facilities footprint, leveraging procurement savings, and selectively adjusting headcount to align with demand. For the third quarter, our adjusted effective tax rate was 24.5%. Adjusted net income was $40 million, and adjusted diluted EPS was 28 cents. As a result of paying our one-time special dividend, both adjusted net income and adjusted EPS were reduced by approximately $800,000 and half a cent respectively in the third quarter because of lower interest income. Turning now to capital allocation and our balance sheet on slide 11, as Scott discussed, our capital allocation approach remains disciplined and balanced between internal investments to drive profitable organic growth, M&A, returning capital to shareholders, and maintaining our attractive net leverage profile. Our strong operating cash flow and low net leverage support our strategic initiatives. During the quarter, we spent $7.5 million on purchases of property and equipment and capitalized software development costs, bringing our total for the year to $20.6 million in capital-related investments. Additionally, on September 1st, we acquired Infinite I.D. for $41 million using cash from the balance sheet. Infinite I.D. brings valuable capabilities that we expect will enhance their growth and market position. This business is profitable and is expected to generate annual revenues of over $10 million. Taking into account the impact on interest income from funding the acquisition, this transaction is expected to be slightly accretive on a net adjusted net income basis once integrated. It had no meaningful impact on adjusted EBITDA, adjusted net income, or adjusted diluted EPS in the third quarter. Our one-time special dividend, along with our ongoing share buybacks, reinforces our commitment to return value to shareholders. During the quarter, we used cash of approximately $280 million to pay a one-time special dividend of $1.50 per share, which represented a greater than 10% return of capital to shareholders. We also continue to repurchase shares, buying back approximately $3.6 million of common stock in Q3. Since the inception of our share buyback program in August 2022 and through November 6th of this year, we have repurchased approximately 9 million shares at a total cost of approximately $118 million. We have approximately $82 million remaining on our authorization, which has been extended through December 2024. In the third quarter, we continued to maintain the largest cash position and lowest net leverage among our public peers. We generated strong operating cash flows of $34.4 million in Q3 and approximately $106 million on a year-to-date basis. Cash flow from operations declined year over year in Q3, primarily due to higher cash taxes paid and a temporary increase in working capital that we expect will normalize in Q4. We ended the quarter with total debt of $565 million and a net leverage ratio of approximately 1.7 times. This is after the $218 million payout for the one-time special dividend and the $41 million Infinite I.D. acquisition. Further, we have no debt maturities due before 2027. Cash and short-term investments were approximately $167 million, and we have $100 million in untapped borrowing capacity under a revolving credit facility. As you may recall, our debt structure positions us well for the current interest rate environment, with approximately half of our long-term debt hedged through February 2024. Additionally, we strategically hedged another $100 million of long-term debt in Q1 of this year. Now, moving to slide 12 and our outlook, today, we are reaffirming our previous guidance ranges, expecting to perform at the low end of these ranges. To remind you, the low end of these ranges represents revenues of $770 million, adjusted EBITDA of $240 million, adjusted net income of $145 million, and adjusted diluted EPS of $1. This reflects the current hiring environment and our expectations that existing macroeconomic conditions and similar labor market trends, including our seasonal increase and the duration of the seasonal peak, will continue through the remainder of the year without significant changes. Based on typical seasonality, we expect customers in our retail, e-commerce, and transportation verticals to ramp up hiring during the fourth quarter for the upcoming holiday season, as compared to Q3. We have seen this play out so far in October, but at a more modest rate than we experienced last year, as we anticipated. October revenues, as is typical in our seasonal pattern, are the highest of the year. All of this has already been captured in our guidance. We remain confident in our resilient business model and our ability to effectively manage those factors within our control. Accordingly, we continue to take measures to maintain our adjusted EBITDA margins above the 31% level on a full-year basis. For the fourth quarter, we expect sequential quarterly revenue and adjusted EBITDA growth; however, revenue will still slightly decline on a year-over-year basis due to our international segment performance. We anticipate that base growth will remain negative but improving. Additionally, we expect our Q4 adjusted EBITDA margins to be approximately 33%. Please note that our full-year guidance ranges have not been adjusted upward or downward for the impact of the one-time special dividend or the contribution from Infinite I.D. The one-time special dividend is expected to have a negative impact of approximately $2.7 million on adjusted net income and two cents on adjusted EPS, resulting from lower interest income. Infinite I.D., which was acquired effective September 1, 2023, is expected to have a nominal impact on full-year results. Specifically, Q3 revenues from Infinite I.D. were approximately $850,000, and we expect the business to contribute over $3 million in total during 2023. The anticipated full-year Infinite I.D. adjusted EBITDA contribution will be substantially offset by the loss in interest income, resulting in no expected impact on adjusted net income or adjusted diluted EPS for the year. While it's too early for us to provide formal guidance on 2024, we wanted to share some preliminary thoughts around next year. Overall, we currently do not expect a meaningful change in the employment environment. We remain confident in the controllable parts of our revenue, as well as our ability to manage costs on a disciplined basis, both of which you can see in the results of the metrics we have provided. These factors combined with easier year-over-year comparisons will be factored into our 2024 guidance. We look forward to sharing more about this on our Q4 results call early next year. To summarize, it has been a productive quarter for us here at First Advantage. We remain highly focused on executing and delivering our Q4 results, which is our biggest quarter of the year. We will continue to invest for long-term growth as well as manage the business to maintain our industry-leading adjusted EBITDA margins. We continue to deliver on what we say while navigating in an increasingly dynamic environment.

Thank you, David. I would like to conclude our prepared remarks today by reiterating our areas of strategic focus and value creation priorities. Our flexible business model enables us to manage costs and we continue to invest in automation for further optimization. We are an innovator with a first-mover advantage in this space, resulting in industry-leading adjusted EBITDA margins, balance sheet metrics, and cash flow generation. We remain focused on our long-term growth opportunities and building on our strong foundation, both organically and inorganically. We continue to leverage our verticalized go-to-market strategy and enhance our long-term relationships with our resilient enterprise customers. Our customers want faster, more automated screening solutions and are increasingly focused on risk mitigation. They look to us to provide solutions to help keep their brand, employees, and customers safe. We have the solutions, the team, and the commitment to provide the best product offerings to meet our customers' needs. We continue to invest in our technology and solutions to maintain our competitive advantage, enhance our customer value proposition, and drive profitable long-term growth. Our investments position us well to capture market share, particularly as the macro environment recovers. Our 97% customer retention rate and long-standing tenure with our top 100 customers is further evidence of our outstanding team and product offerings. Thank you very much for your time and for your ongoing support. At this time, we will ask the operator to open the call for your questions.

Thank you. We will now begin the question-and-answer session. Thank you. Our first question is coming from David Togut with Evercore ISI. Please go ahead. Your line is open.

Thank you. Good morning. Good morning, Scott and David. Good expense control overall. Just the one call out is on SG&A which was up 8% year over year versus revenue down 3%. Is there a currency mismatch between international revenue being incurred in foreign currencies and SG&A being incurred in USD?

No, David. The real answer there is that change in stock cost, that's really the driver.

Got it. Okay. And how should we think about that going forward? Will SG&A be outgrowing revenue for a while?

Only in stock cost, which we had a modification to the program in May of 2023. That will be continuing.

Got it. And then, just my final question, Scott, are you modifying the selling proposition at all for customers as the economy slows, as the jolts numbers come down a bit? Is there a bit more of a cost focus, you know, when you reach out to clients?

I totally think there is. And yes, I think we've mentioned this before. We're seeing a lot more procurement-led deals. And procurement-led deals are actually good for large players like us, because, you know, we've got scale and can help companies save money, but also our innovative offerings. You know, we talked about SmartHub and our verified solutions. We are actually saving companies a lot of money on verifications, you know, and through our automated solutions. These are very fast turnaround type of products. So, also, you know, improving the customer experience. So, I think there's - when you look at our product development and our go-to-market strategies, we're clearly focusing on, you know, helping companies hire smarter and onboard faster as our tagline says, but saving money also helps.

Understood, thank you.

Thank you. We'll take the next question from Ashish Sabadra with RBC Capital Markets. Please go ahead.

Thanks for taking my question. I just wanted to drill down further on the last question on your reference to SmartHub and the verified database, which now has 105 million records. My question there is, how do you plan to increase that? We've seen some pretty significant improvement there or increase in the number of databases? How do you plan to continue to increase the number of records? And have you seen any shift from your SmartHub in terms of how much of those verifications happen using verified and other lower cost providers versus the more traditional verification? Thanks.

Yes, Ashish, thanks for the question. I don't think I'm going to give away the secret sauce on that. But I will give you sort of a high-level answer: our customers - and what I would think, you know, most companies or customers in this space are absolutely looking for alternatives in the verification space. And you know, Fintechs and new companies and new offerings do provide, you know, some alternatives there. But in general, it's - the strategy is a combination of many things. So, increasing the database, you know, through our own data acquisition efforts, partnerships, new tech providers, et cetera. So, it's a very detailed strategy, which I don't want to give away today. But this is a high area of focus for us.

No, that's very helpful, because I completely understand. And then, on the enterprise deals, you mentioned eight new wins there. How - can you provide any more color on the pipeline as we get into the next year? And also, on those wins, is it possible to provide color on how much of those were from your public peer versus the long tail? Thanks.

Yes, I'll take the question in reverse. You know, I think I've mentioned this before, and we think it's very interesting data. And this has been happening, you know, literally for well over a year or even 18 months as we've been tracking it. But the wins continue to be divided equally between what we consider the three buckets of competition. So, roughly a third of the wins are coming from the many mom and pops in the space, a third from sort of the mid-market players, and a third from the large peers. As you know, this is a very fragmented market. And it's, you know, it's a large competitive field with many players. The three large public companies probably only have maybe 36% market share. This trend, we expect to continue because of the fragmented nature of the industry. We think that's healthy and a good sign for us. On the deals themselves, if you look at our revenue growth algorithm, in normal times, the base typically grows 2% to 4%, upsell, cross-sell hits four to 5%, and new logos are 5% to 6%. You back out attrition of 3% to 4%. That gives you a long-term growth of 8% to 10%. If you look at our performance in Q3, we were spot on, right on it. Upsell, cross-sell at 4%, new logos at 5%, attrition at 3%. It's just the base and it's always been the base for the last year plus. But, as David mentioned, we're starting to see some stabilization in that base. The base was only down 8.5% this quarter, which is a very promising sign for us.

That's great color. Thanks, Scott.

We will take our next question from Scott Wurtzel with Wolfe Research. Please go ahead.

Hey, good morning, and thanks for taking my questions. Appreciate the preliminary thoughts a little bit on 2024. And I was just wondering if you could maybe expand a little bit on opening kind of any conversations with some of your clients and what you're hearing from them about hiring plans next year and how that is, you know, maybe to be trending relative to what we saw this year.

Yes. So, you know, again, we've said this in the past. We manage our large enterprise customers really well and we have dedicated account teams for them. This means we're having constant conversations with them. So, I think from a macro perspective - and again, the conversation changes depending on what industry that customer is in, there's a wide variety of responses. But when you look at the macro in general, we've already seen customers in retail, e-comm, and transportation verticals starting to ramp up their hiring in October for the upcoming holiday season. David mentioned U.S. consumer confidence remaining high, and when you look at our verticals, transportation, retail, e-commerce, and healthcare are our top three, and those are the ones we're seeing pretty good growth in. Those macro numbers are pretty good in those verticals. For example, transportation quits are not down. Healthcare quits are up. Retail quits are down. So, you've got pretty good macro indicators for what's happening in our largest verticals. I think from an individual customer standpoint, there's still a lot of uncertainty, and they're keeping things close to the vest because they themselves don't know. But we are seeing for the first time in maybe well over a year that customers are starting to plan a little bit better. For most of this year and definitely Q4 of last year, there was considerable uncertainty where they couldn't even predict their hiring demands. Now, we're starting to see a little bit of that changing where they're starting to be able to plan a bit better. I'm not - we're not expecting them to plan a full year of hiring, but maybe they can plan a quarter and go quarter by quarter. That's great for us because we get that visibility.

Got it. That's super helpful. And then, just as a follow-up on sort of near-term capital allocation, like obviously, the leverage ratio at 1.7 times is still very strong but obviously above the sort of sub 1x that we have seen over the past few quarters. Just wondering how you're sort of thinking about your near-term capital allocation? Are you looking to sort of get back to that sub 1x level or are you comfortable where you're at right now?

Well, first of all, 1.7x leverage is still very low. We're very comfortable operating at that. But, by definition, it's going to continue to come down because we just generate so much cash flow from operations. We are going to continue our stock buyback program. We will continue to pursue M&A, but we're very comfortable at 1.7, and again, we throw off a lot of cash every quarter.

Great. Thanks, guys. Appreciate it.

Thank you. We'll take our next question from Shlomo Rosenbaum with Stifel. Please go ahead.

Sorry. Thank you for taking my questions. Sorry, I didn't realize I was muted. Hey, Scott, can you comment a little bit about kind of the trends through the quarter and maybe what you're seeing in terms of the hiring cadence? You know, if you adjusted for seasonality, are you seeing a little bit more stability? Just maybe some comments about where kind of the trajectory worked through the quarter?

Yes, I think you've used the exact word we've been using, which is stability. You know, first of all, it's great to see that each month, we have sequentially grown. That's obviously great heading into the season. David mentioned October revenue being the highest of the year, so that's four months of sequential growth. Seasonal hiring is about right where we thought it would be. We're getting some good signals from customers. The predictability of that isn't, you know, what it's been in past years. But the order volumes are certainly looking good. Even some large companies have been announcing significant hiring numbers. Obviously, I'm not specifying any customers, but those are the kinds of things that we love to hear.

Okay, great. And then, David, can you remind us what the working capital headwinds in the quarter were that impacted the cash flow and why you expect it to reverse? Just give us the core of what's going on over there.

Yes, it was pretty simple. Our days sales outstanding went up by a couple of days. We had a couple of large payments that came in the first week in October as opposed to the end of September.

Okay, great. And if I could just squeeze in one more, Scott, maybe talk a little bit about what the Infinite I.D. acquisition added to your existing capabilities and identity and, you know, why you're excited about that.

Yes, I think, you know, you've heard from us and others how bullish we are on the whole digital identity and even fraud areas. We think these are high growth areas of the future; these are areas that are important to our customers. This also maps nicely to our product roadmaps around becoming more digital and more automated. When we looked at Infinite I.D., this is basically an identity fraud and biometric company that focuses on creating an actual physical network of third-party locations. Think of it as like fingerprint collection and biometric collection via state-of-the-art kiosks. It's similar to what you see at airports with clear kiosks. A similar type experience around capturing that data, this company was already a partner with us. In fact, I think we were their largest customer, so we knew them and their technology really well. We just saw it as a great fit for expanding our physical footprint around locations where we could collect that data. We also saw it as an important piece of our future roadmap. As we see a lot of these products merging together in the future, think about digital identity, overall fraud protection, and how that ties into the onboarding process. You could have a seamless candidate applicant experience if that's all done effortlessly across multiple products. You get biometric data, trigger fraud protection, and start a background check on the criminal side. You could even loop in the I9 process - all of that could be integrated, creating an eloquent candidate experience in the future as all these products and technologies come together.

Great. Thank you.

Thank you. We will take our next question from Andrew Steinerman with J.P. Morgan. Please go ahead.

Hi, Scott, if you take First Advantage's current hiring volumes and they stayed at kind of current levels going into 2024, of course, adjusting for typical seasonal patterns but without any kind of cyclical pickup. In that kind of stable environment, would First Advantage have positive base revenue growth in 2024 for the course of the year over year comparisons?

Yes. Again, I don't think we're ready to go to 2024 yet. But you answered a big piece of that, which is the comparisons get so much easier in 2024. We'll obviously give you more color on that when we talk next quarter, but we're thinking the same thing. The comparisons get easier, and if we have a stable hiring environment, then we just need to control the factors we can influence, like new logos, upsell, cross-sell, retention, etc. We cannot predict 2024 right now, but your thinking aligns with ours. However, we haven’t modeled it yet and are still conversing with customers to understand their 2024 plans.

Yes. Can I just ask one quick follow-up? When you talked about recent stability in hiring patterns, was that referring to total company, meaning U.S. and non-U.S., or perhaps just U.S.?

No. The international segment is still down and struggling. With the exception of AMEA, as we mentioned. AMEA is holding its own, but APAC and India are really down. Again, we saw roughly an 18% decline in the international base. So, that's still significant. It's primarily APAC and India, and we don't expect them to bounce back in the near future, though we believe they've bottomed out. We think they remain a couple of quarters away from recovery. China will heavily influence APAC when it reopens. As for India, we don't expect improvement until the U.S. fully recovers, given our customer base there is largely comprised of BPO and IT services companies serving multinationals in the U.S. and Europe. In the U.S., it is very vertical-specific, and we believe that transportation and healthcare are demonstrating increased demand, while retail and e-commerce are also holding steady, but financial services, business services, tech, staffing, and similar sectors are still down. Our America's numbers, however, are looking relatively stable at this point.

Okay, great. Scott, thanks for the details.

Thank you. We'll take our next question from Manav Patnaik with Barclays. Please go ahead.

Hi, good morning. This is Ronan Kennedy representing Manav. Thank you for taking my question. Just wanted to cover margins and your take on the margin dynamics when there is a return to the long-term growth algorithm, you know, and base returns, and assuming that there's upsell, cross-sell also expanding? Can you discuss the dynamics of margins? Will they expand further? Or could they potentially be offset by further investments in automation, AI, etc., as you return to growth?

While running, particularly in the international marketplace, there's a certain amount of fixed costs that we have in all of our operations. As the incremental revenue comes back and starts to fall through, that will enhance the margins in the international operations. As Scott previously said, we are going to continue to invest organically and in product and technology. But look, we are already driving industry-leading margins by far. We're at 32.3%. We're implying margins of 33% in Q4. But through automation and incremental revenue, we think there's still room to expand those margins as well.

Got it. That's helpful. Thank you. As a follow-up to the question on capital allocation, that was primarily from a near-term standpoint and leverage. Can you talk about M&A in terms of pipeline evaluations you're seeing, the priorities? And also, from a longer-term capital allocation perspective, with strong cash generation and low leverage, would you consider a regular dividend?

Well, first, relative to the dividend, that's something that we discuss at the board level. This was a one-time special dividend, reflecting our return of capital at this moment. From a capital allocation perspective, we're going to remain disciplined and balanced. We'll invest organically. We are active in the M&A marketplace and will always look at deals in the market. We won't overpay for them; valuations have gotten somewhat more reasonable, but they're still a bit on the high side. We'll continue to evaluate every deal that comes out.

Thank you. Appreciate it.

Thank you. And again, as a reminder, to ask a question, please press star and one on your touchtone phone. We will take our next question from Stephanie Moore with Jefferies. Please go ahead.

Hi, good morning. Thank you. I was hoping you could talk a little bit about your different sales pipeline. Are you seeing the pipeline, you know, the closing times changed? You know, maybe any changes in sales cycles compared to previous quarters this year?

Stephanie, overall pipeline is great. In fact, total pipeline is probably the highest we've ever had as a company. There are a lot of deals out there. We are not seeing really any change in sales cycle duration. In general, most new logo deals take about six months and upsell, cross-sell takes about three months. Obviously, we love the sales cycle on upsell, cross-sell since we're already there and contracts are already in place. The significant change we've observed this year, which began in Q4 of last year and really picked up in Q1 of this year, is the increase in procurement-led deals. Companies appear to be looking to save money and consolidate vendors, and a lot of this just makes sense. This shift to procurement-led deals presents opportunities for us to engage in more RFPs, and we can provide scale and global reach, among other advantages.

Got it. No, that's really helpful. And then, I guess, I have a follow-up, kind of more of a clarification. On the guidance for 2023, I think you noted your expectations to come in at the lower end of those ranges. Is that just a function of maybe the lack of seasonality you've seen in the fourth quarter or how year-to-date trends have panned out? Just trying to get a little bit of color on what drove that expectation.

So, we're really reaffirming the guidance we previously had in place. We directed towards the low-end last quarter, and we’re reaffirming that this is their accurate guidance relative to where we're ultimately going to end up. That's really a function of base growth, which remains the wildcard in the current macroeconomic environment we're operating in. Again, we are reaffirming that guidance that we previously had in place.

Got it. Nope, that's my fault. Thanks, guys. Appreciate the color.

We will take our next question from Kyle Peterson with Needham. Please go ahead.

Great. Thanks for squeezing me in guys. Good morning. I want to start off on the international segment. I definitely appreciate, you know, some of the headwinds like the IT services and BTS phase have been going through, but I guess, thinking about expectations for the fourth quarter. Should we expect growth in that segment to be fairly similar to what we saw in Q3, and then the American segment kind of makes up the delta since it seems to be holding up quite a bit better?

Well, let's start in total. If you look at the low end of guidance, you'll see that from a revenue perspective, Q4 will be slightly down year over year. It will continue to be mid-single digit negative, and a lot of that is due to international, which is still struggling. As Scott and I both mentioned, APAC was down 25%, and India was down 45%. We expect that trend to continue in Q4 as well.

Got it. That's helpful. And then, maybe a little bit more color on some of the eight new deals you guys won. Was that pretty broad-based across verticals based on the revenue mix you have today? Or was there any stark subset of the client base that is worth calling out on the strong side for a few of these new wins?

Yes, again, it was pretty broad across verticals. There was one large deal in the transportation space, but I don't want to go into more detail than that.

And I see no further questions at this time in queue. I will now turn the call back over to Mr. Staples for closing comments.

Thank you, Operator. And thank you, everyone, for your participation. To recap, we are very pleased with our performance through the third quarter. We continue to make great progress against our strategic initiatives and pride ourselves in providing a compelling value proposition to all of our stakeholders. Our sustainable competitive advantages enable us to be the leader in this space, and we are well positioned to capture further share and continue to create value. Thank you. Thanks again and have a great day.

Thank you. This concludes the First Advantage Third Quarter 2023 Earnings Conference Call and Webcast. Thank you all for your participation. At this time, you may disconnect your line and have a wonderful day.