First Advantage Corp Q3 FY2025 Earnings Call

Good day, everyone. My name is Sabrina, and I will be your conference operator today. I would like to welcome you to the First Advantage Third Quarter 2025 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. 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, Sabrina. Good morning, everyone, and welcome to First Advantage's Third 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. 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. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2024 Form 10-K and our Form 10-Q for the third quarter of 2025 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. 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 1, 2023. The pro forma information does not constitute Article 11 pro forma information. I'm joined on our call today by Scott Staples, our Chief Executive Officer; and Steven Marks, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.

Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. We have 4 key messages for today. First, we delivered another quarter of profitable growth, meeting and exceeding our expectations with revenues up approximately 4% year-over-year on a pro forma basis and achieving adjusted EBITDA margins of 29%. Our performance was driven by continued go-to-market success in new logo and upsell, cross-sell. This demonstrates our ability to generate solid results amid the current macroeconomic environment in which hiring growth has been consistently flat while maintaining our relentless focus on cost discipline. Second, just last week, we celebrated the 1-year anniversary of closing on our Sterling acquisition. I am extremely pleased with the performance of our entire team as our integration is progressing ahead of schedule, and we are delivering strategic and financial benefits as promised. Third, we are continuing to execute on our FA 5.0 strategy, actioning our best-of-breed product and platform approach to accelerate growth through new logos, upsell, cross-sell and improve client retention. Today, we will highlight how our technologies and products are enhancing our value proposition and solving customers' critical needs. And fourth, today, we are narrowing our full year 2025 guidance ranges with refined midpoints at or above our original guidance midpoint. Now turning to Slide 5 and a closer look at our performance in the third quarter. We generated solid results across revenue, adjusted EBITDA and margin, cash flow and EPS. For Q3, combined upsell, cross-sell and new logo rates continued to perform in line with our long-term growth algorithm targets. Retention improved to 97%, an increase from 96% in Q2, demonstrating the success of our customer-centric approach and that our best-of-breed technology and deep vertical expertise are resonating with the market. We are pleased to share that we recently signed an exclusive 5-year contract renewal with a top customer that is expected to generate over $100 million in total revenues, of which a significant portion is guaranteed through minimum annual commitments. Base revenue performance again improved sequentially, remaining just below neutral and consistent with our expectations. In Q3, our large new logo win in healthcare went live and is the last of the 3 large wins we have discussed with you on past earnings calls to do so. Combined with the 2 wins that went live last quarter, one in the retail gig economy and the other in an international win in Australia, all are now live and generating revenue, providing solid momentum going into Q4. We are experiencing tremendous success with our go-to-market teams as further supported by our 17 enterprise bookings in the third quarter and 75 in the last 12 months, each with $500,000 or more of expected annual contract value. These wins give us confidence in our ability to generate new logo and upsell/cross-sell revenue and are an encouraging sign of our sustained go-to-market momentum since closing the Sterling acquisition 1 year ago. Additionally, we are encouraged by the strength of our late-stage pipeline with many large potential new contracts in the works, including several that are incorporating our Digital Identity product for the first time. Looking at our verticals in the third quarter, our balanced and resilient vertical strategy supported our performance with nearly all of our verticals seeing revenue growth in the quarter on a pro forma year-over-year basis. We saw strength in retail and e-commerce, driven by upsell, cross-sell and fueled by a good start to the holiday season. Transportation and logistics also grew, driven by our upsell, cross-sell initiatives with particular demand from last mile and home delivery customers. In addition to serving onboarding needs for new hires within transportation, our broad range of solutions also supports our customers' ongoing compliance requirements, enhancing our results with balance and consistency across the solutions we provide. Healthcare was slightly down, driven by uncertainty with Medicare and Medicaid funding, particularly with the nonprofit hospital networks, but this was offset, in part, as healthcare staffing companies stepped in to fill the hiring needs. We remain optimistic about the long-term industry dynamics and fundamentals in healthcare as the U.S. population ages and requires more healthcare services. Our other verticals, including general staffing, manufacturing and industrial financial services showed positive growth in Q3, partially powered by the success in our new logo and upsell, cross-sell programs. October order volumes show similar directional trends to what we saw in Q3 continuing. In international, for the sixth quarter in a row, we achieved year-over-year revenue growth with the U.K. as a bright spot and also improving trends in APAC. Looking at the macro environment, we are still seeing a trend where hiring is remaining consistently flat. Macro uncertainty as well as policy changes, including the recent government shutdown, immigration, tariffs and tax policy have resulted in many of our customers remaining in a wait-and-see posture as it relates to their hiring plans. However, as you can see from our results, our customers are still hiring at consistent levels. Our expectation for the fourth quarter and likely into 2026 is for base growth to remain slightly negative as the overall labor market conditions persist. We continue to be confident in our ability to deliver overall revenue growth through upsell, cross-sell and new logos. Our enterprise customers, diverse vertical mix, global reach, mix of hourly and salaried focused customers and diligent focus on controlling the controllables make our business resilient and able to perform well across a variety of macroeconomic scenarios. With regards to the impact of the government shutdown, our view is that the hiring markets have remained stable and active with our core verticals continuing to perform well. The absence of BLS jobs and employment data has not impacted our ability to run our business. I want to take a few minutes to touch on AI's potential impact on our business, building upon what we shared during our May Investor Day. We are taking a proactive and strategic approach to understanding both the benefits and the risks of AI, and we are optimizing our long-term strategy based on the future of work. We recognize the pace at which AI is evolving and can see how it is currently impacting and how some are expecting it to impact the way certain types of jobs and labor are performed. Of note, the World Economic Forum's 2025 Future of Jobs report predicts net positive growth through 2030, even after accounting for the impacts of AI. Specifically, the WEF notes that while AI and automation are leading factors expected to displace an estimated 92 million jobs, these technologies and other market conditions are also expected to create 170 million new roles as companies and economies adapt to technological change, resulting in an expected global increase of 78 million jobs over the next 5 years. Again, we are confident that our diversified mix of verticals, customer segments, and geographies provides a meaningful degree of resiliency to AI impacts and will allow us to capitalize on the future growth opportunities. We are also strategically reviewing where and how we invest in terms of our products and verticals to ensure we are well positioned to lead in a world increasingly influenced by AI with a focus on continuing to generate long-term shareholder value. For example, we are building tools such as our Digital Identity product, which enables our customers to address the increasing dangers of AI-driven identity fraud. At the same time, we are leveraging AI internally to enhance quality and customer experience. As we like to say, we are building good AI to fight bad AI. Additionally, I want to address some of the recent news headlines on corporate headcount reductions as companies claim to gain efficiencies from AI. In some instances, the news you read happens to relate to customers of ours. And what we have observed is that while those companies are reportedly making job cuts motivated by AI, we are seeing stable, if not growing, overall screening volumes from them. This is because many of these news-making reductions are in administrative-type roles, which have a lesser impact on our business as typically a majority of our screening volume comes from normal churn and core hiring in our customers' operations. Additionally, as customers reinvest in their businesses to build out their internal AI and other capabilities, they should also be driving screening demand as they will require roles to manage these changes. This sentiment is further supported by feedback directly from our customers who have told us that while they are currently investing in and leveraging AI in their businesses, they do not expect to meaningfully change their approach to core hiring over the next several years. Now turning to Slide 6. On October 31, we were thrilled to celebrate the 1-year anniversary of the closing on our Sterling acquisition. Over the past year, we have made significant progress on our integration of this strategic acquisition, which has been outperforming our expectations on customer retention, synergy capture and realization, cultural alignment and complementary technologies and products. Importantly, we have delivered a very seamless, nondisruptive customer experience throughout the integration process. This has enabled us to maintain excellent customer satisfaction as evidenced by our high retention levels and the feedback we are receiving from customers. We have also continued to deepen our customer relationships through our growing Collaborate International user conference series, which reflects our expansive global footprint. In 2025, we've hosted events across the U.S., India, Singapore and EMEA with upcoming user conferences in Hong Kong and Australia. These events provide us with direct insight into our customers' needs and emerging industry risks, showcase our subject matter expertise, uncover upsell and cross-sell opportunities and help cement our position as a category leader. Recently, many of our European customers joined us at our London Collaborate to discuss key topics such as identity fraud, AI-driven screening and global compliance. The strong turnout, high-value content and customer engagement underscore the relevance of our solutions and the trust we are building across markets. Feedback confirms that our customers are looking to us for guidance as they plan for 2026, and we're proud to be a strategic partner in helping them navigate evolving workforce risk. Our back-end automation strategy has also been a key driver of operational efficiency throughout the integration process. By consolidating fulfillment into a single global engine, we are leveraging years of investment, engineering and development in robotic process automation, APIs and AI. We have kept 2 front-end platforms for customer continuity, but behind the scenes, we have been able to streamline workflows, cut redundancies and drive efficiency. These efficiencies not only enhance speed and customer satisfaction, but are also expected to create meaningful margin improvement as we grow. Additionally, since announcing the Sterling acquisition, we have increased our synergy target from our original $50 million plus to a range of $65 million to $80 million. We have also made solid progress on deleveraging our balance sheet as we work towards our target net level range of 2 to 3x. Steven will provide additional details shortly on both our synergy progress and deleveraging. Turning to Slide 7. Throughout the integration process, we have been focused on enhancing our customer value proposition to unlock new logo, upsell and cross-sell opportunities while continuing to drive innovation and foster the high-performance culture we are known for. We are consistently leveraging our best-of-breed approach to provide optimal solutions and technology to solve our customers' challenges. Last quarter, we discussed how the expansion of our award-winning Click.Chat.Call. customer care solution and our high-margin First Advantage work opportunity tax credit product has benefited our customers. We have continued this progress, achieving a milestone in Q3 with the increased usage of the millions of records in our proprietary national criminal record fire database across both platforms, something we have been rolling out since Q1 of this year. With our proprietary data and in-house data science teams, we deliver faster insights and a superior experience for everyone from recruiters to HR teams to candidates. This powers our ability to reduce turnaround time while increasing the speed, coverage and effectiveness of our criminal screenings, facilitating comprehensive and timely results for our customers. In October, we made available our criminal and motor vehicle records monitoring solutions to the entire customer base, offering another best-of-breed experience to all of our customers. We are also underway in leveraging our best-of-breed approach to enhance the user experience. Over the past 18 months, we have been rolling out a new applicant portal. Now approximately half of our order volume on the First Advantage front end runs through this portal with customer adoption continuing to grow. This represents the most secure and user-friendly experience we've ever built, featuring device-agnostic design for a seamless experience across devices, customer-specific branding for a familiar and consistent look and AI-powered features that continuously learn from the candidate interactions to deliver a best-in-class rage click-free experience. In November, we are extending the same modern look and feel to the Sterling front end, bringing the benefits to even more customers. This initiative reflects our commitment to delivering an outstanding user experience backed by rigorous data, feedback, sentiment analysis, and continuous improvement. It's a win for our customers and their candidates and a key differentiator for First Advantage. On top of this, we are continuing to see solid momentum and interest in our Digital Identity products. Negative use of AI and other technologies are creating new risks for companies and organizations and are driving rapid evolution in the Digital Identity space. Knowing who you're hiring and confirming who they actually are is critical. Our Digital Identity solution is fully linked in the hiring life cycle with some customers using it multiple times through the recruiting, screening and onboarding process, which is creating a competitive advantage for First Advantage. As an early market leader with Digital Identity solutions, we are able to deepen our strategic dialogue with customers, strengthening our relationships and stickiness of our products. We are highly focused on this attractive opportunity, which has a total addressable market of over $10 billion and an expected growth rate in the mid- to high teens. Our Digital Identity products is continuing to build a strong pipeline as customers navigate the early adoption and pilot phase. Digital Identity is a powerful competitive differentiator for First Advantage and indicative of the direction in which our industry is growing. Overall, our customers continue to be excited about the benefits of our best-of-breed platforms, products, data, and AI-enabled technologies. This is evident by our strong customer retention and consistent new logo and upsell, cross-sell performance. With that, I will now turn the call over to Steven.

Thank you, Scott, and good morning, everyone. Today, I will provide color on our third quarter results, synergy progress, deleveraging trends and our narrowed 2025 guidance. I'll start with third quarter results on Slide 9. Our third quarter revenues were $409 million, up 3.8% versus last year on a pro forma basis, with our year-over-year revenue growth rate increasing sequentially from Q2 as expected. Our go-to-market success was in line with our long-term growth algorithm targets as the combined contribution of new logo and upsell and cross-sell revenues delivered 9% growth in the quarter, and our retention rate reached 97%. The trends in our base performance continued to moderate on par with how we had forecast the quarter with base remaining negative on a year-over-year basis. Our solid results were supported by consistent execution on our integration and synergy plans, which remain ahead of schedule. Adjusted EBITDA for the third quarter was $118.5 million. Our adjusted EBITDA margin of 29% exceeded our expectations, representing an improvement of 130 basis points versus the prior year on a pro forma basis despite being slightly lower sequentially from Q2 due to mix. Our 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 helping improve the combined company's operating margins in line with our historical expectations of the business. Adjusted diluted EPS was $0.30, a 15.4% increase over our expectations. The benefits of our greater scale, expense and capital management and lower interest expense as a result of our debt repricing and voluntary debt payments to date have supported our per share earnings. These have more than offset the impact of the incremental interest on the transaction financing and the dilutive impact of the new shares issued for the Sterling acquisition. On Slide 10, you can see how we are making great progress on our synergy program. This quarter, we crossed the original $50 million threshold of action synergies, now having actioned $52 million and exceeding our initial total synergy program goal within only 1 year. We benefited from the realization of $12 million of synergies in the third quarter, bringing our in-year realization to $30 million. We remain committed to and confident that we will achieve our goal of $65 million to $80 million of action synergies within 2 years and are pleased to see the consistent success of our integration and synergy execution. Looking forward, we are focused on scaling, automating and applying AI as we continue to execute on our integration priorities. Moving to Slide 11. You can see our historical revenue growth algorithm results with combined company data beginning in 2025. As previously mentioned, in the third quarter, our results were driven by strong upsell, cross-sell as well as new logos, supported by consistent solid retention. Base results came in as expected with sequential improvement from Q2 despite remaining negative for Q3. Now turning to cash flow, net leverage and our debt paydown progress on Slide 12. During the quarter, we generated adjusted operating cash flows of nearly $81 million, an increase of $35 million or 78% on a year-over-year basis. This was driven by the larger scale of our business, our tight management of our working capital, including collections on receivables, the benefit of the OBBBA, which has reduced our required cash tax payments and our overall focus on cash flow. Our cash balance at September 30, 2025, was $217 million. With this ample liquidity and cash flow, subsequent to the end of the quarter in November, we made a $25 million voluntary repayment on our debt principal, bringing our total year-to-date principal repayment to over $70 million, most of which has been voluntary using excess cash flow. Our synergized pro forma adjusted EBITDA net leverage ratio at quarter end was 4.2x and represents a decrease from a year ago when we closed the Sterling acquisition. We remain focused on reducing our net leverage towards approximately 3x synergized pro forma adjusted EBITDA within 24 months post close, and our long-term net leverage target remains 2x to 3x. Moving to Slide 13 and our updated 2025 guidance. As a reminder, year-over-year comparisons are on a pro forma basis to allow for easier comparability. Today, we are narrowing our full year 2025 guidance ranges with refined midpoints at or above the midpoint from our original guidance. Our year-to-date results as well as the momentum we have seen heading into the fourth quarter give us confidence in our revised guidance ranges with revenues now in the range of $1.535 billion to $1.570 billion supported by strong synergy execution and our continued focus on efficiently managing our business, we now expect to achieve full year adjusted EBITDA margins of approximately 28%, a meaningful expansion from pro forma 2024. Looking at the fourth quarter as implied in our updated full year guidance today, our revenue outlook for Q4 of around 6% year-over-year growth at the midpoint continues to assume a certain degree of macro stability while keeping in mind that our customers remain in a wait-and-see mode. The impacts of increased tariffs and other policies remain key areas of uncertainty across the global economy, but our customers continue to hire at consistent volumes. We expect Q4 base growth to remain slightly negative, consistent with Q3, with this trend likely to continue into 2026. As Scott mentioned, we saw very consistent volumes in October, which aligns to our updated Q4 expectations. We anticipate continued productivity of combined upsell, cross-sell and new logo growth, consistent with, if not better than, historical trends. Additionally, the go-lives of our recent large wins and robust new contract pipeline support our expectations for the fourth quarter. We also expect customer retention to remain in line with our historical performance of at least 96%. In the fourth quarter, we expect adjusted EBITDA margins to expand versus the prior year period by more than 100 basis points. This is similar to the expansion we saw in Q3 and results in fourth quarter adjusted EBITDA margins of approximately 28%. While this represents a small sequential decline from Q3 2025, it is in line with the historical trends in our business, reflecting the mix shifts driven by seasonally lower December revenues and some movements in verticals and some movements in volumes between our verticals and products. This year, we also anticipate the mix shifts we saw in Q3 towards products with relatively higher out-of-pocket fees will continue to impact adjusted EBITDA margins into Q4, though over time, we expect these impacts to normalize. Even with these trends in mind, we remain confident in our ability to drive year-over-year margin improvements in Q4. We anticipate that our adjusted diluted EPS growth momentum will continue as revenue ramps and synergies are realized. Despite the mix trend previously mentioned, we expect that quarterly adjusted diluted EPS will remain in the mid-$0.20 range in the final quarter of the year, representing meaningful expansion on a year-over-year basis. On a similar note, we now anticipate free cash flow for the year of $110 million to $120 million. This represents a notable increase from our previous commentary as we have been able to generate incremental cash flow from better working capital management and have successfully managed our integration-related costs. As previously noted, the passing of the OBBBA tax law in July doesn't notably impact our effective tax rate. However, we will be able to utilize certain provisions within the new law to materially reduce our 2025 required cash tax payments. We have provided a full chart in the appendix to the earnings presentation with FX, CapEx, interest and other modeling assumptions. Additionally, we do not expect the government shutdown to materially impact our results. While the shutdown itself has affected some operational items such as the government run E-Verify platform resulting in some delayed I-9 verification, we expect any delays in processing I-9 will be resolved in the quarter as soon as the government shutdown concludes, and this is a very small component of our business. Overall, and taking a step back, we are pleased with our refined 2025 guidance ranges we are providing today, particularly amid our ever-changing world. We are expecting to deliver full year revenue growth, a high single to low double-digit adjusted EBITDA growth rate and an even higher adjusted diluted EPS growth rate and meaningful free cash flow generation, all just 1 year after closing our strategic acquisition of Sterling. With that, let me turn it back to Scott for closing remarks before we open the line for questions.

Thank you, Steven. In closing, I would like to reemphasize 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. We have significant organic revenue growth potential, accelerated by the Sterling acquisition. We are resilient with a flexible cost structure and high revenue diversity that comes from our balanced vertical strategy. 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. All of this supports our confidence in our ability to achieve consistently strong results, including delivering on the 4-year financial targets we established during our Investor Day in May. Looking ahead, we remain focused on executing on our strategy to increase share across our target verticals, accelerate international growth and deliver on our best-of-breed product and platform strategy. Thank you to the entire First Advantage team for the great work you do to support our customers every day. With that, we will open the line for questions.

Our first question is coming from Ashish Sabadra with RBC Capital Markets.

So maybe a 2-part question. As we think about this strong new win momentum that you talked about and as you're ramping up these new clients, how should we think about the upsell, cross-sell as well as new logos going into the fourth quarter, but also into 2026? And then the second question would be just the pipeline for new logos. Have you seen any changes in the sales cycle? Any elongation in the sales cycle? Also any early conversations with your clients around new win momentum?

Yes, Ashish, I'll start with your comments on the new logo and kind of that impact going forward. I'll let Scott take the pipeline. I think you're right. As I mentioned in the prepared remarks, we're expecting our Q4, the contribution of new logo and upsell, cross-sell to be in line, if not better, than our historical. So we did 9% in Q3 with very consistent so far this year. Assuming those deals ramp according to schedule, there's some room to do a little better than our historical averages. We're seeing some good initial order demand from those bigger contracts. A little early to comment on '26 just overall. But I mean, obviously, the deals that are just going live in the second half would have some rollover, still have to fill out the rest of the pipeline funnel and still have to execute. But it gives us a lot of confidence, certainly in Q4 being able to achieve, if not exceed, the historical norms for upsell, cross-sell and new logo.

Yes, Ashish, we are very pleased with the current status of our pipeline. It has reached its highest value ever. The late-stage pipeline for large deals is the strongest we have ever experienced as a company. While this doesn't guarantee specific outcomes, we believe we have a solid pipeline. Our historical win rates have been strong, so we feel optimistic as we approach 2026 regarding our controllable factors and organic growth potential. We are particularly satisfied with the increase in client retention, especially following a significant merger. This uptick suggests that clients appreciate the integration of the Sterling and First Advantage technology platforms. I want to acknowledge our tech teams for their excellent work in seamlessly connecting the back-end and front-end systems for both the Sterling and First Advantage customer bases. In our industry, it is crucial for clients to partner with a company deeply knowledgeable about their specific sector, which we have demonstrated by investing in key verticals and supporting it with a robust technology platform. This is clearly driving our pipeline growth, and we have maintained solid deal flow. We have a compelling tech narrative, backed by experts in the field.

Obviously, I've observed over the years that FA is very tech forward, including AI. With that in mind, do you feel that traditional employment background checks have a risk of being disintermediated by AI innovation and how?

Thank you, Andrew. We have a strong technology foundation and an excellent team. I appreciate your question because I believe we don't receive enough recognition in the market for our technological capabilities. We operate like a Silicon Valley tech company, even though we are based in Atlanta, Georgia. We have talented architects and engineers, and when considering the role of AI in our industry, I see it as purely beneficial rather than a competitive threat. The industry must integrate AI into our processes significantly. The biggest shift is the increasing risk of identity fraud in recruitment and how it connects to traditional background checks. The future will revolve around digital identity verification, which is where much of the AI will be utilized to ensure our customers are onboarding the same candidates they interviewed. The entire process, from recruitment to onboarding and I-9 verification, needs to be connected through technology and consistent databases. We act as the integrative force that provides this for our customers, and this is central to our current customer discussions. I anticipate that many solutions will rely heavily on AI, particularly to help combat the negative uses of AI, such as deepfakes and other identity-related frauds. Our goal is to assist our customers in avoiding the hiring of imposters, which, as we mentioned in our previous call, is an increasingly significant risk for them. This focus not only enhances client retention but also facilitates upselling and cross-selling. Ultimately, our customers recognize us as a technology powerhouse that can bring everything together effectively for them.

Scott, I think you mentioned as part of the comment on your 5-year contract renewal that a portion of that $100 million is guaranteed. So I was just hoping to kind of figure out maybe a little bit more background on that contract, what led to that particular structure? I think that's relatively unique within your broader business. And whether or not that's a one-off or something you'd expect to pursue more regularly going forward?

I appreciate the question because this has been a major focus for us in 2025 and will continue in the future. However, this will be a lengthy process rather than a quick fix. This initiative is the beginning of what we believe will become a standard in the industry, where we aim to create more commitment with contracts that have guaranteed minimums. It is important to note that this will take time to implement, as we won't be approaching existing customers to modify their current contracts. Our goal is to incorporate this new clause into all new business acquisitions and renewals with current clients. So far, we have encountered minimal resistance to this idea. We are also working on additional strategies to strengthen the contracts further, as this is clearly the direction the industry is heading. We believe that elements like Digital Identity and some of our other offerings could also contribute to subscription revenue, which would then be reflected in future contracts. I'm glad you brought it up because it's certainly a shift we are noticing in the industry, and we are taking a leading role in this change.

Understood. For a follow-up regarding the digital identity aspect, is that something that could impact upsell or cross-sell next year? Or is it still too early to suggest growth percentages?

Yes. First of all, it is the hottest topic with our customers right now. We've had Digital Identity products in the market for almost three years. Initially, we focused on educating our customers about the risks related to imposters and identity fraud. However, over the past six months, our customers have begun to share actual instances where they successfully prevented fraud or regrettably hired an imposter. This issue is dominating our conversations, and we have an impressive range of products to offer, consisting of more than six offerings under the digital identity umbrella. At some point in 2026, we plan to quantify this for you, as we are currently in early sales stages and conducting pilots while customer interest builds. There will be three major impacts from digital identity. First, it will drive upsell and cross-sell revenue, which we will quantify in the future. Second, it increases our stickiness with customers since we are involved in various workflows. Digital identity places us at the forefront of their recruiting process, enhancing our retention. The minimum retention rate is 96%, but we are currently at 97% and hope to maintain or even improve that through our product's stickiness. Lastly, it aids in promoting other products. For instance, customers want assurance that the person they interviewed is the same as the one who underwent a background check and was onboarded with the I-9. Digital Identity boosts our I-9 sales, as we can consolidate all necessary data if we are their service provider, relieving them of this responsibility. This creates real stickiness along with multiple opportunities for upsell and cross-sell, making it a critical topic for our clients. Again, this is currently the most pressing issue in the industry. That was a lengthy response, but it was an excellent question.

This is Ronan Kennedy representing Manav. Could you elaborate on the commentary regarding October order volumes following the trends you saw for the quarter? It seems to align with this week's ADP jobs report, which indicated a positive shift after consecutive months of job losses. Additionally, I have a question regarding a report released this morning indicating that October saw the highest increase in layoffs since 2023, with year-to-date layoffs up 65%. Are you observing similar trends? You mentioned that AI and macro factors were contributing factors but also noted that your diversification and resiliency have shielded you from significant AI impacts, and highlighted specific clients. I’d like to understand these dynamics and their potential effects on your growth through 2026.

Yes, Ronan. The macro situation is definitely a concern for everyone. I'll address your question while providing some additional context. In October, we had a very strong month. The order volume trends were similar to what we experienced in Q3, exceeding our expectations. However, that doesn't guarantee the same for November and December; it's merely a snapshot of October. We are currently in a wait-and-see phase for the last two months of the year, but we've made a great start in Q4 based on what we've observed. The holiday season looks promising, and our main customers are driving significant volume growth. There seems to be a demand for better data in this area. It’s important to note that we focus on enterprise clients. While some discussions may center around small and medium businesses, we aren't witnessing the same issues at the enterprise level as are represented in the media. We have a unique advantage in terms of data, as we can see our own order volume and know exactly who is being hired and when. Given the government shutdown, there is currently no BLS data available, and we've previously pointed out the unreliability of BLS data. Participation from companies in BLS data had dwindled to about 35% and was mainly from SMBs, making it an inaccurate representation of the overall macro picture. We have the capability to see real-time hiring data, knowing precisely which companies across various industries and regions are hiring. The BLS data has typically lagged by several months and undergoes significant revisions every six months due to inaccuracies. Our Q3 results and our outlook on order volumes indicate a stable labor market rather than a declining one. This doesn't imply massive job growth or losses, just stability. Looking ahead to 2026, we anticipate it will mirror 2025, with steady hiring trends—no major increases or decreases, just consistency. Lastly, we have access to qualitative analyses of order volumes and various data sources. We're also in regular communication with our customers; this year alone, we've conducted over 1,500 formal business reviews with them. This may involve the same customer multiple times, but it highlights our commitment to working with clients to improve their programs, optimize screening, explore upsell and cross-sell opportunities, and gather insights about their hiring. What we're hearing from our customers doesn't fully match the media narratives, and that’s what informs our business strategy.

Yes, Ronan, great question. We are currently at $52 million, aiming for a target of $65 million to $80 million. We recently marked the anniversary of this figure, and the remaining amount of $15 million to $25 million is expected to come in gradually over the next year. There are various operational, fulfillment, and data projects that require more groundwork and prerequisites to be completed. However, we are confident in reaching our target as we continue optimizing and improving efficiency month after month. Regarding EPS accretion, there's already a noticeable positive impact. Compared to the pre-acquisition period, our EPS numbers have been strong in the latter half of the year due to operational scale, two consecutive quarters of revenue growth, synergies coming into play, and our efforts in managing cash flow and debt. Lower interest rates are beneficial as well, alongside effective working capital management, leading to robust cash flow that supports interest expenses and contributes positively to EPS. As for deleveraging, we are beginning to see positive trends, with strong free cash flow and increased EBITDA. As we accumulate more cash, our net leverage will decrease, and we expect to approach a 3x synergized net leverage ratio by the end of next year, which will mark two years since the deal was made. We believe we are on track regarding all three aspects, Ronan.

I just wanted to go back to some of the commentary around base growth for 2026 and your expectations for it to continue to remain negative. Is that right now sort of an expectation that it will remain negative throughout 2026? Or given we are obviously comping a lot of years of negative growth, could we potentially see an inflection as we get sort of into the second half of the year?

Yes, Scott, that's a good question. We're not ready to provide specific guidance for 2026 yet. Our primary focus is on the order volume trends as we exit 2025 and what that means for the beginning of 2026. I want to emphasize that, as Scott mentioned, the hiring environment has been consistently flat for a while, and we anticipate this trend to continue. The base has shown significant improvement throughout the year, moving from a decline of 5.5% in the first quarter to 3.7% last quarter, and now to just 1.8%. This 1.8% decline represents the slightly negative trend we've discussed over the past few quarters, and we expect this to remain in that range for the next few quarters. We will provide a more detailed outlook during our next earnings call regarding the 2026 guidance. It's also important to note that despite the slightly negative base, we have strong performance in new logos, upsell, cross-sell, and retention, which positions us for overall growth. However, the macro environment appears set to persist, and there’s no formal outlook on how tariffs or immigration policy might influence the customer sentiment that is currently cautious.

And then just as a follow-up, going back to the kind of the identity market opportunity, and you mentioned mid- to high teens market growth rate. I mean, given your position in the screening market and everything, do you think you guys can outgrow that sort of market growth rate over the near to medium term as you sort of bring these solutions into your customer base?

Yes, the short answer is that we don't know yet because it's still early. We believe we are well positioned. Our customers can purchase point solutions to address some issues, but we are uniquely situated to help them integrate all these elements into one cohesive solution. Conversations with customers have been excellent, and we are pleased with our recent wins, pilots, and launches. However, it's still too early to accurately quantify projections for specific numbers and growth rates. As we approach 2026 and these figures become clearer, we will analyze win rates and pipelines, and then share that information, as we recognize its significance to our growth strategy.

You noted the retention improvement sequentially. I think you cited a few factors that are kind of buried in the Q&A. But if I had to focus on a few things, why do you think you saw that retention improve? And is that something you think is sustainable?

I think there's a lot that goes into it. I mean, first thing, we're a very, very, very customer-focused, customer-centric, customer-inspired company. We spend a lot of time with our customers, as I mentioned with our formal business reviews, and those are only the formal ones. We're talking to our customers daily, weekly, monthly. The Collaborate sessions that we talked about in the script have been phenomenally attended. We've got lots, if not most of our large customers attending these Collaborate events around the world. So we're spending a lot of time with our customers. And I think there's a couple of things that are driving retention. One is we are considered thought leaders in their industry. We pick certain industry verticals to focus on, and we go deep, deep, deep into those so that we know what they're dealing with from a compliance standpoint, from an onboarding standpoint, from a cost pressure standpoint, whatever it might be. We know their industry well. And in most cases, we have most of their peers as customers, so we can help them benchmark. So we can help them say, okay, here's what the industry is doing, and here's where you're best-in-class and here's where there's gaps. And those gaps are great to point out because what that means is upsell, cross-sell opportunity. And that's why package density has been such a great driver of growth for us. So vertical knowledge, industry expertise is clearly one of the drivers of retention. The other one is tech. I mean, as I mentioned earlier, we're a great tech company. We've got agile pods all around the world. We've got solution engineers. I mean we're really good at tech. Our products demo really well, which leads to a lot of new logo wins. And customers are very happy with the products. And also, we've really nailed the Sterling integration from a product and platform standpoint. Our vision, our theory from the very beginning of the acquisition was single back end, leveraging all of the great First Advantage automation that's been out there for literally 9, 10 years now. Single back end, but the front ends don't change for the customers. So that kept customers from attritting. Usually, when you do an M&A, that's the biggest thing that they worry about is, are you going to force migrate me onto a new platform? And the answer was no. And it was even better than no. It was like not only are we not going to force migrate you, but you're actually going to get a series of upgrades because we're taking best-of-breed from both platforms and giving it to the other platform. So there were some things that the Sterling platform did really well that are now becoming available to the First Advantage installed base. And there are some of the things that First Advantage did really well that are now becoming available to the Sterling installed base. And those are things that are visible. So we're talking about functionality. We're talking about best-of-breed user experiences, et cetera. And the things that are invisible to them are the things that we're leveraging on that First Advantage back end. So it's the First Advantage back end with all that great automation, which is driving faster turnaround times. If you look at our turnaround times, which is a key KPI for our customers, our turnaround times are coming down with customers because of the automation. So we're enabling them to onboard faster. And onboarding faster is critical for them, especially in high-volume hires because they need the people to do the job. So I think it's the combination of our vertical expertise and the fact that we actually nailed the technology and the future promises of technology, like how we're rolling out digital ID, how you can integrate your I-9, all that stuff is being eloquently explained to our customers, and I think they like the story.

I have a quick question regarding international growth, which has shown several quarters of strong performance. Could you provide more details on how that is evolving? It appears that the U.K. has been performing well, although we've heard that some areas there are still struggling. What efforts are you making in that region? Additionally, you mentioned weaker trends in the health care sector, but it seems there is a seasonal increase in transportation. Is this increase in transportation consistent with historical trends, or is there any additional information you can share on that?

Harold, okay, Steven, go ahead.

Yes, Harold. On international, I mean, look, we're still seeing the momentum we've seen in the last few quarters sustained, if not accelerate a little bit. International was up a little over 11% in total. So again, like the trend we had last quarter, outpacing the consolidated business. And you're right, the U.K. market has been certainly a strong point there, and some of the underlying verticals are still showing weakness due to some government regulation that's also helping us out. But honestly, we saw growth across all 3 of our international regions. And you remember, we've had that larger financial services win in Australia. We've had some other go-to-market success over the course of the year as well. So really strong base, really strong upsell, cross-sell, new logo type winning there in international. I'll let Scott fill on the verticals, but I think international has been kind of ahead of the curve and continued showing that growth and that accelerate a little bit in the third quarter.

Yes, Harold, on the verticals, so you mentioned health care. I think it's important to note, health care for us is really 4 sub-businesses. So it's acute care, think of hospital networks; post-acute care; life sciences; and health care staffing. Post-acute care, life sciences and especially health care staffing really did well in the quarter. It was really just the hospital networks, and it's completely 100% tied to what's going on in Washington, D.C. with Medicare and Medicaid. It's not like there's less demand for their services. In fact, there's more demand. You've got an aging U.S. population, and you probably know from your own experiences that there's a tremendous demand in health care. It's just that a lot of these smaller regional, even rural hospital networks are dependent upon Medicare and Medicaid funding. And there's a lot of uncertainty in that right now. So they've cut back their hiring just because they don't know where the funding is going to come from. Now health care staffers have filled in the gap because they still need the services. So I think this is just an aberration. I think this is something that will play out over the next couple of quarters, will stabilize. We're very bullish on health care because of the aging population, the incredible need for services. And even though it's slightly down, I would say our strategy is actually to double down in this industry because it could be a tremendous growth industry long term. It's just having a little bit of an aberration right now, and it's completely tied to the smaller and midsized hospital networks. It doesn't really affect the larger hospital networks and affects mostly the nonprofits.

There has been nice execution and positive trends. Scott, I have a quick question for you. I want to revisit the concern about AI disruption, which you explained well. I sense there may be a subtle difference in the argument, particularly on the outskirts and possibly among some segments of your client base with AI. It seems that some employers might take certain onboarding or screening responsibilities in-house. How do you view that? Secondly, it's great to see you integrating your databases and building a proprietary one. Could you explain how this is leading to cost savings in data? Is there a critical point where you may truly see a significant change in your data costs due to the years you've invested in creating your proprietary database?

Steven, I'll handle the first part, and you can address the second. Regarding the AI disruption, my brief response is that it’s very unlikely. Customers are not interested in this area; it’s not where they want to invest their engineering resources and efforts, and it's quite complex with significant compliance challenges. They aren’t likely to leverage AI internally during the screening process. However, the scenario is different for recruiting. AI is indeed effectively utilized in recruiting and is yielding positive outcomes. Implementing AI-driven tools at the initial stages of the recruiting process is quite beneficial, as it enhances the quality of information we receive. AI improves data intake right at the beginning of recruiting, which ultimately helps us when we conduct digital identities, initiate background screenings, and manage I-9 onboarding. We obtain better data thanks to the quality enhancements provided by AI. Whether it involves capturing images, biometric data, or assisting applicants in filling out their information accurately—ensuring correct addresses and name variations, including maiden names—AI strengthens our processes without adversely affecting our business model. In fact, it enhances quality and may lead to quicker turnaround times, as receiving improved data from an ATS or from an AI-enhanced recruiting system simplifies our work. Nevertheless, given the extensive FCRA compliance regulations and the multitude of unique data sources involved, I don't foresee customers managing this task on their own under any circumstances.

Yes, and Pete, on your data question, I think there are 2 things there. One, I mean, leveraging the data assets and resources of the 2 combined companies has been a core part of our cost of sales component of our synergy program. And as you can see, where we're at on that time line, we're already above and beyond the original $50 million target. So we're doing well there and leveraging those in many places in the business. But to Scott's earlier point on the Q&A, we're a tech company at heart and tech companies love data. And we'll continue to invest in ways to grow our databases. And when we give out the full year numbers at the end of the year on the Q4 call. You'll see growth in our NCRS, you'll see growth in our verified databases. And then it's not just growing the databases, it's leveraging them in as many ways as possible, but that will continue to be a storyline in a way that we improve the quality of our products, improve the quality of our P&L and cash flow, but it's always going to be a part of our story here.

One other point I'd like to make relates to retention. I realize I didn't bring this up earlier when discussing retention. We have been automating internal processes and our APIs to data sources for a decade. However, over the past year, we are starting to see significant payback from these efforts. Clients are noticing our faster turnaround times. We have also tackled some persistent data source issues in our industry, such as those affecting specific counties or states. When we conduct business reviews with customers and demonstrate their improved turnaround times, they recognize that these improvements are a result of our investments in automation. This capability is part of the First Advantage backend that we mentioned, and now our legacy Sterling customers are benefiting as well since we are utilizing our backend fulfillment engine for them. This contributes positively to customer retention, and the impact is reflected in our retention metrics. Our competitors do not possess this capability, giving us a significant advantage. This creates a strong competitive edge for us.

Thank you. I see no further questions in the queue. Thank you all for joining us today and for your participation. This concludes the First Advantage Third Quarter 2025 Earnings Conference Call and Webcast. At this time, you may now disconnect your line. Have a wonderful day.