Conference Transcript - FA 2026-06-02

Andrew Nicholas, Analyst — William Blair

Thank you for joining us. My name is Andrew Nicholas and I'm the Business Services Analyst here at William Blair. Before getting started, I am required to inform you that for a complete list of research disclosures or potential conflicts of interest, please see our website or visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome First Advantage to our conference, the 46th Annual Growth Stock Conference. With me today, First Advantage President Jwell Smith, CFO Stephen Marks. Thanks to both of you for being here again this year. Understanding that it is a generalist conference, just kind of want to start with just kind of a high-level overview of the business. Maybe take a couple of minutes to give a quick snapshot of First Advantage, what you do, who you help, and why it's valuable.

Joelle Smith, Other

Sure, absolutely. Thank you, Andrew. Happy to be here. And hi, everybody. So First Advantage Manage is a global provider of trusted workforce solutions. So we help organizations screen, hire, and manage talent. We're at the intersection of identity, trust, and compliance. And so those three things really make up what it is that enables us to help organizations identify who they're hiring and make sure they have all the essential requirements to to be hired for that particular role or into that particular company. So we've got about 1.6 billion in revenue. We have about 80,000 customers and we do about 200 million searches annually. So we have scale, proprietary data and platform strength. They're kind of our three differentiators. We also operate in a highly regulated industry. So we have a global footprint. We operate across 200 plus countries and territories. We have deep compliance expertise, and we have a tech platform that integrates directly into our customers' workflows for hiring and managing talent, so applicant tracking systems and HCM systems. Our solutions and proprietary data are underpinned by our AI-enabled platform that has a built-in compliance engine. And our opportunity here is meaningful and pretty long term because we have a couple of changing things happening within kind of the hiring market. There's a more distributed workforce than there ever has been. We have new generations coming into the workforce at a rapid pace that we really haven't seen in decades. And there's a phenomenon of identity fraud happening inside of the hiring market especially with enterprise organizations so this trifecta is really helping us to continue our growth and to be differentiated in the market and that's who we

Andrew Nicholas, Analyst — William Blair

are great appreciate that so a lot that you said there that I'm sure we'll dig into and I want to spend some more time on but maybe before we get into some of the nitty-gritty maybe higher level labor market situation. Much covered, much valued, pluses and minuses over the past several years. Can you just kind of level set where we're at from a labor market perspective or more specifically like a hiring velocity perspective? What are you seeing today? What has the progression been over

Speaker 1

the past handful of quarters? Yeah, I'll give you the data and then I'll let Joel maybe give you some of the commentary from our customers. I think that's what's obviously most valuable to us. But But I think it's, to your point, it's a very confusing market, I think, to most because whether it's the lack of response to Joel's data and kind of the unpredictability there and if you even go to a source like an ADP, it's very down market. I think a couple of things that Joel mentioned that really give us this stability trend that we've seen happening in the market probably for the last 24 plus months, but really starting to manifest itself over the last 12, is the fact that we have a very diverse vertical vertical base. And a couple of our key verticals, healthcare, retail, transportation, which a lot of home delivery, have been very strong and stable over the last number of months, but also at the enterprise level. So we define enterprise customers as half a million dollars or more in screening value. Those are companies hiring thousands, tens, or hundreds of thousands of employees a year. So these are really big companies that when a news story like tariffs or a war, you know, kind of thing act out, they're making strategic decisions. They're not really super reactive. So that creates a lot more stability than i think the markets would perceive and we've seen that in what we would call base base growth or same store customer sales which had been all over the place so post pandemic you know blew up and was plus 25 30 percent um obviously that wasn't long-term sustainable so we've seen this this rotation back to what is now we can really consider to be sustainable um and over the last several quarters we've seen base go from call it negative two to to negative one and in q1 it was essentially positive zero and we that's kind of our guidance for the year we think we'll be right in that neutral to just below neutral state which to us is incredibly comfortable because all of those things joel just pointed out we're able to drive really strong growth from upsell and cross sell so new features new functions that's responding to those risk concepts that joel was talking about and the differentiation is leading to strong new you know new logo wins and retaining 97 of our business over the last number of quarters you're into really good growth numbers without base being positive and you know we see that you're starting to see that come in some of the economic data but that's not you know we don't need the economic data to improve we need our customers to tell us that things are in this neutral to positive territory which you know joelle can tell you all about um but that's what we're hearing yeah the way the

Joelle Smith, Other

customers are responding um and they have been for a number of quarters now is a neutral to positive um very there isn't a single customer out there that we talked to and we talked to thousands of them um that's saying they're not they're hiring less uh they're hiring the same or more every vertical every region um so it's kind of the exact opposite of what you're seeing with the headlines but as steven said we operate and and prioritize the enterprise market and these are large corporations so they they they're not going to respond uh you know quickly to a headline they're going to manage their business effectively so yeah it's i mean i know you guys have talked

Andrew Nicholas, Analyst — William Blair

about the last couple quarters but huge dichotomy between you know lay off this lay off that in in the in the media sphere versus what you're seeing in your business so well you put in your parents

Speaker 1

always tell you don't believe everything you're doing well look the layoffs are happening but but they're you also got to put them in context you'll read some of them and it's you know abc companies laying off a thousand people a no one ever gets to the second paragraph of the article that says they're using those savings to fund investments in whether it's technology or sales or marketing that churn actually is net positive for first advantage because that's creating new new hiring activity and turnover within the organization and then you also look at you know people get really scared and think the labor market's you know gone to hell for lack of a better term then you put that number in the context of what they disclose as their total employee count and it's and it's tiny fractions right um so they're really just making these cuts to you know be able to fund you read a lot about in the news today about you know funding their AI capex and funding their product development and funding their sales and marketing. So anytime there's a rotation and churn in the labor market, that's actually net positive for screening volume in our services. And then take the fact that what they're investing in is things like AI. That's just compounding the risk equation that our customers are having to navigate, which is creating more demand for the upsell cross-sell. So not every news article is always great news for us, but I think a lot of people are just reading the headlines and getting scared about what's going on. You got to read the full article and then really think about what's

Andrew Nicholas, Analyst — William Blair

really happening in the market. Yep, absolutely. Makes perfect sense. All right, so wouldn't be a fireside chat in June 2026 without some AI conversation. You alluded to some of it already, but I just kind of want to walk through from a competitive positioning and moat perspective, you know, AI's impact on the background screening space, why you are a winner or a perceived winner in your opinion on that front. So maybe start with addressing disintermediation risk in particular. How difficult or how would you describe like the mode around infrastructure, around technology, around the surface capabilities that you have and that you bring to market?

Joelle Smith, Other

Yeah, so from an AI perspective, it's important to understand a couple of things about this industry in general and then and then about us um so when you look at the the background screening and workforce management um we're a cra that's a credit reporting agency we're governed by the fcra same as a credit bureau or anything like that um so it's a highly regular and that's just in the us then you have a number of other regulatory requirements if you're hiring in transportation there's the department of transportation the dot health care has their own regulations then you extend out to other countries and you've got gdpr in the eu there's data privacy laws that just are coming up in india australia canada so there's a lot of regulatory requirements and it's not a one-size-fits-all so when you look at how ai can decision you need to be able to have in our business auditability and defensibility and if you're an enterprise having both of those things ai is not going to do that it doesn't do that well at all and so when you look at you know the aspects of compliance that's one area that this this industry and us in particular have a pretty decent moat the other area is around data and so we have thousands of data sources some are publicly available some are third party payment but even the publicly available data if you think about all the criminal records there's almost 4 000 county jurisdictions in the united states upper lower courts where you have to get this criminal data to confirm whether a person obviously has committed a crime or committed something egregious enough to not be hired the data that you need to get to is behind paywalls and so you have to have a fully automated there's no central source they're all completely disparate and they're all varying degrees of sophistication so you have some that are fully automated you have some that still sit in cardboard boxes in the bottom of the courthouse and so you need to have a network and you need to have an infrastructure to be able to do that you need to have the funds to be able to go get the data and handle the payment of that data, and then you need to process the information. So once you gather all the information from these thousands of data sources, you then have to be able to, it's called adjudicate, basically make a decision on whether you can use this information or not, and whether you can use this information to make this decision. And so that decisioning criteria is something that legally AI is not allowed to do. You cannot use AI to make an employment decision. There are 14 states right now that have that law already in effect. And there's 30 of them more that's in process. So these are the things that really kind of create a bit of a moat in the background screening industry and in particular with us and kind of the sophistication. Now, where we can use AI and we do is for finding the right data source that has the highest probability of a complete record and the highest quality and the fastest search. So we use AI to do that type of sophistication on the platform, but we don't use it to decision because legally you can't.

Andrew Nicholas, Analyst — William Blair

Yeah, it sounds like all these things kind of drive you to the 97% retention rate that you've spoken to. I think, although I don't always pay a ton of credence, another kind of aspect of the AI debate has also been the idea that someone else would want to do this on their own, or maybe even a payroll vendor wanting to take on this responsibility? I mean, can you just kind of respond to that disintermediation risk and why it isn't something that you're concerned with?

Speaker 1

Well, I think a lot of the things you all just mentioned are still there, right? A payroll provider by nature is not a CRA under FCRA law. The second you start going into these other worlds, it starts to creep into all the other services you do. So it really, that compliance part, In fact, I talked to a founder in our industry who said, oh, the night the FCRA applied to background screeners, he went home and threw up. And now he goes, it's the greatest thing to ever happen to the industry, right? And it's true because the world's gotten so complicated from this compliance infrastructure that it's fewer and fewer people want to. There's been some startups in, like, the talent screening space that have tried to do this AI search the world, didn't think the CRA, or they were a CRA and the FCRA applied. and they're getting sued out of the world right now because there are a ton of things that come with being an FCRA-covered service that you have to do, the way you have to handle the data, the way you have to process it. A lot of those human-in-the-loop mentalities that Joel just talked about, primary source validation, all comes into it. So it's created this incremental mode, and that's all in just background screening. Then we haven't gotten into the fact that in order to do drug testing, we have 20,000 physical sites in our proprietary network that we're able to tap into. There's all of these things to be able to offer the full suite of services that make it really hard for someone to say, I'm going to go to your Claude co-work class tomorrow night and then learn how to do a background screen in under an hour. You could do one background screen, but to do it at the scale we do and the verticals that we cover and the geographies that we cover is what really gives us the strong competitive positioning and really creates this strong kind of shield, if you will, against a pure AI disruption risk that I know has been common to every company in the software space over the last year or so.

Andrew Nicholas, Analyst — William Blair

It doesn't have to be specifically an AI topic, but can you speak to the Sterling acquisition and how that maybe enhanced the competitive moat as well? That was something that you closed. I think we were talking about this last year, getting an update on that. Just kind of give a little bit of color on how that's evolved.

Speaker 1

Well, I'll tell you how well the acquisition goes. We don't even talk about it much anymore. So, you know, we've got a little bit more synergy work to do, but we look at it as an incredibly successful deal in a couple key measures. One, first time I think a background screening acquisition has gone through and retention levels have gone up. So the fact that we were able to take two very large customer sets, bring them under one house, but preserve the customer experience and the platforms and do that in a way that actually creates higher retention than pre-acquisition to us is the number one success. Obviously, the financial model, our scale now, the breadth of products that we're able to offer, the breadth of investment that we're able to make in those products is second to none in our industry. And Joelle can talk about the specifics, but I think that the biggest key benefit to our customers and in our pipeline has been the fact that we've been able to take the best of both worlds and really roll them out as upgrades. So if you were an original first advantage customer, you got a lot of what the best of the Sterling platforms were and vice versa. So the proprietary data and speed and automation on FA and some of the product suite and integration layers on the Sterling platform, we've been able to take those one-offs and bring them over to the other side and create a better customer experience for everyone. We're obviously seeing now the benefits as we delever come through with cash flow, our scale in terms of our go-to-market and marketing dollars and things like that. But I can tell you, we don't really talk about it a lot anymore. we're we're now focused on how do we take our new the new first advantage and grow um we've rebranded we've harmonized everything we can and now we're now we're off to the races

Andrew Nicholas, Analyst — William Blair

and some of that is is you know showing itself in operating leverage uh you have some synergies left but can you talk about margins broadly i think um at your investor day last year you spoke to 31 percent to 32 percent target by 2028 i think this year you're kind of 28 and a half type range for the full year guide can you talk about kind of the path there the major um levers to getting there and how much is dependent on on base growth if at all yeah it's really not base growth dependent

Speaker 1

at all a few things one yeah there are some more synergies to get but they're really back-end plumbing it's not the stuff that the customer sees and feels so it's not really why it's not talked about much and a lot of that because we're prioritizing growth and in our pipeline and you know we've had some really strong go to market momentum 17 combined new logo upsell cross-sell in q4 12 and q1 uh continuing that growth so we've certainly put synergies a little bit on the back burner but we'll we'll action all those by the end of this year see a lot of that benefit through through margin percentages next year i think just scaling our you know our pnl is very scalable to begin with you know it doesn't incremental dollars of revenue don't require a lot of pnt or product and tech investment certainly not a lot of gna and sgna expenses so as we scale up revenue now that we've got that it really just stable base is all we really have been have been modeling in a neutral base um now we have that and the rest of the growth algorithm takes over we'll see a lot of that that margin accretive items flow through and there's still some other levers that we're working on obviously we're going to you know we've always been focused on automation ai is just the latest iteration of that and joel covered some of that but also how we leverage our proprietary data is also a way that we're going to help enhance margins over the years making sure that we're leveraging our verified database you know and smart hub for verifications, our national criminal record file database for our criminal searches, and there's a few other areas obviously that we'll continue to invest in. But we look at that obviously that 31 to 32 percent target, the 1.8 to 2 billion, and really the dollar 65 to two dollars EPS as those core metrics that are, I can tell you, are front and center in all of our management meetings on making sure that we're executing on them. I think you even saw some of that margin progression in our Q1 numbers this year, and we had some new wins that we knew just from a revenue mix, we're going to kind of put a pause on some of that margin accretion. But because we've seen that broad base stabilization within base, like we saw here in Q1, our margin performance outdid our own models and was actually very, very accretive year on year. I want to double back

Andrew Nicholas, Analyst — William Blair

because you mentioned the verified database. Just can you speak to some of the data that you have that you consider to be proprietary? I think that's obviously one of the major differentiators as people kind of think about software and services companies in this new AI paradigm. Can you give a little bit of context to the audience about what those assets look like and how they're differentiated?

Joelle Smith, Other

We have over a billion proprietary records, and it's split into kind of two groups. One is verified. As you discussed, that's over 130 million records. And really, that's work history authorization. So it's the employment records necessary to verify that somebody has worked where they said they worked. And that continues to grow. It's an investment that we made a number of years ago. And we actually layered AI on top of it, which is a product called Smart Hub. And that allows us to use our data or find other third-party data sources that have the highest probability of completing that record. with the lowest cost, so our customers are very keen on that product, and that is a differentiator. Nobody else in the market has that. The other proprietary data set that we have is around criminal records, and that's the remaining, so over 800 million records of criminal history, which allows us to use it as a reference point for where to go get information in addition to, obviously the places where they lived and worked because that's traditionally what people search for so these two data sets give us a ton of differentiation we use them to train the models we use them to accelerate the time to turn around the record information and it really gives us our operations team an edge as they're trying to process you know 200 million searches a year so

Andrew Nicholas, Analyst — William Blair

makes sense perfect um i want to switch gears a little bit just on on growth opportunities um i think one of the things that's been particularly impressive and actually turned around prior to some of the stabilization you've seen in the u.s market is is the international business can you talk a little bit about how that growth has trended the last couple years and maybe more holistically what that growth opportunity looks like obviously you mentioned from a regulatory perspective it's difficult to support multinational organizations and all all these jurisdictions where does that kind of screening market sit relative to the US and why are you so excited about it yeah absolutely so international has

Joelle Smith, Other

been a great success story for us we're on our eighth straight quarter of growth which we really see as a as a positive indicator for kind of how how this industry is trending but international in general we serve a lot of the global brands so what you would think of as a US based organization that expands out out to other regions across the globe, whether it be India, Europe, Australia, APAC. But there's also a change in how some of the organizations who are headquartered outside of the United States are expanding into the US. And so we're seeing that or European nationals that are expanding to other countries in Europe or other regions outside of Europe. And so we're seeing kind of both sides of that growth curve. And we're really seeing a pretty strong uptick in some of the major markets that we serve. So Europe, for sure. There are regions in APAC, India in particular, but even areas like, you know, northern APAC and Hong Kong and then Australia and Canada. They're definitely high growth areas. They are countries that are really focused on mitigating risk and are following the same U.S. by far as the most mature in this market. but we're seeing a lot of these other countries come up and recognize how important this is from a risk perspective, from a brand perspective. So we're seeing that uptick in growth across the globe.

Speaker 1

But Andrew, I think this is, international is also one of the things where the acquisition was truly beneficial to First Advantage. You think about some of the core markets, the UK, Australia, and India, we're the largest screening provider in all those countries now because of our combined scale. And it's not just the volume that we're putting through, it's the local expertise, it's the sales, it's the marketing, and it's also the vertical diversification within those markets. So I think that's one of the reasons, you know, we were growing pre-acquisition internationally, but you've seen that growth sustain and even accelerate since post, because we're very diversified, but also now just a strong player in Canada, in Mexico, you know, you go market by market by market where you really want to be, have a good presence, and through the acquisition, our combined scale is fantastic in those markets.

Andrew Nicholas, Analyst — William Blair

Earlier, Joelle, you mentioned how sometimes you're getting background screens or data from a cardboard box in the basement. Is that, where is the sophistication or maybe the digitalization of data internationally relative to the U.S., and does that also kind of augment the moat there?

Joelle Smith, Other

Yes, it does. That's a great question. I don't think there's really cardboard boxes in basements internationally. But there is definitely disparate bits of data. And it's really hard to know. Each country has their own. There's national record data. Then there's local record data. And there's certain jurisdictions. So you have to have all of the compliance baked into every single one of those countries. You need to know what's accessible. For instance, a lot of countries have a requirement where you can hire them. And if they have falsified any information, then you have the right to fire them. But if they haven't done it, once you hire them, you really can't fire them. Whereas the US is kind of the opposite where you can, you know, it's at will everywhere. It's very much the opposite, especially in a lot of the European countries, right? So knowing that and knowing what's important to an employer, what they want to check on the background and how that needs to serve into not just the hiring data, but post-hire decisions for once they become an employee. So there is a high level of compliance and sophistication necessary to serve all of these countries.

Andrew Nicholas, Analyst — William Blair

Is there a major difference in package density between U.S. and international customers, or is it more a distinction between kind of like mature economies versus less mature economies? or how how should we think about that maybe even as a potential opportunity long term yeah it's

Joelle Smith, Other

actually both um because when you think about density across like someone out of europe they may have gone to school in india they may have had jobs in three different countries in europe and then they're getting a job in the u.s um and so you have to be able to go to all of those regions and all of those employers and you need to have that depth and breadth to be able to go get that information and then use the compliance engine to know like okay if they worked in the uk these are the things we're allowed to serve up as part of a decision matrix and this is the stuff we're not based on gdpr um so there's a depending on the jurisdiction and depending on the um the type of information we're gathering whether it's employment education criminal record there's a lot of different rules required for that so the density naturally is larger with uh more dense populations around uh especially countries in europe and apac apac has a a ton of variation in their packages just because it's a location base but it's also right as markets mature they

Speaker 1

also because their local screening operations become more sophisticated same thing with verticals in the u.s as certain verticals mature they start to they analyze risk differently and therefore become natural natural kind of locations to do more upsell cross-sell density another area of

Andrew Nicholas, Analyst — William Blair

risk is people that don't really exist digital identity digital identity verification with the expansion of remote work a lot more common than it was a decade ago for someone to say there's someone that they are not that's an opportunity that you've spoken quite a bit about would love to hear more about the digital identity verification opportunity for First Advantage, what you're seeing customers look at and how you service them in that regard.

Joelle Smith, Other

Yeah, absolutely. So it's interesting because it's kind of the bad side of AI. There's a lot of really good stuff that happens with AI where you can do things faster and you get these agents and all these things. But the negative part of AI is it made it really easy for people to create a fake identity they make it really easy to create a falsified resume create a fake company that you say you worked at as a verification for employment and so and and obviously deep fakes so this is something that has really changed the game for a lot of employers trying to bring in folks and that's why risk has risen to the top priority for all enterprise organizations these days but we're excited about it because we have a great product suite we were first to market and sterling was very close second to market right so like the two of us went there so we've had products out in the market for years um just about a year ago the wall street journal put out an article saying that they uh gartner believes that one in four candidates um by 2028 are going to be fraudulent they're going to be fake. And so, and I'm telling you, they're not far, they were not far off on that based on what we're seeing so far. And so that changes the game a little bit. So not only do you have to make sure the person has the right credentials and is safe to be hired into the organization, you now need to make sure they are who they say they are. And so pairing those two things up and making sure that the products complement each other and that the person that you interviewed is the same person that you did the background screen on, is the same person that you onboarded day one for the I-9 and has the right to work in that country or in that region is really important. And what our platform does is we are able to connect all of those dots at all the different stages. And then we even have some organizations that want to do it even post hire. So they want to continue to check because once you have a person that gets hired onto the organization, they want to make sure that they are not then outsourcing their work. And this happens in every vertical. So whether you're a gig business and you want to make sure that the driver who's delivering something hasn't farmed out their work to a friend or a cousin or something like that, or whether you're a financial services institution and you're hiring somebody with fiduciary responsibility and you want to make sure that they haven't been you know talked about or been paid off to be able to do something nefarious within your organization so there's a lot of different use cases that we're seeing and for for the digital identity and the identity fraud phenomenon that we're seeing it's the first time that we have seen a product that is affecting every single vertical that we serve, every single customer segment that we serve, and every single region across the globe. It started with kind of the North Korean, you know, took your job type of headlines. And it's really just continued. So whether you're a retailer who is hiring somebody and you need to verify they're able to work in the United States, because you're afraid you're going to get an immigration fine, so you need to verify that the person is the same person that you did the screen on, or whether it's something more complicated like a technology hire or an engineer hire, where you're going to get the keys to the data and product environment, and you want to make sure that they're not a bad actor that's going to drop in malware. So it's across the board and it's something that we're, our product is very fit for purpose. The fact that we have the sophistication in our platform to be able to stitch it all together to make it an easy decision for our customers, it's kind of like the right place, right time situation for us. So we are very excited about it. Over a quarter of our implementations in Q1 had digital identity associated with them.

Andrew Nicholas, Analyst — William Blair

Awesome. Well, I think we are out of time. Thanks to both of you for being up here with us. For those that are interested in continuing the conversation, we're going to Jenny A for the breakout. Thanks, everyone.

Joelle Smith, Other

Thank you.