Conference Transcript - FA 2026-06-04

Speaker 2

All right, we're going to go ahead and get started. This is the last presentation of the day, and we're saving the best for last in terms of having First Advantage over here. As I think most of you know, they're the leading player in the pre-employment screening and screening and merging areas, including digital identity. and first advantage you know a little more than a year ago ended up doing a big transaction merging with Sterling and becoming the undoubted leader in terms of the entire space we're extremely pleased to have Scott Staples the CEO Stephen Marks the CFO and Joelle Smith the president of the company here with us today so they're gonna do a formal presentation and then we'll have hopefully 10 minutes to go through some Q&A. Scott, I'm going to turn it over to you.

Scott Staples, CEO

Awesome. Thank you very much. We're going to walk you through some slides and just give you an overview. And as Mark said, we'll have time for Q&A at the end. I think the easiest way to think of us is that we're a platform company and that we're global in 200 countries and territories around the world, we bring together a combination of the tech platform and proprietary data and third-party data to help companies manage risk. This is all about risk, risk mitigation, and the newest thing that we're dealing with, we're super excited about, and Joelle will spend more time on, is getting into the areas of fraud detection. There's so much fraud happening right now in recruiting and onboarding, and we are right at the center of it, and that's why we're super excited about where we are as a company. So I mentioned 200 countries and territories. Why is that important? It's really important because if you talk to enterprise customers around the world, and that is our main focus, enterprise, they're hiring from everywhere around the world. So they might be hiring for a role in New York, but maybe that person grew up in Singapore, or maybe they were educated in Australia, whatever it means. So it's really important to have scale. And we are the largest player by far in the space. We've got global reach. We've got offices and people in these locations around the world. We know local compliance laws. We know what it takes to help customers recruit the right people, screen the right people, and onboard the right people. Scale matters in this space. So you see 200 million annual screens. That's a lot. That means that our tech is industrial strength. We can handle lots of volumes. Customers can throw literally thousands of hires at us on a on a weekly basis, a daily basis, hundreds of thousands on an annual basis, so we can handle the scale. And that really resonates with big companies, especially big global companies. The secret sauce of the business is the verticals. The verticals are important for a couple reasons. One, this is a vertical story. So it's not just about being able to help customers with fraud and onboarding and recruiting in certain verticals, it's about understanding those verticals. So especially if you look at our two largest verticals, which is healthcare and transportation, these are highly regulated industries. So when you screen somebody in these spaces, especially in transportation, you need to know what the Department of Transportation rules and regulations are. In healthcare, you need to know what all the compliance rules are in healthcare. And it doesn't mean that we're only going after regulated industries or we're only going after sort of white-collar type jobs. It's quite the opposite. We really like the blue-collar worker. We like the high-turnover, high-transition worker. So lots of truck drivers, lots of warehouse workers, distribution center workers. That's the type of customer that we seek out, the high-turnover type of customer. But not only do our products and our sales story match these verticals, these verticals also give us great resiliency. So if you look at what's going on in the world from a macro standpoint, there's a lot of uncertainty and some confusion. And you get jolts data around labor market. You get headlines in the media. But what's really important to us is these verticals, by not being so dependent on one vertical or two verticals, by being across all these verticals, we get great resiliency. So if you look at our results compared to what you see in the press, we're telling you that actually the economy is good and the labor market is good because our customers are telling us that. Joelle and I spend every day in front of customers, and we were just talking earlier. The two of us haven't met a customer that said in 2026 that they're going to hire less people than they did in 2025. They said they're either going to hire the same or more. Obviously, it's not a sample set of our whole customer base, but we talk to a lot of customers, so that's important. let's talk about the market for a minute the market dynamics have changed over the last couple years so the market used to be the first the light colored circles they used to be about a 14 billion dollar TAM between what's screen vended now and what's white space but that kind of exploded with all the identity fraud that's happening in the space so the digital identity market is an additional $10 million TAM. And that's really important to us, not only from a revenue standpoint, but it gives us tremendous stickiness with our customers and helps our retention rates when we can sell more than just screening or drug testing or I-9. It's the ability to help these customers manage risk and build trust within their organization that they're not hiring fraudsters, that we're helping them combat North Korean agents coming in. We're helping them combat recruit candidates that are using false identities and fake resumes and all that kind of stuff. So this is a really nice time to be in this industry because of everything that's happening with identity and identity fraud. Let's talk about the competitive landscape real quickly. First Advantage has about a 25 percent market share, and we're primarily talking about the U.S. here. This is really the only market that we can really measure well. So it's 25% market share in the U.S. Internationally, we obviously think we have a, we're probably the biggest player in almost every market we play in internationally. But in the U.S., we can actually measure it better. Then you've got a bunch of mid-market players. Then you've got a bunch of mom and pops. The mom and pops have been under pressure in our space for a long time because they just can't keep up with technology, especially the stuff that's happening with digital identity. I mean, you go to a mom and pop, and they wouldn't even know where to begin to find facial recognition tools and things like that. These are the things that we can do and do well. But the good news about us, if you look at our growth, and we've been taking market share pretty equally from mid-market and mom and pops over the last, I don't know, seven, eight, nine, ten years. We've been really doing a nice job of growing the business. As I mentioned, we are by far the largest. And our size, our scale, our tech platforms, our proprietary data, and our verticals make that happen. So last slide, and then I'll turn it over to Joelle. This sort of just kind of sums up some of the things that I just talked to you about. Again, the vertical story is really important. The tech platform being scaled, being able to scale through it through volumes, the global nature of it, being able to interact with us in 160 different languages. This is a global platform that customers can use anywhere in the world. API-driven, highly automated. We started our automation journey probably 12 years ago when we launched our first robotic process automation tools. and now we're into full APIs. I mean, this is a high-tech platform layered by verticals and loaded with AI and all the cool things that make us shine in front of our candidates and our customers. And you can tell from our results, we're winning a lot. Our win rates are great. Our pipeline's the largest it's ever been. We're super excited about where digital identity is going to take the business, and we're off and running. And with that, I will turn it over to Joelle.

Joelle Smith, Analyst — Other

Awesome. Thank you, Scott. Yeah, so we talked a lot about, Scott talked a lot about the proprietary platform that we have, which has built-in compliance across everything that we do with regards to verticals as well as FCRA. We are governed by that regulation, which is the same regulation that the credit bureaus are governed by. But what really sets us apart is our proprietary data. So two of the most common searches that organizations are looking for are verifications, and that's verifications of employment and education, and then obviously criminal records. When you think about background checks, you think about you don't want to hire somebody who has done something terrible to another person. So it's really important that you have this type of proprietary data. This feeds the models that we have inside of our platform. It helps to educate them. and it also provides a high value for our customers. So there is data. We have thousands of data sources that we connect with. Some are public, some are third party, and then obviously we have our own data here. And so what we are able to do with our own proprietary data is to train the mechanisms and the models that we have to be able to find the lowest cost or the highest probability of completeness to be able to fulfill these searches. Ideally, a customer just wants to get these people hired. But there's a lot of steps in between that in order to get them hired. So having a verification database, which is over 130 million records, gives them choice. If we have it, we obviously provide it to them instantly. It costs a lot less than some other third-party pricing. And we also have other sources that allow us to find that information very quickly and provide that work history information. It's important for financial services organizations. It's super important for health care. A nurse isn't going to be able to be hired unless you can prove that they have worked for a certain number of years with a certain salary level. And so that's really important. From a criminal record perspective, it's also equally important. So we have 900 million records. There's a high propensity for folks to commit crime in this country, and it's accelerated since COVID, unfortunately, since the pandemic. So having these records to know exactly where to go and exactly what it looks like for these candidates is really critical to our customers. A little bit more about the platform itself. So the data feeds into the platform, obviously, and it's aggregated, like I said, from thousands of other data sources across the world. We also have direct connections into what we call applicant tracking systems, so the work days of the world, and HCM systems, so the human capital management. And so we integrate and we're that intersection between how the candidate is coming into the hiring cycle and how they get translated into becoming an employee. So we are that glue and that platform that allows us to be able to provide all of the information back to these employers to make an educated decision about whether or not they are fit for purpose for their organization in that particular job spec and there's a whole layer of compliance that sits on top of that so we have all the data coming in we have obviously all of the workflow logic that sits there to enable our customers and their decisions but then it also has deep compliance so we have the FCRA which we are governed by but then we also have state regulations there's federal regulations there's global regulations like GDPR Scott mentioned DOT, which is Department of Transportation. There's health care requirements. There's a number of other things. So really important that that like compliance layer is built all the way into the platform to enable ease of decisioning for all of these large enterprise customers who are hiring thousands, tens of thousands, and in some cases hundreds of thousands of people every year. We talked a little bit about AI. So we are no stranger to AI. We've been using machine learning for about six years now a couple years ago we got on the gen ai train and and ran that that model as well we have two areas where we focus on it we have the customer facing side and we have two end users we have the candidates themselves who want to get the jobs and then we have the people who work at the companies like the HR teams and the recruiters who also use our systems and so we talked about digital identity this This is a really neat product. It creates a facial recognition selfie. It attaches to biographical data, which we house, and it gives our customers a point of view to make sure they're not hiring a deep fake or they're not hiring a fraudulent candidate. There was a Gartner study out there last year saying that by 2028, one in four candidates were going to be fraudulent. I can tell you, having run this product for the last couple of years, they were spot on with that analysis and I would say it may even be growing. So the fact that we have AI capabilities, we call it battling good AI or bad AI with good AI. Our good AI is helping customers to make those decisions. And then internally, we have a whole list of programs that we do for managing the data repositories that we have, knowing where to go. We also have it for operational and fulfillment teams to make it easier for them. We have a whole agentic AI component to our platform that helps them do their jobs better and easier. So we are very excited about AI. I have been for years, and it's not new to us, but it is something that everybody's talking about these days. So obviously we had to help educate what we have been doing. The last thing I'll talk about AI is around our support model. So one of the things that we've done really well is just enabling a completely headless chat option for all of our support that is adding operational efficiencies. We've continued to grow our business, and we haven't really had to hire a lot of folks in order to do that, which enables us, obviously, to get a lot of expansion off of the AI investments that we've been making. And with that, I'll hand it to Stephen.

Steven Marks, CFO

So how do we take all this great stuff that Scott and Joelle just talked about and turn it into cash? So we'll start with kind of the top-level, top-line revenue growth model. And what you see on the screen here is our long-term algorithm. And what we love about this algorithm is if you focus on the middle of the page, and it's great to get to a high single-digit growth number, and that is a long-term sustainable number for us, but we love about this middle of the page. So you look at upsell, cross-sell, 4% to 5%. That's been a sustainable number. If not, we've been outperforming that meaningfully the last number of quarters. A lot of it's powered by some of those great go-to-market items like digital identity that Joelle was talking about. Retention at 96% is a hugely sustainable number. In fact, we've been running at 97% the last three quarters, and that's on the heels of a big acquisition, which we all would have thought that retention levels might have dipped a little bit as you work through integration and potential customer issues. We've actually seen our retention levels rise, and we do think some of that's pretty sustainable based on differentiating product and our focus on our customer experience. And then our new customer growth at 4% to 5%, so add that with your upsell, cross-sell, 8% to 10% of controllable, influenceable growth, 97% or so retention levels. To be able to control that, and throughout the economic and macro cycles that we've seen over the last seven or so years, pre-pandemic, during the pandemic, post-pandemic, and now today, even knowing, as you heard from Scott, we're in a very neutral base environment or macro environment. being able to drive that sustainable growth regardless of the macro backdrop. And then also now we're at a point where we're accelerating. We had 17% new logo and upsell cross-sell growth in Q4, 12% last quarter. We had some very large marquee wins in 2025 that are now running over into 2026. And with the product investments and the differentiation that we're creating, we certainly see some long-term sustainability where we're able to take market share, We're able to grow the market with new products and able to create long-term sustainable growth. And the fact of the matter is base growth, and I know that's on a lot of people's mind, what is going on in the labor market? And like Scott was talking about, a lot of positive sentiment coming out of customers. After a long 15-quarter or so journey of getting back to normalized hiring patterns, our base growth was actually neutral at a positive zero, but it was positive for the first time in a long time last quarter. So we do look at this as a truly long-term sustainable business model. So taking that top-line growth, we're able to drive profitability really two ways, and I'll start on the right-hand side. We've got a really validated, controlled cost model. Our cost of sales is highly scalable, highly variable, and we're able to tailor and match our other variable costs, which is mostly our internal fulfillment costs and our operational expenses towards the inbound volume. So as times where volumes are coming up or modulating, we're able to use the automation, we're able to use our workforce management and really match those items out. And then we're able to use our scale and data investments to help limit the impact of the 75 to 80%, which is that variable third-party data cost. And then the other big trend that we've had supporting our profitability is we acquired Sterling with the big acquisition becomes a big synergy target. We started with an initial target of about $50 million or more of synergies. had I been able to raise that a few times now to the point where we're at a $65 million to $80 million target. We hit about $58 million of action synergies through the end of last quarter. We think we'll hit the full total, that $65 million to $80 million by the end of this year. We'll have turned the page over, and we'll stop talking acquisition. We'll start talking just pure growth. But as those synergies have been folding through, it's, again, supporting cash flow and supporting margin growth, which has been another core tenet of our P&L. I won't spend a lot of time here because I know I want to save some time for questions, but look, we just finished a great Q1, revenue growth near 9%, but almost more importantly, able to drive a healthy amount of margin appreciation up 130 basis points on margin. And on the far right-hand side, you can see a healthy amount of adjusted diluted EPS expansion driven by the synergy story, driven by the revenue scale, but also we continue to deleverage the business and the incremental interest expense impact of the acquisition having a far lower impact on our business. Speaking of cash flow, blew it out of the water on Q1 cash flow as well. Almost $50 million of operating cash flow, not a huge CapEx requirement on our business, so we're able to convert operating cash flow and EBITDA to free cash flow and ultimately our cash balance really easily. We were also able to now, we've deleveraged a near half turn since our acquisition, and that's after funding, all of the integration expenses, the one-time costs. And at the same time, you can see on the right-hand side, while our focus was predominantly on paying down our debt, and we've made $120 million or more of debt prepayment, almost all of that voluntary, with the kind of the evolution, I would say, of the stock price over the last three or four months, we did get a board authorization for $100 million share repurchase program, and we're really opportunistic in how we've been running this, but able to drive a lot of shareholder value and repurchased about $20 million worth of shares through Q1, about $33 million through our earnings call about a month ago. Certainly as we've seen the stock price recover a little bit, we've been very opportunistically focused and we'll certainly upsize our debt pay down if we end up buying back a few less shares than we had previously. And so what does that translate to long-term capital allocation? We are still in the middle of our deleveraging journey. We have a long-term target of two to three times net leverage. We are actively working on marching that down to three and a half and then ultimately down to that three range. So our focus certainly is on managing a very tight balance sheet, being very opportunistic, as I mentioned, on our return of capital. And then once we get into that target range, our playbook opens up even wider. We've had a lot of success on doing some inorganic growth opportunities around impacting our product experience, our technology base. We did some things around vertical and geographic expansion. We have no immediate plans for any M&A until we get that leverage marched down, but certainly when we do, there is a wide playbook that we can access to further increase the value proposition. So where does that all take us? So this is the last slide I have, and then we'll turn it over to Scott real fast before we open up for questions. So we had our investor day almost a year ago today. We initiated our, here is our long-term model. So at the end of 2028, we think we'll be near a $2 billion revenue scale company. We're making very great progress. You know, you heard the numbers on our upsell, cross-sell, and retention. A lot of profitability coming off of that. You can see the numbers here, $560 to $630 million of adjusted EBITDA, which is 31% to 32% margins, which is something that we've achieved before. But obviously, with the acquisition and some mixed items, it took us back down. But we will easily climb back up into those ranges. So generating almost around $2 of EPS. So you look at where our stock price is and the value creation opportunities we have here feel really good about where our business is taking us and certainly on the outlook. I'll give Scott a quick plug and then we'll turn it over to Mark for some questions.

Scott Staples, CEO

I think given we've got six minutes or so, let's go right to questions. This is a great slide to keep up while we have questions going.

Speaker 2

Great overview. Just in terms of very quickly, just a midterm target of three times leverage. How soon do you think you're going to get there?

Steven Marks, CFO

Yeah, we think we'll be certainly around three and a half by the end of this year. We've already taken a half turn out. And then it's obviously a gift that keeps giving faster, right? As we pay down more debt, your interest expense goes down. We are funding a little bit of just growth investment this year that'll certainly tailor back down. So certainly in this midterm horizon, we should be well within that two to three times. And certainly by the time we get to 2028, much closer to two

Speaker 2

unless we do any other capital decisions. That's great. Scott, you mentioned that you're seeing almost all of your clients are basically seeing growth. At least the ones we're talking to. For what it's worth, that's comforting to me because I asked every single company that I've had present over here what they're seeing, and everybody's saying the same thing. They're all saying the labor market is getting better, and some of them are some of the largest employers in the world. We'll add you to our panel. It's great to be here, yes. So with regards to the new logos that you brought on, I mean, getting 18 Enterprise and then 12, who are you taking them from? Because I think there's some misperceptions, I think, among some investors, just from having covered HireRite and Sterling, that they don't fully understand that not all large enterprises are working with the biggest players. There's still a lot of mom and pops that are servicing companies that you wouldn't believe, like GM, that was recently. It's crazy.

Scott Staples, CEO

So, yeah, I think if you think about that slide that I had up, I really do think it's fairly equal. We're taking market share away from our biggest competitors, the mid-market, and the mom-and-pops pretty much on an equal basis. But it's amazing how many large enterprise customers still use mom-and-pops in mid-size. And it's just really because they just don't know. They haven't done, like, an RFP to look what's out there. We're doing our best to get their attention. We added a multi-million dollar account at the end of last quarter, and they were working for the last 20 years with a mom-and-pop we had never heard of. And when they finally decided to do an RFP and they saw our tech, their jaws dropped. They're like, we had no idea this stuff was out there. So yeah, it's incredible how many background screeners there are in this space. That's why we have 25% market share. But our win rates are accelerating. Our deal sizes are getting bigger. Our pipeline's getting bigger. I think especially because of our size scale and tech story, but I think digital identity is also driving a lot of it because those mid-sized and mom-pops don't have an offering there, and these customers can't wait around for that.

Speaker 2

I want to come back to digital identity, but just to give a perspective with regards to what your tech advantages do relative to some of these mom-and-pops, if you can just talk about how quickly, just because you're integrated with the applicant tracking systems, you're integrated with all of these data sources, how quickly you can provide a response relative to some of those mom-and-pops.

Scott Staples, CEO

Yeah, and so there's really integrations on both ends of it. So the front-end integrations are with the workdays of the world, success factors, et cetera. So it's ultimately a very seamless experience for their candidates. So, for example, our Workday integration is so good that the actual background check is triggered within Workday, and the candidate doesn't even really know that they've then gone to the First Advantage systems. They'll see down below, powered by First Advantage. They feel like they're still within Workday. It's that seamless. And the back end is also super important, especially when it comes to improving turnaround times and driving margin improvement. It's all the APIs and the robotics that we've built with these data sources. I don't think people can understand how disparate this industry is and fragmented from a data standpoint. There's no single source to go. You have to be able to have links to every courthouse and every public source and every private source and third parties. And then there's a lot of courts out there that aren't digitized and never will be. So then you actually have to send a human. There's no business case for a rural court in Montana to digitize their database. So they don't have a database. Digitize their records. So you have to send somebody physically there. So you have to have a whole network of APIs, robotics, and humans to put this all together.

Speaker 2

That's great. with regards to what you do for your clients. There's a lot of compliance. There's a lot of variability with regards to the rules, even from one county to another within the same state. Can you talk a little bit about how much you help your clients just in terms of advisory services?

Joelle Smith, Analyst — Other

Sure, yeah, absolutely. So every state, as you mentioned, has their own rules. Many counties do. And, for instance, we're right here in New York. You've got the five boroughs actually have different roles than some of the other counties in the state, right? So you have to know through, obviously, deep compliance research, compliance teams, but then also the platform needs to be able to know the hierarchy of what would supersede what, right? So, like, we're governed by FCRA. The companies that we work with are governed by that to make hiring decisions. But, you know, you need to understand whether the state would supersede the county, which would supersede FCRA. And then you also have to help them understand what they're allowed to decision off of, which is not to decision. So, for instance, New York just gave an example where you must do an education and employment check before you do a criminal check. That doesn't sound like a big deal, but it's actually a huge deal to all the employers because of the timing of that. And if they were to run a criminal check before they got information back on the employment records, they would be in violation of that law and therefore could be subject to fines, which are very significant. So there's a lot of things that we help them manage, and so they don't have to worry about that. They turn our platform on. We will never show results that shouldn't be seen when it's not supposed to be seen. And it takes a lot of investment to do that because you've got 50 states, you have over 3,800 counties in this country, and you have so many different laws that, again, like DOT and FCRA and things like that. So you have to have technology to do that. You just can't get it right enough of the time that you need to in order to follow the law, and that's where we kind of separate ourselves from the smaller organizations.

Scott Staples, CEO

And then you layer in international law. So you've got GDPR. You have all these things. So if you're a New York-based company and you're hiring somebody in Europe, you need to know the GDPR laws as well. We take care of all that for them.

Speaker 2

That's great. Unfortunately, we ran 49 seconds over time. So please join me in thanking Scott, Steve, and Joelle for just a terrific discussion. Thanks for having us, Mark. And congratulations. Thanks for having us.

Scott Staples, CEO

Thank you very much.

Speaker 2

Appreciate it. Thank you. I've got way more questions.