Ladies and gentlemen, thank you for standing by, and welcome to the First Advantage Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Stephanie Gorman, Vice President of Investor Relations. Please go ahead.

Thank you, Angie. Good morning, everyone, and welcome to First Advantage's Inaugural Financial Results Conference Call, highlighting our second quarter 2021 results. We are excited to have so many new shareholders joining us today after our successful initial public offering at the end of June. 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 need to remind everyone that part of 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 prospectus for our initial public offering dated June 22, 2021, as such factors may be updated from time to time in our periodic filings with the SEC. We do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also be presenting and discussing 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 efforts appear in today's earnings press release and presentation, which are available on our Investor Relations website at investors.fadv.com. I'm joined on our call today by Scott Staples, First Advantage's CEO; and David Gamsey, our CFO. After our prepared remarks, we will have time to take your questions. I will now hand the call over to Scott.

Thank you, Stephanie, and good morning, everyone. Welcome to First Advantage conference call discussing our second quarter performance, our first earnings call as a publicly traded company. Starting on Slide 4. In June, we completed a successful IPO for 29.3 million public shares listed on the NASDAQ Global Select Market Stock Exchange under the ticker symbol FA. The offering was upsized and priced at the top of the range indicated a launch at $15 per share which resulted in net proceeds to the company of approximately $316.5 million. On first day of trading, we closed 31% above our offering price giving First Advantage a market cap of approximately $3 billion. This is a major milestone for our company, and we remain committed to continuing to profitably grow our business and provide exceptional value to our customers and in turn, to driving shareholder value. I am incredibly proud of our team whose hard work enables First Advantage to serve over 30,000 customers worldwide with robust technology solutions for screening, verifications, safety and compliance related to their unit capital. I want to thank our shareholders for their confidence in our company. I look forward to speaking with and meeting many of you in the days, weeks and months ahead. For our new investors, a company overview is included on Slide 5. We are a leading global provider of technology solutions for screening, verification, safety and compliance related to human capital. We have proven our ability to deliver value-added solutions, therefore, growing with our customers and winning new ones in what is a fragmented market where our technology and delivery capabilities stand out. We accomplish this through our single core technology platform, robust proprietary data, unique industry verticalization, state-of-the-art technology and global capabilities. We serve a large and growing total addressable market of…

Thank you, Scott, and good morning, everyone. Turning to Slide 10. We reported revenues of $174.8 million for the quarter, a 67% increase over the prior year period, including 60% organic growth. We benefited from accelerated hiring that picked up in the second half of 2020 and has continued through the second quarter of 2021. Increases from our existing customer base and new customers made up $49.3 million and $13.4 million of our organic growth, respectively. Existing customer growth was particularly strong in Q2 and broad-based across key verticals and geographies. We also lapped the quarter during which First Advantage and the broader market was significantly impacted by the effects of the COVID-19 pandemic. In addition to our organic growth, acquisitions contributed $7.1 million to the increase in revenues for the quarter. Also included in our revenues was a minimal foreign currency benefit, which was less than $1 million in the quarter. Adjusted EBITDA for the quarter was $56.3 million, a 78% year-over-year increase, reflecting flow-through from higher revenues as well as margin expansion attributed to increased automation, cost discipline and operating leverage. This resulted in an adjusted EBITDA margin of 32.2%, up from 30.1% in the comparable prior year quarter. We had adjusted net income of $33.2 million or $0.25 per diluted share in the second quarter of 2021 compared to $12.2 million or $0.09 per diluted share in the second quarter of 2020. This growth was positively impacted by all of the factors just mentioned along with the additional favorable impact of lower outstanding debt and lower interest rates, which together resulted in lower interest expense. This was partially offset by higher foreign taxes. Our adjusted effective tax rates were 25.7% and 28% in Q2 of 2020 and Q2 of 2021, respectively. The higher rate in the second…

Thank you, David. I want to conclude our presentation today on Slide 16 by saying that I am very excited about our future. In summary, we are a global leader in a large, fragmented and growing market. We are fueled by macroeconomic tailwinds that are driving a robust hiring environment. Our differentiated and embedded technology platforms provides mission-critical solutions in an increasingly complex market. Our verticalized go-to-market strategy drives deep long-term customer relationships and diversified industry exposure. We have a seasoned leadership team that possesses deep industry knowledge and our company is driven by a culture of innovation. And we have a resilient financial model and a consistent track record. Our products and solutions create significant value for our customers, which we expect to continue to drive our revenue growth, margin expansion and cash flow. At this time, we will ask the operator to open up the line for your questions.

[Operator Instructions] Your first question comes from the line of Hamzah Mazari with Jefferies.

My first question is just on the records you have in your verified database. How quickly can you grow those? And what kind of value does that add? I know speed matters in your business. But does that lower your data cost too? Just kind of walk us through that.

So our verified database continues to grow. As we do verifications, we continue to add information into that database to the extent that we can utilize our internal proprietary database. It cost us less. We pass on lower cost to our clients and our margins are greater. So we want to continue to utilize that database as much as we possibly can.

Got it. And then just looking at the balance sheet leverage, it's below 2. You're generating strong free cash flow. Could you talk about your M&A pipeline? I know you talked about the U.K. screening business. But what does that pipeline look like today? And what do valuations look like?

So first and foremost, we're focused on organic growth in the U.S. However, we are evaluating accretive tuck-in M&A opportunities. We do have a very active pipeline. We just closed on the GBG U.K. screening business acquisition at the end of March. So we are actively evaluating strategic acquisition opportunities but with a disciplined approach. We're not going to be a roll-up company, but we are going to take advantage of what's out there. Valuations are aggressive, but we think we can find the right opportunities and with the right synergies, make it work and be accretive for us.

Your next question comes from the line of Peter Christiansen with Citi.

Congrats on the IPO and nice results here. Scott, I was wondering if you could talk about -- obviously, the economic picture is pretty good, you had nearly 1 million nonfarm last report and the JOLTS data continues to expand. I'd imagine most of your clients, their hiring engines are quite busy. But does that present an issue in terms of winning new logos, given that maybe there's some decision delay out there? Or will people or firms don't want to change, make any major changes given stress in hiring these days. Just wondering if you've seen that on the new JOLTS front at all?

We really haven't seen...

I'm sorry. Go ahead, David. Yes.

The new sales pipeline continues to be very active. We continue to have very strong bookings. At the same time, what we've seen is a very broad-based growth across all of our verticals. So we're seeing not just 1 or 2 or 3 verticals that drove kind of the second half of 2020, but very broad-based growth across the entire business line today. Scott, you want to add that?

Yes, I would just add that hiring is competitive across all verticals. So our ability to help companies hire smarter and onboard faster helps position First Advantage very strongly in the market.

And then as a follow-up, I guess, there have been some firms who talked about mandating vaccines for new hires. Just wondering if how is First Advantage being impacted by that? Do you see that potentially as an opportunity to service your existing client base? Any color there would be great.

Yes. It's really not had an impact on our business. And internally at First Advantage, we're still evaluating our vaccination policy. But I think like the rest of the world, there's a lot of wait and see to see what's happening out there.

Your next question comes from the line of Manav Patnaik with Barclays.

My first question is just given the impressive growth rate for this year, I know you said long term, you're still sticking by your high single, low double-digit guidance. But I was just curious, as we think about '22, do you think there are some comp issues to consider there? Or do you think you can put up those same growth rates in '22?

It's really too early to start talking about 2022 guidance. What we can tell you is we're very pleased with the investments that we've made throughout 2021. We're very pleased with the bookings that we've had and the new business that we're bringing on, and all of that will contribute very favorably towards 2022. We'll give guidance relative to that during our fourth quarter earnings call.

Got it. And then just curious on if you've seen any change to your competitive landscape? You guys obviously went public, and it sounds like your 2 other big players are preparing to do the same. So I'm just curious if that's -- because of that, if you've seen any changes out there?

We have not seen any changes to the competitive landscape. We continue to focus on our business and our products and our customers, but we have not seen any significant change to the competitive landscape.

Your next question comes from the line of Ashish Sabadra with RBC Capital Markets.

I was wondering if you could talk about the traction that you're seeing for new products, the new products that you recently launched like XtdForce and RightID as well as the pipeline for additional products going forward?

Yes. So we continue to be innovative as a company and launching new products. Our new products are on target with the traction that we had hoped to see. We'll continue to launch new products in the future. Our products are developed with customer input and we feel this is a nice competitive advantage for us.

That's very helpful color. And again, if I can have a follow-up question on the proprietary database, the database that you've developed is pretty extensive. I was just wondering, can you talk about potential for using the same database for new use cases like rental screening, but also outside of the traditional screening process, is there opportunity for you to provide more post-monitoring solution and stuff like that.

I believe the databases that we've created are really more geared towards the current business and offerings that we provide. We don't see a real scope or scale for them to be expanded into adjacent or other areas. So no plans for that today. We've got a lot of nice road ahead of us with those databases. So we'll just continue to focus on what we've got.

Your next question comes from the line of Shlomo Rosenbaum with Stifel.

Could you comment a little bit about the -- what your comment was on package density increasing. Is there some way to kind of quantify that? I thought that was particularly interesting. Are you seeing the dollar value per package of an average screen going up because of that? And maybe some -- can you describe about what is the density, what is adding that density? Is it further back into criminal files or something else?

So as we previously mentioned, during the quarter, our existing customer base was up $49.3 million. A portion of that was attributable to product density. So what we're seeing is some of our clients going back instead of just doing a federal criminal search, for example, they'll do state and federal, they'll do city, county, state, federal. So they're going back and checking more databases. They're doing it for a number of different names. So instead of 1 name or 2 names, it could be 3 names or all names and they're going back for a greater number of years. So whereas before they may have gone back for a 3-year history, now they're going back for a 5- or 7-year history. All of that is incremental revenue to us.

And I think that's really in line with what we're seeing as the trend from our customers with a focus on safety, compliance, brand protection, it's just right perfectly in there.

And then in the last 4 weeks, we've seen kind of this COVID Delta variant, is that making a difference in your expectations, either up or down in any of your key verticals or just overall in terms of hiring?

We haven't seen any impact of the Delta in regards to our business. Obviously, we continue to watch that and monitor. But our volumes are strong and our customers are pushing forward with their plans. I really think that the main impact is really more on work from home and that type of logistical stuff, but it's not really affecting the pipeline or the volumes.

Your next question comes from the line of Gary Bisbee with Bank of America Securities.

Congratulations on successfully completing the IPO. First question, you've obviously highlighted some targeted investments you're planning to make in the next few quarters. Given the stronger revenue trend, do you have opportunities to step up those investments and spend some of the upside to drive, I guess, higher growth for longer or something like that? Or are you comfortable that the level of investment you called out previously remains the right way? And I guess as part of that, if I just take a step back sort of more holistically, what are the gating factors to growth in the business? If you did invest more in sales and the vertical strategy and some of the areas you've talked about, would that give you an opportunity to grow faster than how you discussed your long-term growth potential?

Well, I'll jump in and get started. We are -- we do take a disciplined approach to making our investments. We are putting it in the areas. As we said, sales, solutions engineering, product and technology that we think ultimately will drive organic growth and help us expand our margins long term. We look at that and evaluate that on a regular basis. Are there other projects that we could implement a little bit sooner? We have those internal debates on a regular basis, and that is something that we would consider as long as the revenues continue to grow and we get the incremental fall-through on those, which we are anticipating.

Okay. And then a follow-up question. Can you just help us understand how much of the upside in the revenue trend in the quarter in your commentary for the second half of the year is driven by stronger hiring trend versus the many internal strategies that you've highlighted driving your growth?

So it's a combination of both, right? We had a conversation a little earlier about the JOLTS data and that's directionally correct. It's a macro indicator, and we look at that. And that really relates to some extent to our base growth. Although we do focus on enterprise clients, we believe we're more resilient. We think we're better positioned. But that is a good leading indicator. We do see very good momentum. Our international operations came back sooner and stronger than we thought, and we think that momentum is going to carry over into the second half of the year.

And Gary, I think a new -- sort of a new phenomenon for all of us is I think we've always followed JOLTS data and openings and hires are easy things to track. But what the economy you're seeing now is a high number of quits. So if the monthly quits are something that's really new to the equation, it'd be interesting to track and see how that has -- what effect that has on the business because turnover obviously is good for our business.

[Operator Instructions] Your next question comes from the line of Andrew Steinerman with JPMorgan.

Scott, I heard the comments about package density before why package density has gone up. My question is, for how many years ahead, do you feel like package density will continue to go up, like don't you feel like there's a natural ceiling for package density? In terms of risk management, is it there sort of a tolerance at some point that just spending can't go to the sky?

Yes. I mean it's hard to say, and obviously, we can't predict the future, but we are watching this. I think overall, the macro trend is for companies to really look at deeper and deeper protection. As I said earlier, safety, compliance, brand protection has been elevated within organizations. These are now C-suite, board level-type discussions. And there is a lot more density to happen. There -- and that can even happen with new offerings and new products as well. So it's hard to predict if there's a ceiling, when there would be a ceiling, but the trend is clearly in that direction right now where companies want more and more protection.

Your next question comes from the line of David Togut with Evercore ISI.

When we look at the underlying drivers of operating leverage, including robotics, process automation, system integration, the unified global platform, how should we think about margin expansion potential beyond this year, especially when we also incorporate your investments in new proprietary data sets.

So we are investing for growth and efficiency, and our revenue does continue to fall through at a higher margin. We are going to have to grow over public company costs that we're starting to incur in the third quarter and the new investments that we're making in technology and sales area. So those margins will flatten out for a short period of time and then should continue to expand and grow on a longer-term basis.

Understood. And is there some way to bracket the longer-term operating margin or EBITDA margin expansion in '22 and beyond?

We're really not giving guidance on 2022 yet, but what we have said is that we think our -- on a long-term basis, our adjusted EBITDA margin will continue to grow between 11% and 14%.

At this time, there are no further questions. I would like to turn the floor to Mr. Staples for any additional or closing remarks.

Thank you, and thanks, everyone, for your questions. We're very proud of our accomplishments and are excited for what's ahead. We believe we are very well positioned for future growth as a public company, and we'll continue our focus on delivering value for our shareholders. Thank you for joining us. And everyone, have a great day.

Thank you for participating in today's conference call. You may now disconnect your lines at this time.