Good day and thank you for standing by. Welcome to the First Advantage Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode after the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Stephanie Gorman, Vice President of Investor Relations. Ms. Gorman, you may begin.

Thank you, Chris. Good morning, everyone, and welcome to First Advantage's Third Quarter 2021 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 need 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 initial public offering prospectus dated June 22, 2021, and our second quarter 2021 Form 10-Q. 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 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. We will take your questions after our prepared remarks. I will now hand the call over to Scott.

Thank you, Stephanie, and good morning, everyone. Welcome to First Advantage's Third Quarter Conference Call. For those of you who are new to our story, we have included a company overview on Slide 4. We are a leading global provider of technology solutions for screening, verifications, safety and compliance related to human capital. Our technology and delivery capabilities stand out in a fragmented market, allowing us to grow business with existing and new customers alike. We accomplished this through our one core global technology platform, our growing in-house proprietary databases that now include more than 600 million criminal, education and work history records; our API integrations with more than 600 third-party data providers; our laser focus on specific industry verticals; and our global capabilities. We serve a large total addressable market of $13 billion, which offers us a tremendous amount of white space, allowing us to further differentiate and capture additional market share. Our customers include 55 of the Fortune 100 companies. And among our customer base, we enjoy long-tenured relationships, averaging 12 years across our top 100 customers as well as a high gross retention rate of 95%. In 2020 alone, we completed more than 75 million screenings, which demonstrates our ability to handle scale and underscores the importance of our solutions to help improve companies' risk management and compliance practices. Over the 12-month period ended September 30, 2021, we grew revenues 37% to $656 million, of which approximately 85% were from North American markets and 15% from international. Over the same 12-month period, we grew adjusted EBITDA 50% year-over-year to $202 million and achieved an adjusted EBITDA margin of 31%. Moving on to Slide 5. Let me share some additional highlights from the third quarter. Our exceptional third quarter performance included a 41% year-over-year increase in revenues and…

Thank you, Scott. Good morning. Turning to Slide 11. We reported revenues of $192.9 million for the quarter, a 41% increase over the prior year period, of which 34.5% represents organic growth. It is worth noting that the third quarter of 2020 was also a strong quarter, up over 10% compared to the third quarter of 2019 despite the broader impacts of the COVID pandemic. Results have continued to benefit from hiring trends that picked up in late 2020, and that growth has continued through Q3 2021 and into Q4 to date. Early reads on October show solid revenues, continuing the strong performance and trends we have seen this year. Revenue increases from our existing customers made up $39.9 million of our growth, driven by robust base growth and continued up-sell and cross-sell momentum, which was strong and broad-based across key verticals and geographies. Revenues from new customers contributed $7.4 million driven by our verticalized go-to-market strategy and differentiated global technology solutions. Revenues from our U.K. screening business acquisition contributed $8.8 million to the quarterly growth. Also included in our revenues was a minimal foreign currency benefit of $400,000 in the quarter. Adjusted EBITDA for the quarter was $63.9 million, a 48% year-over-year increase, reflecting higher revenues as well as margin expansion due in part to increased investments in robotic process automation and proprietary databases, cost discipline and operating leverage. This resulted in an adjusted EBITDA margin of 33.2%, a 160 basis point increase versus the prior year quarter. We had adjusted net income of $42.2 million or $0.28 per diluted share in the third quarter of 2021 compared to $22.3 million or $0.17 per diluted share in the third quarter of 2020. This growth was positively impacted by all of the factors just mentioned along with the additional favorable…

Thank you, Dave. For the -- moving to Slide 18. For the key reasons we've summarized on this slide, we are very excited about the bright future that we see for First Advantage. We are a global leader in a large, fragmented and growing market with growth that continues to be fueled by macroeconomic tailwinds that are driving a robust hiring environment. Our differentiated and embedded technology platform provides mission-critical solutions to diversified industries and highly loyal customers, thanks to our verticalized go-to-market strategy. We continue to expand our proprietary databases, extending our competitive advantage through product differentiation, faster turnaround times and cost efficiencies. For investors, our bright future is reinforced by our performance. Over time, we've demonstrated our resilient financial model, consistent track record and ability to grow revenues, margins and cash flow. At this time, we will ask the operator to open the line for your questions.

[Operator Instructions] Our first question comes from Hamzah Mazari of Jefferies. Your line is open.

This is actually Ryan Gunning filling in for Hamzah. My first question, I guess, is in terms of vertical exposure, which end markets are seeing greater growth relative to others? And are there any verticals you think you're underpenetrated in where there's more white space opportunity?

David, do you want that one?

Sure. What I would tell you is we've seen growth across all verticals. We don't break that out and disclose that separately. The acquisitions that we just did with Corporate Screening will really help enhance our health care vertical, but we're seeing really broad-based growth from all segments.

Got it. That's helpful. And then for my follow-up, I guess, could you just talk about whether any supply chain issues at your customers are impacting hiring plans at all, maybe in specific verticals or...

What we've seen is our clients are trying to hire anyone and everyone that they can, and they started earlier. And it's a constant effort to get talent and to get employees. We've also seen a lot of churn and turnover, which also adds to more screening as well.

Our next comes from Ashish Sabadra of RBC Capital Markets. Your line is open.

Congrats on such a strong quarter. Also thanks for providing an early look into the 2022 top line and growth. I was just wondering if you could help parse what are the assumptions that are going into your guidance for -- preliminary guidance for '22 -- 2022 top line, how much of it is coming from a strong job market and the benefit that you're going to see from increased cross-sell, up-sell, increased package density. So any color will be helpful.

Again, we're in very early stages relative to 2022, and we'll be giving full guidance when we report on Q4. But based on discussions with our clients, we are optimistic that there will be another successful growth year for us.

Okay. That's very helpful. And then maybe just a quick question on the proprietary database. We've seen significant increase in record in 2021. You've talked about the verified and the national criminal file. My question was. Is there an opportunity to also move some of the third-party data sources in-house? And how should we think about the growth in the proprietary databases also going forward?

Yes. I mean, first of all, as we use more and more of our proprietary data, we're -- we are -- third-party data costs are trending down, obviously. And obviously, it's more profitable for us to use our own data. But our data strategy really varies across geographies and across industries. And so it's really hard to sort of give a blanket statement as to what we would do regarding data, but we're always looking for ways to optimize our data. And so we'll continue to look at that strategy as we go forward.

Thanks and congrats again on strong results.

Thank you.

Our next question comes from David Togut of Evercore ISI. Your line is open.

Could you help dimension for us what the outlook for SG&A expenses might be over the next few quarters, especially as travel and entertainment expenses kind of come back into the cost structure as the sales force gets out and starts meeting more with clients in person?

So, we have clearly factored that in to all of our forecast going forward in addition to public company costs that we're going to have to grow over. So that will flatten G&A, the leverage that we get from it, which should start up again in the second half of 2022.

Got it. Thanks for that. And then as a follow-up, could you talk about your international expansion plans, clearly, with the hiring of a new COO to run your international business? What are the major new geographies you're focused on internationally? And what are -- how much can you expand your TAM as you become a little bit more international-focused?

Yes, absolutely. So if you look at the TAM of this whole industry, we are obviously intrigued by the potential for international growth. I think our international go-to-market strategy is not that far off from our domestic go-to-market strategy where the first priority is always going to be organic growth. We are looking for expansion in the regions we are through potential M&A, but we'll be opportunistic about it. So focusing on organic growth and focusing on the industries -- I'm sorry, the geographies that we're in is going to be priority number one. But we do obviously see nice expansion opportunities in certain geographies. And hence, the acquisition that we did -- that we announced this morning in Latin America is a sign of that, and the acquisition that we announced back in March in the U.K. is also a sign of that.

And you have Shlomo Rosenbaum of Stifel. Your line is open.

Hi, good morning. Thank you for taking my questions. There -- you guys had some pretty good margin expansion, and I wanted to focus a little bit on how much of that is coming from some of the increases you're talking about in terms of the proprietary databases? Or is it really just a very small factor at this point in time and really, it's coming from the other items that you talked about? And just a little bit of discussion and given all the success that you're having in building the database, does it make sense to try to accelerate the build over there?

So clearly, we had large margin expansion in the quarter. Most of that was driven through the incremental revenue fall-through and the way that we were able to leverage those incremental revenues. We did get some additional benefit through automation and trumps some from our proprietary databases, but we're really good expanding margins through the incremental revenue fall-through.

So that's the primary thing that we should think about, it's the what you called, it's the revenue fall-through less taking out from the proprietary data and the databases. Okay. That's helpful. And then just one other thing that's interesting, there's actually a Wall Street Journal article. I believe it's out today in terms of there's such a tough time that clients are having now in terms of getting people into positions that a lot of them are positive momentum that it doesn't really make a difference? And maybe you can just kind of give us some color on that.

Yes. I really think there's two pieces to it. We also saw the article as well. One, we are not seeing our customers asking for that. In fact, we're probably seeing the opposite, where the -- our customers are really asking for more risk mitigation, heavier focus on compliance and safety. And that's really driven the concept of the package density, which we've mentioned before as companies doing actually more and more screens. So that's point number one. But I think point number two is really important because through the automation that we've been talking to you about and through the AI and the machine learning that we've rolled out, we are just becoming faster and faster. So we can actually return background screens very quickly with high levels of accuracy based off of the automation that we brought in. So companies really don't have to move to that model that you saw in The Wall Street Journal with First Advantage because we can provide fast checks to begin with.

Great, thank you very much. That was a good quarter.

Next, we have Andrew Steinerman of JPMorgan. Your line is open.

Scott, you've been really kind of, let's call it, enthusiastic about the prospect of post-hiring background monitoring. And I kind of always wonder why hasn't this market already kind of adopted and penetrated? And why do you feel like it will some time on the, let's say, reasonable horizon?

Yes. I -- you're right. I really think it's a great product. It's great technology, a great product. In the past, we have mentioned continuous monitoring, which is our post-hire monitoring product. It allows customers to continuously screen and monitor their employee base, which, as you can imagine, that should be something that customers should want to do versus a single snapshot in time that looks backwards historically. It still represents a very small percentage of our revenues today, as you stated. But we still believe this product represents meaningful growth and opportunity for First Advantage in the future.

Scott, just say what's going to change to get client adoption? Is it -- I'm just not sure what's going to change.

Yes, it's a longer sales cycle, a longer sales process because, quite honestly, it involves change management on the client side. They have to think differently about how they do background checks and what they're going to do with this new data and this new information once they receive it.

Right.

Companies today just haven't thought through those processes. So it's the combination of HR and legal working internally to figure out, okay, what is it that we're going to screen for? What is it that we're going to monitor? How are we going to ingest that data? How are we going to react on that data? And that's just been a little bit slow because that just is, obviously, a lot more complicated than just hiring a company to do a historical snapshot-in-time background check. But this is, we think, a superior product, and we think it's a great product for the future. But it's just going to take a while for market adoption.

[Operator Instructions] Our next question comes from Gary Bisbee of Bank of America Securities. Your line is open.

So the first question, obviously, very strong labor markets at the moment. I wonder if you could help us just think through how much of this pretty tremendous revenue growth is coming from sort of base business growth as you described it prior to the IPO and also just benefits from tight labor markets? So harder to get employees, you're doing more screens per job you fill that kind of stuff versus just the underlying factors you can control more like new business wins, like up-sell of additional solutions, et cetera. How much if you could divide those down roughly or give some color would be helpful?

I think the best way to think about that, Gary, is there are a number of levers, right, that we've always talked about, base growth, up-sell, cross-sell, new logo. All of that have been very positive contributors. International really came back strong this year, particularly in Q3. That's been very robust. We're seeing all of those markets with tremendous growth. And then relative to the base growth, it clearly has been higher this year than it has been historically. Maybe it's the new norm. We like it a lot. The clients are extremely active in trying to hire everyone that they possibly can. Because of the turnover, the mobility, the great resignation, if you will, we're seeing a lot of that churn result in more and more screens. And that's driving our base growth.

Is there any way to think about the concept of tough comps next year if and when some of these factors normalize? I mean, I heard you on the early '22 commentary. So certainly, you sound like you expect to continue to deliver quite robust growth. But how do you think about that? And I guess is there anything you can do if and when it gets tougher from a macro perspective?

Well, if you look at our long-term targets, those basically have gone back to historical norms. Ultimately, in our model, we see that happening. We could be wrong in the fact that it could be a permanent change, which would just add to that growth. But we are forecasting that it will return to a more historical normal rate long term.

Thank you. And I see no further questions in the queue. I will turn it back over to Scott Staples for closing comments.

Thank you, operator, and thanks, everyone, for your questions. Obviously, we're very proud of our accomplishments and are excited about what's ahead. We believe First Advantage is very well positioned for future growth, and we will continue to focus on delivering value for our shareholders. Thank you for joining us, and have a great day.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.