Ladies and gentlemen, thank you for standing by and welcome to the First Advantage First Quarter 2022 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, Ms. Stephanie Gorman, Vice President of Investor Relations. Please go ahead.

Thank you, Sherri. Good morning everyone and welcome to First Advantage's first quarter 2022 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 2021 Form 10-K and our Form 10-Q for the first quarter of 2022 to be filed with the SEC. Such factors may be updated from time-to-time in our periodic filings with the SEC and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website. I'm joined on our call today by Scott Staples, First Advantage's Chief Executive Officer; and David Gamsey, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.

Thank you Stephanie, and good morning everyone. Thank you for joining our first quarter 2022 conference call. We are extremely proud of our outstanding results from the first quarter, surpassing even our own high growth expectations. This excellent performance by our First Advantage team members across the globe demonstrates that we are doing an incredible job helping our customers hire smarter and onboard faster, which is our rallying cry and how we win. And given the extremely strong finish to the quarter and our positive outlook for sustained momentum in our business today, we are raising our full year guidance. Looking at the last 12 months ended March 31, we had extremely high growth, with revenues up 45%, adjusted EBITDA up 56%, and superior adjusted EBITDA margins of 32%. Now more than ever, our customers depend on product innovation, speed and quality to help them navigate this dynamic and fast moving macro environment. At First Advantage, we leverage automation, machine learning, artificial intelligence and integrations to do things better, faster and more cost effectively. With an impressive gross retention rate of over 96%, our customers include more than half of the Fortune 100 companies and more than one-third of Fortune 500 companies, who typically have immense hiring volumes and high standards for risk management and compliance Some key highlights of our excellent quarter are summarized on Slide 5, and I am very proud of our team and what we have accomplished. We delivered outstanding financial performance across key verticals and geographies, growing revenues for the quarter by 44%. This was our seventh consecutive quarter of double-digit revenue and adjusted EBITDA growth. We are thrilled to have closed the quarter in such a strong fashion. And of note, we accomplished this impressive growth even in a quarter, where the overall GDP…

Thank you Scott, and good morning everyone. We are very proud of our results from another excellent quarter. We grew both revenues and adjusted EBITDA by over 40% on a year-over-year basis, which represents our seventh consecutive quarter of double-digit revenue and adjusted EBITDA growth. Now let's take a look at some of those numbers. Turning to slide 11. Our first quarter revenues of $189.9 million represented 43.8% growth from the prior year quarter, of which 32.6% was organic. On a constant currency basis, our revenues would have been approximately $1 million higher. This was a great quarter by any measure, but please remember that we are lapping Q1 2021 before our international business has fully recovered from the pandemic. Our international business began to accelerate from pandemic lows in March 2021 and has since maintained strong performance and growth rates. International revenues in Q1 of 2022 were $31.7 million, up 91.6% from Q1 2021 with 45.5% organic growth and represented 17% of total consolidated revenues in the quarter. In the first quarter, revenues from our existing customer base contributed $33.9 million to our year-over-year growth. Revenues from new customers contributed $9.1 million to our year-over-year growth, showing strong momentum on a sequential quarter-over-quarter basis. Revenues from our acquisitions contributed $14.8 million in total during the quarter. Adjusted EBITDA for the quarter grew 46.5% to $53.6 million, reflecting higher revenues and year-over-year margin expansion from ongoing improvements in operating efficiencies, automation, use of proprietary databases and G&A leverage. Our adjusted EBITDA margin of 28.2% increased 50 basis points year-over-year, a great performance in our softest seasonal quarter. Results are after additional incremental public company costs, increased insurance premiums and new investments in technology and sales. We continue to be pleased with the high quality of earnings and the small number…

Thank you, David. In conclusion today, on slide 17, I will summarize for you the investment highlights for First Advantage and why we are confident about the future of our company. We are a global leader in a large and fragmented market that we believe will continue to grow both in the Americas and internationally. We have a fantastic enterprise-focused customer base that is diversified across resilient and growing industry verticals due primarily to our verticalized go-to-market strategy. Our historical and ongoing investments in automation artificial intelligence and machine learning are enabling our customers to hire smarter and onboard faster. Our strong cash flow generation is driven by revenue growth and superior margins from our attractive and resilient financial model. Our differentiated and embedded proprietary technology provides customers with mission-critical products and solutions. We continue to expand our proprietary databases, which extends our competitive advantage through product leadership, faster turnaround times, and cost efficiencies. We expect that background screening market growth will continue, fueled partially by macroeconomic tailwinds, structural societal changes, and jobs market trends. We are extremely well-positioned to take advantage of these long-term trends. Thank you very much for your time and your ongoing support. At this time, we will ask the operator to open the call for your questions.

Thank you. [Operator Instructions] Our first question comes from Ashish Sabadra with RBC Capital Markets.

This is John filling in for Ashish. Congratulations on the strong results. Maybe could you just highlight any verticals that are seeing outsized strength? It seems like there's been just a lot of kind of increased momentum since the seven weeks ago. Thanks.

Yes, thanks for the question John.

Well – I'm sorry. Yeah. I think the best way to look at this is that we are actually getting really great results from all verticals and geographies. So it's almost like all pistons are firing at the same time here and there's not really one or two standout verticals. We're getting really consistent good growth across our entire vertical go-to-market strategy.

Great. Thank you. And then maybe just quickly it seems like new customers are really punching over their weight in terms of the long-term targets, maybe around low double digits percent of revenue growth in the quarter. Could you talk more about what you're seeing in the market and how you're winning? Anything also related to the competitive environment would be helpful? Thanks.

Yeah. I think, our message and positioning is absolutely spot on right now, because if you look at the job market everybody is fighting for talent. And we continuously throughout this call and in previous calls keep talking about our positioning of hire smarter onboard faster. This is all – this market has turned into a high-velocity hiring market regardless of what industry you're in. Even if the industry or the company was never a high-volume hirer they have to have – in today's world they have to have the mindset of a high-volume hirer, because they'll lose that candidate to someone else. So candidate dropout and candidate fallout in the recruiting process for our customers is massive right now. It's a huge issue. They spend time money effort trying to land talent. And in a lot of cases they will – they could possibly lose that talent if the background check is not done quickly and doesn't have a great candidate experience. So as I mentioned earlier, speed accuracy candidate experience turnaround times are more important now than ever before. And that really falls nicely into our sweet spot of our technology and the automation that we bring within the technology, where we are just returning results extremely quickly.

Great. Thank you for the color.

Thank you. Our next question will come from David Togut with Evercore. Please go ahead.

Hi. Good morning. And thank for taking the question. This is Millie on for David. Congrats again on the strong quarter. Can you give us more color on your medium-term strategy for international expansion? In particular, geographic targets maybe revenue mix target or normalized inorganic growth contributions?

I think at a high level the first answer is, we're very bullish on the international market in general. We think that there are certainly pockets across the world, where jobs are flowing to and we are focused on those geographies. But keep in mind, our first growth strategy in any market or any region is going to be organic. So we are looking to fuel our sales teams and our customer success teams around the globe, with better technology, more products to sell, et cetera. I think this also plays into potential M&A strategies as we look to expand in certain regions with potential M&A. But that would always be strategic and depends on the geography. But we feel very confident in our organic growth engines. They have performed extremely well over the last four to five years, and that will be our top priority is growing organically and then strategically looking at alternatives.

Got it. Thank you. Just as a follow-up, can you give us an update on your M&A pipeline in the coming quarters?

Yeah. I would just tell you that the M&A pipeline is very strong. We're getting a lot of inbounds. It's a very active M&A market. We're tending to see the opportunities being in sort of what I would call the midrange to mom-and-pop size. And we'll continue to look at the M&A pipeline with the strategic lens. We certainly don't need M&A for scale we've got that on our own. So our M&A strategy will always be strategic in potentially adding geographic strengths internationally, or vertical strength in the US, or potentially other product lines like we just did with the announcement of the Form I-9 Compliance acquisition in early January. That's a great example of just adding a product to our sales bag so that we could sell more to existing customers.

Perfect. Thank you.

Thank you. Our next question comes from Shlomo Rosenbaum with Stifel. Please go ahead.

Hi. Thank you very much. One just a little more of a housekeeping then another strategic one. Just on the housekeeping side David, just trying to understand a little bit what's going on below the operating margin line. I'm seeing, the adjusted EBITDA going up $2 million to $3 million, but the adjusted net income only going up by like $1 million at the low end. Is there – is that an interest expense issue? Is that a tax rate going up a little bit? Maybe you can just fill in a little bit of the blanks over there?

It's really driven by interest rates. So, we've factored in eight bumps in our guidance model for -- that commenced in March.

Okay. Can you just maybe discuss what interest rate you're -- or interest expense you're looking at? And just give us a little -- between what you saw before and what you're thinking about now. And then I just want to ask you one question about M&A.

Well, as you heard, about 50% of our debt is capped at 1.5% on the one-month LIBOR rate. But we essentially have rates going up from LIBOR rates from almost zero at the beginning of the year to 2% by the end of the year.

Okay. Okay. And then, it seems pretty obvious that you guys would like to make a big acquisition just given the capacity and the ability for you guys to potentially expand into other areas. Could you just talk a little bit about just what are the expectations that are out there for some of the larger assets? Given everything that's going on, is the pricing expectations higher lower, the same as what you've seen over the last several quarters? And you've also alluded to looking for some other things alternatives to maximize shareholder value. Would you consider starting a dividend with the cash flow capabilities that you have?

First of all from an M&A perspective, we're seeing a tremendous amount of deal flow right now. As Scott said, there are a lot of midsized and mom-and-pop type of companies coming to market and we've really seen that pick up over the last 30 to 45 days. So we're evaluating a number of opportunities. But, also as Scott said, they need to be strategic. They need to make sense and we're certainly not going to overpay for them. So we continue to evaluate those regularly. And there are some interesting deals that are out there that we're evaluating. In regards to other options, there is a possibility we could pay down some debt later in the year, if interest rates continue to go up, which we all think it will, which would fall through to our adjusted net income line. That is one alternative. Outside of that, we regularly have discussions about what some other alternatives are to maximizing shareholder value and we'll continue to have those on an ongoing basis.

Thank you.

Thank you. Our next question will come from Heather Balsky with Bank of America. Please go ahead.

Hi. Thanks for taking my question. I was just hoping you could talk a little bit about your success in upsell/cross-sell. You called that out as one of the reasons for raising your guide. Where are you seeing the most traction right now? That would be great.

We're seeing traction across, I think three buckets. And so it's not just one single area. We continue to see customers prioritizing risk safety and compliance. So we're getting a lot of upsell/cross-sell from, what we call package density, where customers are continuously adding more to their packages so that they protect their brand, they protect their workforce, et cetera. And given all our investments in automation, we're actually able to add those -- add the density to those packages without affecting time lines and turnaround times. So that's been very attractive to our customers and driven some of the upsell/cross-sell. The other thing is the addition of new products. We continue to roll out new products. And that -- the one great example there is the ability now to offer Form I-9 Compliance and E-Verify solutions with our own company -- within our own company. So that's kind of bucket number two. And then bucket number three is, we're getting a lot of geographic expansion. So, existing customers in one region, giving us their business in another region. So, I think it's really across all three buckets that's driving the upsell/cross-sell.

Helpful. And I'm just hoping you could talk with us about your -- you showed a slide with your sort of focused growth areas. How are those end verticals performing relative to your base business, or is there a significant relative outperformance?

David, do you want that?

Sure. We operate in six primary verticals. And as we previously mentioned, they're all performing very well right now. We feel very fortunate that they're all firing on all cylinders. And it's not just in the verticals, but also in all of our geographies. So we're seeing good organic growth coming across all verticals and all geographies and they're all contributing to the overall growth.

Thank you.

Thank you. Our next question will come from Andrew Steinerman with JPMorgan. Please go ahead.

Hi, Dave. I know you mentioned organic revenue growth earlier. I think when you refer to organic revenue growth in that context, it doesn't account for constant currency. So just to make sure we have all the same numbers, it would be great if you could mention organic constant currency revenue growth for the first quarter. And then also what's the organic constant currency revenue growth assumed in the 2022 guide?

So in Q1, constant currency had a negative impact on our revenues of $1 million. And in our guidance, constant currency we have baked in a negative $4 million into our guidance.

Okay. That's great. If it's okay I'm just going to ask a second question too. Could you just mention right now – you did that your input cost inflation and wage inflation was manageable. I was just wondering what First Advantage's approach is to price increases this year on their background check packages. And when I say on your background check packages, I mean kind of separate from any pass-through cross-sell to third-party providers.

Right. So as you know and why you made that comment is obviously, all the out-of-pocket, third-party costs are passed through including any increases associated with those. And so we're covered from that perspective. We do evaluate price increases from time to time. Most of our contracts give us the ability to pass on CPI increases. We will selectively do that throughout the year. We do not do it on a blanket basis. But we do look at our different customers in our different verticals and their different packages and we do pass on some selective increases. And we have already built that into our guidance.

Okay. Thank you very much.

Thank you. Our next question comes from Manav Patnaik with Barclays. Please go ahead.

Hi, good morning, everybody. This is Ronan Kennedy on for Manav. May I – so understood that there was broad-based strength across both verticals and regions. And you also obviously delivered strong growth in the face of declining GDP. There wasn't really any mention of a recession. Obviously, you also had strong performance in 2020. So would a downturn or a contraction in economic growth be a non-factor? Can you just kind of further unpack the recession resiliency and the support provided by the verticalized end markets that you're exposed to?

David why don't you start with that and I'll add in.

Okay. So in regards to potential recession or downturn. Yes it creates a certain element of uncertainty but we've dealt with that before. And in fact if you look at 2020, we actually grew during the pandemic. So far there's not – it's not had any impact on the demand for our services. The underlying fundamentals remain strong. In fact inflation from that perspective is contributing to turnover and more high-velocity hiring. So we think that's helping us. We're a mission-critical function. Companies are going to have to continue to use us. And when you think in terms of backfill churn turnover, that's going to occur even in a recessionary or a downturn environment, we don't have any real customer concentration and we have a very variable and flexible cost structure, so we think we're really well positioned to handle any type of downturn.

Yes. I would just add in. I think we're in the middle of a generational switch of the job market here. This is – we're seeing things that we've never seen before. And these aren't trends that will go away in a quarter or two. We think there's long-term trends here that are favorable to the business and the industry.

Very good. Thank you. And then as a follow-up if I may. Apologies, if I missed it. Can you talk about the contribution that came from post-onboarding screening, whether it be continuous monitoring, ID and the outlook for the opportunity there?

So about 90% of our business comes from pre-onboarding screening. The other 10% would be other areas of business or post onboarding. Those are still up-and-coming areas. We are talking to clients, there seems to be interest around it. Today the revenue contribution is still very modest but we're very confident that it will continue to grow in the future.

Okay. Thank you. Appreciate it.

Thank you [Operator Instructions] Our next question comes from Pete Christiansen with Citi. Please go ahead.

Good morning. Thanks for the question. Scott, David, nice results here. I was just wondering if you could talk a little bit about sales force productivity on the new logo – on the no – sorry. The new logo front. And how are you looking at the landscape for RFP activity this year in that area?

I think you know what – I'm sorry, Dave. Go ahead.

So – I was just going to throw out a number Scott. In Q1, our new logos contributed $9.1 million, other revenue which was about 7%. That's an increase over the prior quarter. So that's kind of the number. Scott, why don't you take it from there?

Yes, I was going to say that we're seeing pretty consistent and strong deal flow. That I don't think it's any different than previous quarters, or previous years. We've invested in the sales team, so we do actually have a larger sales force. But we are seeing a lot of activity in the market. And I'll go back to this point one more time, is that our messaging is very favorable in this market around helping people with high-volume hiring. So we're very excited about the opportunity to win more RFPs and what it might be. But I would say that, one of the big differentiators of this company over the last four or five years has been the productivity of our sales force and our customer success teams at driving, not only new logo, but upsell/cross-sell.

No, that's really good commentary there. Very helpful. And to the point that was just made in the previous question, First Advantage certainly grew during the pandemic. I mean, we're starting to see some general unwind of conditions, those companies that benefited during the pandemic versus those that haven't. I'm just wondering, if you're seeing any switch among your existing book of business, those who benefited in the pandemic, versus those who perhaps haven't. Any noticeable changes there in some of the underlying numbers? And -- or at least towards their indications for future hiring. Thank you.

Yes. Again, I think, we're hearing very consistent messages from our customer base across all verticals, including the ones that did well during the pandemic is that, they are in full mode -- full hiring mode. And I think one of the big differences that we're seeing in the space is that, this industry typically had some seasonality to it. We're seeing that seasonality go away, because what we're hearing from customers is that, they're now in constant hire mode, versus ramping up for peaks and ramping down for valleys. They are just in constant hiring mode. And that sort of will take away some of the seasonality in our business. We've sort of factored all that into our plans, but I think that's an interesting phenomenon that we'll keep an eye on.

Constant hire mode. Music to your ears, I'm sure.

Absolutely.

Thank you, guys. Great job.

Thank you. Our next question will come from Hamzah Mazari with Jefferies. Please, go ahead.

Hi. This is Hans Hoffman filling in for Hamzah. I just wanted to drill down on the M&A pipeline a little bit more. Could you just talk about how big is it today versus maybe a year ago? How valuations are working right now? And then, I know you guys mentioned, with the focus on adding vertical capabilities, expanding internationally and adding services and technology. Are there any of those areas that are a particular focus right now?

I think I'm going to work backwards on your question. I think, we're looking at all opportunities equally. Whether it's a geographic expansion, whether it's a strategic play for bolstering a vertical or whether it's adding a new technology or a product, we're kind of looking at things as they come. We have invested in the hiring of a new Head of Corporate Development, who is managing the pipeline and driving more opportunities for us. So we have put some more structure and investment around the whole M&A team. We don't calculate or don't measure the M&A pipeline on size. Because our strategy is strategic, size really doesn't matter. We're looking at deals that will help reinforce our positioning and messaging in the market. But David's comment earlier is spot on in that deal flow has significantly increased over the last 30 to 45 days. It almost feels like we get a new deal put in front of us on a weekly basis. I think a lot of companies in the space are for sale right now and we're taking it on a one-by-one basis. And valuations are pretty much the same as maybe a few quarters ago, but I think given that some of the changes with the market that valuations may tick down a bit, but we still haven't actually seen that happen yet.

Got it. Thank you. And then just for my follow-up. On the international side, I think the mix with the guide, 16% 17% of total revenues. Can you just remind us I guess how big that opportunity could be? Could we potentially see that get to 40% 50% of total revenues? Just any color there would be helpful. Thanks.

Well first let's start with the definition of international. Just so it's clear, we've lumped Americas together. So, all of Canada, US, South America are all under our Americas. So, anything outside of that is what we would call international. So, if you actually put Canada and Latin America into our international number, our international number would actually be a lot bigger. Even though it is pretty sizable today, we're pretty proud of our international mix. But just wanted to be clear on first the definition. Second, I think international again as I mentioned earlier we're very bullish on the international market. We think the international market is a great growth market. But keep in mind that the US market is huge and will continue to grow and grow and grow. So even if the international market just absolutely crushes it for us, it still would never get to the numbers that you were talking about because the US market is such a great growth market for us. Yes, we do expect international to be a higher percentage of our mix in the future, but not dramatically higher because again the US will continue to grow.

Got it, its helpful. Thank you.

And we do have a follow-up question from Shlomo Rosenbaum with Stifel. Please go ahead.

Hi, thank you. Hey David, I'm sorry if I missed it. I know Andrew asked about the organic constant currency growth expected for 2022. You said there was $14.8 million of acquisition revenue in the first quarter. Do you mind telling us how much acquisition growth is embedded in the guidance, maybe on a revenue basis or a growth basis?

Sure. So, the implied guidance for revenues is revenue growth of between 15% and 17%. On an organic basis that would be 11% to 13%.

Perfect. Thank you very much.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Scott Staples for any closing remarks.

Thank you, operator and thanks to everyone for your participation. We are off to a great start in 2022 and we are excited about the opportunities ahead. We think First Advantage is well positioned for continued growth and our focus remains on delivering value for our shareholders. Thank you for your support. Have a great day.

Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect.