FIRST ADVANTAGE CORP Q3 FY2024 earnings call

• Closed $2.2 billion acquisition of Sterling on October 31, nearly doubling the company in size with over 10,000 employees, conducting over 200 million background screens annually across over 200 countries and territories, and a 96%+ retention rate.
• Unveiled FA 5.0 strategy, with Joelle Smith promoted to President, Doug Nairne named Chief Operating Officer, and Steven Marks taking over as CFO. New organizational structure aims to improve operational efficiency and customer experience.
• Committed to $50 million to $70 million run rate cost synergies, with over $10 million already actioned, and plans to achieve targets within 24 months post-closing.
• Launched new branding, featuring a clean, modern logo symbolizing interconnectivity, technology leadership, and the joining of the two companies.

First Advantage standalone third quarter revenues were $199.1 million, roughly in line with the prior year and $14.6 million or 8% greater than in Q2. Adjusted EBITDA was $64 million, roughly the same as in the prior year, but sequentially up $8.2 million or 15% greater than Q2. Legacy Sterling third quarter revenue was $195.5 million, up $14.9 million or 8.3% versus prior year. Adjusted EBITDA was $45.3 million, down $2.3 million versus the prior year comparable quarter. Combined LTM as of September 30, 2024, had combined revenues of approximately $1.5 billion and adjusted EBITDA of approximately $407 million, with combined adjusted EBITDA margins of approximately 27%

• Maintains First Advantage standalone 2024 guidance ranges. Combined company 2024 total revenues expected in range of $858 million to $918 million, adjusted EBITDA $250 million to $274 million, adjusted diluted EPS $0.83 to $0.95.
• Aims to reduce net leverage to approximately three times run rate adjusted EBITDA within 24 months post-close and to a long-term target range of two to three times.
• Anticipates double-digit adjusted diluted EPS accretion from the acquisition on a synergized pro forma LTM September 30 basis, with synergies expected to be fully achieved within two years.

• Potential churn of higher-margin customers at Sterling due to business mix changes, impacting margins.
• Macro environment uncertainties including inflation, interest rates, elections, and geopolitical issues affecting base business performance.
• Risks associated with integration process such as customer retention and synergy realization not meeting expectations.

Q: About the customer attrition risk at Sterling, Scott responded that it was a normal mix change in business, with Sterling retention still high historically at 96%+ in Q3, and the margin impact was due to business mix in traditional screening space.

Q: Regarding base business being lower than expected, Scott stated it was due to macro stabilization and normalization, with customers still hiring but at a modest level, and seasonal hiring picking up in October.

Q: About 2025 EPS accretion, Steven explained it was related to synergy pacing, interest expense, and dilution impacts, with synergy realization affecting actual reported results.

Q: On upsell and cross-sell, Steven mentioned recent large deals won contributing to revenue, and customers prioritizing safety and compliance leading to deeper package density.

Q: On platform integration, Scott said they won't force migrate customers, will retain better products and features, and be thoughtful in rolling out new strategies.

Q: On capital allocation for debt paydown, Steven stated priority is completing integration, then reducing net leverage through cash flow generation and debt repayment