First Advantage Corporation Q2 FY2025 earnings call

Key Messages

• Delivered solid Q2 results at the upper end of expectations, with revenue supported by sales engine and scale, and adjusted EBITDA margins over 29% and adjusted diluted EPS growth near 30% year-over-year.
• Successfully integrating the $2.2 billion Sterling acquisition ahead of schedule, focusing on products, customers, synergies, and net leverage reduction.
• Executing FA 5.0 strategy: increasing share in target verticals, accelerating international growth, and actioning best-in-breed product and platform strategy for upsell/cross-sell.
• Reaffirmed full-year guidance. Inaugural Investor Day in May highlighted the company as a category-leading tech firm in a $24 billion+ HR tech market, with Digital Identity at $10 billion and growing faster.
• Collaborate user conferences deepened customer relationships, with regional events held in India, Singapore, and more planned. Synergy target of $65 million to $80 million, with $47 million actioned by Q2.

In the second quarter, First Advantage's revenue was $391 million, up 1.5% pro forma year-over-year. Adjusted EBITDA was $114 million with a margin of 29.2%. Adjusted diluted EPS was $0.27, a 29% year-over-year increase. Synergies: Target range for synergies is $65 million to $80 million within 2 years, with $47 million actioned by Q2 and $18 million realized in Q2. International growth was up 7.2% in the quarter, outperforming Americas in growth algorithm metrics.

Forward-Looking

• Reaffirmed full-year guidance. Updated base growth for the back half to slightly negative instead of modestly positive. Expect full-year adjusted EBITDA margins of 28%. Adjusted diluted EPS is expected to be in the mid-to-high $0.20 range for the final quarters. Anticipate higher free cash flow of $90 million to $120 million, a $25 million increase from previous commentary. Synergy realization is on track, with $18 million realized in Q2.

Risks

• Macro environment uncertainty due to policy changes (immigration, tariffs, tax) causing customers to wait-and-see on hiring plans. BLS/JOLTS data less reliable due to low response rates, not an exact correlation to business performance.

Q: Change in base growth assumption across verticals?

A: Broad-based, not specific to one vertical, due to overall wait-and-see on policy changes affecting hiring plans.

Q: GenAI impact on hiring?

A: Customers are reviewing GenAI use, but no large macro trend yet; mostly wait-and-see on policy developments in Washington.

Q: Vertical performance?

A: Vertical swings have narrowed, with no double-digit positives or negatives. Staffing and financial services held up, health care had a slight tick down but is still a strong vertical with long-term growth potential due to aging demographics.

Q: International growth metrics?

A: International growth was up 7.2% in Q2, outperformed Americas in growth algorithm metrics, with a diversified go-to-market strategy contributing to the growth.

Q: Upsell/cross-sell and Sterling synergy?

A: Early stages, back-end platform work is enabling cross-sell opportunities, with revenue synergies expected to be realized more in the out years (2026).

Q: Net leverage and debt prepayments?

A: Expect to continue making voluntary prepayments using excess cash flow, with the new tax law boosting free cash flow for Q3 and Q4, allowing for more optionality in deleveraging.

Q: Labor market data correlation?

A: BLS/JOLTS data is a data point but not an exact correlation; focus on actual order volumes and customer conversations for business performance.

Q: Collaborate user conferences impact?

A: Not sales-focused; instead, focuses on discussing industry trends, customer needs, and providing input for product roadmaps to deepen customer relationships.

Q: Sales force and base volumes?

A: No cutbacks in the sales force; instead, investing in the sales team and marketing. The scalable P&L can handle softer base volumes, with focus on upsell, cross-sell, and maintaining strong retention.