First Advantage Corp (FA) 2025 Q3 法說會逐字稿

Good day, everyone. My name is Sabrina, and I will be your conference operator today. I would like to welcome you to the First Advantage Third quarter 2025 earnings conference call and webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor relations. (Operator Instructions) Please note, today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.

Thank you, Sabrina. Good morning everyone, and welcome to First Advantage's 3rd quarter 2025 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 would like 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 FEC. Including our 2024 Form 10-K and our Form 10Q for the third quarter of 2025 to be filed with the FEC.

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 websites.

To facilitate comparability, we will also discuss pro forma combined company results consisting of first advantage and Sterling Check Corp historical results and certain pro forma adjustments as if the acquisition of Sterling had occurred on January 1st, 2023.

The pro forma information does not constitute Article 11 pro forma information.

I'm joined on our call today by Scott Staples, our Chief Executive Officer; and Steven Marks, 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 call. We have 4 key messages for today. First, we delivered another quarter of profitable growth, meeting and exceeding our expectations with revenues up approximately 4% year over year on a pro forma basis and achieving adjusted EBITA margins of 29%. Our performance was driven by continued go to market success in new logo and upsell crosso.

This demonstrates our ability to generate solid results amid the current macroeconomic environment in which hiring growth has been consistently flat while maintaining our relentless focus on cost discipline.

Second, just last week, we celebrated the 1 year anniversary of closing on our Sterling acquisition.

I am extremely pleased with the performance of our entire team as our integration is progressing ahead of schedule, and we are delivering strategic and financial benefits as promised.

Third, we are continuing to execute on our FA 5.0 strategy, actioning our best of breed product and platform approach to accelerate growth through new logos, upsell, cross-sell, and improve client retention.

Today, we will highlight how our technologies and products are enhancing our value proposition and solving customers' critical needs.

And fourth, today, we are narrowing our full year 2025 guidance ranges with refined midpoints at or above our original guidance midpoints.

Now, turning to slide 5 and a closer look at our performance in the 3rd quarter.

We generated solid results across revenue, adjusted EBITDA and margin, cash flow, and EPS for Q3, combined upsell, cross-sell, and new logo rates continued to perform in line with our long-term growth algorithm targets. Retention improved to 97% and increased from 96% in Q2. Demonstrating the success of our customer centric approach and that our best of breed technology and deep vertical expertise are resonating with the market.

We are pleased to share that we recently signed an exclusive 5-year contract renewal with a top customer that is expected to generate over $100 million in total revenues, of which a significant portion is guaranteed through minimum annual commitments.

Base revenue performance again improved sequentially, remaining just below neutral and consistent with our expectations.

In Q3, our large new logo win in healthcare went live and is the last of the three large wins we have discussed with you on past earnings calls to do so.

Combined with the two wins that went live last quarter, one in the retail gig economy and the other in international win in Australia, all are now live and generating revenue, providing solid momentum going into Q4.

We are experiencing tremendous success with our go to market teams as further supported by our 17 enterprise bookings in the 3rd quarter and 75 in the last 12 months, each with $500,000 or more of expected annual contract value.

These wins give us confidence in our ability to generate new logo and upsell cross-sell revenue and are encouraging sign of our sustained go to market momentum since closing the Sterling acquisition one year ago.

Additionally, we are encouraged by the strength of our latest pipeline with many large potential new contracts in the works, including several that are incorporating our digital identity product for the first time.

Looking at our verticals in the 3rd quarter, our balanced and resilient vertical strategy supported our performance, with nearly all of our verticals seeing revenue growth in the quarter on a pro forma year over year basis.

We saw strength in retail and e-commerce driven by upsell, cross-selle, and fueled by a good start to the holiday season.

Transportation and logistics also grew, driven by our upsell cross-sell initiatives with particular demand from last mile and home delivery customers.

In addition to serving onboarding needs for new hires within transportation, our broad range of solutions also supports our customers' ongoing compliance requirements, enhancing our results with balance and consistency across the solutions we provide.

Healthcare was slightly down, driven by uncertainty with Medicare and Medicaid funding, particularly with the nonprofit hospital networks, but this was offset in part as healthcare staffing companies stepped in to fill the hiring needs.

We remain optimistic about the long-term industry dynamics and fundamentals in healthcare as the US population ages and requires more healthcare services.

Our other verticals, including general staffing, manufacturing and industrials, business services, and financial services, showed positive growth in Q3.

Partially powered by the success in our new logo and upsell crossal programs.

October order volumes show similar directional trends to what we saw in Q3 continuing.

In international for the 6th quarter in a row, we achieved year over year revenue growth with the UK as a bright spot and also improving trends in APEC.

Looking at the macro environment, we are still seeing a trend where hiring is remaining consistently flat.

Macro uncertainty as well as policy changes, including the recent government shutdown, immigration, tariffs, and tax policy have resulted in many of our customers remaining in a wait and see posture as it relates to their hiring plans. However, as you can see from our results, our customers are still hiring at consistent levels.

Our expectation for the 4th quarter and likely into 2026 is for base growth to remain slightly negative as the overall labor market conditions persist. We continue to be confident in our ability to deliver overall revenue growth through upsell, cross-sell, and new logos.

Our enterprise customers, diverse vertical mix, global reach, mix of hourly and salaried focused customers. And diligent focus on controlling the controllables make our business resilient and able to perform well across a variety of macroeconomic scenarios.

With regards to the impact of the government shutdown, our view is that the hiring markets have remained stable and active with our core verticals continuing to perform well. The absence of BLS jobs and employment data has not impacted.

Our ability to run our business.

I want to take a few minutes to touch on AI's potential impact on our business, building upon what we shared during our May Investor Day.

We are taking a proactive and strategic approach to understand both the benefits and the risks of AI and we are optimizing our long-term strategy based on the future of work.

We recognize the pace at which AI is evolving and can see how it is currently impacting and how some are expecting it to impact the way certain types of jobs and labor are performed. Of note, The World Economic Forum's 2025 Future of Jobs report predicts net positive growth through 2030, even after accounting for the impacts of AI. Specifically, the WEF notes that while AI and automation are leading factors expected to displace. An estimated 92 million jobs. These technologies and other market conditions conditions are also expected to create 170 million new roles as companies and economies adapt to techno technological change, resulting in an expected global increase of 78 million jobs over the next five years.

Again, we are confident that our diversified mix of verticals, customer segments, and geographies provides a meaningful degree of resiliency to AI impacts and will allow us to capitalize on the future growth opportunities.

We are also strategically reviewing where and how we invest in terms of our products and verticals to ensure we are well positioned to lead in a world increasingly influenced by AI with a focus on continuing to generate long-term shareholder value. For example, we are building tools such as our digital identity product, which enables our customers to address the increasing dangers of AI-driven identity fraud.

At the same time, we are leveraging AI internally to enhance quality and customer experience. As we like to say, we are building good AI to fight bad bad AI.

Additionally, I want to address some of the recent news headlines on corporate headcount reductions as companies claim to gain efficiencies from AI. In some instances, the news you read happens to relate to customers of ours, and what we have observed is that while those companies are reportedly making job cuts motivated by AI, we are seeing stable, if not growing, overall screening volumes from them.

This is because many of these news making reductions are in administrative type roles which have a lesser impact on our business as typically a majority of our screening volume comes from normal churn and core hiring in our customers' operations.

Additionally, as customers reinvest in their businesses to build out their internal AI and other capabilities, they should also be driving screening demand as they will require roles to manage these changes. This sentiment is further supported by feedback directly from our customers who have told us that while they are currently investing in and leveraging AI in their businesses, they do not expect to meaningfully change their approach to core hiring over the next several years.

Now, turning to slide 6.

On October 31st, we were thrilled to celebrate the one year anniversary of the closing on our sterling acquisition. Over the past year, we have made significant progress on our integration of this strategic acquisition, which has been outperforming our expectations on customer retention, synergy capture and realization, cultural alignment and complementary technologies and products.

Importantly, we have delivered a very seamless, nondisruptive customer experience throughout the integration process. This has enabled us to maintain excellent customer satisfaction, as evidenced by our high retention levels and the feedback we are receiving from customers.

We have also continued to deepen our customer relationships through our growing collablaborate International User Conference series, which reflects our expansive global footprint. In 2025, we've hosted events across the US, India, Singapore, and AMA with upcoming user conferences in Hong Kong and Australia.

These events provide us with direct insight into our customers' needs and emerging industry risks, showcase our subject matter expertise, uncover upsell and cross-sell opportunities, and help cement our position as a category leader.

Recently, many of our European customers joined us at our London collaborate to discuss key topics such as identity fraud, AI driven screening, and global compliance. The strong turnout, high value content, and customer engagement underscore the relevance of our solutions and the trust we are building across markets. Feedback confirms that our customers are looking to us for guidance as they plan for 2026, and we're proud to be a strategic partner in helping them navigate evolving workforce risk.

Our back end automation strategy has also been a key driver of operational efficiency throughout the integration process.

By consolidating fulfillment into a single global engine, we are leveraging years of investment, engineering, and development in robotic process automation, APIs and AI. We have kept two front-end platforms for customer continuity, but behind the scenes, we have been able to streamline workflows, cut redundancies, and drive efficiency. These efficiencies not only enhance speed and customer satisfaction, but are also expected to create meaningful margin improvement as we grow.

Additionally, since announcing the Sterling acquisition, we have increased our synergy target from our original $50 million plus to a range of $65 million to $80 million. We have also made solid progress on deleveraging our balance sheet as we work towards our target net level range of 2 to 3 times.

Steven will provide additional details shortly on both our synergy progress and deleveraging.

Turning to slide 7.

Throughout the integration process, we have been focused on enhancing our customer value proposition to unlock new logo, upsell, and cross-sell opportunities while continuing to drive innovation and foster the high performance culture we are known for. We are consistently leveraging our best of breed approach to provide optimal solutions and technologies to solve our customers' challenges.

Last quarter, we discussed how the expansion of our award-winning click chat call customer care solution and our high margin first advantage Work Opportunity tax credit product has benefited our customers.

We have continued this progress, achieving a milestone in Q3 with the increased usage of the millions of records in our proprietary National Criminal record file database across both platforms. Something we have been rolling out since Q1 of this year.

With our proprietary data and in-house data science teams, we deliver faster insights and a superior experience for everyone from recruiters to HR teams to candidates.

This powers our ability to reduce turnaround time while increasing the speed, coverage, and effectiveness of our criminal screenings, facilitating comprehensive and timely results for our customers.

In October, we made available our criminal and motor vehicle records monitoring solutions to the entire customer base, offering another best of breed experience to all of our customers.

We are also underway in leveraging our best of breed approach to enhance the user experience. Over the past 18 months we have been rolling out a new applicant portal. Now approximately 50% of our order volume on the first advantage front front end runs through this portal, with customer adoption continuing to grow. This represents the most secure and user-friendly experience we've ever built, featuring device agnostic design for a seamless experience across devices, customer specific branding for a familiar and consistent look, and AP and AI powered features that continuously learn from the candidate interactions deliver a best in class rage click-free experience.

In November we are extending the same modern look and feel to the Sterling front end, bringing the benefits to even more customers. This initiative reflects our commitment to delivering an outstanding user experience backed by rigorous data, feedback, sentiment analysis, and continuous improvement.

It's a win for our customers and their candidates and a key differentiator for First Advantage.

On top of this, we are continuing to see solid momentum and interest in our digital identity products.

Negative use of AI and other technologies are creating new risks for companies and organizations and are driving rapid evolution in the digital identity space. Knowing who you're hiring and confirming who they actually are is critical. Our digital identity solution is fully linked in the hiring life cycle with some customers using it multiple times through the recruiting, screening, and onboarding process, which is a which is creating a competitive advantage for First Advantage.

As an early market leader with digital identity solutions, we are able to deepen our strategic dialogue with customers, strengthening our relationships and stickiness of our products. We are highly focused on this attractive opportunity, which has a total addressable market of over $10 billion and an expected growth rate in the mid to high 10s.

Our digital identity products.

Is is continuing to build a strong pipeline as customers navigate the early adoption and pilot phase.

Digital identity is a powerful competitive differentiator for First Advantage and indicative of the direction in which our industry is growing is growing.

Overall, our customers continue to be excited about the benefits of our best of breed platforms, products, data, and AI enabled technologies. This is evident by our strong customer retention and consistent new logo and upsell cross-sell performance.

With that, I will now turn the call over to Steven.

Thank you, Scott, and good morning everyone. Today I will provide color on our 3rd quarter results, synergy progress, deleveraging trends, and our narrow 2025 guidance. I'll start with 3rd quarter results on slide 9.

Our third quarter revenues were $409 million up 3.8% versus last year on a pro forma basis, with our year over year revenue growth rate increasing sequentially from Q2 as expected.

Our go to market success was in line with our long-term growth algorithm targets as the combined contribution of new logo and upsell and cross-sell revenues delivered 9% growth in the quarter and our retention rate reached 97%.

The trends in our base performance continued to moderate on par with how we had forecast the quarter, with base remaining negative on a year over year basis. Our solid results were supported by consistent execution on our integration and synergy plans, which remain ahead of schedule.

Adjusted EBITDA for the third quarter was $118.5 million. Our adjusted EBITDA margin of 29% exceeded our expectations, representing an improvement of 130 basis points versus the prior year on a pro forma basis, despite being slightly lower sequentially from Q2 due to mix.

Our results were enabled by our continued focus on accelerating synergies, our disciplined approach to cost management, and the scalable nature of our business. As part of the integration process, we are applying best of breed fulfillment execution, which is helping improve the combined company's operating margins in line with our historical expectations of the business.

Adjusted diluted EPS was $0.30, a 15.4% increase year over year and also ahead of our expectations. The benefits of our greater scale, expense in capital management, and lower interest expense as a result of our debt repricing and voluntary debt payments to date have supported our per share earnings.

These have more than offset the impact of the incremental interest on the transaction financing and the dilutive impact of the new shares issued for the sterling acquisition.

On slide 10, you can see how we are making great progress on our synergy program. This quarter we crossed the original $50 million threshold of action synergies, now having actioned $52 million and exceeding our initial total synergy program goal within only one year. We benefited benefited from the realization of $12 million of synergies in the third quarter, bringing our in-year realization to $30 million. We remain committed to and confident that we will achieve our goal of 65 to $80 million of action synergies within two years and are pleased to see the consistent success of our integration and synergy execution.

Looking forward, we are focused on scaling, automating, and applying AI as we continue to execute on our on our integration priorities.

Moving to slide 11, you can see our historical revenue growth algorithm results with combined company data beginning in 2025.

As previously mentioned, in the 3rd quarter, our results were driven by strong upsell cross-sell, as well as new logos supported by consistent solid retention.

Base results came in as expected with sequential improvement from Q2 despite remaining negative for Q for Q3.

Now turning to cash flow, net leverage, and our debt paydown progress on slide 12, during the quarter, we generated adjusted operating cash flows of nearly $81 million an increase of $35 million or 78% on a year over year basis. This was driven by the larger scale of our business, our tight management of our working capital, including collections on receivables. The benefit of the OBBBA, which has reduced our required cash tax payments and our overall focus on cash flow.

Our cash balance at September 30th, 2025 was $217 million. With this ample liquidity and cash flow, subsequent to the end of the quarter in November, we made a $25 million voluntary repayment on our debt principal, bringing our total year-to-date principal repayments to over $70 million most of which has been voluntary using excess cash flow.

Our synergized pro forma adjusted EBITDA net leverage ratio at quarter end was 4.2 times and represents about a quarter of a turn decrease from a year ago when we closed the sterling acquisition.

We remain focused on reducing our net leverage towards approximately 3 times synergized pro forma adjusted EBITDA within 24 months post close, and our long-term net leverage target remains 2 to 3 times.

Moving to slide 13 in our updated 2025 guidance. As a reminder, year over year comparisons are on a pro forma basis to allow for easier comparability.

Today we are narrowing our full year 2025 guidance ranges with refined midpoints at or above the midpoints from our original guidance. Our year-to-date results, as well as the momentum we have seen heading into the fourth quarter, give us confidence in our revised guidance ranges, with revenues now in the range of $1,535 million to $1,570 million. Supported by strong synergy execution and our continued focus on efficiently managing our business, we now expect to achieve full year adjusted EBITDA margins of approximately 28%, a meaningful expansion from pro forma 2024.

Looking at the 4th quarter as implied in our updated full year guidance today, our revenue outlook for Q4 of around 6% year over year growth at the midpoint, continues to assume a certain degree of macro stability while keeping in mind that our customers remain in a wait and see mode. The impacts of increased tariffs and other policies remain key areas of uncertainty across the global economy, but our customers continue to hire at consistent volumes. We expect Q4-based growth to remain slightly negative, consistent with Q3, with this trend likely to continue into 2026.

As Scott mentioned, we saw very consistent volumes in October, which aligns to our updated Q4 expectations. We anticipate continued productivity of combined upsell, cross-sell and new logo growth consistent with, if not better than historical trends.

Additionally, the go-lives of our recent large wins and robust new contract pipeline support our expectations for the 4th quarter. We are, we also expect customer retention to remain in line with our historical performance of at least 96%.

In the 4th quarter, we expect adjusted EBITDA margins to expand versus the prior year period by more than 100 basis points. This is similar to the expansion we saw in Q3 and and results in 4th quarter adjusted EBITDA margins of approximately 28%.

While this represents a small sequential decline from Q3 2025, it is in line with the historical trends in our business, reflecting the mixed shifts driven by seasonally lower December revenues and some movements in verticals and and some movement and volumes between our verticals and products.

This year, we also anticipate the mixed shifts we saw in Q3 towards products with relatively higher out of pocket fees will continue to impact adjusted EBITDA margins into Q4, though over time we expect these impacts to normalize.

Even with these trends in mind, we remain confident in our ability to drive year over year margin improvements in Q4.

We anticipate that our adjusted diluted EPS growth momentum will continue as revenue ramps and synergies are realized. Despite the mixed trend previously mentioned, we expect that quarterly adjusted diluted EPS will remain in the mid-20 cent range.

In the final quarter of the year representing meaningful expansion on a year over year basis.

On a similar note, we now anticipate free cash flow for the year of $110 million to $120 million. This represents a notable increase from our previous commentary as we have been able to generate incremental cash flow from better working capital management and have successfully managed our integration-related costs. As previously noted, the passing of the OBBBA tax law in July doesn't notably impact our effective tax rate. However, we will be able to utilize certain provisions within the new law to materially reduce our 2025 required cash tax payments.

We have provided a full chart in the appendix to the earnings presentation with FX, cap, interest, and other modeling assumptions.

Additionally, we do not expect the government shutdown to materially impact our results. While the shutdown itself has affected some operational items such as the government-run E-Verify platform, resulting in some delayed I-9 verifications, we expect any delays in processing I-9 to be resolved in the quarter as soon as the government shutdown concludes, and this is a very small component of our business.

Overall, and taking a step back, we are pleased with our refined 2025 guidance ranges we are providing today, particularly amid our ever changing world. We are expecting to deliver full year revenue growth, a high single to low double-digit adjusted EBITDA growth rate, and an even higher adjusted diluted EPS growth rate, and meaningful free cash flow generation, all just one year after closing our strategic acquisition of Sterling. With that, let me turn it back to Scott for closing remarks before we open the line for questions.

Thank you, Steven.

In closing, I would like to re-emphasize First Advantage's position as an investment of choice. We are a market leader offering proprietary technology and data in a large and growing market. We have significant organic revenue growth potential accelerated by the Sterling acquisition.

We are resilient with a flexible cost structure and high revenue diversity that comes from our balanced vertical strategy.

We have industry leading operating margins leading to strong and consistent free free cash flow generation, and we have a track record of value accreted capital deployment and balance sheet management.

All of this supports our confidence in our ability to achieve consistently strong results, including delivering on the four-year financial targets we established during our investor day in May.

Looking ahead, we remain focused on executing on our strategy to increase share across our target verticals, accelerate international growth, and deliver on our best of breed product and platform strategy.

Thank you to the entire First Advantage team for the great work you do to support our customers every day.

With that, we will open the line for questions.

Thank you. (Operator Instructions) Ashish Sabadra, RBC Capital Markets.

Thanks for taking my question. So, maybe a two part question. As we think about this strong new win momentum, that you talked about and as you're ramping up these new clients, how should we think about the upsell, cross-sell as well as new logos going into 4th quarter, but also, into 2026 and. Then the second question would be just the pipeline for new logos. Have you seen any changes in the sales cycle, any elongation in the sales cycle, also any early conversations with your clients, around new win momentum? Thanks.

Yeah, Sheisha, I'll start with your comments on the on the new logo and kind of that impact going forward. I'll let Scott take the pipeline. I think you're right, and as I mentioned in the prepared remarks, we're expecting our Q4, the contribution of new logo and upsell crosssell, to be in line, if not better than our historical. So we did 9% in Q3 with very consistent, so far this year, assuming those deals ramp according to schedule, there's some room to. Do a little better than our historical averages. We're seeing some good initial order demand from those bigger contracts. A little early to comment on 26 just overall, but I mean, obviously the deals that are just going live in second half would have some rollover. Still have to fill out the rest of the pipeline funnel and still have to execute, but it gives us a lot of confidence certainly in Q4 being able to, achieve, if not exceed the historical norms for upsell, cross-sell, and new logo.

Yeah, on the pipeline we are, extremely happy where the pipeline is right now. It's at the highest value it's ever been at. The late stage pipeline for large deals is the best we've really ever seen.

As a company that doesn't, mean it translates into, whatever it translates into, but it's a great pipeline. We've obviously got very good win rates historically, so we're feeling pretty bullish heading into 2026 in terms of the things we can control and our ability to grow organically, so very happy with the pipeline, and I think it all comes back to. Again, look at that increase in improvement in client retention, especially after doing a large merger. We are very happy with, client retention actually going up. It means that clients have really resonated with the combination of the of the Sterling and the First Advantage technology platforms, and I think. A big shout out to our tech teams who have done a great job of eloquently putting together these the back end to to the front ends of both the Sterling and and First Advantager customer base, and in this industry it, it's very simple. Clients love a, to partner with a company who understands their vertical, deeply, which we obviously do. And have invested in the key verticals that we're in and have a great technology platform to back it up.

That's clearly why pipeline's growing while the deal flow has been solid. We've got a great tech story and we back it up with subject matter experts.

Very helpful, thanks.

Andrew Steinerman, JPMorgan.

Hi Scott, obviously I've observed over the years that FA is very tech forward, including AI. With that in mind, do you feel that traditional employment background checks has a risk of being disintermediated by AI innovation, and how?

Yeah, thanks, Andrew. As we have a very strong, tech story. We've got a great team and I thank you for your question because I don't think we get enough credit in the market for our tech prowess. I mean, I feel that we're basically a Silicon Valley tech shop that just happens to be headquartered in Atlanta, Georgia. We've got, great architects, we've got great engineering prowess. And I think when you look at, where, AI can help or influence or impact the industry, I only see it or we only see it in beneficial ways. We don't see it as a competitive threat, because it's going to have to be so integrated into the many things that we do. I think the big change is the dramatic rise of the risk of identity fraud in the recruiting process and how that maps into the traditional background screen. So when you think about running criminal checks or verifications or whatever it might be. The future of this industry is really going to be how that flows from a digital identity check and that's where a lot of the AI is going to sit because you're going to be leveraging AI to make sure that our customers feel comfortable that they are on boarding the same person that they interviewed. So going from a recruitment to interview to onboarding and to finally I-9, all that has to be tied together with technology and consistent databases and. We are really the glue behind the scenes that can do that for our customers and that's where a lot of our customer dialogue is going right now and I think a lot of that's going to be AI driven there's going to be a lot of of good AI that are used that are used in that solution to offset the bad AI that people are using for deep fakes and other identity digital identity, hacks, so. We want to make sure that we help our customers avoid hiring imposters, which, as we told you in our last call, is an extremely increasing risk for them so that's also driving client stickiness, it's driving upsell cross sell and again it goes back to the fact that our customers see us as, a tech powerhouse that can pull us all together for them.

Yeah, thanks for spending your time, Scott. Makes a lot of sense.

Thank you. Our next question is coming from Andrew Nicholas with William Blair. Your line is now open. Please go ahead.

Hi, good morning. I appreciate you taking my questions. Scott, I think you mentioned, as part of the comment on your 5-year contract renewal that a portion of that $100 million is guaranteed. So I was just hoping to kind of figure out maybe a little bit more background on that contract. What led to that particular structure, I think that's relatively unique within your broader business and whether or not that's a one-off or something you'd expect to pursue more regularly going forward.

Andrew, love the question because this has been a really big focus for us in 20 to 25 and will continue in years to come.

Now the caveat here is that this will be a little bit of a long road, but this is not a one-off.

This was the first of what we think will be the future contract status in this industry where we do get more stickiness with contracts with guaranteed minimums in our contracts. Again, the caveat is it'll take a long time for this to kind of flow and run and run out because we're not going to go to existing customers and ask them to change existing contracts. We are trying to put this new clause into all new logo wins and renewals with existing customers. To date we have had very little pushback on this concept, and I think it's, there's other things that we're working on to, put more teeth into the contracts, but this is clearly where the industry is now going, and.

We even think things like digital identity and some of our other solutions can actually lead to subscription revenue, and that would then also be included in contracts going forward. So I'm glad you picked up on it because it's definitely a change that we're seeing in the industry and we're kind of leading the charge here.

Understood, thank you. And just for a follow-up, kind of back to the digital identity piece, is that something, I don't think you've sized it recently, but is that something that can move the needle on upsell, cross sell next year, or is it still too early to be adding percentages of growth to the algo?

Thanks.

Yeah, first of all, it is the hottest topic with our customers right now.

We've, as we've had digital identity products out in the market now for 2, almost 3 years, and I would say in the early stages it was us educating our customers as to the risks associated with imposters and deep fakes and all the things that come with identity fraud.

But something has changed over the last I'd say roughly 6 months. Our customers are now showing us actual instances of, where they've either stopped, a fraudster from entering their company or that they've actually hired an imposter and want, don't want it to happen ever again. So this is completely dominating the conversation right now and we've got a fantastic product, and I would call it products because it literally, is a series of 6, 7+ offerings, that are all under the umbrella of digital identity. So a couple of things then, one, at some point in 2026 we do plan on quantifying this for you. As soon as we get, we're still in early, sales stages and we're doing pilots and customers are now ramping up on that product, so I think at some point in 2026 we'll be able to quantify it. There, there's going to be three major impacts to digital identity. One, yes, it will drive upsell, cross sell.

Revenue and again we'll quantify that in the future.

2, it makes us really sticky with the customers because now we're actually in different, workflows, when you do digital identity you're now up in the front of their recruiting workflow, and you're really then sticky throughout the whole process.

3, so the byproduct of that is increases in customer retention which, as Steven said, we, the bare minimum is 96%, but as you can see we're now, we're we're now at 97% and hopefully stick there going forward and maybe even higher.

Through the stickiness of this, and the last thing is it also helps sell other products. For example, customers are worried about the person that they are interviewing is the same person that they actually run the background screen on is the same person they actually onboard and do the I-9 with. So digital identity is actually giving us a boost to our I-9 sales because we're sitting behind the scenes and we can we we can triangulate all that data for them if we're the service provider for them. If we're not the service provider for their I-9 product. They have to figure out if it's the same person that filled out the I-9 and the customers don't want to do this. They want us to do that. So this is real stickiness. This is driving, multiple levels of upsell crosssell, and it's a huge issue with clients right now. This is again the hottest topic in this industry.

Thank you. That was a long answer, but great question.

No, I appreciate it.

Manav Patnaik, Barclays.

Hi, good morning. This is Ronan Kennedy on for Manav.

Thank you for taking my questions. Can I just ask that you unpack the commentary around October order volumes continuing the directional trends that you experienced for the quarter. Sounds like that reconciles to this week's ADP jobs report, which showed a swing into positive territory, I think after some back to back months of job losses. But also had a question in relation to there was a report released earlier this morning that showed October had the highest increase in layoffs since 23 and I think year-to-date layoffs are up 65%. Just wanted to know if you're seeing that as well. I think AI and the macro factors you referenced were given as drivers, but I know you said, with your diversification and resiliency, you're not actually seeing. AI impacts and highlighted specific clients as well so just want to understand those dynamics as you see them, and potential impacts of that for base and the other components of your growth into 26.

Yeah, Ronan, so.

Obviously the macro is on everyone's mind, and I'm going to answer your question, but I'm going to put in a couple other things to give you the picture that we see.

So a couple of things, specifically to October, yes, we are having, we had a very good October. The order volume trends were, similar to what we saw in Q3, meaning that they were, above our expectations. Now that doesn't mean November, December will be, it just is a snapshot that October was, we're still in a wait and see mode for November December, but off to a great start in Q4, with the things that we mentioned, we're seeing, a good holiday season, we're seeing, our key customers, driving a lot of volume.

Number 2 on the macro.

I think you know the world is starved for data right now or better data right now on this, and I will, I will remind people that I remind the market that, we are enterprise focused, so a lot of what you hear may be SMB focused, but we're not experiencing at the enterprise level what is being portrayed in the media, and I think we've got. A unique advantage on on the data side and the fact that we can actually see our own order volume so we know exactly who's being hired and when and obviously you know with the government shutdown there's no BLS data being reported. And you know we've talked in the past about how unreliable the BLS data is anyway.

It had gotten to a point where there was only about 35% participation rate from companies in the BLS data, and it was primarily from S&B, so it wasn't a very accurate depiction of what we see from the macro standpoint.

So one, we've got the ability and the uniqueness of seeing actual hiring data real time. We know exactly when, what companies in what industries and what geographies are hiring people, and the BLS data was always a few months behind and every 6 months did a major, revision of the numbers because they didn't get it right, but, I think our Q3 results and what we're saying.

Forward thinking about, the pipeline and where we are with the order volumes is actually showing a very consistent labor market, not a declining labor market.

It doesn't mean that there's huge job growth and or, and it doesn't mean that there's huge job losses. It just means that it's consistent. And as we get into 2026, and you know we'll talk more about this in our next earnings call, next quarter, but we're basically thinking that it's 2026 is going to be very similar to 2025, consistent hiring, not big decreases, not big increases, just more of the same.

And Ronan, one more point, so I gave you, I, we obviously have the ability to do a qualitative analysis of order volumes and other data sources that we look at, but.

We also have the, we've also speak to our customers on a regular basis, and I think, we've made this point many times.

Just this year alone we've had over 1,500 formal business reviews with our customers. Now that may be the same customer two or three times, but it just shows you and shows you that in that we are formally sitting down with our customers to review their programs to optimize their screening, to talk about upsell cross-sale opportunities. And to get their views on their hiring and you know what we're hearing doesn't necessarily jive with what is being reported in the media, so that's what we're basing our business on.

Got it, thank you very much for all that. I appreciate it. And then if I may, just to shift gears a little bit, can you help with how we should think about cadence synergy, the cadence of synergy realization in 26, and just a reminder on.

Timing for sterling EPS secretion and also deleveraging.

Yeah, Ron, it's a great question. So, as we mentioned, we're at $52 million. Our target is 65 to 80. We obviously, lap the anniversary as of this week, that remaining, somewhere between 15 and $25 million will come fairly rapidly over the next year. It's a lot of operational and fulfillment and data projects that have some of, a little bit just more plumbing, more prerequisites that need to be checked off, but we still are very confident that we'll achieve it, and it should hit fairly rapidly over the next 12 months or so as we just complete, one optimization, one efficiency project after another. In terms of EPS accretion, I mean, you're starting to already see some of that flow through pretty strongly, right? We've got, certainly relative to the pre-acquisition period, really strong EPS numbers in the second half of the year. Some of that is just the operational scale, the fact that, we, we've got to, consecutive quarters of revenue growth. We've got the synergies flowing through and then we also have all the work we're doing on the cash flow and debt side of house, so the repricing, obviously lower interest rates helps a little bit, and just working capital management, so we're driving really strong cash flow, so that's going to obviously support. Interest expense, and help and help flow things down to EPS, and then you know I think to your to your last point on deleveraging, I think we're seeing those trends already kick in, as I mentioned, strong free cash flow, strong EBITDA accretion.

As we build more cash and which ultimately reduces net leverage, we'll continue to see that number start to accelerate, and we still feel like we'll be getting towards that 3x, synergized net leverage ratio by the end of next year effectively at the two year anniversary of the deal. So I think we're on schedule on all three fronts there, Ronan.

Thank you very much. Appreciate it.

Scott Wurtzel, Wolfe Research.

Great, good morning, guys.

Thank you for taking my questions. I just wanted to go back to some of the commentary, around base growth for 2026 and your expectations for it to, continue to remain negative. Is that right now sort of an expectation that it will remain negative throughout 2026, or given, we are obviously comping a lot of years of negative growth, could we potentially see, an inflection, as we get sort of into the second half of the year?

Thanks.

Yeah, Scott, it's a good question. I mean, we're not going to, we're not at the point yet where we can kind of give very specific 2026 commentary. I think really our main focus now is kind of looking at the exit velocity, if you will, of our order volumes in 25 and what that implies for at least the start to 26. I just wanted to make sure that people understand that, to Scott's point, it's been a consistently flat hiring environment now for a period of time, and we expect that dynamic to continue. I mean, bases improved dramatically already through the year. It was 5.5% Q1, 3.7 last quarter, now only 18. 18 is that slightly negative that we've been talking about the last couple quarters, and that's kind of that that ball. Park that our current expectation that that persists for the next few quarters will obviously give out a little bit more refined view, as we get into our next earnings call for the 26 guide, but you also have to remember at at a at a slightly negative base with the new logo and upsell cross sell, consistency and then momentum we have and where we're hitting all cylinders on retention, even with a slightly negative base you're set up. Pretty good overall growth, but you know we do see just kind of this macro environment persisting. There's not really, any kind of formal outlook on where tariffs are going to take us on immigration policy, on all these other things that are kind of impacting just that wait and see mode that customers are in. So a little too early to get specific, but certainly, for the foreseeable future we kind of see that that wait and see consistently flat overall overarching hiring environment.

Got it makes sense. And then just as a follow-up going back to the kind of the identity market opportunity and you know you mentioned mid to high 10s market growth rate. I mean given your position, in the screening market and everything, it's it you think you guys can outgrow that sort of market growth rate over the near to medium term as you sort of, bring this these solutions into your customer base?

Yeah, well, we, I mean I think the short answer is we don't know, because it's so new, I think we're really well positioned our customers can go out and buy point solutions to fix some of this, but we're in a really unique position about, being, we feel. One of the only that can sit behind the scenes and and help them triangulate all of these things into one solution, so the discussions with customers have been phenomenal and obviously we're very happy about. The wins and the pilots and the launches that we've done recently, but it's just so early it's hard for us to sit back and quantify that it will be a certain number and a certain growth rate. But as I said, when we get into 2026 a little bit and these numbers become clearer and we start looking at win rates in pipeline and start doing some math behind the scenes, we will report that out to you because we know it's an important piece of our growth algorithm.

Thanks guys.

(Operator Instructions) Jeff Silber, BMO.

Thanks so much. I know it's late. I'm just asking.

You noted the retention improvement sequentially. I think he cited a few factors, that, kind of buried in the Q&A, but if I had to focus on a few things, why do you think he saw that retention improve, and is that something you think is sustainable?

Thank you.

Yeah I think there's a lot that a lot that goes into it. I mean, first thing we're very customer focused, customer centric, customer inspired company we spend a lot of time with our customers as I mentioned with our formal business reviews and those are only the former runs, former ones we're talking to our customers daily, weekly, monthly. The collaborate sessions that we talked about in the script have been phenomenally attended. We've got, lots, if not, most of our large customers attending these collaborate events around the world, so we're spending a lot of time with our customers, and I think there's a couple of things that are driving retention, one is we are considered thought leaders in their industry, we.

We pick certain industry verticals to focus on and we go deep into those so that we know what they're dealing with from a compliance standpoint, from an onboarding standpoint, from a cost pressure standpoint, whatever it might be. We know their industry well and in most cases we have most of their peers as customers so we can help them benchmark so we can help them say, okay, here's what the industry's doing and here's where there's, here's where you're best in class and here's where you're, where there's gaps and those gaps are great to point out because what that means is upsell cross-sell opportunity and that's why package density has been such a great driver of growth for us. So vertical knowledge industry expertise is clearly one of the drivers of retention.

The other one is tech.

I mean, as I mentioned earlier, we're a great tech company.

We've got agile pods all around the world, we've got solution engineers. I mean, we're really good at tech. Our products demo really well, which leads to a lot of new logo wins, and customers are very happy with the products and. Also, we've really nailed the sterling integration from a product and platform standpoint. Our vision, our theory from the very beginning of the acquisition was single back end, leveraging all of the great first advantage automation that's been out there for literally 9, 10 years now.

Single back end but the front ends don't change for the customers so that.

That kept customers from treating. Usually when you do an M&A, that's the biggest thing that they worry about is, are you going to force migrate me onto a new platform? And the answer was no. And it was even better than no. It was like not only are we not going to force migrate you, but you're actually going to get a series of upgrades because we're taking best of breed from both platforms and giving it to the other platform. So there were some things that the Sterling platform did really well that are now becoming available to the First Advantage install base, and there are some of the things that First Advantage did really well that are now becoming available to the Sterling install base, and those are things that are visible. So we're talking about functionality, we're talking about best of breed user experiences, etc. And the things that are invisible to them. Are the things that we're leveraging on that first advantage back end. So it's the first advantage back end with all that great automation which is driving faster turnaround times. If if you look at our turnaround times, which is a key KPI for our customers, our turnaround times are coming down with customers because of the automation. So we're we're enabling them to onboard. Faster and onboarding faster is critical for them, especially in high volume hires, because they need the people to do the job. So I think it's a combination of vertical expertise and the fact that we actually nailed the technology and the future promises of technology like how we're rolling out digital ID, how you can integrate your I-9, all that stuff is being eloquently explained to our customers, and I think they like the story.

Appreciate the call. Thanks.

Harold Antor, Jefferies.

Hey guys, this is Har Orlando on for Stephanie Moore. Just, I guess, real quick one for me, just, in terms of international growth, I know international growth has seen several quarters of robust growth, if you could just provide any more color, I guess how that's, shaping the other teams to study your kids and.

A bright spot, even though, from, we, we've heard that the UK still is, in some areas are still weak, so just I guess anything you're doing there and then, I guess on your verticals, and I think you call out, weaker, healthcare trends, but I believe, you see some. Seasonal pickup and transportation. So, it's a seasonal, pickup and transportation and, in line with what you saw historically or just anything that would be helpful.

Thank you.

Yeah, Harold, go ahead, Steven, go ahead.

I'll tell you, yeah, Harold, on international, I mean, look, we're still seeing the momentum we've seen the last few quarters, sustained, if not accelerate a little bit. International was up a little over 11% in total. So, again, like the trend we had last quarter outpacing the consolidated business, and you're right, the UK market's been certainly a strong point there, and some of the underlying verticals are still showing some good strength there, and there's some government regulation that's also helping us out, but H1stly, we saw growth across all three of our international regions, and you remember we've had that larger, financial services win in Australia. We've had some other go to market success over the course of the year as well. So, really strong base, really strong, upsell, cross-sell new logo type winning there in international. I'll let Scott fill in the verticals, but I think international has been kind of ahead of the curve and continued to showing that growth and not accelerate a little bit in the 3rd quarter.

Yeah, Harold, on the verticals, so you mentioned, healthcare.

I think it's important to note healthcare for us is really for subbusinesses. So it's acute care, think of hospital networks, post acute care, life sciences, and healthcare staffing.

Post acute care, life sciences, and especially healthcare staffing really did well in the quarter. It was really just the hospital networks and it's completely 100% tied to what's going on in Washington DC with Medicare and Medicaid. It's not like there's less demand for their services. In fact, there's more demand. You've got an aging US population, and you probably know from your own experiences that there's a tremendous demand in healthcare. It's just that a lot of these smaller regional, even rural hospital networks are dependent upon Medicare and Medicaid funding. And there's a lot of uncertainty in that right now, so they've cut back their hiring just because they don't know where the funding is going to come from. Now healthcare staffers have filled in the GAAP because they still need the services.

So I think this is just an aberration. I think this is something that will play out over the next couple of quarters, will stabilize.

We're very bullish on healthcare because of, the aging population, the, incredible need for services. And even though it's slightly down, I would say our strategy is actually to double down in this industry because it's going to be a tremendous growth industry long-term. It's just having a little bit of an aberration right now and it's completely tied to the smaller and mid-size hospital networks. It doesn't really affect the larger hospital networks and it affects mostly the nonprofits.

Peter Christensen, Citi.

Thank you. Good morning. Thanks for squeezing me in here and nice execution here, some nice trends. Scott, a quick question. I want to double tap on the, AI disruption kind of concern, which I think you laid out really well. I think there, there's a slight nuance to the argument though.

That at least on the fringe and maybe in certain pockets of your base with AI then maybe those employers can actually in-house some of their onboarding or screening type of duties there.

How would you respond to that? What's your opinion there? And then as a quick follow-up, great to see that you combined the databases that here. And, the, in building up your proprietary database, can you just talk us through, how that's delivering on data cost savings, and is there a point where of mass criticality where you really could see an inflection in your data cost because of, the years that you've built up your proprietary database?

Thank you.

Yeah, Steven, I'll take the first part if you take the second part, so on the AI disruption, I mean my short answer is no chance. Customers do not want to do this. This is not where they want to spend their engineering dollars and resources, and it's extremely complicated. It's loaded with compliance. There's not a lot that they're going to do internally. With AI through the screening process. Now that's not true with recruiting. I think AI is, fully in play with recruiting, and it, and it's having great results. So, using AI driven recruiting tools in the front end of the recruiting process makes a lot of sense, but that only feeds then, better information to us, we see AI as a real lift in quality. Because AI should improve the intake of data at the very front end of the recruiting process so that when it then comes to us to then run a digital identity, to then kick off a background screen to then on board with the 99, we have better data because AI is helped with the quality of that data. So whether it's a picture capture, whether it's a biometric capture. That the AI is doing whether you know AI is helping the candidate fill out the application to make sure that they're putting in their address correctly, their name is all instances of their name are captured first name, middle initial, or or and last name and capturing maiden names, all that kind of stuff. It only helps us, but it doesn't infringe any way on our business model. In fact, it, it's an improvement in quality, which actually also could help with an improvement in turnaround times because the better data we get from an ATS or from a, AI enhanced, recruiting engine, it makes our job that much easier, but I think with all of the FCRA compliance laws with. With all of the unique thousands and thousands of data sources that need to be hit, I don't see customers doing this themselves in any scenario.

Yeah, and then Pete, on your data question, I think you know two things there. One, I mean, Leveraging the data assets and resources of the two combined companies has been a core part of our cost of sales component of our synergy program and as you can see, where we're at on that timeline, we're already above and beyond the original $50 million dollar target, so we're doing well there and leveraging those is in in many places in the business but to Scott's earlier point on the Q&A, we're a tech company at heart and tech companies love data, and we'll continue. Continue to invest in ways to grow our databases and when we give out the full year numbers at the end of the year on the Q4 call, you'll see growth in our NCRF, you'll see growth in our verified databases and then, it's not just growing the databases, it's leveraging them in as many ways as possible, but that'll continue to be a storyline in a way that we, improve the quality of our products, improve the quality of our P&L and cash flow, but it's always going to be a part of our story here.

And Pete, 11 other thing I'll add, yeah, one other thing I'll add to it is, and again this kind of ties back to retention. I know I didn't mention this when I got the retention, question earlier, but you know we have literally been automating, internal processes and automating, our APIs to data sources literally for 10 years now. And for some reason over the last year or so we are starting to get, amazing accelerated payback on this, so clients are actually feeling our fast turnaround times and we've also particularly solved some of the sticky data source known data source issues in our industry, certain counties or certain states or whatever it might be.

And so when you sit down and do these business reviews with customers and you show them that their turnaround times are coming down and they feel that their turnaround times are coming down because of our investments in automation, and again that's all in the first advantage back end that we talked about and now sterling customers are legacy customers are starting to feel this snap too because we're using our fulfillment engine on the back end for them. That helps with customer retention and you know that that is just, the power of that is showing up in the retention numbers and again this is something that our competitors just don't have. We are light years ahead of them and this is a big competitive moat for us.

Super helpful comments there.

Thank you both.

Thank you. I see no further questions in the queue.

Thank you all for joining us today and for your participation. This concludes the first advantage Third quarter 2025 earnings conference call and webcast. At this time, you may now disconnect your line. Have a wonderful day.