First Advantage - Q2 2023

Transcript

Operator (participant)

Good day, everyone. My name is Todd, and I will be your conference operator today. I would like to welcome you to the First Advantage Second Quarter 2023 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. At this time, all participants have been placed in listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Lastly, if you should require operator assistance, please press star zero. Please note today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.

Stephanie Gorman (VP of Investor Relations)

Thank you, Todd. Good morning, everyone, and welcome to First Advantage's second quarter 2023 earnings conference call. In the investor 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 SEC, including our 2022 Form 10-K and our Form 10-Q for the second quarter of 2023 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 am joined on our call today by Scott Staples, our 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.

Scott Staples (CEO)

Thank you, Stephanie, and good morning, everyone. Thank you for joining our second quarter 2023 earnings conference call. There are several highlights and updates that I'm looking forward to sharing with you today. To start, we are very proud of our second quarter performance. Both revenue and Adjusted EBITDA results were in line with the expectations we communicated during our first quarter earnings call, with our industry leading Adjusted EBITDA margin exceeding 30%. We achieved these impressive results despite the challenging macro environment, particularly within our international operations. We have once again demonstrated the financial discipline that we have built into the business and our ability to match expenditures with fluctuating volumes while maintaining impressive margins. In the second quarter, we again generated strong cash flow from operations.

This, along with our current cash position, enables us to continue to selectively reinvest in our business, pursue acquisitions, buy back shares, and consider other uses of capital that maximize shareholder value. As a result of our current cash position, sustainable and stable operating cash flow and commitment to a balanced capital allocation strategy, today, we are pleased to announce that our board has declared a one-time special dividend of $1.50 per share, which represents a greater than 10% return of capital to our shareholders. This is in addition to our ongoing share buyback efforts. Even after taking the one-time special dividend into consideration, we are still able to maintain a strong balance sheet and modest net leverage position of approximately 1.6 times on a pro forma basis.

Additionally, we will still have ample cash and liquidity, which will continue to give us flexibility to invest in our business. We pride ourselves in providing a compelling value proposition to our customers. I am proud of our team's ongoing dedication as we all continue to operate in an uncertain macro environment. In the U.S. consumer confidence remains high and the inflation outlook is improving. However, fears of ongoing economic weakness and the likelihood of additional interest rate hikes continue to impact corporate spending. That being said, our customer base remains strong and continues to grow across our diverse range of verticals. Over the last 12 months, we booked 31 new logo enterprise customers, with seven of them booked in the second quarter. As a reminder, we define new logo enterprise customers as those with $500,000 or greater in annual expected revenues.

Additionally, we continue to see solid new logo growth opportunities, and in fact, our RFP volume is extremely high. Turning now to our 2Q highlights on slide 5 in our earnings presentation. David will provide additional color on our financial performance and full year outlook in a few minutes. In the 2Q, we generated purely organic revenues of $185 million, down 8% year-over-year, while cycling over double-digit growth from prior year quarter. We also grew sequentially compared to Q1, and sequentially month-over-month, every month in the second quarter. Additionally, our three-year organic revenue CAGR of 18% remains substantially higher than our long-term target. In our Americas segment, demand remains tempered, but continues to be augmented by our positive new logo, upsell, and cross-sell achievements.

Our international markets continue to face challenges that have resulted in significant year-over-year revenue and Adjusted EBITDA declines, driven primarily by India. Technology, financial services, and business services continue to experience a decline in hiring volume. Automation and digitization continue to drive our industry-leading Adjusted EBITDA margins, despite lower year-over-year revenues in the quarter. We remain focused on our solid execution track record and operational excellence initiatives, and continue to expect our Adjusted EBITDA margins to remain over 30% in the second half of the year. Let me now take a moment to discuss some of our strategic highlights in greater detail. Our board of directors has declared a one-time special dividend of $1.50 per share, which reflects our strong cash position and low net leverage, as well as our commitment to shareholders.

This return of capital to shareholders is in addition to our ongoing share buyback program. We are also committed to driving long-term profitable growth through investments in our technology and solutions, such as AI, which I will speak to in a moment, and through M&A, which remains a high priority for us. Over the last two years plus, we have successfully executed four strategic acquisitions. Each has exceeded our expectations and resulted in accelerated profitable growth. We continue to seek to optimize our portfolio and actively evaluating M&A opportunities. Our balance sheet remains strong and continues to provide flexibility to support future strategic growth initiatives. Second, with respect to the macro environment, overall hiring remains generally stable despite the elevated degree of uncertainty. Recent macro jobs data, specifically related to new hires and quits, while down from prior year, remain relatively consistent.

Additionally, we meet with our enterprise customers on a regular basis. While they continue to monitor the impact of the macro environment on their businesses, we are not hearing any reported major changes, upward or downward, in their hiring trends. Many have had measures in place since early in the year to best offset the impacts of inflation and interest rate hikes, and do not anticipate material changes to their already adjusted hiring plans. Our clients, like ourselves, continue to closely monitor and control their costs. Third, I would like to highlight how we are leveraging AI in our business. A notable example of this is within our customer care organization. Over the last two years, we have made investments in tools from leading technology partners with powerful AI capabilities to enable our agents to provide a higher level of service and improve efficiency.

From reporting enhancements, to data analysis optimization, to a chatbot and knowledge base that continue to learn and improve with every transaction, we can leverage not only the innovation offered by our technology partners, but also easily plug in new vendors and technologies directly into our platform as the AI market matures. These advancements have transformed the way we work with our customers and them with us. It has allowed us to do more at a lower cost, provide a better applicant experience, without sacrificing our high standard of customer service. Our AI efforts will continue to evolve and expand. I look forward to updating you on our efforts in the future. I will now turn the call over to David for more details on our financial results and outlook. David?

David Gamsey (CFO)

Thank you, Scott. Good morning, everyone. Turning to slide 7. Our second quarter revenues were $185.3 million, a decrease of 8% from the prior year, or on a constant currency basis, $186.4 million, a decrease of 7.5% from the prior year. As a reminder, these results are against strong double-digit revenue growth of 15% in the prior year quarter. Revenue grew sequentially and in line with our expectations for the quarter. In our Americas segment, revenues of $163 million were down just 4.6% from prior year, as our customers continue to hire, although at a slightly lower rate than in Q2 of last year. Our Americas segment held up relatively well, given overall market conditions, whi ch is attributable to our broad-based, resilient enterprise customers.

In total, our Americas segment represented 87% of consolidated revenues in the quarter. In our International segment, revenues of $24 million were down 27% from Q2 2022. On a constant currency basis, revenues were $25 million, or down 24% year-over-year. The decrease was due primarily to weakness in India, given the region's exposure to BPO and IT services-related businesses, and in APAC, given the tepid recovery in China and other regional market dynamics. Our European operations, while still down on a comparative basis, have proven more resilient in the face of macro headwinds, with the new Digital Identity products contributing to their results. In total, International represented 13% of consolidated revenues in the quarter.

In the second quarter, the year-over-year revenue decline from existing customers was $25.6 million, net of upsell/cross-sell, which contributed $7.1 million or 3.5% to our revenues. We are anticipating an increase in upsell/cross-sell in the second half of the year based on our current pipeline. We continue to see strong customer retention coming in at approximately 97% for the second quarter. Revenues from new customers contributed an incremental $9.4 million, adding 4.7% to our results. Americas' new logo sales outpaced International in both dollars and percentage. Contributions from new customer sales and upsell/cross-sell remain encouraging. Our operating expenses decreased year-over-year, which was possible because of our highly variable, usage-based cost structure and disciplined approach to managing expenses.

We also continue to focus on improving productivity, leveraging our historical organic investments in technology, and managing controllable costs. We are recognizing the benefits from our efforts, which include reducing our facilities footprint, leveraging procurement savings, and selectively adjusting headcount to align with demand. Adjusted EBITDA for the second quarter was $56 million, a decrease of 8% compared to Q2 2022. Our three-year Adjusted EBITDA CAGR was 24.4%. Our Adjusted EBITDA margin of 30.2% was in line with our expectations, and we continue to expect this to remain above 30% in the second half of this year. For Q2, our adjusted effective tax rate was 23.5%, adjusted net income was $35 million, and adjusted diluted EPS was $0.24. Turning now to capital allocation and our balance sheet on Slide 8.

Our capital allocation approach remains disciplined and balanced between M&A, internal investments to drive profitable growth, returning capital to shareholders, and maintaining our attractive net leverage profile. Our excess cash and low net leverage provided flexibility and acted as catalyst for our recent strategic capital allocation initiatives. Our one-time special dividend of $1.50 per share, which equates to a greater than 10% return of capital to our shareholders, along with our ongoing share buybacks, reinforces our commitment to return value to shareholders. Even after the one-time special dividend announced today and the share buybacks through the end of the second quarter, we maintain the largest cash position and lowest net leverage amongst our public peers. In the second quarter, we continued to deliver strong and consistent cash flow generation, with operating cash flows of $33 million.

It is worth noting that the strong cash flow generation is after an incremental approximately $7 million of cash taxes paid in Q2, as we have now fully utilized our U.S. federal tax NOLs. During the quarter, we used cash to repurchase approximately $27 million of common stock, or approximately 2 million shares. Since the inception of our share authorization program last August and through August 3 of this year, we have repurchased approximately 8.7 million shares for approximately $114 million. During the quarter, we also spent $7 million on purchases of property and equipment and capitalized software development costs. We ended the quarter with total debt of $565 million, and cash and short-term investments of approximately $401 million.

We also have $100 million in untapped borrowing capacity under our revolving credit facility with no outstanding balances. Based on our last 12 months Adjusted EBITDA of $239 million, we had a net leverage ratio of approximately 0.7 times as of June 30th. Taking the approximately $218 million payout for the one-time special dividend into consideration, our pro forma net leverage ratio remains industry-leading at approximately 1.6 times, and our pro forma cash position will still be a robust $183 million. As we have discussed in the past, our debt structure has us well positioned for the current interest rate environment.

As you may recall, approximately 50% of our long-term debt is hedged utilizing an interest rate collar capped at a 1.47%, one month SOFR rate through February of 2024, and we strategically hedged another $100 million of long-term debt in the first quarter of this year. We also have no principal payments due before 2027. Even after the one-time special dividend, our interest rate exposure on the remaining unhedged portion of our debt will still be substantially offset by our interest income on interest-bearing cash deposits. Moving to slide 9. Today, we are reaffirming our guidance, however, at the lower end of our guidance ranges. This reflects the current hiring environment and our expectations that existing macroeconomic conditions and similar labor market trends will continue through the remainder of the year without significant changes.

As a reminder, our guidance anticipated modest improvement in the second half of the year, which now does not appear to be materializing. We remain confident in our resilient business model and our ability to effectively manage those factors within our control. Accordingly, we have already taken measures to reduce our costs, to stay in line with previous guidance, and to maintain our Adjusted EBITDA margins above the 30% level on a full year basis. For Q3, we expect sequential quarterly revenue and Adjusted EBITDA growth, though revenue will still slightly decline on a year-over-year basis.

It is also important to note that even after taking into account the one-time special dividend, which is expected to impact adjusted net income and adjusted diluted EPS by approximately $2.7 million and $0.02, respectively, as a result of lower interest income, these metrics are still expected to be within the lower end of the guidance ranges. We are confident that the investments we are making in our business will allow us to grow and operate more efficiently in the future, while also positioning us to improve margins and continue to generate strong cash flow. At the same time, our ability to further enhance our innovative technology and product solutions supports our commitment to our customers, especially in this dynamic environment. I will now turn the call back over to Scott.

Scott Staples (CEO)

Thank you, David. I would like to conclude our prepared remarks today by reiterating our areas of strategic focus and priorities to drive long-term profitable growth. We are a global leader in a large market with significant growth potential. I am confident in our team's ability to execute to capture more of this market. While there are some near-term obstacles, we remain focused on our long-term growth opportunities and our continued strong cash flow, which allows us to invest and create value for our shareholders. We continue to focus on accelerating organic growth with investments in our products and solutions, including investments in machine learning and AI. We will continue to drive purposeful growth with acquisitions that expand our vertical capabilities, geographical footprint, and innovative solutions when available. We also continue to focus on our verticalized go-to-market strategy and leverage our flexible cost structure to enhance margins.

Finally, everything we do centers around our corporate culture and values. Sustainability is fundamental to how we operate, and this is not only the right thing to maximize value for our business, but for all of our stakeholders, including customers, employees, partners, communities, and shareholders. 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.

Operator (participant)

Thank you. We will now begin the question-and-answer session. At this time, if you have a question, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. If you are using a speakerphone, we request that you pick up your handset while asking your question to provide optimal sound quality. Thank you. We'll take our first question from Shlomo Rosenbaum with Stifel. Please go ahead. Your line is open.

Shlomo Rosenbaum (Managing Director)

Hi, thank you for taking my questions. You're talking, you're talking about the strength in the pipeline and new logo activity, and, you know, it's supposed to show up a lot in the second half of the year. We're hearing that similarly with some of the competitors as well, and I was wondering, what's driving this? I mean, we're having kind of a, a tepid existing you know, volume, you know, levels. Are you seeing clients that are looking for more vendor consolidation? Like, what's driving the pipeline, the, the strength in, in the RFPs?

Scott Staples (CEO)

Yeah, Shlomo, you know, great question. It's correct. You know, we are, we are seeing historic highs in our total pipeline and in our late-stage pipeline. Obviously, those are very encouraging signs. We, we also, I, I think your theory is correct. It's probably two areas. One is we are seeing your procurement-led deals, which are looking for vendor consolidation, optimized pricing, et cetera. That's obviously good for all three of the big guys. We're also seeing a lot of deals, you know, just driven by the need for more automation and better applicant experience and better technology, and I, I think that is really just the maturity of the space.

That's also, you know, obviously good for us and all, you know, all, all three of the public companies. I think your theory is spot on, but I would add in the second piece of it, where people are really looking for a better tech experience.

Shlomo Rosenbaum (Managing Director)

Great. Thanks. If I could just squeeze in one other one. Sterling announced an exclusive agreement with Yoti for some ID services. I know you guys also have a Yoti relationship. Is there anything there? Can you talk about what you do with Yoti, and do you feel like you're gonna be preempted all by their exclusive arrangement?

Scott Staples (CEO)

No, I don't believe their arrangement is exclusive, by the way, and Yoti would tell you that. If you talk to Yoti directly, they would say that. We were actually the first background screener to sign up with Yoti, and others have followed. I think it Yoti is an amazing tech, and it's, you know, primarily for the U.K. market. This would be the Digital Identity services within the U.K., and it is a great tech engine that we have built into our workflow and our tech experience. Yoti is an open technology that, you know, that they obviously have to approve it, but other background screeners are also partners with Yoti, so this is not exclusive arrangement.

This is a great opportunity for the entire space, for, you know, company- background screeners with good tech to provide Digital Identity to the U.K. market, and then ultimately that should expand to Europe and other countries as well.

Shlomo Rosenbaum (Managing Director)

Okay, thank you.

Operator (participant)

Thank you. We'll take our next question from David Togut with Evercore ISI.

David Togut (Senior Managing Director)

Thank you. Good morning. Just bridging to Shlomo's question, can you talk a bit about sales pipelines? Are you seeing not just the pipeline but closing times? Are you seeing any change in sales cycles versus prior quarters?

Scott Staples (CEO)

Sales cycles seem to be about the same. You know, as I, as we mentioned, clearly more deals in the pipeline. Sales cycles typically run about six months in this space, and there hasn't been too much change to that. What we are seeing, which is very encouraging, is the post-close integration and onboarding cycles have dramatically decreased. You know, once... That, that means once you get, you know, the contract in place, we're finding our customers are going live much faster than they have in the past. There's, there's probably a, a financial reason for them to do that. You know, if the, if the deal is saving them money, it's in their best interest to get it up and running as fast as possible and start saving that money.

That's the only place that we've seen cycle times improve, but sales cycle times themselves are relatively unchanged.

David Togut (Senior Managing Director)

Appreciate that. Just as a quick follow-up, given your extensive experience with offshoring, prior to leading First Advantage, do you see additional opportunities to offshore some of your own headcount?

Scott Staples (CEO)

Yeah, absolutely, and we've, we've continued to do that. As you know, most of our initial offshoring strategies focused around India, but we have branched out. We, we announced a few quarters back, I think maybe Q4 of last year, opening up a tech center in Poland. We've had a great experience with our tech center in Poland. Not only getting cost savings, but we're getting access to incredible talent. Not only are we using Poland for tech, but we're also using it for customer care and some operations. As you may remember, we acquired a company in Latin America called MultiLatin.

MultiLatin has been extremely helpful in, in helping us, you know, come up with strategies around what, what jobs and what roles can be based in Mexico, and other, other components of, of LatAm. Our, our outsourcing strategy has really become sort of a, a right shoring strategy, where we're finding replacing roles where they make sense, both from a, a customer standpoint and from a company standpoint. That has expanded then our footprint outside of India to the, to the places I mentioned. We're considering other areas as well. We're expanding our footprint in the Philippines, for example, for primarily for our APAC customers. I think between India, Philippines, Mexico, and Poland, we're coming up with a very comprehensive, you know, right shoring strategy.

David Togut (Senior Managing Director)

Understood. Thank you.

Operator (participant)

Thank you. We'll take our next question from Ashish Sabadra with RBC Capital Markets.

David Paige (Associate Analyst)

Hi, good morning. This is actually David Paige for Ashish. I was wondering if you could just provide a little bit more color on how you're sustaining the 30%+ EBITDA margin, given some of the macro headwinds and maybe a little bit of lower year-over-year sales growth. To the extent, if AI is playing a role in that, I know it's early days for AI, but maybe some of the cost savings benefits from AI investing. Thank you.

David Gamsey (CFO)

Well, as you know, we invested early and heavily into technology and automation. We continue to do so. We also have a very variable cost structure, particularly from an operational perspective. We can run five days, six days, seven days. We can run multiple shifts. We manage a lot of volume through overtime, and we are very disciplined about matching headcount with volume. So, that's number one. Number two, in today's macroeconomic environment, we are continuing to look at cost. We've been able to reduce some costs relative to software licenses, insurance costs. We've taken out selective SG&A headcount costs. So we're committed to maintaining a 30%+ EBITDA margin. We've proven that now time and time again over the past three years, and we're very confident that we can continue that.

Scott Staples (CEO)

Let me give it a little more color. I mentioned in my prepared marks, you know, the AI that we use in our customer care centers and operations. Just to give you an example of, of that and how it's helped us, you know, maintain the 30% is, we've launched a new program within our customer care called Click, Chat, Call. Click, Chat, Call is our strategy in customer care, where as you can, you can see from the order in which I gave them, call is the last option. We are giving AI-driven tools to our customers and their applicants on how to leverage Click and Chat through AI tools instead of call. This has been received so well by our customers and applicants.

Our, our, our customer satisfaction scores are, are, are great, you know, through this launch of this, of this strategic change in, in customer care. It has, again, not only driven higher CSAT scores, but it's allowed us to do more with less people, and hence, reducing headcount in our customer care centers. That's helped us with the 30% as well. We get, you know, best of both worlds there with leveraging AI tools, and saving money.

Operator (participant)

Thank you. We'll go to our next question from Andrew Steinerman with J.P. Morgan.

Andrew Steinerman (Managing Director and Senior Equity Research Analyst)

Hi, it's Andrew. Could you just talk about cross-sell, upsell again? I think the percentage in the quarter was about 3%, and I think you said that you expect second half in that cross-sell, upsell revenue contribution to get better. Could you just discuss your confidence in that dynamic?

David Gamsey (CFO)

Andrew, just to give you the numbers, it was 3.5%. It was $7.1 million in Q2. We have some upsell, cross-sell in our pipeline that got deferred by a quarter or two. It's from a major existing customer, obviously, and they have plans to move forward with it. It just got pushed back a quarter.

Andrew Steinerman (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. We'll take our next question from Stephanie Moore with Jefferies.

Stephanie Moore (SVP Equity Research)

Hi, good morning. Thank you. I want you to touch on your, your new business wins that you saw in the quarter, continue to see nice growth there. Can you talk a little bit about, you know, the competitive landscape and where you think you're seeing the majority of, of those new wins? Thank you.

Scott Staples (CEO)

You know, it's interesting. We've been actually tracking this data for a while now, and I think I've reported this on prior calls. We're getting, we're getting the, we're getting the enterprise wins pretty evenly across what we call is the three competitive buckets. You know, one being, you know, the large public peers, two being mid-size, and three being the mom and pops. It's really a pretty equal percentage across all three buckets when you...... I look at, you know, sort of number of units. And that, we feel, is a very healthy sign because, you know, as you know, this is still a very fragmented market. It's a $13 billion TAM with, you know, with still lots of players.

The fact that we're taking, you know, equally across all 3 buckets, you know, is a trend that we wanna see continue, and it's been happening that way for a good year or so. We are seeing it, like, also fairly evenly across verticals. We, there, there's nothing that really stands out as, you know, a lot of wins coming from a vertical or 2 verticals. They're still pretty evenly across verticals, although we, we continue to have, you know, real good success in transportation and in retail e-commerce, which are, you know, 2 real, real, you know, strong verticals for us.

Nothing, nothing really, different about any of those trends other than what we mentioned to, you know, Shlomo's question, which is we are seeing more procurement-led deals and with vendor consolidation. We do expect, you know, the new logo pipeline to continue to remain strong.

Stephanie Moore (SVP Equity Research)

Great. Thank you so much.

Operator (participant)

Thank you. We'll take our next question from Manav Patnaik with Barclays.

Ronan Kennedy (VP)

Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my questions. The, the reference to the historic highs in total pipeline, and I think the responses to the previous questions on new biz, cross, and upsell, coupled with guiding to the low end of the range, the comments that the initially anticipated improvement in 2H doesn't appear to be materializing. Can I confirm that this implies further deceleration for what has been referred to as the wild card of pure base growth? What are the drivers? You know, whether it's regions, specific verticals, or... 'cause it sounds like the macro seems to be consistent with your expectations.

David Gamsey (CFO)

Ronan, what, what that implies is base growth will remain negative in the second half of the year. We do believe that. Base growth was also slightly negative in the second half of 2022, so you now have a negative and a negative. Sequentially, we are seeing quarter-over-quarter growth and seeing improvement, but we are being dragged down right now by our international operations, and we need India and APAC to bounce back. We feel good about the US, and we think base growth will be improving while still being negative.

Ronan Kennedy (VP)

Okay, thank you. Could I just reconfirm the rationale around the special dividend? I know you said, you know, the expectation is for capital allocation to remain balanced and consistent, but are there, you know, any implications for this is the type of thing that can happen in such a dynamic or, you know, obviously, a function of share price with regards to the buyback? If there's any implications for long-term capital allocation? Also on M&A, just if you can comment on the pipeline and what you're seeing from a valuation standpoint.

David Gamsey (CFO)

Well, first, from a special dividend perspective, we just had a lot of cash sitting on our balance sheet and very low leverage. This special dividend isn't gonna preclude us from doing anything else. It's not gonna preclude us from pursuing M&A opportunities. In fact, we are actively pursuing M&A opportunities. Scott will comment on that momentarily. Even after this dividend, our leverage is only gonna be 1.6 times. We're still gonna have $183 million of cash on the balance sheet. We're not borrowing any money to fund it. We're still gonna have the strongest balance sheet, by far, of any of our public peers. We just felt it was the right thing to do.

The other point was, we're continuing to buy back shares, but we didn't wanna move this more into the share buyback program because the float's starting to get a little difficult. We've already bought back 8.7 million shares. It's becoming a little more difficult to accumulate a big position, and we didn't wanna do that to our existing investors. We thought this was the right allocation.

Scott Staples (CEO)

Yeah, on the M&A side, just to answer your question there. I think we've been talking about this for the last couple of quarters because we certainly started to see a change in the pipeline maybe six months back or so. The overall, you know, high level is that there are certainly less deals in the pipeline, but those deals tend now, for some reason, which we can't explain, but the deals maybe tend to be a little higher quality companies that we're seeing now, but valuations are still high. Our M&A strategy has not changed. You know, we, as we mentioned in the prepared marks, you know, we've done, you know, 4 deals in the last 2 years, and they've all been home runs, because we stick to our strategy.

You know, we're looking for good strategic fits that could be growth accelerators. As I, as I mentioned in the prepared marks, either enhancing our vertical story, expanding our geographical footprint, or giving us... you know, a product or tech, you know, that will help us grow. We'll continue to look for that, and we certainly are talking to companies, and we certainly are, are looking at, at things. Overall, pipeline is definitely lower, but there are still some high-quality companies out there, and but valuations are still a challenge.

Ronan Kennedy (VP)

Thank you. Appreciate it.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one at this time. Our next question comes from Kyle Peterson with Needham.

Kyle Peterson (Senior Analyst)

Great. Thanks. Good morning, guys. I wanted to start off as, as kind of a piggyback on, on Ronan's question on the special dividend. Obviously, this business seems to, you know, generate quite a bit of cash. You guys have a strong balance sheet. Would something maybe a, a more recurring regular dividend, you know, be something you guys would consider, you know, as a, you know, another way to, you know, deploy capital and potentially open up the investor base a little bit down the road? Or do you think that given kind of the more volume sensitivity of the business, that, you know, special dividends are sort of the way to go, at least for the foreseeable future?

David Gamsey (CFO)

Well, what we can tell you right now, Kyle, is this was a one-time special dividend. We always look for ways to maximize shareholder value. What you're asking in regard to an ongoing dividend is really a board-level kind of conversation. We consider all ways to maximize shareholder value, but it's, you know, nothing imminent.

Kyle Peterson (Senior Analyst)

Okay. Understood. That's clear. Then just a follow-up on, you know, the revision into the guidance. I know you're kind of steering us a little bit more towards kind of the lower end, I guess. Is the, the directional change in the outlook, you know, is that mostly due to some of the softness? I know you guys called out the Indian, you know, IT services and BPO providers. Is it the mostly hiring in that arena, or, you know, is this a little more broad-based that just makes you guys kind of direct us a little bit more towards the low end of the guide?

David Gamsey (CFO)

Well, keep in mind, we didn't change the guidance, right? We are directing you towards the lower end, but part of the factoring in that original guidance was the fact that we could have some softness in certain areas. At the upper end of the guidance, we anticipated improvement in the second half of the year. Keep in mind, this was given back in February, right? There are a lot of uncertainties. They have continued to evolve. We have seen-

Peter Christiansen (Director Equity Research)

Hampered a little bit by the AI scene. Just curious if there's any read-through there for, for generative AI, perhaps taking over more and more tasks. Is do you see that as, as an input to the slower hiring growth coming from that specific vertical? Thank you.

Scott Staples (CEO)

Yeah, Pete, I don't think so yet. Obviously, that is something to keep an eye on for that space, especially the BPO space. You know, we're, we're, we're many, many, many years away from, you know, AI, writing code and things like that. Certainly, it should and could impact the BPO space, just as we've proven with our own call center, rollouts. I still think we're way early days. I think what's, what's dragging the IT services and BPO companies down is not AI, but it's the macro. You know, they're still doing okay, because just think about, you know, who their customers are.

They're primarily the big MNCs from the US and Europe, and those companies are still giving work, sending work there, because that's obviously low cost for them. What's really, you know, hitting them is that the, those, those companies or their customers aren't, aren't actually, they're delaying new projects and they're delaying ramp-ups. If you, if you, if you talk to the IT services and BPO companies, especially out of India, a lot of them have delayed their annual hiring of freshers out of, out of college, and most have pushed them to late fall. That's a good indicator that their customers, the big MNCs, you know, are delaying projects and ramp-ups.

Business is still pretty good for them because existing projects aren't being canceled, but it's the new projects that aren't being ramped up, and that's where, you know, then it comes downstream to us, where they're just not bringing on as many people as they had in the past. I think, you know, once the macro, you know, swings back, you know, their business will swing back pretty quickly. I would expect that to be a delay to the U.S. macro because the U.S. macro has to come back first for India, IT services and BPO to come back. There should be a quarter or so delay in that. Again, their businesses are still pretty good. It's just the new projects that are being delayed.

Kyle Peterson (Senior Analyst)

Yeah, I appreciate that. That's a really helpful call. I, I know it, it's, it's way off, but just curious how you think strategically about your client mix and, and their exposure to AI in the future, and, and, and if you're thinking about, you know, strategically altering, you know, your, your client mix, given that? Thank you.

Scott Staples (CEO)

Oh, love the, love the question. Actually, we're feeling really good about this because if you think about our customer base and our, our, our go-to-market, you know, we're really, we're really sort of positioned for high-volume hirers, and high-volume hirers primarily, you know, in the, you know, hourly worker space and things like that. I think AI's impact on, you know, the hourly worker, you know, a distribution center worker, a forklift driver, a truck driver is, you know, is, is going to be minimal. You know, AI is certainly going to affect, you know, tech, and other, you know, full-time employment sectors, which isn't as big of a footprint for us.

We actually are in the, you know, we're actually in a double down strategy on our existing strategy because we, we love it. Because, you know, high-volume hirers in our space with a lot of turnover, you know, a lot of volume, and they love our automation and our speed, and, and that's, you know, that's, that's why we win. I don't think AI will have a huge impact on our customer base. Obviously, we've got lots of customers, so it will affect some down the road, but the majority of our go-to-market, you know, is spot on where AI won't have an impact.

Kyle Peterson (Senior Analyst)

Yeah, that's super helpful. Thank you, Scott.

Operator (participant)

Thank you. At this time, we have no further questions in queue. I will now turn the call back to Scott Staples for closing comments.

Scott Staples (CEO)

Thank you, operator. Thanks, everyone, for your participation today. Have a great day.

Operator (participant)

This does conclude today's call. We thank you for your participation. You may disconnect at any time.