First Advantage - Q2 2024

Executive Summary

• Q2 2024 delivered stable results with revenues of $184.5M, Adjusted EBITDA of $55.8M (30.2% margin), and Adjusted Diluted EPS of $0.21; GAAP EPS was $0.01 due to $9.2M Sterling acquisition-related costs [$184.5M, $55.8M, 30.2%, $0.21, $0.01, $9.2M].
• Sequential improvement vs Q1: management highlighted quarter-over-quarter growth in revenues, Adjusted EBITDA, and margins, with margins returning above 30%.
• Full-year 2024 standalone guidance reaffirmed (Revenue $750–$800M; Adj. EBITDA $228–$248M; Adj. Net Income $127–$142M; Adj. Diluted EPS $0.88–$0.98), indicating confidence despite labor-market normalization.
• Strategic catalysts: Sterling acquisition progressing (DOJ HSR process); synergy target raised to $50–$70M; expected leverage at close ~4.2–4.4x net debt/Adj. EBITDA with a plan to delever toward ~3x within 24 months.
• CFO transition announced: CFO David Gamsey to retire in December; Chief Accounting Officer Steven Marks named successor—an execution and continuity focus for the finance function.

What Went Well and What Went Wrong

What Went Well

• Sales execution strong: 15 bookings ≥$500K ACV in Q2 and 47 over LTM; two large upsell bookings totaling $13.5M; upsell/cross-sell contribution $8.6M (4.7% of Q2 revenue), new logos $7.8M (4.2%).
• Margin discipline and sequential recovery: Adjusted EBITDA margin improved to 30.2%, up ~270 bps q/q, reflecting a flexible cost structure and automation initiatives.
• AI-driven operational leverage: SmartHub and Verified! enabled diversion of up to 60% of verifications away from higher-cost third parties, improving turnaround and costs; Profile Advantage rollout advancing; Customer Care efficiency via Click. Chat. Call.
• Management tone: “Solid financial results” and continued AI expansion—“SmartHub verifications router” and “Click. Chat. Call.” cited as value drivers (CEO).

What Went Wrong

• GAAP profitability compressed: Net income $1.9M (1.0% margin) and GAAP EPS $0.01 due to $9.2M Sterling transaction expenses; Adjusted EPS of $0.21 reflects non-GAAP normalization.
• Base revenue remained a headwind: Base declined by $13.0M (-7%); SMB down 25% (though only ~4% of revenue), consistent with broader macro normalization; banking/financial services down 7%.
• Interest burden elevated: Net interest expense $7.4M in Q2; leverage expected to rise at Sterling close (~4.2–4.4x), pressuring near-term GAAP earnings until synergy capture and deleveraging progress.

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 2024 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 a 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 2024 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 2023 Form 10-K and our Form 10-Q for the second quarter of 2024 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 the 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 turn the call over to Scott.

Scott Staples (CEO)

Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. We are proud to announce another quarter of solid results while continuing to progress toward the closing of the Sterling acquisition. Our team is executing well in a dynamic environment by leveraging our capabilities and innovations to deliver continued value for our customers and our shareholders. This morning, I will provide an overview of our second quarter results, along with updates on the Sterling acquisition and our strategic initiatives. David will then provide a deeper dive on our results and additional color on our expectations for the remainder of the year. Turning to slide five.

In the second quarter, we delivered revenues of $185 million, adjusted EBITDA of $56 million, and adjusted EBITDA margin of 30.2%, all of which were in line with what we communicated on our last earnings call and nearly flat on a year-over-year basis. This gives us additional confidence in achieving our full year 2024 guidance, which we are reaffirming today. Our upsell, cross-sell, new logos, and attrition rates continued to perform in line with our historical revenue growth algorithm. Our base growth remained negative but improved from Q1. We also had two very large upsell bookings worth a combined $13.5 million in the second quarter. In total, we had 15 bookings in the second quarter and 47 in the last twelve months, each with $500,000 or more of expected annual contract value.

We are pleased that our sales engine continues to deliver consistent results. Second quarter results reflect a macroeconomic picture of normalization and stabilization within our business. From a vertical perspective, volatility has decreased, with no single vertical's revenue volumes up or down beyond single digits. We feel this narrowing of the gaps between verticals reflects an overall normalization of the business, which we welcome. In terms of the macro environment, we are seeing normalization and stabilization of key labor metrics, including quits, hires, and openings, as job trends stabilize from the pandemic years. Additionally, our customers continue to hire, albeit at a more modest level. Our business continues to be propelled by the fundamental long-term drivers we have spoken about in the past, including the increasing importance of risk management, compliance, and turnaround times for our customers.

We have made investments in specific products and geographies to strengthen our business, including highly automating our technology. We are also an early mover in our approach to verticals and proactively picked what we felt were going to be high volume turnover verticals. As such, we are skewed more toward the hourly worker, who is still in very strong demand and tends to change jobs more frequently. This strategy enables us to win in the marketplace and deliver value for our customers by offering vertical subject matter expertise, compliance, speed, and accuracy so that our customers can hire and onboard their new employees quickly. In this environment, we also continue to successfully control the controllables. We have previously demonstrated our strong operating discipline and ability to act quickly to control costs, to preserve margins, and we will continue to do so in the future.

As a reminder, we have a highly flexible cost structure that allows us to adjust to changing conditions. Over 70% of our cost of sales are third-party costs, and those costs are 100% variable. The remainder of our cost of sales consists of operations and customer care, which are variable in the way we manage scheduling and backfill open positions. We also have the ability to modulate our investments if needed. We evaluate all of these considerations on an ongoing basis to ensure that we are operating efficiently to match the demand of the current environment. Turning to slide six, let me now provide an update on the Sterling acquisition. We are making good progress toward closing. As we announced in late May, we received a second request from the DOJ.

We are currently working through that process and continue to anticipate closing after we receive HSR clearance, which we currently expect in the fourth quarter of this year. In the meantime, we are continuing to advance our pre-closing integration planning efforts. Our Integration Management Committee is leading dedicated teams from First Advantage and Sterling, who are working daily to create plans that will allow us to deliver a seamless post-close integration and achieve our synergies. The Sterling business is highly complementary and will extend our high quality and cost-effective background screening, identity, and verification technology solutions for the benefit of both companies' customers. From a vertical perspective, Sterling focuses primarily on verticals that are salaried, white-collar workers, while First Advantage focuses primarily on verticals serving blue-collar, hourly employees. We also expect to benefit from complementary geographic reach and the ability to expand.

While both parties have a global presence, Sterling is larger in Latin America and Australia, while we have deeper presence in India, Hong Kong, and Singapore. In terms of cost synergies, we have expanded our target to a range of $50 million-$70 million as we have progressed our integration planning work and have identified additional synergy opportunities. We are confident in our ability to action this goal within the first 18-24 months post-closing. We see opportunities from combining back-office functions and resources, eliminating overlapping public company costs, and rationalizing insurance programs. We also see the potential to reduce our costs of serving customers and bring our existing automation capabilities to Sterling's business to increase efficiencies and productivity. We are focused on a seamless transition for Sterling customers, while also allowing us to unlock valuable operational and third-party efficiencies.

As we have been delving deeper into our pre-closing integration planning work, we are uncovering opportunities that we expect will further enhance our customer value proposition, unlock upsell and cross-sell opportunities, and reduce certain third-party pass-through fees. As an example, we can bring to Sterling's customers our full suite of I-9, tax, and transportation products. Sterling has a recovery management service and a further developed digital identity product in the U.S., which we could potentially sell to our installed base. We believe opportunities such as these would benefit customers by providing more options to meet their evolving needs and improve solutions to help manage risk, hire smarter, and onboard faster. Additionally, culture is an important focus area for us, and both companies have high-performing cultures and motivated employees.

We are being very thoughtful in how we approach this post-close integration work stream and have brought in leading third-party experts to assist. I am really excited about our opportunities and what our combined teams will be able to accomplish. Upon closing the transaction, we will immediately almost double our revenues to nearly $1.5 billion on a pro forma basis. We expect to generate double-digit adjusted EPS accretion on a run-rate basis and to continue compounding adjusted EPS at a teens growth rate over time through the combination of top-line growth, ongoing synergy capture, and significant deleveraging enabled by our strong free cash flow generation. As we look ahead, our priorities after closing the transaction will be focused on our customers, successful integration, achieving synergies, and deleveraging our balance sheet.

Overall, we expect that this strategic and accretive acquisition will benefit customers and investors, accelerate and advance our strategic priorities, and drive long-term value creation. Turning to slide seven and an update on our AI efforts. We have been early adopters of integrating responsible generative AI into our business, and we are continuing to leverage AI to deliver value to our customers. One way we are doing this is through the expanded use of our proprietary SmartHub technology and Verified database. As a reminder, SmartHub is our AI-driven intelligent router that sits on top of our large Verified database, which as of the end of 2023, is made up of nearly 110 million education and work history records, up from 36 million in 2021.

SmartHub enables us to quickly search across multiple data sources to determine the optimal verification source based on speed, data quality, and cost-effectiveness. By optimizing verification sources, we have been able to provide our customers with alternative options and decrease the third-party costs they incur. We are currently diverting up to 60% of verifications away from the most expensive third-party sources. Our customers love SmartHub because, in many cases, it generates results quickly and helps them save money. Additionally, we are continuing to expand our next-gen Profile Advantage platform in the U.S., rolling it out to new customers each week. This API-first technology interface is used by applicants through either a computer, tablet, or mobile device. With its embedded AI and machine learning, Profile Advantage drives significant time savings for both applicants and customers, and enables fast time to hire.

Our technology also complies with web content accessibility guidelines, and our user experience is receiving very favorable reviews. We are also continuing to see success in utilizing AI for customer and applicant support with our Click, Chat, Call initiative. This has brought increased speed and accuracy to our customer care program, improving overall customer satisfaction. It has also allowed for continued headcount leverage in our call center, after having achieved an initial headcount reduction of approximately 20%. Overall, we are continuing to make advancements in our use of AI, and are rolling out multiple new AI pilots within the organization to improve our processes and support our employees as they conduct business. Before I turn the call over to David, as you saw in our press release this morning, we announced that David has decided to retire later this year.

On behalf of the entire board of directors, I want to express our sincere gratitude for David's many contributions to First Advantage over the past 8+ years. He has been a critical member of our team, and we have substantially grown the business, executed our IPO and M&A strategies, and most recently, announced our acquisition of Sterling. David has been an outstanding leader and an exceptional colleague, and we all wish him well in his retirement. Part of David's legacy is having created a high-performing finance team inside our organization. Accordingly, we're fortunate to announce that David will be succeeded by our Chief Accounting Officer, Steven Marks. Steven has been with First Advantage for over eight years. He has tremendous experience, he knows the company well, and he has worked closely with David during that period.

David and Steven will continue to work together to ensure a smooth transition through the beginning of December. But it's not time for us to say goodbye to David just yet. David will continue to lead our finance function for the next several months, and of course, he is here today to discuss our performance in the quarter. With that, I will now turn the call over to David.

David Gamsey (CFO)

Thank you, Scott, and good morning, everyone. As Scott discussed, after a 45-year career in accounting and finance, and given the timing of the pending Sterling acquisition, I have decided to retire later this year. It has been a privilege to have had the opportunity to work with our outstanding board of directors, the excellent professionals at Silver Lake, and to have been a part of the First Advantage team. Scott has developed a great culture and a tremendous team, and together, we have built an outstanding company. I am very proud of what we have accomplished, but there is still a lot of exciting work yet to be done. I hired Steven in 2016, and he and I have worked together very closely over the past 8 years. He has always demonstrated strong leadership skills and excellent business judgment.

Steven has been an essential partner in executing our strategy in building the exceptional finance team we have today. I have no doubt that he will do an excellent job as Chief Financial Officer at First Advantage and the combined companies moving forward. Now, back to business. Turning to our second quarter results on slide nine. In line with our previously communicated expectations, our results for the second quarter improved sequentially over our first quarter results. Our second quarter revenues were $184.5 million, flat compared to the prior year, and $15.1 million greater than in Q1. Currency had nearly no impact on results. For the quarter, Infinite ID contributed approximately $3.3 million. In our Americas segment, revenues of $162.4 million, or 87% of consolidated revenues, were flat to the prior year.

Similarly, our international segment revenues were also flat compared to the prior year, at $24.2 million, or 13% of consolidated revenues. We believe that our international operations have now stabilized, with India and APAC producing consistent sequential base revenue volumes. For the total company, adjusted EBITDA was $55.8 million, also flat compared to the prior year. Our adjusted EBITDA margin was 30.2%, a 270 basis point improvement over Q1. Our adjusted effective tax rate was 24.6%. Adjusted net income was $30.8 million for the quarter. Adjusted diluted earnings per share was $0.21. This includes an approximately $0.02 negative impact from our 2023 one-time special dividend, share repurchases, and expired interest rate swaps.

When taking these into account, adjusted diluted earnings per share would have also been nearly flat on a year-over-year basis. On slide 10, you can see that our historical performance for upsell, cross-sell, new customer logos, and attrition has been largely consistent with our growth algorithm and demonstrates that we are managing and delivering on what we can control, with the variation being driven by the base. Base was still negative in Q2, but it did improve by 400 basis points from Q1. Revenues from upsell and cross-sell partially offset our base decline for the quarter and contributed $8.6 million, or 4.7%, to our performance in Q2. New customer logos contributed an additional $7.8 million, or 4.2%, in Q2. Base declined by $13 million, or 7% in Q2, and attrition was 4%.

Turning now to our balance sheet and capital allocation summary on slide 11. In the second quarter, we generated strong operating cash flows of $40.7 million after adjusting for the $8.7 million of cash costs paid directly related to the Sterling acquisition. During the quarter, we used $7.4 million for purchases of property and equipment and capitalized software development costs. As we mentioned previously, given the pending Sterling acquisition, we have suspended share repurchases as we continue to build cash. In addition to our existing $565 million of First Advantage debt, we anticipate raising approximately $1.6 billion of new term debt to fund the Sterling acquisition.

This results in approximately $2.15 billion of gross debt, or approximately $2 billion of net debt, when considering our balance sheet cash expected at close. Additionally, we expect our net debt to Adjusted EBITDA leverage at close to be within the range of 4.2-4.4 times. However, there are still a number of variables that could impact this, including timing, cash generation, synergy estimates, and any incremental actions taken before close to further improve margins. Additionally, as part of our financing agreement, we will upsize our revolver from $100 million to $250 million and extend the maturity date to five years after the closing date of the transaction, which will provide additional liquidity for our business.

We remain committed to our long-term net leverage target of 2-3 times and have a proven track record of managing leverage. Over the four years since Silver Lake invested in us, we deleveraged from 6 times as a private company to less than 2 times prior to the announced Sterling acquisition. This is after repurchasing approximately $120 million in shares, paying a $218 million one-time special dividend, and completing our acquisitions. Our goal within 24 months of closing is to reduce net leverage to approximately 3 times run-rate adjusted EBITDA. Our path to delever will be driven by high margin top-line growth of the combined businesses, productivity, productivity efficiencies, cost synergies, and continued strong cash flow generation. Interest rate cuts would help us accomplish this goal even sooner. Now, moving to slide 12.

Today, we are reaffirming our 2024 annual guidance. Our second quarter actual results position us well to achieve the midpoint of our full year guidance. We still expect sequential quarter-over-quarter growth for revenues, adjusted EBITDA, and adjusted EBITDA margins similar to 2023. For 2024, we expect to generate full year revenues in the range of $750 million-$800 million. Based on the midpoint of $775 million, this results in slightly positive year-over-year organic revenue growth. This includes revenues related to Infinite ID, which is expected to contribute approximately $7 million in the first eight months of the year as we cycle over the anniversary of that acquisition. We expect customer retention, along with the continued execution of upsell, cross-sell, and new logo growth, to be consistent with historical trends and long-term targets.

We expect to maintain adjusted EBITDA margins approaching 31% at the midpoint, and adjusted EBITDA in the range of $228 million-$248 million. This reflects the strength of our flexible model, disciplined cost management, and investments in automation. As a reminder, our adjusted EBITDA guidance includes increases in annual employee wages, normalization of management incentive plans, and increases in benefit costs totaling approximately $10 million. It also includes new investments in product, technology, and sales capabilities of approximately $7 million. Looking at the quarterly phasing, we expect sequential top-line improvement as we move through the remainder of 2024. We expect third quarter revenues to reflect modest positive growth, with that trend continuing sequentially into Q4.

The midpoint of our guidance range also assumes continued macro-driven base declines, though improving sequentially through the year and getting to essentially flat ± in Q4. We continue to expect quarterly EBITDA, adjusted EBITDA margins of at least 30% in the second half of the year, with upside potential. Before I hand the call back to Scott, I would like to close by saying that it has been an honor to serve as the Chief Financial Officer at First Advantage, and I would like to thank everyone for their support and confidence over the past eight years. In the coming months, Steven and I will collaborate even more closely to ensure a smooth transition and to continue to deliver the future results that we articulated today. With that, let me turn it back to Scott for closing remarks before we open the line for questions.

Scott Staples (CEO)

Thank you, David. We are delivering solid results and continuing to execute on our strategic initiatives. Most notably, we are progressing toward closing on the Sterling acquisition expected in the fourth quarter, while also leading with innovation and driving productivity through our AI solutions. We remain focused on delivering on our value creation playbook and shaping the future of First Advantage to better serve our customers. With that, we will open the line for 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. Our first question will come Your line is open. Please go ahead.

Shlomo Rosenbaum (Managing Director and Senior Equity Research Analyst)

Hi, thank you very much. I wanted to just ask you a little bit about the macro environment and what you're hearing from your customers in terms of hiring plans. It's just the commentary you had, Scott, about some stabilization in the context of what seems to be a little bit higher unemployment and a little bit lower, you know, I see higher levels of, maybe say, lower levels of quits that we're seeing, at least in the JOLTS data. So I just wanted to ask you what you're hearing from your clients really on the ground, and then I'll have a follow-up.

Scott Staples (CEO)

Yeah. Obviously, the macro is something, you know, we're focusing on, you know, and trying to see what, you know, where things would be going on this. But Shlomo, I think, you know, what we're hearing from customers is really unchanged for the last couple of quarters. We are still hearing that there's a strong demand for their product and services, but they are really not hiring ahead of the curve. It's more of just-in-time hiring and doing backfilling. So I think what we're hearing from them is cautious optimism. And, you know, that's fine with us. You know, it's I... We really like, you know, the fact that we're seeing a little bit of normalization and stabilization in the space.

You know, we're not getting those, you know, kind of like wild swings in base that we got during the pandemic years. So this is actually, you know, a little easier for us to manage our business. You know, because, again, I think one other thing to remember is, you know, we really focus primarily on enterprise customers, and enterprise customers, you know, are fairly resilient, especially in the verticals that we've got.

Shlomo Rosenbaum (Managing Director and Senior Equity Research Analyst)

And then, just as a follow-up, can you talk a little bit about the breakdown maybe of some of the movements between verticals? In other words, which ones are doing better, or which ones are doing maybe not so well? I know there was commentary that they were more similar, but maybe just talk a little bit about that. And last quarter, you know, you talked a little about staffing, I think, went positive, which was a positive sign. I wanted to know if that had continued to be positive.

Scott Staples (CEO)

Yeah, this is really interesting, because, you know, for the first time in, you know, in a long time, you know, what we saw from a vertical perspective was what we're saying is a return to normalization and stabilization. So in Q2, no single vertical's revenue volumes were up or down beyond single digits. So we feel this narrowing of the gaps between the verticals really reflects an overall normalization of the business, which again, we welcome. So, you know. For us, specifically, just to give you a sense, you know, transportation is our largest vertical at 24% of our revenue, and it had a good quarter. Transportation was up 9%. I think our- on the bottom of the spectrum was banking and financial services, which were down 7%. So everything else fell in between that.

So you've got a lot of, you know, -2, -3, or +2, or flat, or whatever it might be, so a lot more narrowing of the vertical. Staffing was still positive for us in the quarter. So we did have... That was on the positive side, but we love the fact that this is all sort of narrowing. I think what's probably the most reflective space that maps to the JOLTS data is what we're seeing in the SMB space. Again, we're an enterprise-focused company, so SMB for us is not a large business. It's about 4% of our revenue. But I think SMB has always been more volatile to the macro swings, either positive or negative. And our SMB business was down 25%, so that's not really a vertical.

But I think that's where we're seeing, you know, the business reflecting what's going on with JOLTS data. Again, it, you know, it's not a huge impact to us because, as we've said, you know, over and over again, not only are we enterprise-focused, but we're also more focused on the hourly worker. And if you look at our vertical mix of transportation and retail, whatever it might be, 71% of our revenue, you know, falls into that space, and there's still a strong demand for that type of worker.

Operator (participant)

Thank you. Our next question will come from Andrew Steinerman with J.P. Morgan. Please go ahead.

Andrew Steinerman (Managing Director and Senior Equity Research Analyst)

Hi, Scott. You might think this one a little premature, but I'm gonna ask about that teen EPS growth that you highlighted again today. I was wondering, when you think about that over time comment, you know, post-merger, how many years do you feel like the company combined could grow teens EPS, and is the base year gonna be 25?

Scott Staples (CEO)

David, I'll throw that to you.

David Gamsey (CFO)

So, Andrew, based on all of our modeling, I think what you've seen and the results that we just released is that we've expanded the range of synergies that we think we can go get. We had previously said we thought we could get $50 million plus. We now, based on additional integration work that we've done, believe that could be $50 million-$70 million. So therefore, we think on a run-rate adjusted basis we can go get that right away, and that that can continue as we continue to delever and as interest rates go down.

Andrew Steinerman (Managing Director and Senior Equity Research Analyst)

Did you wanna give a timeframe of how many years do you think the teens growth could be sustained for?

David Gamsey (CFO)

You know, at least a couple of years, maybe longer. It's a little bit early, and premature to be commenting on the future like that.

Andrew Steinerman (Managing Director and Senior Equity Research Analyst)

Thank you.

Scott Staples (CEO)

Yeah, Andrew, just to clarify, I mean, you know, until we get, you know, DOJ approval, we're just really doing a lot of planning, so we haven't really been able to get under the cover of- under the hood and look at these things, you know, in more detail to give you a more, you know, detailed answer on exact years and that kind of stuff. But you know, we're, we're pretty comfortable with these ballpark estimates that we're giving right now.

Andrew Steinerman (Managing Director and Senior Equity Research Analyst)

Sounds good. Thanks, Scott.

Operator (participant)

Thank you. Our next question will come from Andrew Nicholas with William Blair. Please go ahead.

Andrew Nicholas (VP and Senior Equity Research Analyst)

Hi, good morning. Thanks for taking my questions, and congrats to David and Steven on the news from today. I wanted to ask on international growth. I think it was flat overall year-over-year. Last quarter, you talked about stabilization there. Scott, you gave a bunch of great color on the vertical level. I'm just wondering if you could give similar commentary in what you're seeing in APAC and maybe in your IT services business in India.

Scott Staples (CEO)

Yeah, I mean, we were so happy to, you know, look at this data, 'cause as you know, international has been a drag on the business for literally two years. And so now, you know, we had been sort of signaling this, as you know, and so again, when we think of our international business, it's three buckets: It's EMEA, it's India, and it's APAC. So we lump Canada and LatAm in with North America, I mean, the U.S., to create the Americas business. So if you look at those three regional businesses in our international sector, India and APAC had been really the big drags over the last two years, while EMEA actually, you know, was sort of chugging along fairly nicely.

So EMEA, you know, continues to do that, and it was always really just what's going on in India and APAC. And we had signaled to you guys in Q4 of 2023 that we thought India had bottomed out and would start growing, and that's exactly what we saw in Q1 of this year. And in Q1 of this year, we kind of thought APAC had bottomed out and would start growing. What I would say is this is probably the bottoming out for APAC, and we now expect APAC to, you know, to start growing. Really, APAC is... The drag on APAC, particularly, had been China. And, you know-... China, you know, is what it is, but the rest of our APAC business is starting to show some green shoots of life, which is great.

In the India business, we are seeing IT services and BPO customers starting to, you know, slowly hire again. Again, I think cautious optimism is kind of what we're hearing out of that. But also remember that our comps are much better. So we're not talking about dramatic changes in the business. We are seeing some positive changes, but we're also now competing against, you know, much easier numbers.

Andrew Nicholas (VP and Senior Equity Research Analyst)

Perfect. Thank you. Switching gears a little bit for my follow-up, the 60% number employment verifications that you cited, you know, maybe surprised me a bit in terms of how big that number was. I'm curious if that's up versus, you know, maybe this time last year or at any point in 2023. Also, is there any way to quantify or maybe even qualitatively speak to how much of those employment verifications are hitting Verified versus being directed to other providers? Just trying to get a sense for how much would be a direct margin or even profit benefit to you if it's going to Verified. Thank you.

Scott Staples (CEO)

Yeah, and so the actual number is 60% of verifications, you know, being diverted. We—this is the first time we've given a number like this, so I know you're looking for trends and baselines, and we will continue to do this sort of going forward as we get, you know, more data on this. But I just think, you know, without getting into specifics of numbers, which, you know, we're not really ready to do right now, and we'll consider doing going forward, we're just basically seeing a much larger adoption of the concept of SmartHub. You know, clients really like it because, you know, as we've said, you know, multiple times, you know, we believe we're the, you know, the only background screener out there with—that's offering these type of alternatives.

And clients are looking for alternatives. One, they want faster turnaround times, but two, it's really driven by cost savings. This, you know, the verifications in general have become a heavy drag on the budgets of our customers, and it's got, you know, really it's getting to an untenable position in terms of cost. And so it's really more, I'd say, of a, you know, our ability to, you know, to sell this and to promote it and market it. So the uptake has definitely increased. And the technology gets better and better every quarter. You know, remember that this is probably our best piece of technology in the company. It's machine learning, and that means it gets better with every verification that it does. It's all the AI that's built into it.

It just gets smarter and more sophisticated, and that enables us to, you know, keep pointing it in different directions, and, again, as we add more and more data records, you know, to our database, you know, we expect that number to improve.

Andrew Nicholas (VP and Senior Equity Research Analyst)

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 Heather Balsky with Bank of America. Please go ahead.

Heather Balsky (Equity Research Analyst)

Hi, thank you. I was curious... It was interesting to see you expand the, the range of synergies. And then also you made a comment during the Q&A that you still haven't really gotten out of, I guess, under the hood, 'cause as you wait for approvals. I'm just curious, can you talk a little bit about the work you have done to kind of... that has enabled you to expand the range, and you know, how much you've learned while you're waiting for the process to get approved? Thanks.

Scott Staples (CEO)

Yeah. So, we've done an incredible amount of work. So let me sort of paint a bigger picture for you, for you first, Heather, and then I'll get more specifically to your question. You know, one, we're getting great advice from, from Silver Lake, who has done, you know, hundreds and hundreds of, of M&A deals, and from other third-party consultants as to, you know, how to structure things, how to, how to plan things. And what we've done is we've created dedicated teams, that consist of both First Advantage and Sterling, leaders. And those teams are literally meeting daily to go through, you know, data and do planning.

We're not, we're not, you know, legally allowed to do any, you know, integration work, and, and there are certain, certain pieces of data we're not able to see at this point. But for, you know, what we've done from a planning standpoint and a conversation standpoint, we're getting a much better sense of how to put these two businesses together. Because basically they're equal-sized companies, and through those conversations and, you know, sort of mapping out what we would do, in the first, you know, 100 days, in the first, six months, in the first, you know, year, in the first 18 months, all that stuff is being planned. And as we map those things out, we're getting a better sense of timing of synergies as well.

And so, you know, while we don't have specific numbers, we've got pretty good ballpark numbers of sort of like where we can move things either sooner or later. And so the process has been treated like it's its own work stream. You know, and we've taken, you know, two really senior leaders in First Advantage, and this is their full-time job. And Sterling's, you know, done the same on their side. And we've got steering committees and functional teams meeting, you know, every you know, daily and in-person sessions. So a lot of stuff is going on, and that's why it's given us confidence that we could raise that synergy number up, not only from a total dollar value, but, as David mentioned, even probably moving some of it sooner versus later.

Andrew Nicholas (VP and Senior Equity Research Analyst)

That's really helpful. Thank you.

Operator (participant)

Welcome. If you would like to ask a question. We'll take our next question from Kyle Peterson. Your line is now open.

Kyle Peterson (Equity Research Analyst)

Great. Thanks, guys. Good morning. Wanted to start on the upsell, cross-sell. You know, that continues to remain pretty strong here. And I just wanted to see if you guys could provide any more color on, you know, what is continuing to drive a better package density here.

Scott Staples (CEO)

Yeah, I mean, obviously, as we had just announced, you know, two really large deals, one in the quarter, you know, on the upsell, cross-sell side, and also new logo continues to chug along. You know, we're really happy, as we said, with controlling the things that are controllable. I'll get to the answer to your question in a second. But I think one other thing that we, you know, really like is the consistency of those things. So if you look back, even going back to 2021, and, you know, in mapping what we've done with upsell, cross-sell, new logo, and attrition, I mean, they've all been just super consistent along those lines. You know, upsell, cross-sell, 4%-6% almost every quarter.

New logo, 4%-5% almost every quarter. Retention, 96%-97% almost every quarter. It's just sort of the base that's obviously fluctuated. So again, really happy with the consistency and how we're able to control the controllables. And I think, and we've mentioned this before, what's really driving a lot of upsell, cross-sell for us is just this whole, what I'd call additional awareness of risk management. Our customers are, are really in tune with, you know, what's going on in the world, and sort of how crazy the world is, and how they need to protect their business, their employees, and their facilities. And they just are continuing to ask us for more and more protection and services. And that's really what's driven, upsell and cross-sell.

Yes, there's always a new product launch that helps drive that and other things, but in general, it's just this pivot toward wanting more risk, you know, management offerings. And companies are willing to spend money to protect the brand, protect shareholders, you know, protect their business, protect their employees, protect their facilities. And that's just been a great, you know, tailwind for us for now, last couple of years.

Kyle Peterson (Equity Research Analyst)

Got it. That's, that's really helpful color and, and appreciate you guys calling out, you know, some of the, the transaction costs related to Sterling that you guys incurred this quarter. I guess, you know, is there anything else, notable, or at least that you guys have visibility to in, in terms of transaction costs, between now and deal close that, that you guys, you are able to disclose or estimate at this time?

David Gamsey (CFO)

So, Kyle, you know, we continue to incur costs as we go through the DOJ, HSR review. We're not gonna share those numbers at this point in time, but it will be further professional fees associated with that until we get the transaction closed.

Kyle Peterson (Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. This does conclude the First Advantage second quarter 2024 earnings conference call and webcast. Thank you for your participation. At this time, you may disconnect your line, and have a wonderful day.