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FIRST ADVANTAGE CORP (FA)·Q2 2024 Earnings Summary

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 .

Financial Results

MetricQ4 2023Q1 2024Q2 2024
Revenues ($USD Millions)$202.6 $169.4 $184.5
Income from operations ($USD Millions)$29.4 $(0.7) $9.9
Net Income ($USD Millions)$14.8 $(2.9) $1.9
Net Income Margin %7.3% (1.7%) 1.0%
Diluted EPS (GAAP) ($USD)$0.10 $(0.02) $0.01
Adjusted EBITDA ($USD Millions)$68.2 $46.6 $55.8
Adjusted EBITDA Margin %33.7% 27.5% 30.2%
Adjusted Net Income ($USD Millions)$42.6 $24.8 $30.8
Adjusted Diluted EPS ($USD)$0.29 $0.17 $0.21

Segment Breakdown

Segment Revenue ($USD Millions)Q4 2023Q1 2024Q2 2024
Americas$182.290 $149.127 $162.378
International$22.065 $22.023 $24.187
Eliminations$(1.793) $(1.734) $(2.019)
Total$202.562 $169.416 $184.546

KPIs (Q2 2024)

KPIQ2 2024
Upsell & Cross-sell Contribution ($USD Millions; % of revenue)$8.6; 4.7%
New Logos Contribution ($USD Millions; % of revenue)$7.8; 4.2%
Base Change ($USD Millions; %)$(13.0); -7%
Attrition (%)4%
Bookings ≥$500K ACV (Q2 / LTM)15 / 47
Large Upsell Bookings (combined)$13.5
Transportation Revenue Mix (% of total); YoY growth24%; +9%
Banking & Financial Services YoY-7%
SMB Revenue Mix (% of total); YoY4%; -25%

Liquidity and Cash Flow

MetricQ1 2024Q2 2024
Cash and Cash Equivalents ($USD Millions)$245.4 $269.6
Total Debt ($USD Millions)$564.7 $564.7
Cash Flows from Operations ($USD Millions)$38.3 $32.0 (or $40.7 adjusted for $8.7M Sterling costs)

Guidance Changes

MetricPeriodPrevious Guidance (May 9, 2024)Current Guidance (Aug 8, 2024)Change
RevenuesFY 2024$750M – $800M $750M – $800M Maintained
Adjusted EBITDAFY 2024$228M – $248M $228M – $248M Maintained
Adjusted Net IncomeFY 2024$127M – $142M $127M – $142M Maintained
Adjusted Diluted EPSFY 2024$0.88 – $0.98 $0.88 – $0.98 Maintained

Management also guided that H2 quarterly Adjusted EBITDA margins should be at least 30% with sequential revenue improvement through Q3 and Q4 .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’23 & Q1’24)Current Period (Q2’24)Trend
AI/Technology initiativesRightID next-gen identity fraud solution; Profile Advantage and SmartHub emphasized . Record Adj. EBITDA margin in Q4’23 aided by automation .SmartHub + Verified! divert up to 60% of verifications from high-cost sources; ongoing AI pilots; Profile Advantage rollout accelerating; Customer Care efficiency via Click. Chat. Call .Strengthening adoption; clear cost/time benefits.
Macro and hiring environmentFY24 guidance introduced despite mixed labor indicators . Q1 reaffirmed guidance; macro normalization cited .Normalization and stabilization across verticals; enterprise customers hiring “just-in-time”; volatility narrowed with no vertical >±single digits .Stabilizing; narrower dispersion across verticals.
Sterling acquisition progressAnnounced merger; at least $50M synergies; double-digit run-rate EPS accretion targeted .DOJ second request; closing expected Q4’24; synergy target expanded to $50–$70M; complementary vertical/geographic mix; integration planning underway .Accretive opportunity expanding; timeline extended to Q4.
International operationsAPAC/India were drags; stabilization expected .International now stabilized; India/APAC bottoming with green shoots; EMEA steady .Improving; stabilization confirmed.
Balance sheet & leverageHealthy cash; plan to fund Sterling via debt; share repurchases suspended .Pro forma net leverage at close ~4.2–4.4x; revolver upsized to $250M; delever to ~3x within 24 months via growth, synergies, free cash flow .Near-term leverage higher; clear delever road map.

Management Commentary

  • CEO: “In the second quarter, we delivered solid financial results in line with our communicated expectations… early adopters of integrating responsible Generative AI… SmartHub verifications router… Click. Chat. Call.” .
  • CEO (Sterling): “We are making good progress toward closing… anticipate closing in the fourth quarter… expanded our target to a range of $50 million to $70 million [synergies]… confident in our ability to action this goal within the first 18 to 24 months post-closing” .
  • CFO: “We are reaffirming our full-year 2024 guidance… sequential quarter-over-quarter growth for revenues, Adjusted EBITDA, and Adjusted EBITDA Margin, with margins returning to over 30%” .
  • CFO (capital structure): “Approximately $2.15B gross debt… net debt ~ $2.0B… net debt to adjusted EBITDA leverage at close within 4.2 to 4.4x… revolver upsized to $250M… goal within 24 months of closing is to reduce net leverage toward ~3x” .

Q&A Highlights

  • Macro hiring tone: Enterprise customers continue “just-in-time” backfilling; cautious optimism; normalization welcomed vs pandemic swings .
  • Vertical dispersion narrowed: Transportation largest at 24% of revenue and up 9%; banking/financial services down 7%; SMB small (4% of revenue) but down 25% .
  • International outlook: APAC likely bottomed; India/IT services/BPO slowly rehiring; EMEA steady .
  • AI/verification economics: SmartHub diverted ~60% of verifications away from expensive third-party sources; customer uptake rising; machine learning improves routing over time .
  • Sterling costs & synergies: Ongoing professional fees until close; synergy target lifted to $50–$70M, with run-rate adjusted EPS accretion and deleveraging roadmap .

Estimates Context

  • S&P Global consensus EPS and revenue estimates were unavailable at time of request due to provider request limits; therefore formal “beat/miss” vs Street cannot be assessed. Values would have been retrieved from S&P Global if available.
  • Management stated results were “in line with communicated expectations” and reaffirmed FY24 guidance, suggesting limited need for near-term estimate changes absent macro shifts or acquisition timing changes .

Key Takeaways for Investors

  • Sequential recovery with margin resilience: Adjusted EBITDA margin returned above 30% and is guided to remain ≥30% in H2, supported by cost variability and automation .
  • Sales engine offsetting base weakness: Upsell/cross-sell and new logos contributed ~$16.4M in Q2; bookings momentum sustained (15 in Q2; 47 LTM) .
  • AI as a tangible cost lever: SmartHub/Verified! materially reduce third-party verification costs and improve turnaround—structural tailwind to unit economics .
  • Sterling synergy runway expanded: $50–$70M target implies stronger pro forma margin/EPS potential; closing expected Q4’24—key event catalyst .
  • Leverage to rise near-term, but plan to delever: Net debt/Adj. EBITDA ~4.2–4.4x at close; management targets ~3x within 24 months via growth, synergies, and cash generation .
  • Vertical normalization reduces volatility: No vertical >±single-digit change in Q2; transportation strength; SMB weakness modest given small revenue mix .
  • Leadership continuity through CFO transition: Steven Marks (current CAO) to assume CFO role—supports execution through Sterling integration and scale-up .