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    First Advantage Corp (FA)

    Q2 2024 Summary

    Published Jan 13, 2025, 7:32 PM UTC
    Initial Price$16.27April 1, 2024
    Final Price$15.86July 1, 2024
    Price Change$-0.41
    % Change-2.52%

    What went well

    • Consistent Upsell and Cross-Sell Performance: First Advantage has demonstrated consistent upsell and cross-sell growth of 4% to 6% almost every quarter, driven by increasing demand for risk management solutions as customers seek more protection services. This strong performance indicates a solid ability to control growth factors within the company's control.
    • Signs of Growth in International Business: After being a drag on performance for two years, the international business, particularly in India and APAC, has bottomed out and is starting to show positive signs, with IT services and BPO customers in India slowly hiring again. This turnaround could contribute to overall company growth.
    • Increased Synergy Potential from Sterling Acquisition: The anticipated acquisition of Sterling is expected to deliver increased cost synergies, with targets now expanded to a range of $50 million to $70 million, leading to expectations of double-digit EPS growth for at least a couple of years post-merger. Integration planning efforts have increased confidence in achieving these synergies, potentially ahead of schedule. ,

    What went wrong

    • Macroeconomic uncertainties are leading to cautious hiring plans by customers, with clients backfilling positions but not hiring ahead of the curve, reflecting cautious optimism. This could negatively impact First Advantage's business, which relies on hiring volumes.
    • The Small and Medium Business (SMB) sector, although a small part of revenue (about 4%), experienced a significant decline of 25%, indicating potential vulnerabilities in this segment.
    • There are ongoing costs and uncertainties associated with the Sterling acquisition, including costs from the DOJ HSR review process and anticipated increased leverage post-acquisition, which may impact the company's financials and integration efforts.

    Q&A Summary

    1. Merger Synergies Expansion
      Q: Can you discuss the increased synergy range and planning?
      A: Scott Staples explained they've expanded expected synergies from $50 million plus to $50 million to $70 million based on additional integration work. Dedicated teams from both companies are planning daily, giving them confidence in achieving these synergies despite awaiting DOJ approval.

    2. Long-term EPS Growth Outlook
      Q: How long can you sustain teens EPS growth post-merger?
      A: David Gamsey stated they expect to achieve teens EPS growth for at least a couple of years, possibly longer, driven by the expanded synergies and potential deleveraging as interest rates decline.

    3. Macro Environment and Hiring Plans
      Q: What are clients saying about hiring amid the macro environment?
      A: Scott Staples noted customers remain cautiously optimistic. Demand for products and services is strong, but hiring is just-in-time and backfilling rather than ahead of the curve. Stabilization and normalization make the business easier to manage, especially with their focus on resilient enterprise customers.

    4. International Growth Recovery
      Q: How is international growth, particularly in APAC and India?
      A: Scott Staples reported that international business, previously a drag for two years, is showing signs of recovery. India has started growing, with IT services and BPO customers slowly hiring again. APAC appears to have bottomed out, with expectations to start growing, despite challenges in China.

    5. Vertical Performance and Staffing
      Q: How are different verticals performing, especially staffing?
      A: Scott Staples observed a normalization across verticals, with no single vertical's revenue up or down beyond single digits. Transportation, their largest vertical at 24% of revenue, was up 9%, while banking and financial services were down 7%. Staffing remained positive, and the SMB segment, though only 4% of revenue, was down 25%, reflecting macro volatility.

    6. Employment Verifications Diversion
      Q: What is the status of employment verifications and 'Verified!'?
      A: Scott Staples announced that 60% of verifications are being diverted, marking increasing client adoption of SmartHub. As they add more data records to their database, they expect this number to improve, driven by clients seeking faster turnaround times and cost savings.

    7. Upsell and Cross-sell Consistency
      Q: What's driving strong upsell and cross-sell performance?
      A: Scott Staples attributed consistent upsell and cross-sell growth of 4% to 6% per quarter to increased awareness of risk management among customers. Clients are investing more in protection services to safeguard their brand, business, employees, and facilities amid a volatile world.

    8. Transaction Costs for Sterling Acquisition
      Q: Are there additional transaction costs related to Sterling?
      A: Scott Staples acknowledged ongoing costs related to the DOJ HSR review process but did not disclose specific numbers. They anticipate incurring further professional fees until the transaction closes.

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