First Advantage Corporation (NASDAQ:FA) Q3 2025 Earnings Call Transcript

First Advantage Corporation (NASDAQ:FA) Q3 2025 Earnings Call Transcript November 7, 2025

Operator: Good day, everyone. My name is Sabrina, and I will be your conference operator today. I would like to welcome you to the First Advantage Third Quarter 2025 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. [Operator Instructions] Please note, today’s event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.

Stephanie Gorman: Thank you, Sabrina. Good morning, everyone, and welcome to First Advantage’s Third Quarter 2025 Earnings Conference Call. In the Investors Section of our website, you will find the earnings press release and slide presentation to accompany today’s discussion. This webcast is being recorded and will be available for replay on our Investor Relations website. Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2024 Form 10-K and our Form 10-Q for the third quarter of 2025 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. To facilitate comparability, we will also discuss pro forma combined company results consisting of First Advantage and Sterling Check Corp historical results and certain pro forma adjustments as if the acquisition of Sterling had occurred on January 1, 2023.

The pro forma information does not constitute Article 11 pro forma information. I’m joined on our call today by Scott Staples, our Chief Executive Officer; and Steven Marks, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.

Scott Staples: Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. We have 4 key messages for today. First, we delivered another quarter of profitable growth, meeting and exceeding our expectations with revenues up approximately 4% year-over-year on a pro forma basis and achieving adjusted EBITDA margins of 29%. Our performance was driven by continued go-to-market success in new logo and upsell, cross-sell. This demonstrates our ability to generate solid results amid the current macroeconomic environment in which hiring growth has been consistently flat while maintaining our relentless focus on cost discipline. Second, just last week, we celebrated the 1-year anniversary of closing on our Sterling acquisition.

I am extremely pleased with the performance of our entire team as our integration is progressing ahead of schedule, and we are delivering strategic and financial benefits as promised. Third, we are continuing to execute on our FA 5.0 strategy, actioning our best-of-breed product and platform approach to accelerate growth through new logos, upsell, cross-sell and improve client retention. Today, we will highlight how our technologies and products are enhancing our value proposition and solving customers’ critical needs. And fourth, today, we are narrowing our full year 2025 guidance ranges with refined midpoints at or above our original guidance midpoint. Now turning to Slide 5 and a closer look at our performance in the third quarter. We generated solid results across revenue, adjusted EBITDA and margin, cash flow and EPS.

For Q3, combined upsell, cross-sell and new logo rates continued to perform in line with our long-term growth algorithm targets. Retention improved to 97%, an increase from 96% in Q2, demonstrating the success of our customer-centric approach and that our best-of-breed technology and deep vertical expertise are resonating with the market. We are pleased to share that we recently signed an exclusive 5-year contract renewal with a top customer that is expected to generate over $100 million in total revenues, of which a significant portion is guaranteed through minimum annual commitments. Base revenue performance again improved sequentially, remaining just below neutral and consistent with our expectations. In Q3, our large new logo win in health care went live and is the last of the 3 large wins we have discussed with you on past earnings calls to do so.

Combined with the 2 wins that went live last quarter, one in the retail gig economy and the other in international win in Australia, all are now live and generating revenue, providing solid momentum going into Q4. We are experiencing tremendous success with our go-to-market teams as further supported by our 17 enterprise bookings in the third quarter and 75 in the last 12 months, each with $500,000 or more of expected annual contract value. These wins give us confidence in our ability to generate new logo and upsell/cross-sell revenue and are an encouraging sign of our sustained go-to-market momentum since closing the Sterling acquisition 1 year ago. Additionally, we are encouraged by the strength of our late-stage pipeline with many large potential new contracts in the works, including several that are incorporating our Digital Identity product for the first time.

Looking at our verticals in the third quarter, our balanced and resilient vertical strategy supported our performance with nearly all of our verticals seeing revenue growth in the quarter on a pro forma year-over-year basis. We saw strength in retail and e-commerce, driven by upsell, cross-sell and fueled by a good start to the holiday season. Transportation and logistics also grew, driven by our upsell, cross-sell initiatives with particular demand from last mile and home delivery customers. In addition to serving onboarding needs for new hires within transportation, our broad range of solutions also supports our customers’ ongoing compliance requirements, enhancing our results with balance and consistency across the solutions we provide. Health care was slightly down, driven by uncertainty with Medicare and Medicaid funding, particularly with the nonprofit hospital networks, but this was offset, in part, as health care staffing companies stepped in to fill the hiring needs.

We remain optimistic about the long-term industry dynamics and fundamentals in health care as the U.S. population ages and requires more health care services. Our other verticals, including general staffing, manufacturing and industrial financial services showed positive growth in Q3, partially powered by the success in our new logo and upsell, cross-sell programs. October order volumes show similar directional trends to what we saw in Q3 continuing. In international, for the sixth quarter in a row, we achieved year-over-year revenue growth with the U.K. as a bright spot and also improving trends in APAC. Looking at the macro environment, we are still seeing a trend where hiring is remaining consistently flat. Macro uncertainty as well as policy changes, including the recent government shutdown, immigration, tariffs and tax policy have resulted in many of our customers remaining in a wait-and-see posture as it relates to their hiring plans.

However, as you can see from our results, our customers are still hiring at consistent levels. Our expectation for the fourth quarter and likely into 2026 is for base growth to remain slightly negative as the overall labor market conditions persist. We continue to be confident in our ability to deliver overall revenue growth through upsell, cross-sell and new logos. Our enterprise customers, diverse vertical mix, global reach, mix of hourly and salaried focused customers and diligent focus on controlling the controllables make our business resilient and able to perform well across a variety of macroeconomic scenarios. With regards to the impact of the government shutdown, our view is that the hiring markets have remained stable and active with our core verticals continuing to perform well.

The absence of BLS jobs and employment data has not impacted our ability to run our business. I want to take a few minutes to touch on AI’s potential impact on our business, building upon what we shared during our May Investor Day. We are taking a proactive and strategic approach to understanding both the benefits and the risks of AI, and we are optimizing our long-term strategy based on the future of work. We recognize the pace at which AI is evolving and can see how it is currently impacting and how some are expecting it to impact the way certain types of jobs and labor are performed. Of note, the World Economic Forum’s 2025 Future of Jobs report predicts net positive growth through 2030, even after accounting for the impacts of AI. Specifically, the WEF notes that while AI and automation are leading factors expected to displace; an estimated 92 million jobs, these technologies and other market conditions are also expected to create 170 million new roles as companies and economies adapt to technological change, resulting in an expected global increase of 78 million jobs over the next 5 years.

Again, we are confident that our diversified mix of verticals, customer segments and geographies provides a meaningful degree of resiliency to AI impacts and will allow us to capitalize on the future growth opportunities. We are also strategically reviewing where and how we invest in terms of our products and verticals to ensure we are well positioned to lead in a world increasingly influenced by AI with a focus on continuing to generate long-term shareholder value. For example, we are building tools such as our Digital Identity product, which enables our customers to address the increasing dangers of AI-driven identity fraud. At the same time, we are leveraging AI internally to enhance quality and customer experience. As we like to say, we are building good AI to fight bad AI.

Additionally, I want to address some of the recent news headlines on corporate headcount reductions as companies claim to gain efficiencies from AI. In some instances, the news you read happens to relate to customers of ours. And what we have observed is that while those companies are reportedly making job cuts motivated by AI, we are seeing stable, if not growing, overall screening volumes from them. This is because many of these news-making reductions are in administrative-type roles, which have a lesser impact on our business as typically a majority of our screening volume comes from normal churn and core hiring in our customers’ operations. Additionally, as customers reinvest in their businesses to build out their internal AI and other capabilities, they should also be driving screening demand as they will require roles to manage these changes.

This sentiment is further supported by feedback directly from our customers who have told us that while they are currently investing in and leveraging AI in their businesses, they do not expect to meaningfully change their approach to core hiring over the next several years. Now turning to Slide 6. On October 31, we were thrilled to celebrate the 1-year anniversary of the closing on our Sterling acquisition. Over the past year, we have made significant progress on our integration of this strategic acquisition, which has been outperforming our expectations on customer retention, synergy capture and realization, cultural alignment and complementary technologies and products. Importantly, we have delivered a very seamless, nondisruptive customer experience throughout the integration process.

This has enabled us to maintain excellent customer satisfaction as evidenced by our high retention levels and the feedback we are receiving from customers. We have also continued to deepen our customer relationships through our growing Collaborate International user conference series, which reflects our expansive global footprint. In 2025, we’ve hosted events across the U.S., India, Singapore and EMEA with upcoming user conferences in Hong Kong and Australia. These events provide us with direct insight into our customers’ needs and emerging industry risks, showcase our subject matter expertise, uncover upsell and cross-sell opportunities and help cement our position as a category leader. Recently, many of our European customers joined us at our London Collaborate to discuss key topics such as identity fraud, AI-driven screening and global compliance.

The strong turnout, high-value content and customer engagement underscore the relevance of our solutions and the trust we are building across markets. Feedback confirms that our customers are looking to us for guidance as they plan for 2026, and we’re proud to be a strategic partner in helping them navigate evolving workforce risk. Our back-end automation strategy has also been a key driver of operational efficiency throughout the integration process. By consolidating fulfillment into a single global engine, we are leveraging years of investment, engineering and development in robotic process automation, APIs and AI. We have kept 2 front-end platforms for customer continuity, but behind the scenes, we have been able to streamline workflows, cut redundancies and drive efficiency.

These efficiencies not only enhance speed and customer satisfaction, but are also expected to create meaningful margin improvement as we grow. Additionally, since announcing the Sterling acquisition, we have increased our synergy target from our original $50 million plus to a range of $65 million to $80 million. We have also made solid progress on deleveraging our balance sheet as we work towards our target net level range of 2 to 3x. Steven will provide additional details shortly on both our synergy progress and deleveraging. Turning to Slide 7. Throughout the integration process, we have been focused on enhancing our customer value proposition to unlock new logo, upsell and cross-sell opportunities while continuing to drive innovation and foster the high-performance culture we are known for.

We are consistently leveraging our best-of-breed approach to provide optimal solutions and technology to solve our customers’ challenges. Last quarter, we discussed how the expansion of our award-winning Click.Chat.Call. customer care solution and our high-margin First Advantage work opportunity tax credit product has benefited our customers. We have continued this progress, achieving a milestone in Q3 with the increased usage of the millions of records in our proprietary national criminal record fire database across both platforms, something we have been rolling out since Q1 of this year. With our proprietary data and in-house data science teams, we deliver faster insights and a superior experience for everyone from recruiters to HR teams to candidates.

This powers our ability to reduce turnaround time while increasing the speed, coverage and effectiveness of our criminal screenings, facilitating comprehensive and timely results for our customers. In October, we made available our criminal and motor vehicle records monitoring solutions to the entire customer base, offering another best-of-breed experience to all of our customers. We are also underway in leveraging our best-of-breed approach to enhance the user experience. Over the past 18 months, we have been rolling out a new applicant portal. Now approximately half of our order volume on the First Advantage front end runs through this portal with customer adoption continuing to grow. This represents the most secure and user-friendly experience we’ve ever built, featuring device-agnostic design for a seamless experience across devices, customer-specific branding for a familiar and consistent look and AI-powered features that continuously learn from the candidate interactions to deliver a best-in-class rage click-free experience.

In November, we are extending the same modern look and feel to the Sterling front end, bringing the benefits to even more customers. This initiative reflects our commitment to delivering an outstanding user experience backed by rigorous data, feedback, sentiment analysis and continuous improvement. It’s a win for our customers and their candidates and a key differentiator for First Advantage. On top of this, we are continuing to see solid momentum and interest in our Digital Identity products. Negative use of AI and other technologies are creating new risks for companies and organizations and are driving rapid evolution in the Digital Identity space. Knowing who you’re hiring and confirming who they actually are is critical. Our Digital Identity solution is fully linked in the hiring life cycle with some customers using it multiple times through the recruiting, screening and onboarding process, which is creating a competitive advantage for First Advantage.

As an early market leader with Digital Identity solutions, we are able to deepen our strategic dialogue with customers, strengthening our relationships and stickiness of our products. We are highly focused on this attractive opportunity, which has a total addressable market of over $10 billion and an expected growth rate in the mid- to high teens. Our Digital Identity products is continuing to build a strong pipeline as customers navigate the early adoption and pilot phase. Digital Identity is a powerful competitive differentiator for First Advantage and indicative of the direction in which our industry is growing. Overall, our customers continue to be excited about the benefits of our best-of-breed platforms, products, data and AI-enabled technologies.

This is evident by our strong customer retention and consistent new logo and upsell, cross-sell performance. With that, I will now turn the call over to Steven.

Steven Marks: Thank you, Scott, and good morning, everyone. Today, I will provide color on our third quarter results, synergy progress, deleveraging trends and our narrowed 2025 guidance. I’ll start with third quarter results on Slide 9. Our third quarter revenues were $409 million, up 3.8% versus last year on a pro forma basis, with our year-over-year revenue growth rate increasing sequentially from Q2 as expected. Our go-to-market success was in line with our long-term growth algorithm targets as the combined contribution of new logo and upsell and cross-sell revenues delivered 9% growth in the quarter, and our retention rate reached 97%. The trends in our base performance continued to moderate on par with how we had forecast the quarter with base remaining negative on a year-over-year basis.

Our solid results were supported by consistent execution on our integration and synergy plans, which remain ahead of schedule. Adjusted EBITDA for the third quarter was $118.5 million. Our adjusted EBITDA margin of 29% exceeded our expectations, representing an improvement of 130 basis points versus the prior year on a pro forma basis despite being slightly lower sequentially from Q2 due to mix. Our results were enabled by our continued focus on accelerating synergies, our disciplined approach to cost management and the scalable nature of our business. As part of the integration process, we are applying best-of-breed fulfillment execution, which is helping improve the combined company’s operating margins in line with our historical expectations of the business.

Adjusted diluted EPS was $0.30, a 15.4% increase over our expectations. The benefits of our greater scale, expense and capital management and lower interest expense as a result of our debt repricing and voluntary debt payments to date have supported our per share earnings. These have more than offset the impact of the incremental interest on the transaction financing and the dilutive impact of the new shares issued for the Sterling acquisition. On Slide 10, you can see how we are making great progress on our synergy program. This quarter, we crossed the original $50 million threshold of action synergies, now having actioned $52 million and exceeding our initial total synergy program goal within only 1 year. We benefited from the realization of $12 million of synergies in the third quarter, bringing our in-year realization to $30 million.

We remain committed to and confident that we will achieve our goal of $65 million to $80 million of action synergies within 2 years and are pleased to see the consistent success of our integration and synergy execution. Looking forward, we are focused on scaling, automating and applying AI as we continue to execute on our integration priorities. Moving to Slide 11. You can see our historical revenue growth algorithm results with combined company data beginning in 2025. As previously mentioned, in the third quarter, our results were driven by strong upsell, cross-sell as well as new logos, supported by consistent solid retention. Base results came in as expected with sequential improvement from Q2 despite remaining negative for Q3. Now turning to cash flow, net leverage and our debt paydown progress on Slide 12.

During the quarter, we generated adjusted operating cash flows of nearly $81 million, an increase of $35 million or 78% on a year-over-year basis. This was driven by the larger scale of our business, our tight management of our working capital, including collections on receivables, the benefit of the OBBBA, which has reduced our required cash tax payments and our overall focus on cash flow. Our cash balance at September 30, 2025, was $217 million. With this ample liquidity and cash flow, subsequent to the end of the quarter in November, we made a $25 million voluntary repayment on our debt principal, bringing our total year-to-date principal repayment to over $70 million, most of which has been voluntary using excess cash flow. Our synergized pro forma adjusted EBITDA net leverage ratio at quarter end was 4.2x and represents about [ 0.25 ] of a churn decrease from a year ago when we closed the Sterling acquisition.

We remain focused on reducing our net leverage towards approximately 3x synergized pro forma adjusted EBITDA within 24 months post close, and our long-term net leverage target remains 2x to 3x. Moving to Slide 13 and our updated 2025 guidance. As a reminder, year-over-year comparisons are on a pro forma basis to allow for easier comparability. Today, we are narrowing our full year 2025 guidance ranges with refined midpoints at or above the midpoint from our original guidance. Our year-to-date results as well as the momentum we have seen heading into the fourth quarter give us confidence in our revised guidance ranges with revenues now in the range of $1.535 billion to $1.570 billion supported by strong synergy execution and our continued focus on efficiently managing our business, we now expect to achieve full year adjusted EBITDA margins of approximately 28%, a meaningful expansion from pro forma 2024.

Looking at the fourth quarter as implied in our updated full year guidance today, our revenue outlook for Q4 of around 6% year-over-year growth at the midpoint continues to assume a certain degree of macro stability while keeping in mind that our customers remain in a wait-and-see mode. The impacts of increased tariffs and other policies remain key areas of uncertainty across the global economy, but our customers continue to hire at consistent volumes. We expect Q4 base growth to remain slightly negative, consistent with Q3, with this trend likely to continue into 2026. As Scott mentioned, we saw very consistent volumes in October, which aligns to our updated Q4 expectations. We anticipate continued productivity of combined upsell, cross-sell and new logo growth, consistent with, if not better than, historical trends.

Additionally, the go-lives of our recent large wins and robust new contract pipeline support our expectations for the fourth quarter. We also expect customer retention to remain in line with our historical performance of at least 96%. In the fourth quarter, we expect adjusted EBITDA margins to expand versus the prior year period by more than 100 basis points. This is similar to the expansion we saw in Q3 and results in fourth quarter adjusted EBITDA margins of approximately 28%. While this represents a small sequential decline from Q3 2025, it is in line with the historical trends in our business, reflecting the mix shifts driven by seasonally lower December revenues and some movements in verticals and some movements in volumes between our verticals and products.

This year, we also anticipate the mix shifts we saw in Q3 towards products with relatively higher out-of-pocket fees will continue to impact adjusted EBITDA margins into Q4, though over time, we expect these impacts to normalize. Even with these trends in mind, we remain confident in our ability to drive year-over-year margin improvements in Q4. We anticipate that our adjusted diluted EPS growth momentum will continue as revenue ramps and synergies are realized. Despite the mix trend previously mentioned, we expect that quarterly adjusted diluted EPS will remain in the mid-$0.20 range in the final quarter of the year, representing meaningful expansion on a year-over-year basis. On a similar note, we now anticipate free cash flow for the year of $110 million to $120 million.

This represents a notable increase from our previous commentary as we have been able to generate incremental cash flow from better working capital management and have successfully managed our integration-related costs. As previously noted, the passing of the OBBBA tax law in July doesn’t notably impact our effective tax rate. However, we will be able to utilize certain provisions within the new law to materially reduce our 2025 required cash tax payments. We have provided a full chart in the appendix to the earnings presentation with FX, CapEx, interest and other modeling assumptions. Additionally, we do not expect the government shutdown to materially impact our results. While the shutdown itself has affected some operational items such as the government run E-Verify platform resulting in some delayed I-9 verification, we expect any delays in processing I-9 will be resolved in the quarter as soon as the government shutdown concludes, and this is a very small component of our business.

Overall, and taking a step back, we are pleased with our refined 2025 guidance ranges we are providing today, particularly amid our ever-changing world. We are expecting to deliver full year revenue growth, a high single to low double-digit adjusted EBITDA growth rate and an even higher adjusted diluted EPS growth rate and meaningful free cash flow generation, all just 1 year after closing our strategic acquisition of Sterling. With that, let me turn it back to Scott for closing remarks before we open the line for questions.

Scott Staples: Thank you, Steven. In closing, I would like to reemphasize First Advantage’s position as an investment of choice. We are a market leader offering proprietary technology and data in a large and growing market. We have significant organic revenue growth potential, accelerated by the Sterling acquisition. We are resilient with a flexible cost structure and high revenue diversity that comes from our balanced vertical strategy. We have industry-leading operating margins, leading to strong and consistent free cash flow generation, and we have a track record of value-accretive capital deployment and balance sheet management. All of this supports our confidence in our ability to achieve consistently strong results, including delivering on the 4-year financial targets we established during our Investor Day in May.

Looking ahead, we remain focused on executing on our strategy to increase share across our target verticals, accelerate international growth and deliver on our best-of-breed product and platform strategy. Thank you to the entire First Advantage team for the great work you do to support our customers every day. With that, we will open the line for questions.

Q&A Session

Operator: [Operator Instructions] Our first question is coming from Ashish Sabadra with RBC Capital Markets.

Ashish Sabadra: So maybe a 2-part question. As we think about this strong new win momentum that you talked about and as you’re ramping up these new clients, how should we think about the upsell, cross-sell as well as new logos going into fourth quarter, but also into 2026? And then the second question would be just the pipeline for new logos. Have you seen any changes in the sales cycle? Any elongation in the sales cycle? Also any early conversations with your clients around new win momentum?

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

Scott Staples: Yes, Ashish, on the pipeline, we are extremely happy where the pipeline is right now. It’s at the highest value it’s ever been at. The late-stage pipeline for large deals is the best we’ve really ever seen as a company. That doesn’t mean it translates into whatever it translates into, but it’s a great pipeline. We’ve obviously got very good win rates historically. So we’re feeling pretty bullish heading into 2026 in terms of the things we can control and our ability to grow organically. So very happy with the pipeline. And I think it all comes back to — again, look at that increase in improvement in client retention, especially after doing a large merger. We are very happy with client retention actually going up.

It means that clients have really resonated with the combination of the Sterling and the First Advantage technology platforms. And I think a big shout out to our tech teams who have done a great job of eloquently putting together the back end to the front ends of both the Sterling and First Advantage customer base. And in this industry, it’s very simple. Clients love to partner with a company who understands their vertical deeply, which we obviously do and have invested in the key verticals that we’re in and have a great technology platform to back it up, that’s clearly why the pipeline is growing, while the deal flow has been solid. We’ve got a great tech story, and we back it up with subject matter experts.

Operator: Our next question is coming from Andrew Steinerman with JPMorgan.

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

Scott Staples: Yes. Thanks, Andrew. As you know, we have a very strong tech story. We’ve got a great team. And I thank you for your question because I don’t think we get enough credit in the market for our tech prowess. I mean I feel that we’re basically a Silicon Valley tech shop that just happens to be headquartered in Atlanta, Georgia. We’ve got great architects. We’ve got great engineering prowess. And I think when you look at where AI can help or influence or impact the industry, I only see it or we only see it in beneficial ways. We don’t see it as a competitive threat because it’s going to have to be so integrated into the many things that we do. I think the big change is the dramatic rise of the risk of identity fraud in the recruiting process and how that maps into the traditional background screen.

So when you think about running criminal checks or verifications or whatever it might be, the future of this industry is really going to be how that flows from a digital identity check. And that’s where a lot of the AI is going to sit because you’re going to be leveraging AI to make sure that our customers feel comfortable that they are onboarding the same person that they interviewed. So going from a recruitment to interview to onboarding and to finally I-9, all that has to be tied together with technology and consistent databases. And we are really the glue behind the scenes that can do that for our customers. And that’s where a lot of our customer dialogue is going right now. And I think a lot of that’s going to be AI-driven. There’s going to be a lot of good AI that are used in that solution to offset the bad AI that people are using for deepfakes and other identity — digital identity hacks.

So we want to make sure that we help our customers avoid hiring imposters which, as we told you on our last call, is an extremely increasing risk for them. So that’s also driving client stickiness. It’s driving upsell, cross-sell. And again, it goes back to the fact that our customers see us as a tech powerhouse that can pull this all together for them.

Operator: Our next question is coming from Andrew Nicholas with William Blair.

Andrew Nicholas: Scott, I think you mentioned as part of the comment on your 5-year contract renewal that a portion of that $100 million is guaranteed. So I was just hoping to kind of figure out maybe a little bit more background on that contract, what led to that particular structure? I think that’s relatively unique within your broader business. And whether or not that’s a one-off or something you’d expect to pursue more regularly going forward?

Scott Staples: Andrew, I love the question because this has been a really big focus for us in 2025 and will continue in years to come. Now the caveat here is that this will be a little bit of a long road, but this is not a one-off. This was the first of what we think will be the future contract status in this industry where we do get more stickiness with contracts with guaranteed minimums in our contracts. Again, the caveat is it will take a long time for this to kind of flow and run out because we’re not going to go to existing customers and ask them to change existing contracts. We are trying to put this new clause into all new logo wins and renewals with existing customers. To date, we have had very little pushback on this concept.

And I think it’s — there’s other things that we’re working on to put more teeth into the contracts, but this is clearly where the industry is now going. And we even think things like Digital Identity and some of our other solutions can actually lead to subscription revenue, and that would then also be included in contracts going forward. So I’m glad you picked up on it because it’s definitely a change that we’re seeing in the industry, and we’re kind of leading the charge here.

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

Scott Staples: Yes. First of all, it is the hottest, hottest, hottest topic with our customers right now. We’ve — as you know, we’ve had Digital Identity products out in the market now for 2, almost 3 years. In the early stages, it was us educating our customers as to the risks associated with imposters and deepfakes and all the things that come with identity fraud. But something has changed. Over the last, I’d say, roughly 6 months, our customers are now showing us actual instances of where they’ve either stopped a fraudster from entering their company or that they’ve actually hired an imposter and don’t want it to happen ever again. So this is completely dominating the conversation right now, and we’ve got a fantastic product.

And I would call it products because it literally is a series of 6, 7-plus offerings that are all under the umbrella of digital identity. So the — a couple of things then. One, at some point in 2026, we do plan on quantifying this for you. As soon as we get — we’re still in early sales stages, and we’re doing pilots and customers are now ramping up on that product. So I think at some point in 2026, we’ll be able to quantify it. There’s going to be 3 major impacts to digital identity. One, yes, it will drive upsell, cross-sell revenue. And again, we’ll quantify that in the future. Two, it makes us really sticky with the customers because now we’re actually in different workflows. When you do digital identity, you’re now up in the front of their recruiting workflow and you’re really then sticky throughout the whole process.

Three, so the byproduct of that is increases in customer retention, which, as Steven said, we — the bare minimum is 96%. But as you can see, we’re now at 97% and hopefully stick there going forward and maybe even higher through the stickiness of this. And the last thing is it also helps sell other products. For example, customers are worried about the person that they are interviewing is the same person that they actually run the background screen on is the same person they actually onboard and do the I-9 with. So Digital Identity is actually giving us a boost to our I-9 sales because we’re sitting behind the scenes, and we can triangulate all that data for them if we’re the service provider for them. If we’re not the service provider for their I-9 product, they have to figure out if it’s the same person that filled out the I-9.

And the customers don’t want to do this. They want us to do that. So this is real stickiness. This is driving multiple levels of upsell, cross-sell. And it’s a huge issue with clients right now. This is, again, the hottest, hottest, hottest topic in this industry. That was a long answer, but great question.

Operator: Our next question is coming from Manav Patnaik with Barclays.

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

Scott Staples: Yes, Ronan. So obviously, the macro is on everyone’s mind. And I’m going to answer your question, but I’m going to put in a couple of other things to give you the picture that we see. So a couple of things. Specifically to October, yes, we are — we had a very good October. The order volume trends were similar to what we saw in Q3, meaning that they were above our expectations. Now that doesn’t mean November, December will be. It just is a snapshot that October was. We’re still in a wait-and-see mode for November and December, but off to a great start in Q4 with the things that we mentioned. We’re seeing a good holiday season. We’re seeing our key customers driving a lot of volume growth. I think the world is starved for data right now or better data right now on this.

And I will remind people that — I’ll remind the market that we are enterprise focused. So a lot of what you hear maybe SMB focused, but we’re not experiencing at the enterprise level what is being portrayed in the media. And I think we’ve got a unique advantage on the data side. And the fact that we can actually see our own order volume, so we know exactly who’s being hired and when. And obviously, with the government shutdown, there’s no BLS data being reported. And we’ve talked in the past about how unreliable the BLS data is anyway. It had gotten to a point where there was only about 35% participation rate from companies in the BLS data, and it was primarily from SMB. So it wasn’t a very accurate depiction of what we see from the macro standpoint.

So one, we’ve got the ability and the uniqueness of seeing actual hiring data real time. We know exactly when — what companies in what industries and what geographies are hiring people. And the BLS data was always a few months behind, and every 6 months did a major revision of the numbers because they didn’t get it right. But I think our Q3 results and what we’re saying on forward thinking about the pipeline and where we are with order volumes is actually showing a very consistent labor market, not a declining labor market. It doesn’t mean that there’s huge job growth or — and it doesn’t mean that there’s huge job losses. It just means that it’s consistent. And as we get into 2026, and we’ll talk more about this in our next earnings call next quarter, but we’re basically thinking that 2026 is going to be very similar to 2025.

Consistent hiring, not big decreases, not big increases, just more of the same. And Ronan, one more point. So I gave you — we obviously have the ability to do qualitative analysis of order volumes and other data sources that we look at. But we also have — we’ve also speak to our customers on a regular basis. And I think we’ve made this point many, many times. Just this year alone, we’ve had over 1,500 formal business reviews with our customers. Now that may be the same customer 2 or 3 times. But it just shows you that we are formally sitting down with our customers to review their programs, to optimize their screening, to talk about upsell, cross-sell opportunities and to get their views on their hiring. And what we’re hearing doesn’t necessarily jive with what is being reported in the media.

So that’s what we’re basing our business on.

Ronan Kennedy: And then if I may, just to shift gears a little bit. Can you help with how we should think about the cadence of synergy realization in ’26? And just a reminder on timing for Sterling EPS accretion and also deleveraging?

Steven Marks: Yes, Ronan, great question. So as we mentioned, we’re at $52 million. Our target is $65 million to $80 million. We obviously lapped the anniversary as of this week. That remaining, somewhere between $15 million and $25 million, will come fairly ratably over the next year. It’s a lot of operational and fulfillment and then data projects that have some of a little bit just more plumbing, more prerequisites that need to be checked off. But we still are very confident that we’ll achieve it. And it should hit fairly ratably over the next 12 months or so as we just complete one optimization, one efficiency project after another. In terms of EPS accretion, I mean, you’re starting to already see some of that flow through pretty strongly, right?

We’ve got certainly relative to the pre-acquisition period, really strong EPS numbers in the second half of the year. Some of that is just the operational scale. The fact that we’ve got to consecutive quarters of revenue growth, we’ve got the synergies flowing through, and then we also have all the work we’re doing on the cash flow and debt side of house. So the repricing, obviously, lower interest rates helps a little bit and just working capital management. So we’re driving really strong cash flow. So that’s going to obviously support your interest expense and help flow things down to EPS. And then I think to your last point on deleveraging, I think we’re seeing those trends already kick in. As I mentioned, strong free cash flow, strong EBITDA accretion.

As we build more cash and — which ultimately reduces net leverage, we’ll continue to see that number start to accelerate. And we still feel like we’ll be getting towards that 3x synergized net leverage ratio by the end of next year, effectively at the 2-year anniversary of the deal. So I think we’re on schedule on all 3 fronts there, Ronan.

Operator: Our next question is coming from Scott Wurtzel with Wolfe Research.

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

Steven Marks: Yes, Scott, it’s a good question. I mean we’re not — we’re not at the point yet where we can kind of give very specific 2026 commentary. I think really, our main focus now is kind of looking at the exit velocity, if you will, of our order volumes in ’25 and what that implies for at least the start to ’26. I just wanted to make sure that people understand that, to Scott’s point, it’s been a consistently flat hiring environment now for a period of time. And we expect that dynamic to continue. I mean base has improved dramatically already through the year. It was negative 5.5% Q1, negative 3.7% last quarter, now only negative 1.8%. Negative 1.8% is that slightly negative that we’ve been talking about the last couple of quarters, and that’s kind of that ballpark that our current expectation that persists for the next few quarters.

We’ll obviously give out a little bit more refined view as we get into our next earnings call for the ’26 guide. But you also have to remember at a slightly negative base with the new logo and upsell, cross-sell consistency and the momentum we have, and where we’re hitting all cylinders on retention, even with a slightly negative base, you’re set up for a pretty good overall growth. But we do see just kind of this macro environment persisting. There’s not really any kind of formal outlook on where tariffs are going to take us on immigration policy and all these other things that are kind of impacting just that wait-and-see mode that customers are in. So a little too early to get specific, but certainly, for the foreseeable future, we kind of see that wait and see consistently flat overarching hiring environment.

Scott Wurtzel: And then just as a follow-up, going back to the kind of the identity market opportunity, and you mentioned mid- to high teens market growth rate. I mean, given your position in the screening market and everything, do you think you guys can outgrow that sort of market growth rate over the near to medium term as you sort of bring these solutions into your customer base?

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

Operator: [Operator Instructions] Our next question is coming from Jeff Silber with BMO.

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

Scott Staples: I think there’s a lot that goes into it. I mean, first thing, we’re a very, very, very customer-focused, customer-centric, customer-inspired company. We spend a lot of time with our customers, as I mentioned with our formal business reviews, and those are only the formal ones. We’re talking to our customers daily, weekly, monthly. The Collaborate sessions that we talked about in the script have been phenomenally attended. We’ve got lots, if not most of our large customers attending these Collaborate events around the world. So we’re spending a lot of time with our customers. And I think there’s a couple of things that are driving retention. One is we are considered thought leaders in their industry. We pick certain industry verticals to focus on, and we go deep, deep, deep into those so that we know what they’re dealing with from a compliance standpoint, from an onboarding standpoint, from a cost pressure standpoint, whatever it might be.

We know their industry well. And in most cases, we have most of their peers as customers, so we can help them benchmark. So we can help them say, okay, here’s what the industry is doing, and here’s where you’re best-in-class and here’s where there’s gaps. And those gaps are great to point out because what that means is upsell, cross-sell opportunity. And that’s why package density has been such a great driver of growth for us. So vertical knowledge, industry expertise is clearly one of the drivers of retention. The other one is tech. I mean, as I mentioned earlier, we’re a great tech company. We’ve got agile pods all around the world. We’ve got solution engineers. I mean we’re really good at tech. Our products demo really well, which leads to a lot of new logo wins.

And customers are very happy with the products. And also, we’ve really nailed the Sterling integration from a product and platform standpoint. Our vision, our theory from the very beginning of the acquisition was single back end, leveraging all of the great First Advantage automation that’s been out there for literally 9, 10 years now. Single back end, but the front ends don’t change for the customers. So that kept customers from attritting. Usually, when you do an M&A, that’s the biggest thing that they worry about is, are you going to force migrate me onto a new platform? And the answer was no. And it was even better than no. It was like not only are we not going to force migrate you, but you’re actually going to get a series of upgrades because we’re taking best-of-breed from both platforms and giving it to the other platform.

So there were some things that the Sterling platform did really well that are now becoming available to the First Advantage installed base. And there are some of the things that First Advantage did really well that are now becoming available to the Sterling installed base. And those are things that are visible. So we’re talking about functionality. We’re talking about best-of-breed user experiences, et cetera. And the things that are invisible to them are the things that we’re leveraging on that First Advantage back end. So it’s the First Advantage back end with all that great automation, which is driving faster turnaround times. If you look at our turnaround times, which is a key KPI for our customers, our turnaround times are coming down with customers because of the automation.

So we’re enabling them to onboard faster. And onboarding faster is critical for them, especially in high-volume hires because they need the people to do the job. So I think it’s the combination of our vertical expertise and the fact that we actually nailed the technology and the future promises of technology, like how we’re rolling out digital ID, how you can integrate your I-9, all that stuff is being eloquently explained to our customers, and I think they like the story.

Operator: Our next question is coming from Harold Antor with Jefferies.

Harold Antor: Harold Antor on for Stephanie Moore. I guess real quick one for me. Just in terms of international growth, I know international growth has seen several quarters of robust growth. If you could just provide any more color on, I guess, how that’s shaping up. It seems as though the U.K. has been a bright spot even though we’ve heard that the U.K. still is — in some areas is still weak. So just I guess, anything you’re doing there? And then I guess on your verticals, I think you called out weaker health care trends, but I believe you see some seasonal pickup in transportation. So is the seasonal pickup in transportation in line with what you saw historically or just anything there that would be helpful.

Scott Staples: Harold…. okay, Steven, go ahead.

Steven Marks: Yes, Harold. On international, I mean, look, we’re still seeing the momentum we’ve seen in the last few quarters sustained, if not accelerate a little bit. International was up a little over 11% in total. So again, like the trend we had last quarter, outpacing the consolidated business. And you’re right, the U.K. market has been certainly a strong point there, and some of the underlying verticals are still [Audio Gap] some government regulation that’s also helping us out. But honestly, we saw growth across all 3 of our international regions. And you remember, we’ve had that larger financial services win in Australia. We’ve had some other go-to-market success over the course of the year as well. So really strong base, really strong upsell, cross-sell, new logo type winning there in international.

I’ll let Scott fill on the verticals, but I think international has been kind of ahead of the curve and continued showing that growth and that accelerate a little bit in the third quarter.

Scott Staples: Yes, Harold, on the verticals, so you mentioned health care. I think it’s important to note, health care for us is really 4 sub-businesses. So it’s acute care, think of hospital networks; post-acute care; life sciences; and health care staffing. Post-acute care, life sciences and especially health care staffing really did well in the quarter. It was really just the hospital networks, and it’s completely 100% tied to what’s going on in Washington, D.C. with Medicare and Medicaid. It’s not like there’s less demand for their services. In fact, there’s more demand. You’ve got an aging U.S. population, and you probably know from your own experiences that there’s a tremendous demand in health care. It’s just that a lot of these smaller regional, even rural hospital networks are dependent upon Medicare and Medicaid funding.

And there’s a lot of uncertainty in that right now. So they’ve cut back their hiring just because they don’t know where the funding is going to come from. Now health care staffers have filled in the gap because they still need the services. So I think this is just an aberration. I think this is something that will play out over the next couple of quarters, will stabilize. We’re very bullish on health care because of the aging population, the incredible need for services. And even though it’s slightly down, I would say our strategy is actually to double down in this industry because it could be a tremendous growth industry long term. It’s just having a little bit of an aberration right now, and it’s completely tied to the smaller and midsized hospital networks.

It doesn’t really affect the larger hospital networks and affects mostly the nonprofits.

Operator: Our next question is coming from Pete Christiansen with Citi.

Peter Christiansen: Nice execution here, some nice trends. Scott, a quick question. I want to double tap on the AI disruption kind of concern, which I think you laid out really well. I think there is a slight nuance to the argument though that at least on the fringe and maybe in certain pockets of your base with AI, then maybe those employers can actually in-house some of their onboarding or screening type of duties there. How would you respond to that? What’s your opinion there? And then as a quick follow-up, great to see that you combine the databases here and building up your proprietary database. Can you just talk us through how that’s delivering on data cost savings? And is there a point where — of mass criticality where you really could see an inflection in your data cost because of the years that you’ve built up your proprietary database?

Scott Staples: Steven, I’ll take the first part, if you take the second part. So on the AI disruption, Pete, I mean, my short answer is no chance. Customers do not want to do this. This is not where they want to spend their engineering dollars and resources, and it’s extremely complicated. It’s loaded with compliance. There’s not a lot that they’re going to do internally with AI through the screening process. Now that’s not true with recruiting. I think AI is fully in play with recruiting, and it’s having great results. So using AI-driven recruiting tools in the front end of the recruiting process makes a lot of sense. But that only feeds then better information to us. We see AI as a real lift in quality because AI should improve the intake of data at the very front end of the recruiting process so that when it then comes to us, to then run a digital identity, to then kick off a background screen to then onboard an I-9, we have better data because AI has helped with the quality of that data.

So whether it’s a picture capture, whether it’s a biometric capture that the AI is doing, whether AI is helping the candidate fill out the application to make sure that they’re putting in their address correctly, their name is — all instances of their name are captured, first name, middle initial or — and last name and capturing maiden names, all that kind of stuff, it only helps us. But it doesn’t infringe any way on our business model. In fact, it’s an improvement in quality, which actually also could help with an improvement in turnaround times because the better data we get from an ATS or from an AI-enhanced recruiting engine, it makes our job that much easier. But I think with all of the FCRA compliance laws, with all of the unique thousands and thousands of data sources that need to be hit, I don’t see customers doing this themselves in any scenario.

Steven Marks: Yes. And then, Pete, on your data question, I think there are 2 things there. One, I mean, leveraging the data assets and resources of the 2 combined companies has been a core part of our cost of sales component of our synergy program. And as you can see, where we’re at on that time line, we’re already above and beyond the original $50 million target. So we’re doing well there and leveraging those in many places in the business. But to Scott’s earlier point on the Q&A, we’re a tech company at heart and tech companies love data. And we’ll continue to invest in ways to grow our databases. And when we give out the full year numbers at the end of the year on the Q4 call. You’ll see growth in our NCRS, you’ll see growth in our verified databases.

And then it’s not just growing the databases, it’s leveraging them in as many ways as possible, but that will continue to be a storyline in a way that we improve the quality of our products, improve the quality of our P&L and cash flow, but it’s always going to be a part of our story here.

Scott Staples: Pete, yes, one other thing I’ll add to it is — and again, this kind of ties back to retention. I know I didn’t mention this when I got the retention question earlier. But we have literally been automating internal processes and automating our APIs to data sources literally for 10 years now. And for some reason, over the last year or so, we are starting to get amazing accelerated payback on this. So clients are actually feeling our fast turnaround times. And we’ve also particularly solved some of the sticky data source — known data source issues in our industry, certain counties or certain states or whatever it might be. And so when you sit down and do these business reviews with customers and you show them that their turnaround times are coming down and they feel that their turnaround times are coming down because of our investments in automation.

And again, that’s all in the First Advantage back end that we talked about. And now Sterling customers, our legacy customers are starting to feel this now too because we’re using our fulfillment engine on the back end for them. That helps with customer retention. And that is just — the power of that is showing up in the retention numbers. And again, this is something that our competitors just don’t have. We are light years ahead of them. And this is a big competitive moat for us.

Operator: Thank you. I see no further questions in the queue. Thank you all for joining us today and for your participation. This concludes the First Advantage Third Quarter 2025 Earnings Conference Call and Webcast. At this time, you may now disconnect your line. Have a wonderful day.