First Advantage Corporation (FA) Q3 2025 Earnings Call Transcript
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Overview
The earnings call reveals strong financial performance with stable growth projections, high customer retention, and successful integration of technology platforms. The management's confidence in upsell and cross-sell opportunities, alongside a robust deal pipeline, supports a positive outlook. While base growth is slightly negative, optimism around digital identity solutions and strategic contract renewals with guaranteed minimums provide additional positive catalysts. Despite some uncertainties in macroeconomic conditions, the company's proactive strategies and stable financial health suggest a likely positive stock price movement.
Key Financial Performance
Revenue $409 million, up 3.8% year-over-year on a pro forma basis. Growth driven by new logo wins, upsell, cross-sell, and strong retention rate of 97%.
Adjusted EBITDA $118.5 million with a margin of 29%, an improvement of 130 basis points year-over-year. Improvement attributed to synergy realization, cost management, and scalable business model.
Adjusted Diluted EPS $0.30, a 15.4% increase year-over-year. Growth supported by greater scale, expense management, and lower interest expenses.
Cash Flow Adjusted operating cash flow of nearly $81 million, a 78% increase year-over-year. Growth driven by larger business scale, working capital management, and reduced cash tax payments.
Synergies $52 million of actioned synergies, exceeding the original $50 million target within one year. Realized $12 million in Q3, with a total in-year realization of $30 million.
Net Leverage 4.2x synergized pro forma adjusted EBITDA, reduced by approximately 0.25x from a year ago. Supported by $70 million in year-to-date debt repayments, mostly voluntary.
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Operating Highlights
Digital Identity product: This product is being incorporated into new contracts and is seen as a competitive advantage. It addresses risks like AI-driven identity fraud and has a total addressable market of over $10 billion with expected growth in the mid- to high teens.
New applicant portal: Approximately half of the order volume now runs through this portal, offering a secure, user-friendly experience with AI-powered features. It is being extended to the Sterling front end.
Criminal and motor vehicle records monitoring solutions: These solutions were made available to the entire customer base in October, enhancing screening capabilities.
International growth: Achieved year-over-year revenue growth for the sixth consecutive quarter, with strong performance in the U.K. and improving trends in APAC.
Vertical strategy: Revenue growth was observed in nearly all verticals, including retail, e-commerce, transportation, logistics, and financial services. Health care showed slight decline due to funding uncertainties but remains optimistic long-term.
Integration of Sterling acquisition: Integration is ahead of schedule, delivering strategic and financial benefits. Synergy target increased from $50 million to $65-$80 million.
Operational efficiencies: Back-end automation and AI-driven processes have streamlined workflows, reduced redundancies, and improved margins.
AI strategy: Proactively addressing AI's impact by leveraging it internally for quality and customer experience while building tools to combat AI-driven risks.
Customer retention and growth: Retention improved to 97%, and new logo, upsell, and cross-sell initiatives are driving growth. Exclusive 5-year contract renewal with a top customer expected to generate over $100 million in revenue.
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Risk or Challenges
Macroeconomic Environment: Hiring growth remains consistently flat, and macro uncertainty, including policy changes like government shutdowns, immigration, tariffs, and tax policies, has led to a 'wait-and-see' approach among customers, potentially impacting hiring plans and revenue growth.
Healthcare Vertical: Revenue in the healthcare vertical was slightly down due to uncertainty with Medicare and Medicaid funding, particularly affecting nonprofit hospital networks.
AI and Automation: AI and automation are expected to displace jobs, creating potential risks for certain types of roles. However, the company is leveraging AI to enhance its offerings and mitigate risks.
Government Shutdown: The government shutdown has delayed some operational items, such as the government-run E-Verify platform, causing delays in I-9 verification processes.
Base Revenue Growth: Base revenue growth remains slightly negative, with expectations for this trend to continue into 2026, reflecting ongoing challenges in the labor market.
Product Mix and Margins: Mix shifts towards products with higher out-of-pocket fees are impacting adjusted EBITDA margins, though these impacts are expected to normalize over time.
Digital Identity Risks: The increasing dangers of AI-driven identity fraud are creating risks for companies, which the company is addressing through its Digital Identity product.
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Guidance & Outlook
Revenue Growth: The company expects full-year 2025 revenues in the range of $1.535 billion to $1.570 billion, with Q4 revenue growth projected at around 6% year-over-year at the midpoint.
Adjusted EBITDA Margins: Full-year adjusted EBITDA margins are expected to be approximately 28%, with Q4 margins expanding by more than 100 basis points year-over-year.
Base Growth: Base growth is expected to remain slightly negative in Q4 and likely into 2026, consistent with Q3 trends.
Customer Retention: Retention rates are expected to remain in line with historical performance of at least 96%.
Free Cash Flow: The company anticipates free cash flow for 2025 to be in the range of $110 million to $120 million, driven by better working capital management and reduced integration-related costs.
Digital Identity Products: The company is focusing on its Digital Identity products, which have a total addressable market of over $10 billion and an expected growth rate in the mid- to high teens.
Synergy Targets: The company has increased its synergy target from $50 million to a range of $65 million to $80 million, with $52 million already actioned within one year of the Sterling acquisition.
AI and Automation Impact: The company is strategically reviewing investments in AI and automation, expecting these technologies to create 170 million new roles globally by 2030, despite displacing 92 million jobs.
Macroeconomic Conditions: The company expects hiring to remain flat due to macroeconomic uncertainties, including tariffs and policy changes, but anticipates consistent hiring volumes from customers.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:How should we think about upsell, cross-sell, and new logos going into Q4 and 2026?
A:Management expects Q4 contributions from new logos, upsell, and cross-sell to be in line or better than historical averages. They are seeing good initial order demand from larger contracts and are confident in achieving or exceeding historical norms for Q4. However, it is too early to comment on 2026.
Q:Have there been any changes in the sales cycle or early conversations with clients about new win momentum?
A:The pipeline is at its highest value ever, with a strong late-stage pipeline for large deals. Management is optimistic about organic growth heading into 2026, citing improved client retention and successful integration of technology platforms.
Q:Do you feel that traditional employment background checks are at risk of being disintermediated by AI innovation?
A:Management does not see AI as a competitive threat but rather as a beneficial tool. They believe AI will enhance processes like digital identity checks, helping customers avoid hiring imposters and improving client stickiness.
Q:Can you provide more background on the $100 million 5-year contract renewal with guaranteed minimums?
A:This contract is part of a broader strategy to include guaranteed minimums in new and renewal contracts, aiming for more stickiness. Management plans to incorporate this structure into all new logo wins and renewals, with minimal pushback from clients.
Q:Can digital identity solutions drive upsell, cross-sell growth next year?
A:Digital identity is a hot topic among customers, with increasing demand due to risks like identity fraud. While it is too early to quantify its impact, management expects it to drive upsell, cross-sell revenue, improve customer retention, and boost sales of other products like I-9.
Q:What are the dynamics of October order volumes and macro factors affecting growth into 2026?
A:October order volumes were above expectations, reflecting a consistent labor market. Management does not see significant job growth or losses but expects a stable hiring environment into 2026. They emphasize their enterprise focus and unique data insights.
Q:What is the cadence of synergy realization in 2026, and what is the timing for Sterling EPS accretion and deleveraging?
A:The remaining $15-$25 million in synergies will be realized over the next year. EPS accretion is already evident, supported by operational scale, revenue growth, and cash flow improvements. Management expects to reach a 3x net leverage ratio by the end of 2026.
Q:Will base growth remain negative throughout 2026, or could there be an inflection?
A:Management expects a slightly negative base growth environment to persist, reflecting a flat hiring market. However, they believe upsell, cross-sell, and retention momentum will drive overall growth.
Q:Can you outgrow the mid-to-high teens market growth rate for digital identity solutions?
A:It is too early to quantify, but management is optimistic about their unique position in the market and the strong customer response to their digital identity solutions.
Q:What factors contributed to the sequential improvement in retention, and is it sustainable?
A:Retention improved due to strong customer focus, vertical expertise, and successful technology integration. Management believes these factors, along with automation and faster turnaround times, make the improvement sustainable.
Q:How is international growth shaping up, and what are the trends in verticals like healthcare and transportation?
A:International growth remains strong, with the U.K. and other regions performing well. In healthcare, post-acute care, life sciences, and staffing are growing, while hospital networks face challenges due to Medicare/Medicaid uncertainty. Transportation shows seasonal growth in line with historical trends.
Q:Is there a risk of employers in-housing onboarding or screening duties using AI?
A:Management sees no risk of employers in-housing these processes due to their complexity and compliance requirements. They believe AI will enhance data quality and improve their processes rather than disrupt their business model.
Q:How is the proprietary database delivering on data cost savings, and is there a point of critical mass?
A:Leveraging combined data assets has contributed to cost savings and synergy realization. Management continues to invest in growing and utilizing their databases, which they see as a competitive advantage.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the potential growth rate for digital identity solutions, stating it is too early to quantify. They also did not provide a clear outlook for base growth in 2026, emphasizing the flat hiring environment without committing to specific projections.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI technology
Collaborate
Digital Identity
Identity product
Identity solution
OBBBA
Today
ability logo
acquisition progress
adoption
anniversary
breed
core
customer satisfaction
degree
differentiator Advantage
economy
expansion
expectation customer
experience device
feedback
forma basis
fraud AI
government shutdown
health care
integration process
market condition
momentum
movement
need
news
payment
policy
portal
product vertical
realization
record
risk
role
user experience
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The earnings call reveals strong financial performance with stable growth projections, high customer retention, and successful integration of technology platforms. The management's confidence in upsell and cross-sell opportunities, alongside a robust deal pipeline, supports a positive outlook. While base growth is slightly negative, optimism around digital identity solutions and strategic contract renewals with guaranteed minimums provide additional positive catalysts. Despite some uncertainties in macroeconomic conditions, the company's proactive strategies and stable financial health suggest a likely positive stock price movement.
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Frequently Asked Questions
Where does this earnings call transcript come from?
All transcripts are sourced directly from the official live webcast or the company’s official investor relations website. We use the exact words spoken during the call with no paraphrasing of the core discussion.
How soon is the transcript available after the earnings call ends?
Full verbatim transcripts are typically published within 4–12 hours after the call ends. Same-day availability is guaranteed for all S&P 500 and most mid-cap companies.
Is the transcript edited or altered in any way?
No material content is ever changed or summarized in the “Full Transcript” section. We only correct obvious spoken typos (e.g., “um”, “ah”, repeated 10 times”, or clear misspoken ticker symbols) and add speaker names/titles for readability. Every substantive sentence remains 100% as spoken.
Why do some answers appear as “Unclear” or “Inaudible”?
When audio quality is poor or multiple speakers talk over each other, we mark the section instead of guessing. This ensures complete accuracy rather than introducing potential errors.
Who creates the AI Summary and Key Q&A highlights shown above the transcript?
They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
