Info services companies here at RBC. Thanks, everyone, for joining. Thank you, Steven, for giving us this opportunity. We are really excited to host Steven. CFO, First Advantage. I'll start off with a question that I'm sure you're getting the most. It's all about macro. It's all about hiring. Can you talk about seasonal hiring trends, how those are coming along, and what are your thoughts for November and December? Thanks.
Yes. This will sound a little cliché, but don't believe everything you read in the news. I think that has never been more true in our industry right now, or at least with the way we operate. I think a couple of things before I talk about the macro to keep in mind. One, remember that First Advantage, we focus on enterprise-sized customers. So $500,000 or more of screening value, those are companies that are big. They're hiring a lot of people on a regular basis. That's very different than small business, mid-market, and they have very different approaches towards things. Two, we're very verticalized, right? Our core vertical focus, health care, retail, e-com, transportation, home delivery, logistics, really key verticals for this time of the year as well.
If you read the news and you looked at whether it was the Challenger, Gray & Christmas information from a couple of weeks ago, or just every day there seems to be a new headline that makes you think that the world's really grim, we're certainly seeing a lot of stability in the hiring markets that we serve. Again, enterprise-focused and verticals. We look at just what we did in Q3. While base growth was still negative about 2%, 1.8% to be exact, that's continuing this flat curve that we've seen. It was negative 5.5% at the beginning of the year in Q1. It was negative 3.7% in Q2. To be at negative 1.8%, it's continuing to flat. That's because you have this sequential stability that's remaining in there. That's the core of the market.
I think when you look at what we're seeing, honestly, in October and then now November, October was a really good month. In fact, it's always an important month for us because our retail and transportation customers, that is their peak hiring season. Now, with the Sterling acquisition, we're a little bit more diversified, so we're a little bit less reliant on it. It is still a really important time of the year for us. We saw a strong start in September. We saw that really good velocity and momentum carry through October. Early November results are right in line with that.
If not, when you look at it all together, it's probably a little bit ahead of our model, to be brutally honest, which is hard to imagine where if you just took the net sum of the Wall Street Journal homepage and the cover of those things, you would say that's never supposed to happen. I think the other thing to think about with our overall revenue model, that's really base growth, right? While all this is going on, year after the acquisition, we've got our retention rates up at 97% last quarter, which is fantastic. I think kind of a vote of confidence on how we've executed on the integration. Likewise, our go-to-market success in terms of the controllable growth out of new logo and upsell, cross-sell, that drove up to 9%, which is right in line with norms.
We think there's room to outperform there over the near term because we've got so many big deals all ramping into revenue at the same time. It's interesting because we've talked to a lot of investors over the last couple of weeks after our earnings cycle and upstairs in the one-on-one room upstairs on FORE. People are concerned about what they're reading. I think it's, again, you read the news and then you look at our numbers and they're very different. I think it's because of how strategically focused on enterprise we are, how strategically focused on our verticals we are, the fact that there is flatness in the underlying markets that we serve. We've got a really strategic focus towards controllable growth.
That's great color. Maybe just to follow up on the same point would be, if you look at your fourth quarter implied guidance, it's 6% organic growth, which is a pro forma growth, which is an improvement compared to 4% that we saw in the third quarter. You obviously talked about base declining, base decline have moderated. You talked about momentum and the new vents, cross-sell, retention improving. As we think about that four going to six, can you help us understand what are those drivers for that incremental improvement from 3Q to 4Q?
Yeah. So a couple of factors. Let's start with base. Yeah, base has improved, but it's still negative about 2%, plus or minus. We don't see that changing, right? It is a flat hiring environment. There's a lot of noise coming through the system, whether that be Washington policy or just some of the other factors. Let's just use kind of flat base as a modeling assumption for a second. Now, we are very confident in 97% retention for the next couple of quarters because we've done a lot of work to preserve the customer experiences, to keep that integration approach and make sure that our customers are really happy. So then you say, all right, how did you get from 4% in Q3 to a midpoint of guidance? To your point, that's at 6%.
We feel really good about our upsell, cross-sell, and new logo momentum. We have been talking about three big marquee deals all year long that we signed in Q1, a financial services win, an APAC, and then in the U.S., a health care win, and then somewhere in the retail gig space. All three of those will be in our revenue number in Q4. To have three big deals, of which two are top 15 size contracts, all hitting revenue at the same time, that certainly powers growth. Our go-to-market teams have done a phenomenal job of just filling the funnel with other big deals. We talked about 17 enterprise bookings in Q3. We had 18 in Q2, record dollar amount in Q1, 25 last Q4. All of those deals are starting to cycle through and hit revenue.
That is why I was saying we're very optimistic and bullish about our performance. We think we can create some upward momentum from our historical 9% to deliver that overall growth of 6%.
That's great color. Just maybe a good segue into the next point around the enterprise booking. You talked about 17 enterprise booking. You highlighted some of these big events. What's driving these big events? Is this competitive displacement? What's really driving it? As we think about the pipeline going forward, can you comment on what does the pipeline look like over the next several quarters?
Yeah. I mean, I think what's really happening is we've had sustained momentum. We always liked First Advantage. What we liked about Sterling culturally is two high-performing sales organizations. We think we have the best go-to-market machine in the industry. We think that our scale and our story is resonating well in the market. The fact that kind of our unique approach to how we've integrated the two businesses obviously is resonating in the base. I think the market's appreciative of it. How do you get those 17 this quarter and 70 some odd over the last 12?
12.
Yeah, over the last 12 months? Execution, right? So we've got products that people want to buy. We're deep in the verticals that we serve. That's really impactful, especially when you start talking about transportation or health care or financial services. There's a lot you need to do right to do the compliance, right? You need to know DOT rules and regulations. Our transportation go-to-market team knows those rules. When they show up to talk to a customer, they're talking their language, right? It's like me talking to another accountant. We can sit there and talk ASC 606 and this, that, and the other. I couldn't do anything about DOT, but they can. That market message resonates well. I think what's helping us accelerate is we're able to now differentiate with product. I'm sure we'll talk a little bit more about digital identity.
One of the things that has me bullish about that product, yes, is the market opportunity it creates in and of itself. It is a differentiating customer and product experience. We are winning incremental screening business because people are saying, hey, we want your digital identity solution. While we are here, we will look at your screening solution as well. I think all of those happening at the same time is really helping us hit all cylinders and even start to accelerate on the go-to-market approach.
Oh, that's great. Maybe that would be a good segue to talk about product itself. Maybe if you can talk about digital identity. Maybe two phrases. First, we'll do a deep dive into the digital identity, what's driving the demand for it. Then how do we think about the package density going forward. Maybe to start off with digital identity, what's really driving it? What are the other factors which are driving it? Why you? What's your core competency which is driving more success for you?
Yeah. It's unfortunate why there's a demand for the product, right? It is one of the things that AI and some of these other technologies are making really easy to do is to fake who you are, right? Whether that means you can just deepfake yourself in an interview, I could probably make myself turn into a Sheesh Sabajra one day. You can do that in an interview fashion when there's Zoom interviews and Teams and all these other tools. You can fake credentials. You can fake resumes, all those things very easily. What's happening is while that started as fun tools and you could do some fun things on Instagram, I guess, or whatever, people are starting to use that for some unfortunate things. There was an article back in May on Wall Street Journal.
It was the morning of our investor day. Three hundred corporates in the U.S. wound up hiring someone from North Korea and did not know it. It is because they used those fake credentials. They used all that technology for the bad side of it. What digital identity is really around is know your people, right? It is helping companies piece together that Steven Marks is who he says he is. When you do the background check, it was that same Steven Marks. That person you then onboard who shows up to your facility is Steven Marks, the person who has your laptop, your right to work, et cetera. Stitching that all together, you can do if you engage on a point solution.
Where we have a competitive differentiation is because we're doing the identity check upfront, because we do the background check, because we offer I-9 and right to work, because we can do post-employee monitoring, we can bring that all together under one user experience and then prevent the candidate swap out that also can happen because we're kind of tracking. It's almost like artwork provenance, right? You can track that person through the stages and make sure that Steven Marks is Steven Marks is Steven Marks. There is a big demand for it. Like I said, because it's a differentiating product, it's both creating discrete demand for the product itself and then opening up doors into customers and prospects where we haven't been able to crack into before. There is a lot of exciting market opportunity.
I think the biggest unknown to us is each vertical has different use cases. In a more sophisticated financial services customer, we have some talking about doing it five to eight times for every candidate at interview, at onboarding, at drug test, at background check, at I-9. Even there's a couple that are talking about you'll get a text saying you have 15 minutes to complete this or your laptop won't stop working because they want to make sure the people who are using their products and using their systems are who they say they are. A retailer may decide to do it once or twice. We're starting to build up the data and the use cases for what those attachment rates are. There will be more data on this in 2026.
We are really bullish on the opportunity it's both creating from driving the discrete upsell and cross-sell into digital identity and unlocking new logos from just differentiating product in the market.
That's great. It seems like a big addressable market for you to go after from a discrete perspective. Also, as you said, it's opening up new doors and new win opportunities. Maybe just shifting gears a bit and talking about package density. Package density has continued to go up. Can you talk about what's driving higher package density, your ability to cross-sell more products? How do we think about that going forward?
Yeah. I mean, what's driving package density is the unfortunate it's very similar to digital identity. It's just everyone we live in this risk world. Everyone's been trying to figure out how do you manage that risk. Package density is just making sure you're doing a richer background screen to go deeper, whether it's doing checks and components that you weren't looking at before. So if you were doing a very simple check and you weren't checking if someone was on sex offender registries or if they weren't in a global sanctions and not a disbarred list from medical credentials and things like that, or just going deeper into a criminal history, right? A very basic search, you cut off at three years. What about going deeper to five or seven or ten using different spellings and usage of names?
There are a lot of different ways you can upsell into that package density world. It really all comes down to helping tailor that risk management approach and helping kind of give more certainty to knowing that, hey, if I'm exposing my employees to the third party, to my product, to my intellectual property, what we see a lot of the trend is any company that has employees who are unsupervised with third parties, that is a risk because you don't know what they're going to do. If you've employed someone who you probably shouldn't be having in that scenario, you want to know about it because that creates a bigger risk on the back end. It's an unfortunate side of the world that's becoming more common. It's obviously a healthy driver of upsell, cross-sell demand. It's been that way for a while.
We have white space across every single one of our customers on how we could increase package density.
That's great color. That's very helpful. One of the things that you also mentioned was data was a competitive differentiation for you. Can you talk about some of the databases that you've had, the Verified database in particular, and how you've continued to expand on that database?
Yeah. We look at that both from a competitive differentiation. It helps us win some business. Obviously, I think from a margin differentiation too in our industry. There are two main databases that we have. We have our National Criminal Record File, which is over 700 million criminal and arrest records. We've been building that up for years and years and years. We really just sell that as a search. You get broad national search. I'm going to pick on myself for a few more minutes. Steven Marks has lived in Fulton County, Georgia for a long time. If I went to Vegas and did something in Clark County, Nevada, you never know that if you did a traditional county-based search only. This has a wide net.
You can kind of help find some of those where someone went out of town or did something out of jurisdiction. We have 700 million plus records in it, growing all the time. We sell that as a supplemental search on almost every background check we sell now. It is great because it is almost high margin to us because we own the data. We do not have to go to third parties. We are not relying on anyone else for it. That is something that we will continue to invest in forever. Verified is just helping companies manage the costs of working their way through the employment and education verification process. It has gotten expensive. The data market out there is not cheap. Every year it gets more expensive. It is the combination of our Smart Hub, AI intelligent router, which we have built a network of data providers into that.
We have some of the bigger credit bureau players in there. We have the fintech players. We have our own database, which we love. We will ultimately say we will fulfill this, whichever is the most efficient, fastest, highest quality route. If we go to the big guys, great. If we go to our database, great. If we have to go manual, fine. We can do that very efficiently as well. That database, the Verified side of that, has over 120 million records. That has been rapidly growing as well. We see that both as a competitive differentiator, the fact that we have our own National Crim File. We have a solution to the high cost of employment verifications. The market resonates well to that. It obviously is margin beneficial when you can use your own data versus third party data.
We like that proprietary data from the fact of it's margin beneficial.
Yeah. Yeah. That's very helpful color. As you talked about AI Data Hub, right? That's an important part of the value prop. AI is obviously such a hot topic right now. Can you talk about how do you think about AI from a monetization perspective? How do you think about there's always concern around disruption from Gen AI native solutions? If you could also address that. We will talk about the bottom line later. Just on the top line side, monetization opportunities and the moat that you have versus a Gen AI native solution.
Yeah. I mean, I would say, look, ultimately we look at AI strategically in three lights. One is how are we using AI internally? We can come back to that one later. How can we make First Advantage faster? How can we make ourselves more efficient? How can we increase quality? If the byproduct is cost savings, absolutely great. Those are that. We've been investing, whether it was RPA 10 years ago, which evolved to machine learning, which is now evolving to AI. It's been our bread and butter to do those things. We'll talk more in a minute. We look at it from a disruption angle. I think when people think about disruption, people need to really keep in mind how complicated of an environment that background screening you really operate in. First off, it's heavily regulated.
You've got whether it's FCRA compliance here in the U.S., GDPR overseas. There are even state-specific laws around the use of AI in the hiring process, making sure you do all of that with the appropriate framework subject to all of the requirements of FCRA, subject to whether it's California law or Illinois law, et cetera. We've got a large compliance team that's both internally consultative and with our customers consultative. There are some just limitations even where you can't just roll out a bot that does it all. It's such a fractured data environment. There are almost 4,000 unique disparate separate court jurisdictions that you have to go, you have to go FCRA. You have to go to the primary source. Some of those courthouses, the bigger jurisdictions, are good, modern, online databases. You still have to get credentialed. You have to have access.
Sometimes they don't let bot robotics come in and do that work. You have to use a human to do it. We have ways of doing all that. Rural court jurisdictions, smaller older courts, they're manual and paper. You have to send a physical human being in there. By the way, that's just criminal, right? You still haven't covered in verifications. For drug and health screening, we have 18,000 vendors in our network that we've got in our proprietary network. You can't just write a copilot bot or an AI bot or go there and do that. We get into these engagement discussions with investors all the time. You also have to think about the cost to an organization to build it on your own. You still have to go buy the data first cost. Our gross margins are roughly 50%.
A large portion of that cost of sales is third party data that's passed through. Going to the state of New York courthouse, going to whatever, Fulton County, Georgia, and paying their couple bucks every time you do it. You can't eliminate those with AI. You have FCRA law. You have to go and do it. You have all the compliance infrastructure and all the reporting add-ons and everything else that we bring to the table. We can do everything. That's the U.S. It's a global market we live in and our ability to fulfill in over 200 countries and territories. Disruption is less of a risk.
I think the biggest thing that we've put in putting our mind to besides the internal side is making sure that we've aligned our strategy just to the parts of the employment market that we don't see as look, some of business services will probably be disrupted by AI in and of itself. That is why we love our core verticals: healthcare, retail, e-com, transportation, logistics, and a few of our other core verticals because we see there as a long-term value creation. We're putting our capital and our investment dollars and go-to-market and product where we see a lot of long-term growth and spending a lot of time looking at whether it's our own data, looking at some think tank type data on the impacts of AI, just making sure we're aligned for long-term growth.
That's great. That's great. You mentioned obviously that fourth quarter seasonality has come down because of the Sterling acquisition. Sterling acquisition also helped you diversify your vertical exposure. Can you talk about some of the other revenue synergies that you've generated as you've combined the product suite and went with the best of the products to the market?
I'd say first off, the diversification has been fantastic. If you look at just this year in a bubble and some of the ebbs and flows of 2025, that diversification has really helped us show stability. Earlier in the year when the tariffs and Liberation Day first came around, our retail e-com business took a little bit of a hit. Those guys pulled back. They adjusted their inventory levels, et cetera. If we were just standalone First Advantage back then, that would have been a problem if our largest vertical was experiencing some downturn. Because we had professional services and healthcare and some of the Sterling verticals offsetting that, it was great. Look at Q3. Every single one of our verticals grew except for healthcare.
If we were standalone Sterling, that would have been a problem at around 30% of revenue to have your number one vertical pull back. The diversification certainly helped us stabilize across the board. I think because we've had a productive and successful implementation, now to your point on revenue synergies, we've been able to roll out our WOTC tax credit service, a traditional First Advantage product, over to Sterling, I-9, have a universal product. There are some other cross-sell opportunities that are coming down the pipeline where we're able to leverage the product suite of one side, use that best of breed approach that we've been talking about now for well over a year, and get that available to the full customer set to where now the customers really see these as upgrades. Like I didn't have access to this in my single candidate experience before.
Now I can get the tax credits. I'm not asking my employees and prospective employees to do anything different. They're in one user experience. I think more to come when you see that really help. Again, that's why we feel so bullish about upsell, cross-sell, and new logo going into the future.
No, that's great. One of the things you also mentioned was your presence in 200 different countries, international in particular, grew 11% in the third quarter, so significantly faster than the company average. What's driving the strength in the international markets?
A couple of things. I mean, it's always easy. As an old CFO who you might have known, he said the easiest way to have a good year is to have a bad year. International certainly got back to more normalized hiring levels faster. We saw that with some declines in international in probably 2022 and 2023. This is also the sixth consecutive quarter of growth internationally. Now it's only 15% of the overall business. We've got some really strong core markets internationally. The U.K. hiring market's actually doing really well. Again, don't believe everything you read in the news. There's a lot going on in that market that's really positive. Australia and how we verticalized and APAC has done really well. India is having a good year as well. In fact, all three of those markets grew in Q3 as well.
You're just seeing really good demand in those markets. I think some of that is when the U.S. gets a little noisy and messy, a lot of these guys turn to more domestic production and domestic economic activity. Some of that is what we're being the beneficiary of. I think in some of those markets, particularly in India and APAC, they're rapidly maturing. They want to have a more Western look and feel from a corporate standpoint in the large multinationals. They're taking screening more seriously. It's creating more opportunity for us.
That's great. That's fantastic. Just moving to your midterm guidance that you provided. Can you just quickly remind us what those midterm targets are if you can?
Yeah. No. I mean, ultimately at our investor day in May, we provided some 2028 model. We're doing well against that. I mean, obviously when I talked about what are our assumptions on revenue, we never had base as a positive contributor to growth in 2025. Even for most of 2026, we still see that as kind of a transition year. Ultimately, yeah, we think we can get into those upper single digit growth numbers. Again, stabilizing base, strong upsell, cross-sell, and new logo generation. It's really strong customer retention, which has historically been 96% plus. We think A, product differentiation and our customer focus can help improve that over time. Obviously from a profitability standpoint, that incremental revenue, that gross margins close to 50% flow down nicely. We still have some more work to do on synergies.
We're at $52 million through Q3, $65 million-$80 million target by the end of this time next year effectively. I've got another $20-ish million plus or minus of synergies to get. A lot of that is in the gross margin line items. When you look at how all that works, and then you get to that low 31%-33% EBITDA margin, depending on where we land there, really good strong profitability improvement from where we'll finish this year around 28%. From an EPS line item, you get the added benefit of the deleveraging. We've already paid down $71 million of debt, generating really good free cash flow numbers, operating cash flow with $71 million gap in Q3, very stable CapEx investment of about $60 million a year plus or minus. I feel really good about that model.
I think we're making really good initial steps towards achieving it.
That's great. Question around cost synergies. Obviously you talked about making some great progress. You've already raised the bar on cost synergy once. You've been making some great progress on that front. What are some of the things that are pending on the cost synergy side? How should we think about those coming along?
Yeah. I mean, yeah, we've raised it a few different times from I think we started at $50 million + and now have landed on $65 million-$80 million, which we feel is a really good solid number and obviously very accretive when you do the whole modeling of the acquisition. The initial focus went more towards public company costs, internal operations, G&A type line items. The remaining go get is mostly within cost of sales. As I mentioned, there are 4,000 or so disparate court jurisdictions. We need to be optimizing and combining how we acquire, how we process that data, how we report that data. We've got a pipeline. It's well over 100 opportunities that we are doing. They'll come pretty ratably over the next 11, 12 months. I feel really good about still achieving that range. Obviously, if we can outperform it, we will.
Not at a point yet where we have certainty to want to give you any updates there. Certainly feel good about the range we have. Again, most of the go get being in cost of sales, which helps then normalize out where gross margins kind of used to be and then our new mix and whether that be FA Sterling and the new vertical mix and the services they order. Feel good about the overall attaining our initial goals. I think when we zoom out, if we can achieve the synergy model and have raised it a couple of times and get to where we wanted to be and then retention's at 97% now, that's a successful integration.
That's great. Yeah. If there are any questions, please feel free to ask questions. I'll jump on to the next question around we talked about AI monetization opportunity and the deep moat that you have around the business. Obviously, you've talked about this big margin expansion opportunity. A lot of it is coming from cost synergies. Can you also talk about how AI is driving a lot more of if there is potential for AI to also help drive some of the efficiency and margin expansion as part of your midterm targets?
Yeah. No. As I mentioned before, AI is just for us a natural progression of what we were already doing, right? RPA to machine learning to AI. We've already had some, I would say, early wins, if you will, just given AI is rapidly evolving. Our click chat call customer care, which is converting from a very old school phone email-based customer care experience to AI-enabled chat and AI-enabled voice. We rolled that out within First Advantage in 2023 in April. We're able to take out roughly 20% or so of that headcount and then optimize that probably even up to 30%. We have just now made that available as of last quarter of Q2 on the Sterling side. We will continue to find the efficiency savings there as we start to get the use of the chat and voice more and more.
That is certainly one opportunity. I think when you think about just all of the overall fulfillment work streams, there are some times where we're replacing one of the older RPA, machine learning, OCR type technologies with a more modern and accurate AI bot perspective. We're also using it internally. We've rolled out the build your own agent into our finance team and our HR teams and helping get just more efficient from top of the P&L to the bottom of the P&L. I think there's a lot of opportunity in that. Some of even what our synergy go get is applying what we were doing really well with automation or AI on one side of our business and applying it pluralistically to the whole thing. We still think there's a lot of juice to squeeze there.
Look, we've always been First Advantage culturally focused on margin efficiency, driving annual cost savings. A lot of that came from, I would say, the more legacy automation products that have now just the natural progression is let's do those same principles, but use AI to do it.
Yeah. Yeah. No, that's helpful. One question just going back, and you've talked about the new wins you've had and competitive displacements that we've seen. Can you just talk about just what the competitive environment looks like now post the Sterling acquisition? How much of a market share do you have? There are maybe there's one or two more national players, mostly regional mom and pop. Any broad strokes around what the marketplace looks like now?
Yeah. I mean, certainly the biggest development in the market over the last year has been the Sterling FA merger and bringing the two companies together. I mean, we still feel very confident that we're in our very leading market position. Our ability to operate at scale, our ability to operate and to invest at scale, by the way, and create new differentiating products we think is close to second to none. I think our share is still roughly in that 25% range plus or minus. Obviously, we feel really good that if we're growing upsell, cross-sell, and new logo by 9% and have gross retention at 97%, that we're taking our share of the market and growing well competitively. I would say the competitive landscape hasn't changed a lot. That mid-market is still there. The players are all still there. To your point, a couple are global.
Some are national. Some are more vertical oriented or not. I have not seen a lot of change there. Yeah, there is still a huge market of these smaller mom and pops, whatever you want to call them. These are good-sized companies, $10 million, $20 million, $30 million of revenue. As crazy as it sounds, they all have a handful of these larger enterprise-sized contracts. We feel like our market message is resonating well against all parts of that dynamic there and creating a lot of opportunity for us.
That's great. Last question on capital allocation. You talked about having really strong operating cash flow, $71 million in the quarter. How do you think about, you've also been very proactive on deleveraging and exceeded your original expectation. How should we think about your deleveraging going forward, target leverage?
I mean, our long-term target's still to get to two to three times. Obviously, when you do an acquisition like this, it takes a little bit of work to get back to those ranges. We still feel confident we'll get there in a reasonable time frame. Current day, our capital allocation has been very consistent in the last 12 months. It's let's complete the integration, focus on the customer, focus on retention and growth, yield the synergies. I think we're doing a really nice job on both. To your point, deleverage. We want to get our leverage into a more market-appropriate position or a market-accepted position. Free cash flow has been great. We've already paid down $71 million of the debt. We'll continue to operate that way.
I think when we get into 2026 and we've made some really good progress there, we'll start to have a few different forward-looking positions there of what could be in our playbook going forward. For now, really simple three-tiered approach.
That's great. We'll keep it there. Thank you again. Thanks, Steven.
Thanks for having us.
Thanks.