First Advantage Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. First Advantage provides background screening, verification and compliance services across pre-onboarding, ongoing monitoring and adjacent products. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $185.3 | $201.6 | $360.8 | $391.4 |
| Operating income | $17.6 | $22.8 | $28.9 | $39.9 |
| Net income | $9.8 | $14.2 | $11.7 | $27.2 |
| Net income margin | 5.3% | 7.1% | 3.2% | 7.0% |
| Adjusted EBITDA (non-GAAP) | $56.0 | $60.8 | $104.5 | $114.4 |
| Adjusted EBITDA margin (non-GAAP) | 30.2% | 30.2% | 29.0% | 29.2% |
| Diluted EPS | $0.07 | $0.09 | $0.08 | $0.18 |
- Revenue fell 8.1% in Q2 and 7.8% in H1 year over year. Management attributed the declines primarily to weaker demand from existing customers, lower hiring in certain industries, lost accounts and comparisons with post-pandemic growth in 2022. New Americas customers and upselling/cross-selling partly offset the decreases.
- Americas revenue declined about 4.6% in Q2; International revenue declined about 27.0%. International weakness was particularly pronounced in India and Asia-Pacific.
- Cost of services was 50.2% of revenue in Q2 versus 49.8% a year earlier, and 51.0% in H1 versus 50.3%. Automation and cost actions reduced expenses, but customer ordering mix and third-party data costs weighed on the ratios.
- Operating income and net income declined in both comparison periods. Q2 Adjusted EBITDA margin was unchanged; H1 margin was slightly lower. Adjusted EBITDA is a non-GAAP measure and excludes specified expenses; it should be considered alongside GAAP results.
Cash flow, balance sheet and capital allocation
- H1 operating cash flow was $71.7 million, down from $96.4 million. Investing cash outflow was $13.3 million, including $12.4 million of capitalized software development. Financing cash outflow was $51.0 million, mainly share repurchases.
- At June 30, cash and cash equivalents were $399.1 million; short-term investments were $2.2 million. Debt was $564.7 million gross ($557.6 million net of deferred financing costs), implying approximately $165.7 million of net debt based on cash and cash equivalents.
- The $100 million revolving facility was undrawn, and the company reported compliance with its debt covenants. The term loan matures January 2027. In June, the credit agreement and derivatives transitioned from LIBOR to SOFR. Management said available cash, the revolver and operating cash flows should meet needs over the next 12 months.
- The company repurchased 3.90 million shares for $52.3 million in H1; approximately $87.1 million remained authorized at June 30. Through August 3, repurchases totaled approximately $114.5 million.
- After quarter-end, the board declared a one-time $1.50-per-share cash dividend, payable August 31, 2023 to holders of record August 21.
Outlook, risks and notable items
- No numerical revenue or earnings guidance is provided in the filing. Management cited continued macroeconomic uncertainty and longer sales cycles, while expressing confidence in the long-term business, product offering and strategy.
- Key risks discussed include hiring-volume sensitivity to economic conditions, evolving privacy and data-security regulation, cyber incidents, reliance on third-party data providers and vendors, competition, international exposure, seasonality and leverage. Customer contracts generally lack minimum or committed order volumes. The company also noted historical seasonal revenue peaks in October and November.
- One customer contributed approximately 11% of Q2 revenue and 10% of H1 revenue. No customer accounted for 10% or more of receivables.
- Potentially notable expenses include $1.8 million of H1 non-cash impairment charges, primarily for exited office leases, and a $4.9 million accrual for legal matters considered probable and estimable. The company said it intends to defend pending matters; outcomes may remain uncertain.
- A May modification changed vesting terms for certain performance awards. The company reported $28.8 million of unrecognized expense related to those modified awards and $45.8 million of total unrecognized share-based compensation expense at June 30.
- The company used its remaining U.S. federal net operating loss carryforwards in Q2; management expects income taxes to become a material use of cash, depending on future profitability and tax rates.
Important facts for investors to verify
- Whether hiring demand, customer order volumes and International performance stabilize, and how new-customer wins compare with reductions in existing-customer revenue.
- Whether automation and cost savings can offset weaker revenue, third-party data costs and margin pressure.
- Cash generation, interest expense under SOFR-based debt terms, and liquidity after repurchases and the declared special dividend.
- Developments in legal matters, privacy and cybersecurity risks, and the financial impact of the modified equity awards.
- Non-GAAP Adjusted EBITDA and adjusted earnings reconciliations against GAAP results, including the recurring nature of excluded costs.