HireRight Holdings Corporation (HRT) on Q2 2022 Results - Earnings Call Transcript
Operator: Good afternoon ladies and gentlemen. And welcome to the HireRight Second Quarter 2022 Conference Call. Joining today's call is the company's President and Chief Executive Officer, Guy Abramo; and Chief Financial Officer, Tom Spaeth. I remind everyone that management will refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures is included in the press release issued today, which is available in the Investor Relations section of HireRight's website. Also during this call, management's remarks will include forward-looking statements related to HireRight's market opportunities, customer retention, competitive differentiation, growth expectations, operational improvements, strategies to increase revenue and margins, growth prospects for industry sectors and our international business, labor market and economic trends, future cash flows, and financial performance including 2022 guidance. Such statements are predictions and actual results may differ materially. Additional information concerning factors that could cause actual results to materially differ from those in forward-looking statement is contained in Form 10-K filed with the Securities and Exchange Commission, in particular, in the section of the document entitled Risk Factors, Forward-looking Statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations. Now it is my pleasure to turn the call over to Guy Abramo. Guy Abramo: Thank you, operator, and good afternoon, everyone. We're pleased to have you with us today to discuss another set of strong quarterly results. I'll hit the highlights and Tom will walk through the details as usual. Second quarter revenue was up a robust 26% over the corresponding prior year period reaching a record $222 million. This strength reflects our continued high client retention and upsell rates, new logo wins and secular trends resulting in continued strong demand for labor in our targeted end markets. Our strong performance over the last four quarters reflects our full recovery from the pandemic impacted periods of 2020 and early 2021. And we expect solid but more normalized growth over the medium to longer term. We also continue to deliver on our commitment to improving profitability, delivering more than a 240 basis point gain in adjusted EBITDA margin showing growth of 40% over the prior year period. The efficiency improvements and increasing automation that drove these gains flowed through to adjusted net income, which more than doubled over the prior year, reaching $43 million for the quarter. Our results showed continued strong demand for our high quality solutions across all of our regions and verticals. While we certainly recognize the challenges of the macro environment with inflation at multi-decade highs, rising interest rates, and recessionary concerns. The demand for talent remains higher than historic norms and the churn in the labor market continues at elevated levels compared to historical periods. Quality and thoroughness remain key selling points and differentiators for us, particularly in our core markets. Last quarter, we talked about our early success in our version of the Pepsi challenge. If you'll recall, this is where we rescreen candidates previously screened by a competitor only to find hundreds and hundreds of missed felony convictions. The key point here is that we are willing to stack up our solution against anyone in the market and show that not all background checks are created equal. As such, we are continuing to offer this challenge up to key prospects and is continuing to deliver the results we expect. Most recently, we extended a major client relationship with the Fortune 500 business services organization into the Latin America region as a result of the client putting us to the challenge of going side by side with the incumbent to measure both quality and turnaround time. We demonstrated a turnaround time at nearly 50% lower than this top global competitor, all while maintaining the high level of quality we demonstrate to this client across all global regions. We took over 100% of the LatAm business immediately following that test. Additionally, our other key differentiator continues to be our global platform. This quarter, for example, we extended the global relationship with a Fortune 100 technology company into India, replacing the top-tier competitor and further solidifying our relationship with this client. Similar to last quarter, we have once again solidified our coverage with some of the largest technology companies in the world by rounding out our global footprint. Reflecting on our go-to-market success, new customer bookings were strong yet again during the quarter and our onboarding pipeline of new customers continues to grow. New clients continue to tell us that our unified platform, our highly coordinated global account management structure, our quality service and geographic reach are clear differentiators that appeal to them and are directly helping to drive these new wins. Regarding our vertical and geographic success, as has been the case for quite a few quarters now, health care has led our vertical strength growing nearly 50% over the prior year. The remaining core verticals all delivered 20% plus growth rates. We are also excited to announce our first vertical-oriented solution on our e-commerce platform, backgroundchecks.com. As a reminder, we're the only major background screening firm with a purpose-built e-commerce platform targeting the small medium business market. Now we look to capitalize on our leadership in the transportation industry by building an easy-to-use e-commerce solution targeted specifically at small and mid-sized trucking firms. There are over 1.2 million drivers in the U.S. working for companies that have fewer than 20 trucks, making this an exciting opportunity. Our extensive experience with DOT regulations, combined with the fact that we are the only background screening service provider in the industry with connections to the motor vehicle record sources in all 50 states, makes this an ideal target market for backgroundchecks.com. Now let me turn to our international markets where growth continues to be quite strong. Second quarter performance in our non-U.S. markets showed a growth rate of 30% over prior year. While we saw strength in every single region, LatAm and India had particularly impressive results. Revenue derived from applicants outside the U.S. now represents 16% of our total, and we expect this to further expand. We will continue to make investments in these international markets to provide the best local support with the power of our global platform. Two notable examples of this are Mexico and India. In the past 9 months, we have ramped our Mexico operations from less than 10 team members to more than 100. And similarly, in India, where we have strong BPO partnerships, we've expanded our own team from less than 100 employees to nearly 500. As I've said repeatedly, our ability to service customers with our unified platform continues to be a strong competitive differentiator for us. Lastly, I would like to provide an update on our platform and fulfillment technology initiatives. As a reminder, we have partnered with a leading global IT services firm to streamline and automate the fulfillment process, while improving the customer and candidate experience. This is a 2-year journey that we expect to complete at the end of 2023. Our focus is on technology investments aimed specifically at automating more of our back office processes and maximizing the usage of our industry-leading data assets. Our emphasis is on driving automation and process improvement with the continued use of robotics processing automation, natural language processing and other cloud delivery technologies that will reduce the cost and improve quality and efficiency of our researchers. We believe this margin enhancement strategy will drive double-digit profitability growth. I am pleased to report we have moved the first modules of the program into production. Since this is the first phase of the program, we are rolling volume in a measured manner. We're pleased with the results we're seeing and are excited about the opportunity to broaden the deployment and yield the long-term improvements we're expecting. Simultaneous to this rollout, we are planning for the next modules to be delivered in the second half of the year. As previously stated, we expect only modest financial benefit this year with a ramping of savings beginning next year and fully yielding the benefits by the end of 2023. So in closing, we're very pleased with the results we've been able to deliver in the first half of the year. And while there remains significant uncertainty around the broader macro environment, the underlying demand for talent and our ability to cross-sell and add new customers gives us great confidence in the long-term outlook for this business. With that, I'll turn the call over to Tom for a closer look at our second quarter financial performance and our outlook for the balance of the year. Tom? Tom Spaeth: Thank you, Guy. Good afternoon, everyone, and thank you for joining our call today. As Guy mentioned, we experienced another strong quarter, in fact, a record quarter with revenues of $222 million, reflecting a 26% growth rate over the prior year period. This growth rate reflects the strength in the overall hiring market that's benefiting from secular trends, our leadership position in the industry as well as a favorable comparison to a partially pandemic impacted quarter last year. We continue to benefit from high retention rates and our ability to upsell existing customers, all while adding new customers at the same time. Our implementation pipeline is the strongest it has been in some time after a very good bookings quarter. I also note that our revenue growth is 100% organic. While we are actively evaluating M&A opportunities in the market, we continue to be disciplined in our approach, and as of this time, have not executed any transactions. Turning back to Q2 revenue, we continue to see strength across our core verticals, particularly health care which grew nearly 50% during the quarter and now represent our second largest vertical next to technology. Our core four verticals of technology, health care, transportation and financial services now comprise nearly 60% of our total revenue. We will continue to focus on these core verticals as our quality solutions are ideally suited to these highly demanding customers. Our international markets are growing even faster than our U.S. business, with international driven screens now representing 16% of overall revenue. International strength continues to be widespread but was led this quarter by Canada, Latin America and India, each of which grew in excess of 40%. FX fluctuations had a minimal impact overall on the quarter. The strength in our top line, coupled with our continued focus on productivity improvements, led our adjusted net income to more than double over the prior year period from $17 million to $43 million, which is also a sequential increase of more than 40% in Q1. In addition, adjusted EBITDA increased 40% or more over the prior year period for the second quarter in a row, while adjusted EBITDA margin improved by more than 240 basis points to 24.1%. We are pleased with our margin improvement efforts, especially as we are now carrying over $3 million of incremental public company costs versus the prior year period. The vast majority of our improvement is being driven at the gross profit or cost of service level. While we have important technology automation project that Guy touched on earlier, there are many other initiatives underway or being completed that can continue to drive cost improvements on the cost-of-service line. There are four primary categories of these improvements: one, smaller automation projects that focus on specific repeatable path; two, labor optimization, including offshoring; three, general process improvements; and four, a focus on data cost acquisition reduction through vendor management and elimination. The combination of these efforts has already resulted in a reduction of cost of service as a percent of revenue from 55.6% to 54% over the past year. These four elements will continue to be a focus for us as the larger technology transformation continues and which Guy has already mentioned, won't provide material margin contribution until 2023. The improvements in our cost of service more than overcame our rising cost of SG&A, which are largely driven by the addition of public company costs in 2022. Our SG&A expense was higher by $11 million, but still generally flat as a percentage of revenue compared to the prior year. Excluding stock comp increases, SG&A would have reflected nearly a 100 basis point improvement from 13% of revenue to 11.9% this quarter. More than $3 million of the increase in SG&A was related to new public company costs, including accounting and legal fees as well as in churns. Lastly, like many companies, we are dealing with a tight labor market and increasing wages. Now turning to adjusted net income which increased by 152% from $17 million to more than $43 million in the quarter. In addition to the improvements we saw in our operating performance, we benefited from a $13 million reduction in interest expense, largely driven by our improved capital structure. And as with previous quarters, we continue to see the benefit of our tax assets, reducing our income tax expense. Please note, with our improved financial performance, we are carefully reviewing our valuation allowance on our tax assets, and we may reverse that allowance at some point in the future. Next, I would like to provide some color on our cash flow and balance sheet. This is another area we have delivered exceptional results with year-to-date operating cash flow of nearly $36 million, up from the usage of cash of $300,000 the year earlier. Excluding our technology transformation project, operating cash flow year-to-date would be more than $52 million. Year-to-date free cash flow was approximately $28 million. As of quarter end, we had no draws against our revolver and had approximately $704 million outstanding on our first lien loan. Our leverage ratio now sits at 3.1 times, down from 9.1 times last year at this time and down from 3.7 times at the end of 2021. And we ended the quarter with more than $118 million of unrestricted cash on the balance sheet. Additionally, during the quarter, we amended and extended our revolver to move maturity out to June of 2027 and increased the size from $100 million to $145 million. Turning to our updated outlook for full year 2022. While our year-to-date performance has been strong and the demand for talent remains robust, we cannot ignore the macro signs around inflation, rising interest rates and the potential impact of a recession. This is truly an unprecedented environment for labor markets. I cannot think of a similar time when we have this type of demand for labor, all while on the cusp or even in the midst of a recession. The labor market dynamics are different than anything we have seen in a prior downturn. And while we are well aware that this can impact demand for our solutions and the growth rates we have seen over the past year are likely not sustainable, we do feel that the level of hiring and demand for our services will continue at levels higher than pre-pandemic. With that backdrop, we are raising our full year revenue guidance from a range of $815 million to $825 million to a new range of $820 million to $830 million. We are raising our adjusted net income guidance from a range of $120 million to $130 million to a new range of $130 million to $140 million. We are raising our full year adjusted EBITDA guidance from a range of $188 million to $195 million to a new range of $190 million to $197 million. We are also raising the corresponding adjusted diluted earnings per share from the range of $1.51 to $1.64 to a new range of $1.64 to $1.76 per share. And finally a comment about seasonality, as previously indicated, Q2 and Q3 are our seasonally stronger quarters. This year, Q2 was particularly robust, and we would not expect Q3 to be as strong as Q2, given Q2 strength in the economic trends cited earlier. With that, we look forward to continuing our momentum in the second half of the year and keeping you posted on our progress. With that, operator, we can open up the call to questions. Thank you. Operator: Thank you. We will now begin the question-and-answer session. The first question comes from Manav Patnaik with Barclays. Please go ahead. Manav Patnaik: Thank you, good evening. I just wanted to inquire about the kind of outperformance this quarter versus your expectations. You beat the street obviously by $20 million, but you're only raising by $5 million. I think you kind of addressed why you're doing that, given the uncertainty. So I just wanted to understand maybe relative to what you guys expect and how things are shaking out. Guy Abramo: Sure, Manav. I'll start, and then, Tom, you can finish it. So some of it is related to a couple of things. First, some of it is just related to timing. Typically, we anticipated some revenue in Q3. The latter half of the summer, we often do rescreening for financial services clients and some of our health care clients. Just interesting thing year was some of that revenue got pushed into Q3. So you had a little bit more over performance in Q3 that - I'm sorry, in Q2 that won't flush through to Q3. Tom Spaeth: Yes. So I mean, generally, Manav, yes, that's one of the primary reasons is certainly timing. Some of the revenue we had expected in Q3 came in a little bit earlier on some of our annual rescreening programs. And then generally, again, per my comments, it's hard to read anything in the news today and not have some level of cautiousness in terms of the outlook. So that's what's reflected in the guidance. Guy Abramo: Yeah, now obviously, we raised guidance for the full year, and we're very confident in that guidance. Tom Spaeth: Yes, I mean, as we sit here today, I think it's important to note that there's been nothing - no fundamental change in the current demand levels that we're seeing over the last first seven months of the year. Guy Abramo: Yeah, I think it's worth saying as I said it during the last call, actually, we survey our clients all the time, and we are still continuing to see a very robust hiring and they're seeing the same thing we all are. Their quits are up. Even if they're out in the market stating that they're - that they may be doing well, as you see some prominent companies or clients of us make those statements yet. It's not reflected at all in what their hiring trends have been and what they expect them to be over the course of the next couple of quarters. Manav Patnaik: Okay, got it. Yes, I was going to ask you about the surveys that you do, but perhaps maybe just as a follow-up. So can you talk about what's the base growth versus new customer growth perhaps has been for the first half of the year and what you're assuming for the second half? Tom Spaeth: Yeah, I mean we're not going to just aggregate the growth percentages. But I can tell you that the first half of the year, our new business adds were very strong as well as were our upsell sell-throughs to our largest clients who, I think we've talked about this quarter-over-quarter. We've got a dedicated sales team that focuses on upsells to our top 1,000 clients, and they continue to outperform. But generally, it's broad-based, Manav. We saw just general organic growth as well as contribution - solid contributions from new revenue as well as upsells. And the last point, piece of the equation there is retention. Our retention for the last 18 months has just been phenomenal. Guy Abramo: Yeah, just adding to that real quick, on the back of what we're seeing with new business that was implemented in the first half of this year, our pipeline of clients yet to be implemented is also very strong. Tom Spaeth: Yeah. Manav Patnaik: Okay. Thank you, guys. Operator: The next question is from Hamzah Mazari with Jefferies. Please go ahead. Hans Hoffman: Hi, this is Hans filling in for Hamzah. Can you just talk a little bit how labor availability issues are impacting your business directly and maybe indirectly as well? And then just what are your plans around headcount growth over the next 12 months? Guy Abramo: So I mean we're finding the - it's a great question, by the way. We're finding the same challenges that everyone in the world is finding on getting talent. We've done a good job retaining talent, especially staying in front of high potential talent and we've got a good mix of white-collar talent and then a bunch in operations. We've beefed up our recruiting team before the beginning of the year and keep a good pipeline of operations, researchers and customer service folks, which tend to be the higher turnover types of labor in our business. But we're keeping up with it pretty well for now, but it's a challenge. There's no question. And as Tom pointed out earlier, it will lead to some higher labor costs to make sure we're dealing with the retention and the lack of attrition from our employees. Tom Spaeth: Yeah. And one thing we're doing to combat that is it's kind of indicative of some of the numbers that Guy quoted in his section is we're diversifying our geographies in terms of - and again, this is a good thing for the overall industry and Guy talked about this a lot about the ability for people to take jobs in different geographies. We're doing the exact same thing. Part of the ramp that we've seen in our India office as well as our Mexico City office, part of it is operational in nature. Part of it is back end office support. Like I've got finance people in Mexico City and India now where I didn't a year ago, right? So we're trying to offset some of the pressures we're seeing here from a retention perspective in the U.S. by diversifying our geographies with some of our support personnel. Hans Hoffman: Got it, appreciate the color there. And then can you just talk about how you're thinking about capital allocation, specifically M&A and the pipeline there? Guy Abramo: Yes. So just and I've spoken a lot about our M&A strategy is very much more oriented at companies that can add value to our business either in new products or new geographies. We've got a good pipeline of potential opportunities. We've passed on a few. Our - traditionally doing small tuck-ins with pure background screening companies doesn't make a lot of sense to me given that we're continuing to take share from that part of the market. So I don't want to pay an EBIT multiple to get that business when I can win it for free in the marketplace. But you'll continue to see some activity with us, but again, it will be companies that provide us either niche capabilities or geographic presence that we want to bolster up. Hans Hoffman: Got it. Thanks and congrats on the strong quarter. Guy Abramo: Thanks, Hans. Operator: The next question is from Ashish Sabadra with RBC Capital Markets. Please go ahead. Ashish Sabadra: Thanks for taking my question. I just wanted to focus on the health care vertical. Obviously, really strong growth there and it looks like pretty good momentum. I was just wondering if you could drill down further on the pipeline, particularly on the health care side and more opportunities out there. Guy Abramo: Yeah, so another good question. So one of the things that we're seeing, especially with global health care providers is our global platform has become quite a competitive advantage, that and the fact that we staff our health care vertical teams with experts in doing business with health care companies. We've had an emphasis in particular on pharma companies and have had some great recent wins there and a lot of that growth that you're seeing in our reported numbers, some of that is coming from our international markets where we're filling out that portfolio. But the general comment would be there's good broad base of wins for us for, all kinds of health care companies with particular emphasis on the company's manufacturing pharmaceuticals. Tom Spaeth: Yes. I think it's an important vertical for us. I mean you saw the jobs numbers come up the other day. While there was kind of a backup a little bit from a job openings perspective, certainly, one of the strongest, if not the strongest - I don't have the numbers in front of me - performing sectors in the overall U.S. economy was health care. And that's why it's such an important vertical for us and why we're really pleased that we continue to grow and take share in that vertical. Ashish Sabadra: Yeah, now that's very helpful. And then maybe on the EBITDA margins, pretty strong margin expansion there on a year-on-year basis but also sequentially. And I was just wondering, as you continue to execute on all the projects that you talked about, the automation projects, the labor and operational improvement, how should we think about - at IPO, you had talked about margin expansion. So how is that coming along? It seems like you might be tracking ahead of that and so I was just wondering if you - as you made some progress on that front, how are you thinking about the margin expansion opportunity? Thanks. Tom Spaeth: Yeah, no problem. And that's why I really wanted to kind of line item, the different projects that we're working on. It's not just all about one big bang project, kind of the automation project that Guy talks about. There's a lot of other projects ongoing from an operational improvement perspective that we're always looking to take advantage of. And we'll continue to focus on those, and I don't want to call it in the background, but we do have the major automation project going on that will start to provide material results in 2023. But in the meantime, we still think we can expand margins just from our day-to-day operating efficiency programs. Guy Abramo: That's where most of that came from. Tom Spaeth: Yeah. Ashish Sabadra: Thatâs great. And congrats once again on a solid result. Guy Abramo: Thank you, Ashish. Operator: Next question comes from Andrew Nicholas with William Blair. Please go ahead. Andrew Nicholas: Hi, good afternoon. Thanks for taking my questions. I wanted to follow-up on margins a bit more. Obviously, it seems like business momentum is quite good, but you're talking about the potential for an economic slowdown or a normalization in certain hiring trends. So I'm just wondering if you could talk to protecting margins or even growing margins in a more challenging environment for hiring and how we should kind of think about profitability sensitivity to that type of slowdown? Guy Abramo: Sure, Andrew. I'll answer the first part of that. So a big part of the technology initiative that we have is we call the back office automation project is one of those insulating effects, right? That is going to work to take out good chunks of labor going forward regardless of the macro environment that we have as we start to implement that technology, our ability to remove labor from the system is very impressive. So that will certainly continue to provide positive momentum on margin. And then the other half is really - it has to do with the variable nature of the cost of our business. But I'll let Tom talk on that. Tom Spaeth: Yes, that's exactly what I was going to say. I mean we've said this in the previous quarters that roughly 80% of our cost of service is variable today. Part of that is driven by the third-party data costs and things of that nature, but it's also the mix of labor we have and our use of contract labor resources as well as our own labor and really optimizing that mix is what we continue to look at, optimizing that mix between our own labor and contract labor as well as our geographic spread of labor and where we're allocating work. So we think dialing all those dials allows us some flexibility in terms of any fluctuations we may see in demand models. Andrew Nicholas: Great, thank you. And then for my follow-up, in the slide deck, you referenced incremental upsell. I'm sure part of that is a conversation about expanding relationships internationally with existing clients. But are you also seeing upsells in the form of kind of new products, whether it's post-hire monitoring, social media monitoring, that sort of thing, any momentum there to call out? Guy Abramo: We are. Actually, it's all across the board, not just - so part of that is the international expansion, but most of what we see is continuing to sell some new products. Some of its drug and health screening, social media monitoring is taking off at a pretty good clip. We're doing and implementing more monitoring products, which also follow through with our vertical strategy in both transportation and health care, those are two good markets for us to be doing monitoring. So it's been a good performance across the board. Andrew Nicholas: Thank you. Operator: The next question is from George Tong with . Please go ahead. Unidentified Analyst: Hi, thanks, good afternoon. You mentioned some rescreening revenue was pulled forward from 3Q to 2Q. Can you quantify approximately how much that was? Tom Spaeth: No, we won't get that specific, but it's just material, but not - Guy Abramo: Single-digit million is all I would say, not to get the specific level. Unidentified Analyst: Okay. Got it and maybe just stepping back at a more high level. You mentioned that you're not really seeing any fundamental change in current demand levels really over the past seven months. How would you explain that? Is that just a function of the labor trends out there? Or is it a function of your mix or your internal initiatives? Or it's a function of churn versus new job creation on a net basis? How would you explain that disconnect between what we're seeing more broadly and in the headlines versus what you're seeing at the business level? Guy Abramo: Yes. And frankly, George, it's a little bit of everything, right? First of all, if you just look at the numbers, if you look at jobs and quits, even though they came - the jobs came down a little bit in the June numbers from May numbers, they're still huge. I mean, way bigger than they were pre-pandemic. Second is, if you look at the industry, a lot of the drop came from retail. So we're not very retail heavy. The companies that we specialize in health care, technology, financial services, transportation, they're all struggling still to hire people, and that is supported by the conversations we have for planning for the remainder of the year with all of those clients. So it's - that's a big part of it. And then one of the things that we've talked about a lot before is the competition for labor also continues to show the number of screens per job being about one for sure. More global hiring is continuing. We continue to see that trend. I can speak to a major client of ours who says to us that, okay, thankfully now we're sort of - our hiring patterns are starting to slow down. It just continues to heat up. Now can that change? question, for all the reason we all know and can talk about. Unidentified Analyst: Great, very helpful, thank you. Operator: The next question is from Andrew Jeffrey with Truist Securities. Gus Gala: Hey, guys. This is Gus stepping on for Andrew. Just wanted to unpack the health care points a little more. I want to understand, was UnitedHealthcare as part of the lift in this quarter? I thought they were onboarded. And if not, I just want to understand what is driving that strength in upsells, the cross-sells, the new logos, and understand the sustainability of that growth? I don't expect it to continue growing nearly 50%, but where in the double digits can we kind of tag it? Guy Abramo: Yeah. So first, we won't - obviously, we won't address any specific clients and the revenue that we're getting. But what I can tell you is that our performance does not - it was not dependent on any single client. It is in particular, new wins. There was a comment I made before, some are new pharma companies that we've been onboarding and been successful marketing too. We have a very good track record of onboarding health care companies and then even completing upsells before we launch the very first background screen. So we find them very receptive to some of the products that we have that they do internally, then they outsource to us. A good example of that I've used before is a lot of health care companies will manage their own immunization/inoculation scheduling and they might outsource the drug testing to a background screener, but they're doing their immunization/inoculation checks in-house. Well, we're finding that because we've built capabilities to do that and managed it for some clients. We're finding a good upsell rate on that. So it is across the board. It's momentum that will continue. I mean certainly winning a very large client has an impact on the numbers, but it's broad, it's very broad. Gus Gala: Got it. Operator: Next question comes from Mark Marcon with Baird. Please go ahead. Mark Marcon: Hi, good afternoon. And most of my questions have been answered, but I just wanted to delve a little bit more in terms of the opportunities to further expand what you're doing in terms of some of the challenges and to get the recognition for how strong your screening capabilities are relative to the competition. What are some of the programs that you can put in place in order to accelerate that and get even more wins? Guy Abramo: You mean in terms of the - what I call the Pepsi challenge, Mark? Where we're headed again? Mark Marcon: Exactly. Guy Abramo: Yeah. So it's been a big part of our sales and marketing teams' efforts is to get clients to see that. Because one of the challenges that we have in our industry is you don't know that your background screener may have missed a lot of things and until you have a problem, right? That's when you discover it. And our pitch to them is, don't wait to find out that you have a problem sitting in there. And we visit the compliance teams as well as the HR functions and security teams depending on who owns the background screening program. So we're continuing to build materials on that. We're continuing to build comps that we have and are continuing to push that and will be vocal about it. So the best that we're doing is to do it right across the table from a prospect as we're sitting there and showing them the actual data. And then putting, as I said, our money where our mouth is. We will pay for the screening, absent any data costs that are required. And we're seeing pretty good acceptance to that. But we also see skepticism, right? I mean you see - I think part of it is some clients don't want to know, you know? So - Mark Marcon: Yeah, that makes sense. And then with regards to the macro factors that you talked about, how different are the conditions that you're seeing today relative to when you ended up reporting the first quarter and you were - you had done a nice beat, but we're guiding fairly conservatively. Have you seen any sort of change at all in terms of the tone of business? Or on a monthly basis, is there - are there any verticals that are shifting at all? Guy Abramo: No, Mark. No, no difference. As I said, I think part of that is because of - I like our mix. We don't have a large dependency on any single client or any single industry, but the four target industries that we have are still struggling to keep up with labor demand, despite being some very, very large clients of ours publicly stating that they were going to be cutting back on hiring. That's not what their on-the-ground recruiting teams are telling us. That weâre still not so it's a little bit mindboggling, to be honest with you, and it's hard to imagine that, that's just going to continue the way it is. But when you look at the openings, the quits just continue to push. Mark Marcon: Yeah. And then with regards to the health care verticals, you obviously had tremendous success there. How much of that was this due to that one big win that you ended up taking on recently? Guy Abramo: Well, some of it, but not all of it is what I can tell you. Obviously, any big client is helpful, but that was the combination of a bunch of wins on the back of that as well. Mark Marcon: Yeah. Okay. And then the gross margin performance was nice. What was the core driver there? And how would you characterize pricing in the industry at this point? Tom Spaeth: Yes. Again, as I alluded to, we're always looking at ways to improve margin, and that does include price, right? And as we talked about in the past, we will be opportunistic in pushing price increases through on a very targeted basis. We don't do any kind of peanut butter spread price increases, but we're always looking at that as a toolbox, a tool in our toolbox. But the primary drivers, I would say this past quarter were really some of just operational efficiencies. Again, minor automation projects that eliminate a repeatable past that maybe 30 people were doing onshore, right, or moving some of that labor offshore that can be moved offshore or just looking at different ways to flow work through the system and create efficiencies there. So we'll continue to make those tweaks that give us $100,000 million, $500,000, $1 million here and there. But enough of those programs add up over a quarter to drive some nice improvement. Mark Marcon: Terrific. Great job. Tom Spaeth: Thanks. Guy Abramo: Thanks Mark. Operator: The next question, Kevin McVeigh with Credit Suisse. Please go ahead. Kevin McVeigh: Great, thanks so much. Are you seeing any change in the margin and the attrition rates of your clients? To say it another way, are you starting to see the churn move one way or the other that's impacting the screens that they're incurring? Guy Abramo: I mean they're employee churns, Kevin. Is that you're talking about? Kevin McVeigh: Yes. Guy Abramo: I haven't honestly - again, it goes to the overall kind of ordering patterns. And with the exception of a little seasonality, you get a little bit of a slowdown over the summer, sometimes when people are on holidays. Generally, the ordering patterns have been pretty consistent. Yeah. Kevin McVeigh: Great. And then I know you had some - a lot of success recently with winning some clients back. Is that kind of been at the same pace? Or just help us frame how the momentum around that been more recently. Guy Abramo: Yeah. So remember, I think the last quarter, I talked about some of the win backs came, some international win backs came from us reimplementing products that we have removed when we rolled out the global platform. We've seen a continuation of that trend. I talked specifically about a large technology client in India. India was the only business of theirs we don't have with investor. And again, because we rolled out these new products, and now we have that global platform, they came back to us. So that's yet another win back that I got in Q2. So I think I noted two of them in Q1, there was another two in Q2. Kevin McVeigh: Okay. Thanks. Guy Abramo: Thanks Kevin. Operator: The next question is from Shlomo Rosenbaum with Stifel. Please go ahead. Shlomo Rosenbaum: Hi, thank you for taking my questions. Hey, Guy, how far optimization, are you pulling your clients about plans? In other words, how tight are these clients that you're talking to are the ultimate decision makers in terms of the hiring? Or would they really find out what the management is starting to think back and forth or one day and just find that all of a sudden, the C levels suite came back with complete change of plans and all of a sudden we're going to get some --? Guy Abramo: Yeah, great question, Shlomo. They absolutely could do that, right? I mean the people that we're talking to, it depends on the client, right, who runs the screening program. More times than not, it's the talent acquisition organization, and they know the pipeline and demand they have for people. It doesn't mean the management can't just all of a sudden, say, that we're in a hiring freeze, right? So we take every piece of that data one day at a time, and we keep in continual conversation with them. And I can tell you, just the tone between the first quarter and the second quarter did not change much. Tom Spaeth: And I think it's also important to note, I mean there's been a lot of high-profile comments about hiring freezes. And I think there are some semantics involved there with certain companies saying they're going to hiring freeze, but does that mean they're not expanding their workforce or they are literally not hiring anybody because that churn factor comes in there. I can tell you the same thing applies to us, right? If I lose somebody in my accounting team, I definitely have to go out and replace that person. And that churn level remains high. And so somebody may say they have a hiring freeze, but that's more often than not, it doesn't mean they're not backfilling. Shlomo Rosenbaum: Yeah, got it. Okay. Then what tax rate are you assuming now for the EPS guidance? And what were you assuming last quarter? It seems like there were almost no taxes paid this quarter and you guys use an actual tax rate versus kind of a structural tax rate. So I'm just trying to understand what might have changed between last quarter's guidance and this quarter's guidance? Tom Spaeth: Yes. Our tax rate is always going to be, at least for the foreseeable future, going to be driven by our foreign income, right? We're generally not a U.S. taxpayer. So it's a much more complicated tax calculation because we're doing a tax calculation across numerous different countries. So it is going to fluctuate based on our income by country, which we're obviously not going to break out. So we are giving you an actual rate based on what we're seeing on our income at the country level, and it's a blended rate. And I made a comment on the call about the reversal of our tax allowance. Our tax assets have been - we've had a full allowance against them for the last few years. But now that we've reached a point where we're generating consistent profitability, you're likely to see that allowance reverse here in the next couple of quarters. Shlomo Rosenbaum: Is there a change in the tax rate, though? In other words, was there a change in the assumption of the amount of taxes you're going to pay between last quarter and this quarter? Tom Spaeth: It's recalculated every quarter based on our income by country because it's not driven by the U.S. But yes, I don't have the blended rate, but it's going to be different by country. Shlomo Rosenbaum: Okay. I will talk with you on that offline. Tom Spaeth: Okay. Operator: The next question is from Jason Celino with KeyBanc Capital Markets. Please go ahead. Devin Au: Hi Guy. Hi, Tom. This is actually Devin on for Jason today. Now, thanks for taking my question. First one I have is international business continues to post really strong growth, good to hear. Just want to double click on Europe. On how big of exposure you have over there. But it's been a key focus from investors. Just wanted to ask about if you've seen any sort of changes in the sales cycle in that region? Or any changes around customers who want to spend there? Guy Abramo: No, not at all. The EMEA business overall has done very well. It continues to do well. It's growing well, and it's broad-based, right? It's not just its U.K., it's the Continental Europe. We've seen some good - and have good progress in the Middle East. We have not seen any slowdowns or cautions at all. Devin Au: Got it, thatâs good to hear. And then just quickly on the full year guide. I'm not sure if you mentioned it already, but in terms of the assumptions around macro for the second half of the guide, are you sort of baking in any deterioration in macro? Yeah. Guy Abramo: Yes. Well - you can go back and look at my comments. Basically, we are very aware of what the macro challenges out there are and what the headlines are. I think we've been consistent in terms of what we've been saying in terms of what we're seeing at our ordering level, and we factored that into our second half guidance. And you can see relative to where the first half came out. Again, it's not that far off from where we were from the first half perspective, but you can definitely see that there's a little bit more caution in the second half. Devin Au: Got it, okay. Appreciate it. Guy Abramo: Thanks, Devin. Operator: It appears we have no further questions. I'll turn the call back to Guy Abramo for closing remarks. Guy Abramo: Thank you, all. We'll follow up shortly. Take care. Tom Spaeth: Bye. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.HRT Ratings Summary
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HireRight Holdings Corporation Shares Up 20% on Q4 Beat & Outlook
HireRight Holdings Corporation (NYSE:HRT) shares were trading more than 20% higher Tuesday afternoon following the company’s reported Q4 results, with EPS of $0.32 coming in significantly better than the consensus estimate of $0.07. Revenue was $198.5 million, compared to the consensus estimate of $204.98 million.
The company guided full 2022 revenue growth of 10–12%, above its medium-term organic growth algorithm of 8–10%, driven by the single, unified global technology platform integrated with Applicant Tracking Systems, industry-specific proprietary databases, 250+ products portfolio, and an online platform for the self-service market.
Analysts at RBC Capital believe technology transformation will fuel above 15% profitability growth beginning in the second half of 2022, and management’s tone on the pipeline was positive given comprehensive screening and unified global platform.
