HireRight Holdings Corporation (NYSE:HRT) Q2 2023 Earnings Call Transcript

HireRight Holdings Corporation (NYSE:HRT) Q2 2023 Earnings Call Transcript August 12, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to HireRight’s Second Quarter 2023 Conference Call. Joining today’s call is the company’s President and Chief Executive Officer, Guy Abramo; Chief Financial Officer, Tom Spaeth; and VP of Treasury and Investor Relations, Andrew Hay. [Operator Instructions] 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, including related to macroeconomic conditions, demand for the company’s services and the company’s technology improvement and cost reduction initiatives as well as our updated guidance.

Such statements or predictions and actual results may differ materially. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Form 10-K filed with the Securities and Exchange Commission 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. Please go ahead, sir.

Guy Abramo: Thank you, operator, and good afternoon. I appreciate everyone taking the time with us as we share our second quarter 2023 results. In the current global economic environment, as much as things change, they seem to stay the same. In spite of inconsistent conflicting economic signals, hiring reports and projections, our customers seasonal hiring patterns were consistent with prior years, albeit at a lower volume. For the quarter, we generated revenues of $192.1 million. While revenues were down 13.6% compared to the same period in 2022, our adjusted EBITDA margin grew over 300 basis points to 27.4%. As I’ve discussed many times, since our IPO, we have invested in developing a more automated back-office fulfillment system, leveraging various AI technologies.

The result is that this increases our degree of automation in completing a search, for example, automatically matching our customer search guidelines with our databases and public records. Our platform is now operational and being implemented across our global footprint. We’ve maintained our precision while improving speed. Our improved workflow and cost savings are already increasing productivity and improving margins on search results. And we’ve recently expanded our development team in India to drive additional cloud-based functionality and enhancements working side-by-side with our engineering teams in Estonia. Increased automation has enabled us to streamline our domestic workforce and transition to more cost-effective offshore markets.

In addition, we significantly reduced on-boarding and training time for these new associates, improving productivity and operating leverage. In other words, more output with fewer resources. Even though we have made great progress to date, we will continue to invest in software development, driving additional margin improvement beyond the 300 basis points achieved over the past year. We continue to have success with new business, concentrating on what we can control, such as upsells, package expansion, and new logos. Our go-to-market teams and account executives added 9 new enterprise logos in the quarter with combined projected annual revenue of $8 million. Our strong pipeline conversion in the quarter was across all of our verticals. Existing customer retention of our enterprise accounts remained very strong at 97.4%.

In the quarter, we saw upsells increase over 7% sequentially from Q1 2023, demonstrating our team’s growing ability to increase our average order size and services provided. This, in turn, allows our customers to consolidate their pre and post-hiring activities with one provider. Additionally, our pipeline remains robust across all verticals. We implemented approximately $13 million worth of new business during the quarter and have more than $20 million of annual contract value in late-stage pipeline that we expect to close by the end of the year. We’ve discussed our disciplined approach to M&A aimed at expanding our geographic reach as well as adding complementary services and products to our comprehensive offerings. In July, we announced the acquisition of a majority share of Digital Trusted Identity Services or DTIS, an FBI approved channeler specializing in collecting and processing biometric and biographical data.

This investment expands our commitment to biometric-based screening as a critical component for customers in highly regulated industries such as health care, financial services, and transportation. This acquisition improves our native fingerprinting capabilities to use in connection with background screening services that require this component. DTIS also opens up a new revenue stream for us as it operates the transportation security clearinghouse on behalf of the American Association of Airport executives to fulfill their obligations as a TSA designated aviation channeler, facilitating fingerprint and other security services for more than 300 airports and 75 air carriers. Another important area of investment for us has been Latin America. Our ongoing investment in Mexico has enabled us to improve margins through the off-shoring of many of our back-office functions with exceptional local talent and leadership.

In April, we announced the acquisition of Inquiro Vitae in Argentina and the establishment of operations in Brazil, which provides direct access to local data, reducing costs in addition to increasing our ability to service our global enterprise customers in their local operating markets. Our all-inclusive presence in Latin America markets continues to set us apart, opening the door for a new global business expansion. Turning to profitability. To further enhance margins, we continue our effort to streamline costs, including reducing global headcount, shrinking our real estate footprint and managing discretionary expenses. We are reviewing and will implement options to further reduce costs and outsource non-essential corporate functions throughout the remainder of the year and into 2024.

These self-help actions are within our control, designed to improve operating leverage with the smaller operating footprint regardless of the economic environment. Looking at current market trends, I want to remind everyone that many of the market hiring indicators are backward looking and have limited predictive value on future hiring trends. Even though the recent BLS and quits data are weaker, they are still stronger than pre-pandemic levels, and there remains more open positions than available candidates. From our standpoint, there is still strong demand for talent and hiring continues across all verticals. We continue to see hiring patterns during Q2, which were consistent with our previous commentary, and our core verticals continue to show seasonal improvement.

In closing, we are pleased with our results, especially given the backdrop of the broader macro environment. More importantly, we believe that the favorable fundamental changes in hiring and employment practices are here to stay and discretionary hiring will increase as the economic outlook improves. Our business has been resilient for the last 25-plus years regardless of the cycles that are often pronounced for one particular sector. We recognized the marathon, not a sprint, and we are positioning ourselves to further expand margins, while continuing to be a global leader in providing reliable, cost-effective technology-driven verification services. With that, I’ll turn the call over to Tom for a closer look at our second quarter financial performance and our outlook for 2023.

Tom?

Tom Spaeth: Thank you, Guy. Good afternoon, everyone, and thank you for joining our call today. As Guy mentioned, our second quarter revenue was $192.1 million, down 13.6% versus the prior year, primarily related to uncertainty in the hiring environment. The results are consistent with our prior commentary on headwinds impacting non-essential hiring. The results were also consistent with our historical seasonal patterns as we saw our customary Q2 uplift in demand. Our high retention rate of 97.4% and the steady conversion of our pipeline to revenue-generating customers supported our positive results. In other words, even during a slower hiring environment, our retention remains strong, and we continue to add new customers. Specifically, while revenue from existing customers was down approximately 16%, revenue from new customers was up more than 36% from the prior year.

Our core verticals accounted for 55% of the revenue this quarter, fairly consistent with prior periods. Technology and services are primarily responsible for the decline versus Q2 2022. However, both verticals showed sequential seasonal improvement versus Q1 of this year. Our remaining verticals were down 7%, when compared to Q2 2022. Looking at our geographic split, international revenue based on applicant location was approximately 14% of revenue. EMEA posted a 14% decline, while APAC in India continue to be impacted by the softness in technology and services were down a combined 32% from the prior year. Turning to expenses and profitability for the quarter. We continue to improve our delivery cost to service, helping to drive gross margins, which were up more than 260 basis points year-over-year, excluding depreciation and amortization to 49%.

Our sequential margin growth was consistent with our historical quarterly patterns and our target of 200 basis point improvement over last year. We reported $52.7 million of adjusted EBITDA, just $1 million lower than last year despite reduced revenues. Our adjusted EBITDA margin grew over 300 basis points to 27.4%. This growth is indicative of our improved operating efficiency, driven by our technology investments as well as optimizing our geographic footprint. In the quarter, we continued to execute on our restructuring plan, which was primarily targeted on our global SG&A positions and expenses, including our real estate portfolio. As Guy mentioned, we are evaluating and finalizing implementation plans to further increase our off-shoring teams and outsource non-essential corporate functions.

We have recently visited and toured our new facility in India and are very pleased with the impressive teams and the rapid adoption of our operating platform and our technology road map. These targeted margin expansion initiatives began to show benefit in the current quarter and will have a positive impact on overall 2023 results and beyond. We remain focused on delivering long-term adjusted EBITDA margins of 30%. And even though we have made great progress, we have more work to do. We will monitor performance and take timely actions to further expand our margins through the reduction of unwarranted costs in streamlining our operational footprint. Digging deeper into SG&A expenses in the quarter, excluding stock-based compensation and restructuring charges, employee costs decreased 3.8% to $27.5 million, driven largely by a reduction in variable compensation.

Additionally, non-employee-related expenses, excluding restructuring and other onetime items, decreased by $3.4 million compared to the prior year, including a $1 million reduction in bad debt expense. Adjusted net income for the quarter was $25.5 million compared to $31.8 million in Q2 2022. The reduction is a result of higher adjusted net interest expense of $6.8 million, driven by our floating rate debt and lower operating income from lower volumes. I will also note that we have changed our methodology on adjusted net income tax rate presentation. In order to provide more consistency and comparability across periods, we have begun using an estimated blended statutory rate of 26%. To be clear, though, both our estimated statutory rate and our GAAP effective rate will differ from our actual cash taxes paid, which are primarily based on revenue generated outside of the U.S. due to our tax assets in the U.S. We expect to continue to be a nominal cash taxpayer through 2025.

However, with our improving profitability, we’ll now be reporting a higher effective tax rate on our GAAP results as well as our adjusted net income. For comparison purposes, we have provided a slide in the presentation that illustrates the change of the tax rate for adjusted net income and adjusted diluted EPS purposes. Finally, adjusted diluted EPS for the quarter was $0.34 compared to $0.40 in the prior year period. The weighted average share count for the quarter was $74 million, reflecting the shares purchased through the share buyback program versus $79.5 million in Q2 2022. Outstanding shares at the end of the quarter were $70.3 million. Turning to cash flow. We generated $12.6 million of cash flow from operations in the first half of the year and expect to continue to generate operating cash through the remainder of the year.

Historically, the second half of our year generates the majority of our operating cash flow. Total cash decrease for the quarter was $50 million, reflecting $61 million in cash used in our share repurchase program. At the end of the quarter, we had no draws against the revolver and had just over $695 million outstanding on our first lien loan. Our leverage ratio ended the quarter at 3.5x, and we also ended the quarter with $77.5 million of unrestricted cash on the balance sheet compared to $127.4 million as of March 31, 2023. The decrease in cash was primarily related to our share repurchase program. During the second quarter, we exhausted the original $100 million program. And in June, the Board authorized an additional $25 million. As we’ve previously stated, we are confident in HireRight’s ability to generate cash flow, enabling us to invest in the long-term future of the business, investing in geographic expansion, acquiring complementary assets and repurchasing shares.

The intermediate and long-term strategic decisions we are making today will generate increased shareholder value over time. Looking ahead, we do not assume a significant change in the economic outlook. We have operated in this softer labor market for the better part of the last year, and we have continued to deliver improved gross and adjusted EBITDA margins and positive free cash flow. In the near term, certain of our verticals may continue to defer some hiring decisions yet our plans and efforts are aimed at producing sustainable long-term growth and profitability. Our 2023 guidance reflects our unchanged economic outlook, vertical performance to date and conversations with our key customers. Additionally, we have updated our adjusted net income and EPS guidance to reflect our share repurchases and a blended statutory tax rate based on the tax methodology I mentioned earlier.

Again, while we expect to be a nominal cash taxpayer through at least 2025 for consistency and comparability purposes, we will now provide our guidance with this adjusted blended statutory rate of 26%. With this in mind, we are updating our guidance as follows. Narrowing the revenue forecast to a range of $720 million to $735 million, raising our adjusted EBITDA guidance to a range of $172 million to $177 million, updating our adjusted tax rate such that adjusted net income moves to a range of $75 million to $80 million, and therefore, adjusting diluted earnings per share to a range of $1.05 to $1.10 based on a weighted average fully diluted share count of $73 million. All economic cycles impact industry segments differently. Performance in our core verticals will vary, and down cycles will always be replaced by periods of growth.

As a management team, we monitor both short and long-term trends and will implement actions to capitalize regardless of where we are in the economic cycle. We remain focused on growing revenues through our key strategic initiatives while maintaining strict financial discipline. With that, operator, we can open the call for questions.

Q&A Session

Operator: Thank you, sir. [Operator Instructions] The first question we have comes from Andrew Nicholas from William Blair. Please go ahead.

Andrew Nicholas: Hi, good afternoon. Thanks for taking my questions. I wanted to start on some of the positive pipeline commentary. I think, Guy, you mentioned $8 million of revenue from new clients or enterprise logos. And then I think it was $20 million in late-stage pipeline. I’m just kind of curious, is that something that once it is one layers in over time? Is that something that comes in pretty quickly, obviously, not the full year amount, but just trying to think of the kind of cadence of how it layers into revenue once it’s 1?

Guy Abramo: Yes, Andrew, how are you? It’s sort of difficult to predict because it largely depends on the client, the size of the client and where they are sort of in the complexity of the changeover to a new provider. So it’s hard to just give you that number and be able to give you sort of a smooth ratable sense of how much revenue would flow through for a given period of time. But generally speaking, that’s an ACV annual contract value number that we would expect to achieve within the next – no later than the next 12 months, typically sooner.

Andrew Nicholas: Okay. So if you close $20 million tomorrow, I’m not saying that’s what you’re saying. But if you close $20 million tomorrow, that’s the $24 contribution barring anything unforeseen.

Guy Abramo: Typically. Yes, again, depending on the size of the client, there are deals to go right to contract, right to implementation if it’s not that complex.

Tom Spaeth: Yes. Anywhere from early days to month. If it’s a large global implementation.

Andrew Nicholas: That’s helpful. Thank you. And then for my follow-up, you talked, I think, on several occasions in your prepared remarks about potentially outsourcing certain nonessential corporate actions, streamlining certain operational efforts. Is that all included in kind of the $50 million cost savings plan you talked about last quarter? Or is any of that incremental to that target? Thank you.

Guy Abramo: No. It’s included in that, Andrew.

Andrew Nicholas: Got it. Thank you very much.

Operator: Thank you. The next question we have comes from Kyle Peterson from Needham & Co. Please go ahead.

Sam Salvas: Hey, guys. It’s actually Sam on for Kyle today. Thanks for taking questions here. Good quarter. Could you guys give us a little bit more color into how we should think about both growth and margins in both the third and fourth quarters, maybe relative to how the second quarter went?

Guy Abramo: Hey, Sam, sure. Yes, sure. We talk about our seasonality. We got a little bit more prescriptive on it last quarter on our call. And what we’ve always said is Q2 and Q3 are stronger two quarters from a revenue and a profitability perspective. And depending on the year, they are kind of plus or minus 1% or 2% away from each other. Certainly, sometimes it falls, how the calendar falls during a given year and how many production days we have. But Q2 and Q3 are typically in around each other. Q1 and Q4 tend to be more aligned. And we would expect that same seasonal pattern that we’ve seen historically to hold out this year. As you saw by the results in Q2, we were pretty pleased with the way the results came in. We would expect the second half of the year to follow suit as to what we saw in the first half of the year.

Sam Salvas: Got it. Okay. That’s helpful. And then just a quick follow-up on the competitive landscape, have you guys noticed any changes in terms of win rates or any changes in the competitive landscape given this kind of prolonged period of softness we’ve been in?

Tom Spaeth: No, not really, Sam. You saw we had a pretty significant increase in new business quarter over – year-over-year. We continue to, I think, do a good job winning the business opportunities that are in front of us. I would say anecdotally, I don’t see the dynamics changing that much, even though – again, one of the reasons we’re calling it softness, but a lot of the deals that we’re winning are larger global deals, some international deals, and there’s a limited number of competitors that can provide what we do in a lot of those markets.

Sam Salvas: Alright. Thanks, guys.

Operator: Thank you. [Operator Instructions] The next question we have comes from George Tong from Goldman Sachs. Please go ahead.

George Tong: Hi, thanks. Good afternoon. Revenues from existing clients declined 16% in the quarter. Can you talk about trends on revenue from existing customers over the course of the quarter, did find stabilization? Were the trends worsening over the course of the quarter? Any color there would be helpful. And then can you also confirm your full year guidance, does that assume stable trends from the exit rates being in 2Q?

Guy Abramo: George, thanks for the question. So yes, I mean, we’re seeing what we would call normal seasonal trends. So even though we’re talking about revenue being down from existing clients quarter-over-quarter, it was up. We’ve spoken a lot about our tech sector, tech and services are down most significantly of all clients, yet both of those sectors were up quarter-over-quarter. So those trends normal, what we would call normal seasonal trends are holding despite them being muted relative to year-over-year.

Tom Spaeth: Yes. Just to add on to that, the guidance reflects what we’ve seen up through today, obviously, right? So we are updating the script as of last night. So we feel comfortable in the stability, a lot of noise in the market about changing environments and when the recession is going to come. The fact of the matter is that the hiring market has been soft for a year now, right? And in certain sectors, like we’ve said in technology, volume is down 40%. So while we think there could still be some choppiness in the rest of the year, we do think our diversified nature of our revenue base and our diversified customer base is going to hold from a kind of stability perspective in the second half of the year. And that’s what our guidance is reflective of us.

George Tong: Got it. That’s helpful. And just a follow-up on a point you mentioned earlier on the tech sector. Could you remind us what your latest tech vertical mix is? And then you noted that on a quarter-over-quarter basis, the tech vertical improved. Can you talk a little bit about sort of customer spending patterns and the overall budget in the selling environment in the tech vertical specifically?

Guy Abramo: Yes, George, when we say type vertical, what we’re largely talking about are the largest big tech brand names that are out there, they comprise the bulk of the vertical. We, of course, don’t talk about them individually, but you know all the names, and you’ve seen those logos before. The second part of your question, I’m not sure I quite understood.

George Tong: Just the overall selling environment for the tech vertical. Is it getting better? It sounds like it’s getting better.

Guy Abramo: So it’s getting better quarter-over-quarter, but that’s normal seasonal behavior. So that’s – it’s still down year-over-year, but Q2 was better than Q1 as we expected.

George Tong: So, we’re at the – it sounds like we’re at the point where normal seasonal patterns apply in the tech vertical, and we’re not, at this point, trying to find the bottom.

Guy Abramo: That’s correct.

Tom Spaeth: That is absolutely correct.

Guy Abramo: It’s a great way to put it.

George Tong: Perfect. Thanks very much. Very helpful.

Operator: Thank you, sir. The next question we have comes from Shlomo Rosenbaum from Stifel.

Shlomo Rosenbaum: Again, just first, just a little bit of just clarification on what changed in the guidance. You obviously you talked about the tax rate and the share count. But is there some kind of acquisition contribution now in the revenue and EBITDA with some acquisition announcement? And also, is there a change in the interest expense in that what you were assuming from last quarter? And then I would like to ask you more about kind of what’s going on in the industry and what are you assuming a little bit more in terms of your guidance in terms of wiggle room, if anything, those steps down again?

Guy Abramo: Okay. A couple of parts to that question. The first one is regarding acquisitions. And obviously, we announced the DTIS acquisition after the quarter ended. We expect some modest contribution from that in the second half of the year, low-single digit million dollars, so not very material. Your second part of your question, I think around interest expense and obviously, yes. And you can see that in the investor deck, we have updated Shlomo, the modeling assumptions for interest rate expense. You can see it’s higher than it was two quarters ago when we originally gave guidance. I don’t have the number right in front of me, but it’s circa $10 million. It’s pretty meaningful from an interest rate – interest cost perspective on the outlook. And then what was the last one?

Shlomo Rosenbaum: It was wiggle room. Like if we see another step down in hiring, is that going to result in your guidance having to come down on the low end on the revenue side, or did you – do you have enough in your pipeline and the wins? It seems like you are pretty enthusiastic about the cross-sell, up-sell and the new wins. Would that be able to absorb if there were another kind of like June, July type of step-down in hiring, would we be – would you have to adjust the guidance again?

Guy Abramo: Yes. I mean Shlomo, we really don’t know. I mean we have no reason to think that, that’s the case as we sit here – what is today, August…

Tom Spaeth: Six weeks into the quarter or wherever we are.

Guy Abramo: Everything, we are very comfortable with the guidance we provided. We are very comfortable with the pipeline that we have. Now, you saw what happened last year, sort of in one month, the entire world just sort of stopped hiring for a little bit, and we saw that downturn. But there is nothing that we see in either the macro environment, conversations with clients, the current trends and momentum that we have in the business that would make us think that that’s the case.

Shlomo Rosenbaum: Okay. Great. And just can you comment on vendor consolidation and I will give it up, but like are you seeing more vendor consolidation as clients are trying to get like kind of discounts from volume discounts?

Guy Abramo: We definitely are seeing a good uptick in RFPs, for more global RFPs, frankly, which generally points to a general consolidation of companies wanting to pick a single provider rather than have multiple providers even in multiple countries. From our standpoint, we love those RFPs because we are the only one in the industry with a single global platform, so we think it gives us a competitive advantage in that case. So, I would say, anecdotally, yes, we are seeing trends like that. And I think those are often driven by larger HCM implementations, whether somebody is going through an Oracle implementation or SAP or UKG or Workday or whatever it may be. When we tend to see those large global HCM implementations, it creates an opportunity for us.

Shlomo Rosenbaum: Thank you so much.

Guy Abramo: Thanks Shlomo.

Operator: Thank you. The next question we have is from Mark Marcon from Baird. Please go ahead.

Mark Marcon: Hey, good afternoon and thanks for taking my questions. So, just as the quarter unfolded, did you see any variance with regards to either a pickup or slowdown with regards to a level of hiring. Obviously, you are aware that you had a large competitor that talked this morning. And so I was just wondering whether or not you are seeing any of the same sort of dynamics there?

Guy Abramo: We are seeing – what I would characterize as normal, again, normal quarterly behavior, normal seasonal behavior. So obviously, Q2 was a nice uptick relative to Q1. We generally expect that level of uptick year-over-year given our mix of both verticals and geographies. So, I would say that this year is definitely behaving like a normal year from a seasonal pattern standpoint.

Tom Spaeth: Yes. We haven’t seen any – again, the commentary, Mark, specifically is kind of consistent trends and patterns we have seen now for three months, four months, yes, and even six weeks into the quarter.

Mark Marcon: Great. And just within that tech vertical, is the percentage decline within that tech vertical less than what it was during the first quarter?

Guy Abramo: No. It was pretty consistent. Yes, it was consistent or maybe even a hair higher. You got to remember, Q2 ‘22 was our peak quarter, the peak of the hiring frenzy last year, $222 million of revenue for us. And technology was by far our biggest vertical in that quarter of last year. So, while the decline as a percentage may have been – might have been a little bit higher, but what was more important for us is that we saw Q2 of this year improve over Q1 of this year, showing that it feels like we have kind of hit at least some firmness from a bottom perspective. In tech, right specifically?

Mark Marcon: And then can you talk a little bit more about – I mean it sounds like you have got some impressive wins coming along. First of all, with the ones that you did close, can you talk about like what the incumbents were like, whether it was some of the bigger players that everybody knows about or whether it was similar to a couple of quarters ago where you ended up winning a really large client, but the incumbent was a regional player. Can you just talk a little bit about that and some of the drivers behind those wins? And then you mentioned what – it sounds like you are close to winning as opposed to have won some of the – you mentioned the $20 million. I just want to make sure I am interpreting those comments correctly?

Guy Abramo: Yes, that $20 million is late stage. But just overall, Mark, we saw with a lot of the wins that we have, again, we have seen them come from multiple competitors, including one of the big other two. So, it’s sort of across the board. I can tell you the main reasons why the stated reasons why we have won some of them. One is, again, accuracy. We talk about this all the time, but we know that we find more hits and fill any convictions than our competitors do because of the way we do searches. We have been told that specifically by clients, and we have been told that by at least two of the large enterprise wins that we have had have come from clients who have experienced missed hits from their incumbent provider. We also are seeing good traction again on the – Tom pointed out, the HCM provider.

So, in particular, we have pretty unique relationships with UKG, with Oracle recruiting Clouding, with Workday, and we have seen some of the wins come from clients that are implementing those solutions. And because we have got so many integrations and feature functionality within those integrations that they have become an advantage for us, so I can’t give you the names of specific competitors, but I can tell you, this last several wins have come from both smaller players and a few of the bigger players.

Mark Marcon: Okay. And then just with regards to the pace of the buybacks and thinking about that vis-à-vis your interest expense, how should we think about just capital allocation on a go-forward basis? And what is the assumed interest rate behind the interest expense assumption?

Guy Abramo: Well, we are sitting here right now at LIBOR plus 3.75, correct me if I am wrong on that one, Andrew. And so the rate has gone up quite a bit over the last six months, needless to say. When we think about the capital allocation process, obviously we and the Board felt strongly about the value of our shares and the return on investment we could get there. Obviously, as the interest cost gets higher, that equation changes a bit. As we mentioned, we have already gone through $100 million of the original authorization. The Board has authorized an incremental $25 million, so a much smaller repurchase program. So, at this point, I would think that over the next few quarters, we will revisit it with the Board, whether or not we want to continue to extend the share repurchase program. But I think we have made our investment there, and we will continue to look at other alternatives at this point.

Mark Marcon: Got it. And then if I could squeeze one last one in. It sounds like DTIS is going well. Can you talk a little bit more about some of the newer initiatives that you have in place and some of the promising elements that you are seeing there?

Guy Abramo: Yes. DTIS is a unique – is a very unique asset. In that it was – the relationship with AAAE, airport employees association, I always screw up the actual definition of that and their biometrics-type searches and having the FBI channeler status sort of cemented two things for us. One is we are the clear leader in transportation sectors, including aviation, and we loved that a large part of their basin capability is run through TSA approved employees and airports, which provides us strong background screening opportunities within all of those air carriers and employees that are around the major airports around the U.S. we have, for a long time, has talked about the need to have our own solution through the FBI channel network. So, DTIS checks that box for us. So, we are looking forward to the opportunities and growth that that provides us over the course of the next year.

Mark Marcon: Great. Thank you very much.

Guy Abramo: Thanks Mark.

Operator: Thank you. The next question we have comes from Manav Patnaik from Barclays. Please go ahead.

Ronan Kennedy: Hi. This is Ronan Kennedy on for Manav. You had referred to the back-office automation being operational across the footprint. Can you confirm the role that implementation played in driving those 300 basis points of margin expansion? And is there further upside from optimization? And then can you talk about – you also alluded to further software development investment opportunities to further expand margins. Can you talk about what those are and also where your new product pipeline and the recent launch of the screening analytics solution?

Guy Abramo: Yes. So, there is a lot there. So, we don’t – we haven’t really deconstructed which parts of which initiative has contributed to the margin improvement. But what I can tell you is the investments that we have made in the new platform are bearing fruit, in that, the platform is live. A couple of major modules on that platform are live, and we are seeing without question improved productivity as we sort of – as we said during the call, which has definitely had a sizable contribution on margin improvement. The additional opportunities that we talked about continue to be our efforts in just driving automation in all parts of our business. So, it’s a combination of using AI proprietary algorithms that complete the searches that we do, that we know adds to our accuracy all the way to just doing robotic process automation, RPA work in some discrete processes across the entire business.

So, that is just an ongoing never – we will never stop those types of improvement initiatives. And I know you had a couple of parts to that…

Tom Spaeth: I think we have increased our investment in software development, both at the product level as well as the automation level. And that is the reference we made to our – part of our new operation in India, where we have diversified our engineering talent and stood up by another engineering group in India over the last six months or so.

Ronan Kennedy: Thank you. That’s helpful. And then could I reconfirm your framework for acquisitions from economics and financial standpoint and then also potential areas to add?

Guy Abramo: Yes. So, the – our strategy very much looks like what we announced in the last couple of quarters. So, DTIS provided us specific product capabilities and value in a target vertical of ours and transportation via aviation. Inquiro Vitae gave us valuable assets in Argentina, which also allowed us to put an entity in Brazil to again strengthen that part of Latin America. And those are the types of M&A opportunities that we look at. We are not particularly interested in paying a multiple of EBITDA for revenue when we know we are taking share in the market as it is. So, if it brings us a unique capability or a unique geographic location, that’s the stuff that’s on our existing M&A pipeline as evidenced by the things that we have executed.

Ronan Kennedy: Thank you. Appreciate it.

Guy Abramo: You bet.

Operator: Thank you. The next question we have comes from Stephanie Moore from Jefferies. Please go ahead.

Stephanie Moore: Hi. Good afternoon. Thank you. One clarification question on the guidance, and I apologize if I missed this, but on the revenue guidance, the kind of adjustment, maybe whether you look at it at the midpoint or lower the high end, what was the primary driver of just kind of the adjustment to the guidance from a revenue standpoint?

Guy Abramo: Yes. It really is reflective of what we are seeing. Again, as I mentioned, up-to-date as recently as this week, it’s consistent with what we saw in Q2. We talked about our seasonal revenue ordering patterns that we typically see in a more normalized environment. We have really started to see those come through this year, and we have started to see those even into Q3 here. So, we felt positive about our ability to forecast the second half of the year based on what we have seen in the first half of the year, even through, like I said, in the first five weeks or six weeks of the quarter. So, it’s really reflective of the ordering patterns that we are seeing up-to-date.

Stephanie Moore: Okay. That’s very helpful. And then on the flip side, really strong adjusted EBITDA margin performance and improvement in the quarter and we are obviously flowing through to the full year guidance. So, you made a comment about clearly, the 30% EBITDA margin target is still on track and looking to hit that over time. So, could you talk a little bit about what is needed over time to get to that 30% target? I would assume at some level, there needs to be kind of a return or some improvement at the top line. So – and then further, what’s next from a margin enhancement beyond just the leverage improved top line? Thank you.

Guy Abramo: Yes. Stephanie, thanks for the question. Largely, a good source of the improvement has been a combination of us as we talked about off-shoring labor. It’s been investments in software and automation. It’s continuing to do those things, continuing to light up more of the automation that we have in the pipeline in addition to continuing to do whatever we can to make operational improvements to the business. It’s – we have a clear path to get to 30%. I think the 300 basis point improvement hopefully allows our investors to have confidence in our ability to achieve those numbers. It’s certainly doing a lot of the same things that we have been doing and now proven work that will lead to that 30% and it certainly bolsters our confidence in achieving it.

Stephanie Moore: Got it. Very clear. Thank you so much.

Operator: Thank you. A final question we have comes from Jason Celino from KeyBanc Capital Markets. Please go ahead.

Unidentified Analyst: Great. This is actually Devin on for Jason today. Thanks for fitting us in. Maybe just one question from us. I know you mentioned macro is still uncertain, but it seems like new business in the quarter, but also the pipeline is still looking pretty good. Maybe just from your recent RFPs, you have engaged and curious if you have seen any uptick from customers who have decided to sort of stick with their existing vendors and sort of delay the upgrades to down the road, and any noticeable changes to sales cycle and close rate versus prior year in the quarter? Thanks.

Guy Abramo: No, good question. We see continued strength and the pipeline continued to strengthen not just the RFPs. We don’t just sit back here and wait for RFPs to come across the table. There is certainly a lot of activity. And we – our sales teams also continue to be effective at unseating competitors because of the differences between us and the rest of the industry, in particular, on accuracy and finding more hits. It’s been a good – it’s a strong competitive advantage for us. And we like the level of activity that we are seeing, and we also like the level of activity that we are generating from just being present in front of large enterprise clients.

Operator: Thank you, sir. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to Guy Abramo for closing comments. Please go ahead.

Guy Abramo: Yes. Thanks operator. We continue to be proud of the results delivered by our team, especially on the margin front. We are encouraged by the normal pattern of orders that we are seeing seasonally and continue to be very, very comfortable with the guidance that we provided. And very much looking forward to the follow-up calls that we have scheduled with each of you as we go out through the rest of the day. With that, thanks everybody. Have a great rest of your day.

Operator: Thank you, sir. Ladies and gentlemen that then concludes today’s conference. Thank you for joining us. You may now disconnect your lines.