Executive Summary / Key Takeaways

• Strategic Transformation and Market Leadership: First Advantage has solidified its market leadership through the $2.2 billion Sterling acquisition, effectively doubling its scale and diversifying its customer base across verticals and geographies. This strategic move, coupled with the FA 5.0 strategy, positions the company for accelerated growth in the expanding HR tech and digital identity markets.
• Technological Edge and Efficiency: The company's "best-of-breed" approach to integrating First Advantage and Sterling's platforms, powered by proprietary AI and automation, is a significant differentiator. Innovations like AI agents for criminal records processing and the Click.Chat.Call customer care solution enhance speed, quality, and efficiency, driving competitive advantage and margin expansion.
• Resilient Financial Performance Amidst Macro Headwinds: Despite a "wait-and-see" macroeconomic environment and "slightly negative" base revenue expectations for the second half of 2025, First Advantage delivered solid Q2 2025 results, with revenues of $390.6 million and a 29% year-over-year increase in Adjusted Diluted EPS to $0.27. Strong upsell, cross-sell, and new logo growth, alongside high customer retention (over 96%), underpin this resilience.
• Accelerated Synergy Realization and Deleveraging: First Advantage is ahead of schedule on synergy realization, having actioned $47 million towards its $65 million to $80 million target. Proactive debt management, including voluntary principal repayments totaling over $40 million year-to-date and a 50 basis point interest rate reduction on its credit facility, demonstrates a clear path to its 3x net leverage target.
• Positive Outlook and Enhanced Free Cash Flow: The company reaffirmed its full-year 2025 guidance, projecting revenues of $1.5 billion to $1.6 billion and Adjusted EBITDA of $410 million to $450 million. A significant increase in Free Cash Flow guidance to $90 million to $120 million, driven by the OBBBA tax law, provides additional financial flexibility and supports long-term value creation.

A New Era of Verification: First Advantage's Strategic Ascent

First Advantage Corporation, founded in 2002 and formally established as a Delaware corporation in 2019, has evolved into a formidable force in the HR technology industry. The company's core business revolves around providing comprehensive employment background screening, digital identity, and verification solutions across the entire workforce lifecycle. This includes extensive pre-onboarding services like criminal background checks and identity verification, post-onboarding solutions such as continuous monitoring, and adjacent products like hiring tax credits.

The industry landscape is characterized by a large and growing Total Addressable Market (TAM) exceeding $24 billion, with digital identity solutions alone representing a $10 billion segment that is expanding faster than traditional background screening. This market is highly competitive and fragmented, populated by numerous players ranging from small local providers to larger, more specialized firms. First Advantage's overarching strategy, dubbed FA 5.0, is designed to capitalize on these dynamics by increasing market share in target verticals, accelerating international growth, and leveraging a "best-in-breed" product and platform approach.

A pivotal moment in First Advantage's history was the strategic acquisition of Sterling Check Corp. (STER) on October 31, 2024. This $2.2 billion transaction fundamentally reshaped the company, effectively doubling its scale and significantly diversifying its customer base. The combined entity now boasts over 10,000 employees and serves 80,000 active customers across 200 countries and territories, including a substantial portion of Fortune 100 and 500 companies. This expanded footprint and diversified revenue mix, balancing exposure between hourly and salaried-focused customers and across various verticals, enhances the company's resilience against macroeconomic fluctuations.

Technological Moats and Innovation Leadership

First Advantage's competitive edge is deeply rooted in its proprietary technology and relentless innovation. The company's platforms, data, and APIs are the backbone of its comprehensive service offerings, enabling efficient and accurate background screening and identity solutions. A key differentiator is its "best-of-breed" approach to integrating the technologies of both First Advantage and Sterling post-acquisition. This strategy focuses on adopting the superior functionalities from either platform, rather than forcing client migrations, ensuring a seamless experience and continuous upgrades for customers.

The tangible benefits of this technological prowess are evident in several areas. For instance, the company has rolled out its AI-enabled Click.Chat.Call customer care solution to Sterling customers, providing chat availability where it previously did not exist. This enhances customer satisfaction and streamlines operations. Furthermore, the implementation of AI agents in criminal records processing has dramatically increased speed, transforming tasks from minutes to nearly instantaneous completion and eliminating almost all manual touches. This directly translates to faster turnaround times and higher quality for customers, a critical priority in the hiring process.

First Advantage is also an early market leader in Digital Identity solutions, a rapidly growing segment driven by the increasing threat of AI-generated candidate fraud. A Gartner report projects that by 2028, one in four job candidates globally could be fake, highlighting the urgent need for robust identity verification. The company's end-to-end background and digital identity solutions, combined with its proprietary databases containing over 900 million records (120 million Verified, 780 million National Criminal), create a powerful competitive moat. These technological advancements contribute to higher operational efficiency, better margins, and a stronger market position by offering differentiated solutions that address evolving client needs.

Competitive Positioning and Market Dynamics

In the competitive landscape, First Advantage stands out against rivals like Sterling Check Corp. , HireRight Holdings Corporation (HRT), and Equifax Inc. (EFX). While Sterling and HireRight offer similar core services, First Advantage's integrated technology solutions and "best-of-breed" platform approach provide a qualitative edge in efficiency and comprehensive verification. The company's focus on global scalability and customer-centric innovation, including its verticalized go-to-market strategy, allows it to serve diverse industries with tailored compliance tools more effectively.

Compared to Sterling, First Advantage's operational execution and technological integration appear to be stronger, leading to better customer retention and strategic adaptability. Against HireRight, First Advantage's advanced biometric and fraud mitigation tools offer superior accuracy and security, differentiating its premium services. While Equifax possesses vast data resources and a broader analytics ecosystem, First Advantage's specialized focus on human capital screening provides more targeted and agile employment-related verifications. The company's strong network effects from over 100 integrations with Applicant Tracking Systems and Human Capital Management partners further solidify its competitive standing.

First Advantage's competitive advantages are reinforced by high barriers to entry in the industry, including stringent data privacy regulations, significant compliance costs, and the necessity for extensive data networks. These factors favor established players like First Advantage, supporting its financial performance and market share. The company's proactive engagement with customers through events like the "Collaborate" user conferences also fosters strong relationships and provides valuable insights for product development, enhancing its responsiveness to market trends and competitive pressures.

Financial Performance and Strategic Execution

First Advantage's financial performance in the first half of 2025 demonstrates resilience and effective strategic execution amidst a challenging macroeconomic backdrop. For the second quarter ended June 30, 2025, the company reported revenues of $390.6 million, an increase of 111.7% year-over-year, largely driven by the Sterling acquisition. Adjusted EBITDA reached $113.9 million, translating to an Adjusted EBITDA Margin of 29.2%, a 270 basis point improvement on a pro forma basis compared to the prior year. Adjusted Diluted EPS saw a significant 29% increase year-over-year to $0.27, exceeding expectations.

The first six months of 2025 saw total revenues of $745.2 million, up 110.5% year-over-year. While base revenue growth remained "slightly negative" due to macroeconomic pressures and customer "wait-and-see" postures, the company's "controlling the controllables" strategy paid off. Combined upsell, cross-sell, and new logo rates consistently performed in line with long-term growth algorithm targets, contributing 9% growth in Q2 2025. Customer retention remained robust at over 96%, underscoring the success of the integration efforts and customer-centric approach.

The Sterling acquisition, while strategically accretive, initially impacted profitability due to Sterling's higher relative cost of services and a more fixed cost operating methodology compared to First Advantage's historically variable structure. For instance, Q2 2025 cost of services as a percentage of revenues was 53.2%, up from 50.0% in Q2 2024, partly due to Sterling's product and customer mix. However, the company is actively addressing this through synergy realization and adapting Sterling's business model to a more variable cost structure, including First Advantage's workforce management practices.

Liquidity, Capital Allocation, and Outlook

First Advantage maintains a strong liquidity position, with $184.3 million in cash and cash equivalents and $250 million available under its revolving credit facility as of June 30, 2025. The company is actively managing its debt, which stood at $2.16 billion as of Q2 2025. Proactive measures include a $15 million voluntary principal repayment in May 2025 and another $25 million repayment on August 1, 2025, bringing year-to-date voluntary payments to over $40 million. Furthermore, the company repriced its credit facility on July 30, 2025, reducing interest rates by 50 basis points on both its term loan and revolving credit facility. These actions demonstrate a clear commitment to deleveraging, with a target of approximately 3x synergized pro forma adjusted EBITDA within 24 months post-close.

For the full year 2025, First Advantage reaffirmed its guidance, projecting revenues between $1.5 billion and $1.6 billion, Adjusted EBITDA of $410 million to $450 million, and Adjusted Diluted EPS of $0.86 to $1.03. This outlook anticipates a meaningful expansion of full-year Adjusted EBITDA margins to 28%, driven by synergy realization and efficiency gains. A significant boost to financial flexibility comes from the One Big Beautiful Bill Act (OBBBA), enacted in July 2025, which is expected to "significantly reduce our 2025 required cash tax payments," leading to a revised Free Cash Flow guidance of $90 million to $120 million, a $25 million increase from previous commentary.

The company expects sequential year-over-year revenue growth improvement from Q2 to Q3, with Q4 growth on par or slightly ahead of Q3. Adjusted EBITDA margins are projected to be 28% or slightly above for Q3 and Q4, with Adjusted Diluted EPS momentum continuing in the mid-to-high $0.20 range for the latter half of the year. This positive trajectory is supported by a robust deal pipeline, including two large U.S. deals with the potential to become top 10 customers, and continued international growth, which has shown strong momentum for several quarters.

Conclusion

First Advantage Corporation is undergoing a profound transformation, leveraging its strategic acquisition of Sterling Check Corp. to redefine its market position and accelerate growth. The company's unwavering commitment to technological innovation, particularly in AI and digital identity solutions, provides a robust competitive moat in a rapidly evolving HR tech landscape. Despite macroeconomic uncertainties, First Advantage's diversified business model, disciplined cost management, and proactive capital allocation strategy have enabled resilient financial performance and a confident outlook for 2025.

The successful integration of Sterling, marked by accelerated synergy realization and a "best-of-breed" approach to platforms and talent, is a testament to the company's operational prowess and cultural alignment. With a clear path to deleveraging and a significant boost in free cash flow, First Advantage is well-positioned to continue expanding its industry-leading margins and delivering double-digit adjusted diluted EPS accretion as synergies are fully realized. Investors should view First Advantage as a compelling opportunity, driven by its enhanced scale, technological leadership, and strategic execution in a critical and growing market.