First Advantage (NASDAQ:FA) Surprises With Q3 Sales

Background screening provider First Advantage (NASDAQ:FA) announced better-than-expected revenue in Q3 CY2025, with sales up 105% year on year to $409.2 million. The company’s full-year revenue guidance of $1.55 billion at the midpoint came in 1.1% above analysts’ estimates. Its non-GAAP profit of $0.30 per share was 7.2% above analysts’ consensus estimates.

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“We delivered another quarter of profitable growth through continuing go-to-market success in new logo and upsell/cross-sell, demonstrating our ability to perform amid the current uncertain macroeconomic environment in which hiring growth has been consistently flat. Our strategy of diversified exposure across verticals and geographies supported our results with strong momentum in our retail & e-commerce and transportation & logistics verticals, and for the sixth quarter in a row, our International business has achieved year-over-year revenue growth,” said Scott Staples, Chief Executive Officer.

Company Overview

Processing approximately 100 million background checks annually across more than 200 countries and territories, First Advantage (NASDAQ:FA) provides employment background screening, identity verification, and compliance solutions to help companies manage hiring risks.

Revenue Growth

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years.

With $1.46 billion in revenue over the past 12 months, First Advantage is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, First Advantage grew its sales at an incredible 25% compounded annual growth rate over the last five years. This shows it had high demand, a useful starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. First Advantage’s annualized revenue growth of 37.4% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, First Advantage reported magnificent year-on-year revenue growth of 105%, and its $409.2 million of revenue beat Wall Street’s estimates by 1.6%.

Looking ahead, sell-side analysts expect revenue to grow 9.4% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is healthy and implies the market is baking in success for its products and services.

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Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

First Advantage was profitable over the last five years but held back by its large cost base. Its average operating margin of 6% was weak for a business services business.

Looking at the trend in its profitability, First Advantage’s operating margin decreased by 5.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. First Advantage’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, First Advantage generated an operating margin profit margin of 10.3%, up 5.7 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

First Advantage’s full-year EPS grew at a weak 1.8% compounded annual growth rate over the last four years, worse than the broader business services sector.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for First Advantage, its EPS declined by 4.6% annually over the last two years while its revenue grew by 37.4%. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of First Advantage’s earnings can give us a better understanding of its performance. We mentioned earlier that First Advantage’s operating margin expanded this quarter, but a two-year view shows its margin has declinedwhile its share count has grown 21.3%. This means the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q3, First Advantage reported adjusted EPS of $0.30, up from $0.26 in the same quarter last year. This print beat analysts’ estimates by 7.2%. Over the next 12 months, Wall Street expects First Advantage’s full-year EPS of $0.92 to grow 24.7%.

Key Takeaways from First Advantage’s Q3 Results

We enjoyed seeing First Advantage beat analysts’ full-year EPS guidance expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 2.1% to $13.18 immediately after reporting.

Sure, First Advantage had a solid quarter, but if we look at the bigger picture, is this stock a buy? If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.