HireRight Holdings Corporation (NYSE:HRT) Q3 2022 Earnings Conference Call November 3, 2022 5:00 PM ET
Company Participants
Guy Abramo – CEO, President & Director
Thomas Spaeth – CFO
Conference Call Participants
George Tong – Goldman Sachs
Ashish Sabadra – RBC Capital Markets
Kevin McVeigh – Crédit Suisse
Kyle Peterson – Needham & Company
John Kennedy – Barclays Bank
Devin Au – KeyBanc Capital Markets
Mark Marcon – Robert W. Baird & Co.
Andrew Nicholas – William Blair & Company
Stephanie Moore – Jefferies
Gustavo Gala – Truist Securities
Operator
Good afternoon, ladies and gentlemen, and welcome to the HireRight Third 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. [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 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, effects of macroeconomic uncertainty, 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 statements is contained in Form 10-K filed with the Securities and Exchange Commission, in particular, in the sections of that document entitled Risk Factors, Forward-Looking Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Now it’s my pleasure to turn the call over to Guy Abramo. Please go ahead.
Guy Abramo
Thank you, operator, and good afternoon, everyone. We’re pleased to have you with us today as we celebrate 1 year as a public company and report another solid quarter of results in an increasingly uncertain environment.
For this fiscal third quarter, revenue was USD210 million, an increase of USD5 million over last year’s solid results. Importantly, our strength reflects continued high client retention of 97%, increased upsells and package expansion to existing customers, new logo wins in our targeted end markets, and our team’s commitment to growing our core verticals.
Our account management and go-to-market teams are focused on developing new global client relationships while expanding existing relationships across all of our regions. I indicated on our last call that we expected to see more normalizing trends as the year progressed and Q3 reflects just that. It is our first year-over-year normalized results following the impact of the pandemic on prior quarterly results and demonstrates the demand for our high-quality solutions across all of our regions and verticals.
We are pleased with the growth we were able to deliver, notwithstanding the well-known macro headwinds. For example, even though order volumes in the U.K. were up 15%, the dramatic fall of the British pound had a nearly USD2 million negative impact on revenue during the quarter, resulting in EMEA revenue being flat year-over-year.
Also in the U.S., one of our largest customers discontinued their verification products due to a substantial price increase from one of our suppliers. This impact was approximately USD6 million in the quarter. Although the first half of the quarter saw continued strong order volumes, we began to experience a noticeable decline in volumes from many of our enterprise customers during the back half. Account reviews and ongoing dialogs with many of them are starting to reflect a genuine nervousness about the macroenvironment and its impacts on their own business outlook. This uncertainty is causing some of our customers to slow the pace of hiring. To be clear, we are not observing a cessation in hiring nor have we seen a significant drop-off in new business and our pipeline remains very strong. Rather, the pace of hiring with existing customers has slowed, and we expect that pressure to be felt until such time companies have a more confident economic outlook.
This macro slowdown will have an impact on the fourth quarter, and therefore, our guidance, which Tom will review in a minute. However, make no mistake, our important initiatives to optimize long-term growth and enhance our margins are continuing at the same rapid pace. This includes upselling to existing customers, bringing on new logos, and growing our core verticals through new global client relationships and expanded business with existing clients. It also includes continued strong execution on our platform and fulfillment technology initiatives that I’ll discuss in a moment.
Turning to profitability in the quarter. We delivered a 5% increase in adjusted EBITDA versus the prior year period with a 50 basis point increase in adjusted EBITDA margin. Our efficiency improvements, increased automation, and strict fiscal discipline drove these gains and improvement in adjusted margin. Quality and thoroughness in our investigations remain key selling points for us, particularly in our core markets that tend to be more demanding, and our single global platform and automation initiatives continue to be key differentiators. This focus on speed, precision, and innovation played a significant role in adding 44 new logos.
Most importantly, new logos in the quarter were distributed across all of our key focus verticals. As I’ve said repeatedly in previous calls, we are willing to prove to clients and prospects that our solutions will outperform anyone in the market. The key is to show that not all background checks and background screening companies are created equal, and none are more thorough than we are. Regarding our vertical and geographic success, healthcare has continued to be one of our strongest performers, growing nearly 11% over the prior year period. Transportation also showed strength during the quarter growing more than 14% year-over-year.
Turning to our international markets, where revenue growth was impacted by foreign currency fluctuations, particularly the weakness in the British pound. As I said earlier, despite foreign currency headwinds, U.K. volumes grew 15% over the prior year. Canada also continues its strong year with 34% growth. While international growth has slowed similar to the U.S., our investments in our international operations positions us to be the global leader in the space, where we continue to support our customers by leveraging our unified global platform.
Lastly, I would like to provide an update on our platform and fulfillment technology initiatives. As a reminder, we partnered with a leading global IT services firm to streamline and automate our back-office fulfillment processes through the continued and expanded use of a full suite of automation technologies that will improve how we conduct a background screen. Leveraging smart technology to identify, learn, and map all the variations of a specific search term, with our industry-leading data assets, reduces the number of manual data reconciliations, enabling us to continue to drive improvements in both quality and profitability. We are nearly a year into this competitively differentiating journey. And as I have said previously, we expect only modest financial benefit this year with a ramping of savings beginning next year and benefits throughout 2023 and through 2024.
In closing, we’re pleased with today’s results given the backdrop of significant uncertainty around the broader future macroenvironment. The underlying demand for talent and our ability to cross-sell and add new customers gives us confidence in the long-term outlook and our ability to create significant shareholder value over time.
With that, I’ll turn the call over to Tom for a closer look at our third quarter financial performance and our outlook for the balance of the year. Tom?
Thomas Spaeth
Thank you, Guy. Good afternoon, everyone, and thank you for joining our call today. I am pleased to report we have delivered our sixth consecutive quarter of growth with revenues of USD210 million in spite of macroeconomic headwinds, which started to impact ordering patterns towards the tail end of the quarter. Part of this impact included a nearly USD2 million decrease in our international revenues resulting from the weakened pound.
As Guy also mentioned, we had a USD6 million negative impact from one of our customers discontinuing their verification program due to pricing increases from the leading employment verification vendor. This was a very isolated case as we have not seen other customers take similar actions. We continue to benefit from high retention rates and our ability to upsell existing customers while continuing to build a strong pipeline. Gross retention year-to-date is 97%, while net retention sits at 117% year-to-date. As in previous quarters, our revenue growth is 100% organic. And while we are actively evaluating M&A opportunities in the market, we continue to be disciplined in our approach.
Diving deeper into Q3 revenue, despite some early signs of the macroeconomic slowdown, our healthcare vertical continued to outperform both industry and company averages and achieved double-digit year-on-year growth. Transportation, which had been the slowest of our core 4 verticals to recover from the pandemic, was our leading growth vertical during the quarter, growing 14%. And while manufacturing and distribution is not a core focus for us, that vertical also grew in excess of 13% during the quarter.
Financial services showed modest growth. However, it had particular exposure to the weakened pound, as we have tremendous market share among the large U.K.-based banks. Technology was the first vertical to demonstrate hiring softness, declining a few points year-over-year. Revenue from all core verticals of technology, healthcare, transportation, and financial services, as a percentage of our total revenue dipped slightly during the quarter to 57%.
Services, manufacturing, and distribution, each represented approximately 10% of revenue during the quarter. International markets began to show impacts from the macro changes sooner than the U.S. did, particularly in markets such as India where many of our technology clients have a significant presence. This, coupled with the FX headwinds, led our international markets to slightly underperform the U.S. One continued bright spot in the international markets was Canada, which continued to grow at double-digit rates.
One of the clear highlights of the quarter was our continued improvement in margin. Our focus on productivity improvements and cost control resulted in an adjusted EBITDA margin of 25.7%, a 50 basis point improvement over last year and a 150 basis point improvement over Q2. The vast majority of our improvement is being driven at the gross profit or cost of service level. We continue to focus on delivering the important technology automation project that Guy touched on earlier, in addition to driving cost improvements through the optimization of our onshore and offshore labor mix and increased focus on managing data costs.
Gross margin, excluding depreciation and amortization, was a multiyear high of 47.3%, an increase of 160 basis points over the prior year period. Year-to-date gross margin now sits at 45.6% and year-to-date adjusted EBITDA margin is 23.7%, an increase of 160 basis points versus the same period in 2021. It’s important to note that gross margin improvements from the technology transformation are not tied to revenue growth. The streamlining of our fulfillment processes will drive future profitability and cash flow. Also, our variable cost structure enables us to flex our labor in response to any slowing market demand. As we demonstrated in the early days of the pandemic, we quickly reduced our direct costs in response to slowing demand, allowing us to minimize the impact on gross margin.
Turning to SG&A. Expenses, excluding stock-based compensation, were down by USD2 million from Q2, however, were higher by USD1.5 million versus Q3 2021. This increase is largely due to higher personnel costs and higher public company expenses such as D&O insurance and accounting fees. Personnel-related costs for SG&A were relatively flat to Q2, however, up USD3 million over the prior year period, reflecting our investments in technology and our go-to-market teams.
Adjusted net income increased to USD112 million, largely driven by the reversal of our taxes. This reversal is a noncash transaction that resulted in a onetime benefit to income tax expense of USD70 million. We do not anticipate a meaningful change in the effective current cash tax rate as the allowance will offset future U.S. cash taxes. Further, this release will not impact our TRA calculation and the timing of those projected payments. In addition to the improvements we saw in our operating performance, we benefited from a reduction in interest expense, largely driven by our improved capital structure compared to a year ago.
I would also like to provide some color on our cash flow and balance sheet. This is another area where we had delivered exceptional results with year-to-date operating cash flow of nearly USD71 million, up from USD19 million a year earlier. Excluding our technology transformation project, operating cash flow year-to-date will be more than USD94 million. Year-to-date free cash flow was approximately USD58 million. As of the quarter end, we had no draws against our revolver and had approximately USD702 million outstanding on our First Lien loan. Our leverage ratio now sits at 2.9x, and we ended the quarter with USD147 million of unrestricted cash on the balance sheet.
Turning to our updated outlook for full year 2022. While our year-to-date performance has been strong, the macroenvironment has certainly softened in recent months, and there remains uncertainty around the length and depth of any potential recession. While we continue to hold to our long-term growth objectives for this industry and believe the secular changes we have discussed in labor markets will continue over the long term, there is clear softness and uncertainty as we stand here today.
With that in mind, we are updating our full year revenue guidance from a range of USD820 million to USD830 million to a new range of USD798 million to USD805 million. We are updating our adjusted net income guidance from a range of USD130 million to USD140 million to a new range of USD200 million to USD204 million, inclusive of the tax adjustment. We are updating our full year adjusted EBITDA guidance from a range of USD190 million to USD197 million to a new range of USD178 million to USD185 million, and we are updating the corresponding adjusted diluted earnings per share guidance from a range of USD1.64 to USD1.76 to a new range of USD2.52 to USD2.57 per share. Both adjusted net income and adjusted diluted earnings per share include the impact of the USD70 million reversal of our tax allowance made this quarter.
I also want to note that the implied Q4 guidance reflects approximately another USD6 million headwind from the aforementioned customer who discontinued verifications, as well as another roughly USD2 million from FX headwinds, with the remaining year-over-year decline attributed to lower volumes resulting from the changes in the macroenvironment. Finally, with respect to 2023 guidance, we are finalizing our 2023 operating budget, taking into consideration the headwinds of potential recessionary macro operating environment, domestically and internationally; incremental interest actions by the Federal Reserve; , available job openings, and the pent-up demand for talent and will provide full year 2023 guidance when we release our year-end results. However, I will comment that our commitment and focus on margin improvement will continue regardless of the demand environment. And much of the margin improvement actions we are taking through technology with our vendor and operations are not volume dependent.
With that, operator, we can open up the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from the line of George Tong with Goldman Sachs.
George Tong
You mentioned that the business is progressing well. You’re not really seeing any meaningful signs of slowdown. If you look at the business and look at past downturns, where would you see it first? What are the leading indicators, what are the KPIs that you would watch for? And are there any such inflections that you’re seeing in the business that might point to perhaps early signs of a moderation?
Guy Abramo
George, we did mention that we are seeing signs of a slowdown. In fact, some of our — what we said specifically was in this quarter, Q3, the back half of the quarter, we started to see some volumes move downward and are projecting that through the fourth quarter, which is why our annual guidance was moved down. But I can tell you it’s an interesting trend because it’s — in fact, I would classify it as an inch deep and a mile wide, right? It’s not a huge drop in volume. It’s modest drops in volume, but it’s modest drops in volumes everywhere. And in our conversations with our clients, what we’re hearing is what you saw today announced by Amazon and Lyft is just general nervousness and outlook on macroeconomic conditions is making people adjust their hiring for perhaps the rest of this year, so that would certainly have an impact on the background screening industry as a whole.
George Tong
Right. And you mentioned that certain verticals like healthcare, transportation, they’re outperforming and doing really well. Are there any particular verticals that are doing less well and are lagging in performance?
Guy Abramo
So the one we highlighted was technology. And it’s interesting because as I said on the call after Q2, we weren’t — even though there were reports in the media that technology was going to slow hiring, we were not seeing that in our volumes in the second quarter. But in the third — in this quarter reported, we started to see a slowdown in ordering patterns. Again, across the board, I would tell you, every — all the major technology players are clients of ours, and every single one of them had dips in their volumes.
Operator
Our next question comes from the line of Ashish Sabadra with RBC Capital Markets.
Ashish Sabadra
I just wanted to focus on that USD6 million impact. What I want to understand, is that a quarterly or an annual impact? And is the right way to think about the annual impact, would that be like multiplying it by 4x?
Thomas Spaeth
Yes. That was a quarterly impact, Ashish. You can’t necessarily annualize it multiplying by it by 4 because this particular customer has a little bit more volume weighted towards the second half of the year, including the third quarter. So their peak tends to be Q3, Q4. So while you can’t necessarily multiply it by 4, you could probably multiply it by 3 in terms of an overall impact.
Guy Abramo
And there is some uncertainty involved in this as well, Ashish, in that they could start ordering verifications. We’re clearly working with them on alternative solutions. It’s not that that business is going to someplace else. They just decided to stop. So that’s why it would be difficult to project that moving forward. But we do believe that that will be the case in the fourth quarter.
Ashish Sabadra
Okay. And if I back in, even if I take the high end of your guidance range, both for revenue and EBITDA, on the revenue — and even if I add back that USD6 million of onetime impact and USD2 million of FX, I get like revenues being down 8%. And I understand you talked about some of the slowdown at the end of the quarter and slowdown in volume. But is my math right? Is that the right way to think about it…
Thomas Spaeth
Yes.
Ashish Sabadra
12.5% or 8% excluding. Okay. And then maybe just on the margin — sorry, one more on margins. When I back it in, I get margins of 20.5%, which is down 100 basis points year on year. I would think that that USD6 million would be mostly pass-through revenue, so it shouldn’t have impacted margins as much. Is that because of the revenue weakness that we are seeing the impact on margins as well?
Thomas Spaeth
Yes. So there’s really 2 things going on there. One, historically, Q4 margins tend to be a little bit softer based on just the way the holidays, our staffing levels work, and the volumes flow through. So that’s clearly a driver of what you’re seeing there. And the second impact is just the overall volume decline that we’re forecasting for Q4 based on the implied — based on the guidance and the implied guidance for Q4.
Ashish Sabadra
Okay. That’s helpful.
Operator
Our next question comes from the line of Kevin McVeigh with Credit Suisse.
Kevin McVeigh
Great. As we think about — I know you’re not giving formal 2023 guidance, but is it fair to maybe annualize what the Q4 is implied for 2023? And I know there’s some seasonality in there, things like that, but if we wanted to think about a potential range, or are there other things to just call out? Obviously, you’ve got the one client, some FX in there. I’d imagine the FX probably is a little bit more of a headwind beyond the USD2 million. But just, again, I know it’s not formal guidance, but is there any way to think about other puts and takes? And just to follow up with that, the client — how are they doing it now? So is it — how are they doing those screens now?
Guy Abramo
So they’re doing — so it’s a full package that we have with this client, Kevin. And so they just decided to just stop doing verification. We’re still doing background screening and all the other things that we do. But verifying employment specifically has been stopped because of the significant price increase by a very well-known vendor. But what they’re doing is, they’re stopping it and then looking for an alternative solution that would likely run through us anyway. Your question on long-term guidance, there’s a reason why we’re not giving long-term guidance, right and the reason why — what you see reflected in our rest of year guidance is us trying to trend line a phenomenon that’s only existed for about five or six weeks, right? So as I characterize it is leading to half-inch deep and a mile wide and it’s just difficult to say what that trend will be going out — even going out the next several months, right?
Kevin McVeigh
Right. And is there risk that other clients like — are there any other clients — obviously with this particular vendor, is there any other risk potentially any other maybe 6 million clients out there or anything like that or and is there that the — you talked about the margin, okay?
Guy Abramo
No, no, I think verification question.
Kevin McVeigh
Okay, thank you.
Guy Abramo
Thank you, Kevin.
Operator
Our next question comes from the line of Kyle Peterson with Needham. Please proceed with your question.
Kyle Peterson
Hey, good afternoon, guys. Thanks for taking the questions. Just want to get some clarity on the implied 4Q guide, it seems like at least in 3Q a lot of the weakness was in the technology vertical, is that where a lot of the kind of fallout in the guide there be some top line is concentrated for 4Q or have you guys forecasted more broad based headwind in areas like healthcare, transportation where they seem to be holding in pretty well right now?
Thomas Spaeth
Hi, Kyle, appreciate the question. So if you look at, it’s all of our verticals, I mean and I mean everyone, everything from energy, manufacturing, distribution, financial services, technology. The reason why I characterize this as an inch deep and a mile wide, is we’re seeing drops modest drops in volume from almost everybody, right and obviously there are some clients that are up and some that are down, but as industries go, it’s a very small number but because it’s across every industry is obviously going to be an impact. So, as there is no trend in a specific industry, other than of course we quarter-over-quarter from the third quarter, some industries outperform doubles, but that was the third quarter, you don’t know what we’re going to see in the fourth quarter.
Guy Abramo
And it’s generally broad-based geographically as well, we’re seeing it overseas as well.
Kyle Peterson
Okay, that’s helpful and that makes sense. Just a quick follow-up, I know you guys called out the one client on the verification side, are you guys seeing really any other signs of kind of trading down in screens, whether it’s going shorter duration or less comprehensive outside of that one instance kind of a lower ARPU or is this purely a base growth volumes type of headwind?
Guy Abramo
It’s purely that, it’s purely based growth.
Kyle Peterson
All right, that’s helpful. Thanks guys.
Thomas Spaeth
Thanks, Kyle.
Operator
Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question.
Mark Marcon
Hey, this is Andre Childress on for Mark Marcon. Thank you for taking our questions. So my first question is, you’ve said several times that you saw a modest drop that was pretty broad, I just want to clarify, I assume that’s sequentially, but there is a year-over-year rate it’s obviously exacerbated given the incredible comps as we rebounded from COVID last year. And is there any way to quantify that by either order volume or hiring trends whatever it may be throughout the quarter and into October thus far?
Guy Abramo
Yes, I’ll answer the first part of question, so that modest drop I talked about is sequentially, so think of it ending the third quarter coming into the fourth quarter.
Thomas Spaeth
Yeah and certainly the guidance that we’ve indicated earlier on the call reflects our latest thinking obviously through October results, right? So that is certainly baked into our guidance and so it’s reflected on a sequential basis from what we saw in Q3 going into Q4.
Mark Marcon
Great, thank you. And so my other question, I know this is kind of a tough question because it’s going to be around historical recessions and each one varies dramatically, but you gave some perspective in terms of how you’re going to manage your expenses, but we only have the financials in terms of what happened over COVID and that was obviously a very unique recession. So assuming this environment continues and we do go into recession, how should we expect the revenue to trend, would it be kind of maybe less deep, but longer-lasting than we experienced during COVID or is there any way we should think about that?
Guy Abramo
I think when we get ask that question quite a bit, Andre and I think one of the answers we say to those people is when you’ve seen one recession, you’ve seen one recession, right? So it’s certainly can’t correlate this to something that we saw in COVID, we think that’s an extreme. We certainly look back at the great financial crisis, but there was a very different business back in 2008 and 2009. So I think we’re looking at when we go through our forecasting and budgeting for 2023, we’re going to certainly do some sensitivity planning and we certainly think by the time that we provide guidance sometime around the March framework, we’ll have much better insight into how the year is going to shape up.
Mark Marcon
Thank you, that’s great context and actually just one more on top of that. So you talked about from an expense perspective, but how should we think about the go-to-market and sales environment. I know you said that you haven’t seen a slowdown in terms of your bookings with the pipeline, but assuming that happens among your enterprise clients and prospects, would you lean more heavily on cross-sell, up-sell or what kind of is the go-to-market in a more challenged macroenvironment?
Guy Abramo
So interesting, the one proxy we have is the pandemic and in pandemic we have very, very strong sales pipeline and new wins even during that time. We’re not seeing a slowdown certainly and the opportunities are in front of us, there’s no slowdowns in the RPs, there’s no slowdowns in the wins that we have. We’ve got a very, very robust pipeline, it was adding almost literally weekly. And it’s when I say pipeline, I mean both new logos, cross-sells, upsells, we continue to have good strong performance and we’ve made some investments on those teams over the last year to grow their numbers and we don’t see that that necessarily will be an impact.
Mark Marcon
Great. Thank you so much for all the answers.
Guy Abramo
Okay.
Operator
Our next question comes from the line of Andrew Nicholas with William Blair. Please proceed with your question.
Andrew Nicholas
Hi, good afternoon. I wanted to hone in a bit further on fourth quarter guidance, understand that there were some modest decline sequentially as you moved through the quarter and you’re embedding October results into that number. Is there anything you could say about kind of what you’re assuming for the remaining two months of this quarter, are you expecting continued deterioration or just trying to get a sense for maybe the conservatism of what’s in the outlook for fourth quarter or things could kind of accelerate to the downside if conditions don’t improve?
Guy Abramo
Thanks, Andrew. We typically see some real seasonal impact in November and December anyway, so that’s reflected clearly in the guidance, particularly because of the holiday seasons coming up and year-end activities, people tend to slowdown hiring. So that’s certainly reflected in that, but historically what we’ve done is taking a look at kind of the month-over-month seasonal trending that we typically see year-over-year from our customers and really are taking a look at that and basing it off of what we’ve seen in October so far and kind of extrapolating that into November, December, it’s generally the way we’re coming up with the guidance.
Thomas Spaeth
The other side of that, Andrew, I would tell you that in our conversations with our clients, the decisions to slow the pace of hiring seem to be more associated with just general uncertainty and nervousness about their business, not necessarily the actual performance of their business. So I would just quickly and classify the markets in our — for our clients to just be uncertain and that uncertainty as it might with most companies generally the first thing people do is maybe pause or slowdown the pace of hiring because it’s the ultimate controllable expense, but doesn’t necessarily have to be long lasting. So I guess it’s a roundabout way for us both to say we don’t know, but we used the trends that we have to make the best estimate we could.
Andrew Nicholas
Absolutely, that’s helpful. And then for my follow-up, I just want to ask about capital allocation given the interest rate environment and the debt schedule or debt balances, just wondering if that has evolved at all, recognizing you also want to probably keep some cushion given the macro headwinds. Just if you could update us on how you’re thinking about leverage at this point in time? That’d be helpful. Thanks.
Guy Abramo
No problem, no real change there. We continue to be very cost conscious when it comes to investing capital in terms of acquisitions, obviously, we haven’t been terribly acquisitive and we’ll continue to keep that type of discipline. There may be — we do certainly have a pipeline of opportunities we’re looking at, but we are going to be very mindful of the overall leverage ratio, you can see we’re under three now and I would expect it to keep it in that level or under that level for the time being and don’t foresee that changing. So really no change in our kind of focus in terms of capital allocation. Our single biggest capital priority right now relates to our technology automation program and that is going full steam ahead.
Andrew Nicholas
Thank you.
Operator
Our next question comes from the line of Andrew Jeffrey with Truist Securities. Please proceed with your question.
Gustavo Gala
Hey, guys. It’s Gus on for Andrew, appreciate you taking our question. This question is for Guy, appreciate the great color on margin and expense control, but on the top line would it kind of be fair to say that we need to revisit that long-term goal of 8% to 10% growth. I appreciate it is likely an industry thing, but how do you think about this internally or are we starting realizing the elevated endpoint of velocity like the checks per liquid levels that will normalize to pre-pandemic levels or just I want to parse out some of those drivers there?
Guy Abramo
Yes, so let me talk about that from two points of view, one is just the fundamentals for our industry, none of that has changed, right, but you still see the job openings and the quit rates in the long-term those will continue to drive we think good healthy growth beyond what traditional growth for the industry used to be. The big unknown though clearly for forward growth rates is just this recession and what impact it’s going to have.
Thomas Spaeth
Yes, I think long-term, we don’t change our view at all in terms of the fundamental changes in the labor market. Certainly, they’re going to be disrupted for a period of time as people are uncertain about the outlook over the next number of quarters and who knows that one quarter or five quarters we don’t know. But we still feel really good about the long-term growth prospects, we know historically that this industry and this business grew at a nice solid 7% clip and that was before all the fundamental secular change that we’ve seen in the labor market that we think are only going to be additive in the next cycle.
Gustavo Gala
Great, appreciate it. And then on the — it seems there’s some share taking in health care and transportation which is made to here, is any of that coming from larger competitors or are we again just mostly coming from Tier 2 and Tier 3?
Guy Abramo
We don’t talk about where we take business from, but it’s generally coming from the whole industry.
Gustavo Gala
Got it. Thank you.
Operator
Our next question comes from the line of Stephanie Moore with Jefferies. Please proceed with your question.
Stephanie Moore
Hi, good afternoon. Thank you. I guess touching on the fourth quarter guidance, I appreciate — I think the puts and takes particularly with the one customer and kind of that expected USD6 million headwind, but if you just take maybe the midpoint of the guidance and the implied let’s just say high single-digit top line decline. Can you kind of break out, how you got to that number in terms of baking in new logos, cross-sell, you were very clear that the base business has deteriorated, just given the macroenvironment, but I’m trying to understand kind of some of the other offset also on the cross-selling and new logo front that’s remained I think pretty consistent here?
Thomas Spaeth
Yeah, sure, Stephanie. We are not going to deconstruct our guidance quarter-by-quarter in terms of the growth algorithm, but we — as Guy remarked, we are very comfortable and actually pretty excited about how our pipeline looks going into 2023. Some of that will close and go live in Q4, but 2023 is shaping up, it’s a pretty strong year from a new logo perspective. So excited about that, not only from a new logo, but also from an upsell opportunity.
Stephanie Moore
Great. And then switching gears, you noted continue to look into the M&A market as opportunities, in your opinion and I know you said one recession is one recession, but would you view that a potential slowdown might be actually be a favorable opportunity for maybe you kind of acquire a business that’s smaller and struggling a bit more, but has still good assets and good customer contracts, is that’s something that we could think that this could actually be a positive from an M&A standpoint, if we do hit a slowdown?
Thomas Spaeth
I don’t know if it’s positive or negative in terms of our approach at M&A, Stephanie, as we — we continue to look for businesses that fit either a product capability that we think is better to buy than build or a geographic market where we want to expand some presence or some unique adjacency that then just do the math on whether or not it’s the right purchase for us. But I don’t know that you would expect any more or less M&A activity out of us because of the moderate slowdown.
Stephanie Moore
Understood. Thank you.
Operator
Our next question comes from the line of Devin Au with KeyBanc Capital Markets. Please proceed with your question.
Devin Au
Great, thanks for taking my question here. Curious to hear about back on checks.com and what you’re seeing in the SMB market, how is that platform performed in past quarter and are you seeing same type of nervousness from that SMB customer segment?
Guy Abramo
The SMB market as we had mentioned on previous quarters had been one of the slower ones to recover and frankly we’re still kind of in recovery mode. So what I would say is that nothing has really changed there, we still are slightly up on that sector of our business, but it’s definitely been a lagging sector for us frankly for the last 18 months, it’s been the slowest to recover from the pandemic and that hasn’t changed.
Devin Au
Okay, that’s helpful. And maybe just one more, I want to ask about the pipeline that you’re seeing, I know you said that it’s still shaping up really nicely for 2023 and you expect some to go live in 4Q, are there certain industries that you’re seeing maybe stronger pipeline development than other verticals at this point?
Guy Abramo
So for the most part, it’s well within our wheelhouse, the core verticals that we focus on between tech, transportation, financial services and healthcare. Pretty spread across and it is — yeah, pretty evened out.
Devin Au
Okay, got it. Thanks for the color.
Operator
[Operator Instructions]. Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.
John Kennedy
Hi, this is actually Ronan Kennedy on for Manav. Can I confirm you said that you don’t feel that the fundamentals actually have changed, has — what’s happened because it seems to have…
Guy Abramo
I’m sorry, you’re breaking up, can’t get a little…
John Kennedy
Hi, is that better?
Guy Abramo
Yes much better. Thank you.
John Kennedy
Apologies. Thank you. You had said, based on what you’ve seen, you don’t think the fundamentals within the industry have changed with regards to the secular drivers, has it changed your view on your visibility and what you see from a leading indicators and how does that kind of reconcile with what we have been seeing from the Jobs, the JOLTS data et cetera?
Guy Abramo
Yes, it’s a good question, but I think as I said earlier, our view of the long-term fundamentals on the employment market are very bullish for the reasons we discussed. And what we’re seeing right now which is really a six-week trend, right? So and it’s a lumpy one, right, it’s not necessarily just precipitous decline by any stretch of the imagination. But the softness seems to be reflected in general nervousness about our clients’ businesses and in prudence and then managing costs, they are slowing down their pace of iron. It doesn’t mean that the demand for jobs for those businesses isn’t still there, it just means they’re not filling those jobs for some period of time here and it may be temporary, it may be a few quarters, who knows, but right now the visibility that we have is only borne over the last six weeks and the conversations we’ve had with our top 100 enterprise clients, who were all reflecting just that sense of uncertainty.
John Kennedy
Okay, thank you. And then as a follow-up, if I may, what about in terms of the different products, whether I know you had commented on the one client USD6 million no longer doing verifications, but what about say in terms of annual rescreening with the continuous monitoring or other things that there was good trends behind such as inoculation management, immunization management? Are you seeing different rates of use of certain products and services and has there been any change to the economics or pricing of those?
Guy Abramo
Yes, no, not at all, the total products you just mentioned are part of the reason why our pipeline is as robust as it is. And no impact on pricing that we’ve seen. The situation we describe is very, very isolated and the only reason why we mention is because it’s with the larger customers we had an impact.
John Kennedy
Got it. Thank you very much.
Operator
Mr. Abramo, there are no further questions at this time, I’ll now turn the call back to you.
Guy Abramo
All right. So thanks operator. We appreciate everyone joining the call, please don’t hesitate to reach out with any additional questions. We look forward to keeping you posted on our progress in the coming months. So thanks again. Everybody stay safe and have a great night.
Operator
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a great day.
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