First Advantage’s Q1 Results: A Tale of Growth and Integration Hurdles

First Advantage (NASDAQ: FA) delivered a starkly bifurcated set of Q1 2025 results: revenue surged 109% year-over-year, driven by its $2.2 billion acquisition of Sterling Check Corp., while net losses widened due to integration costs and margin pressures. The quarter underscores the challenges of scaling through acquisitions while balancing short-term financial discipline with long-term strategic bets.

Revenue Surge Masks Margin Pressure

The top-line growth was undeniable, with revenue hitting $354.6 million—nearly double Q1 2024’s $169.5 million. The Sterling acquisition, completed in late 2024, accounted for the entirety of this increase. Yet, profitability took a hit: GAAP net loss widened to $41.2 million, or $0.24 per share, compared to a $2.1 million profit a year earlier. The culprit? A $41.2 million drag from depreciation and amortization tied to Sterling’s intangible assets, plus $15.3 million in one-time integration expenses.

Even adjusted metrics told a cautionary tale. Adjusted EBITDA fell to $92.1 million, down 5.6% from $97.5 million in Q1 2024, as the EBITDA margin compressed from 27.5% to 26.0%. This decline suggests that while synergies are being realized, operational inefficiencies from integrating two large businesses are still weighing on profitability.

Integration Gains and Remaining Challenges

Management highlighted progress on cost synergies, claiming $37 million in annualized savings—surpassing the midpoint of its $60–70 million target. This acceleration reflects early wins in streamlining overlapping costs and optimizing workflows. However, the adjusted EPS of $0.17 remained flat year-over-year, underscoring how margin pressures are offsetting revenue growth.

Customer metrics offered a silver lining. First Advantage reported “sequential quarterly improvement in the base business” and maintained a robust 97% gross retention rate. The company also emphasized cross-selling opportunities, with 80% of its 80,000 global clients using multiple services. Management’s focus on expanding into vertical markets like healthcare and financial services could unlock incremental revenue, though specifics on timing or scale were absent.

Guidance and Strategic Outlook

Despite the margin headwinds, First Advantage reaffirmed its full-year 2025 guidance: revenue of $1.5–1.6 billion and adjusted EBITDA of $410–450 million. This confidence hinges on its ability to deliver the remaining synergies and improve margins in the second half of the year.

The upcoming May 28 investor day will be critical. The event promises details on the FA 5.0 strategy, which likely includes scaling AI-driven automation, enhancing API-based solutions, and deepening partnerships with enterprise clients. Investors will scrutinize whether these initiatives can sustain growth beyond the Sterling deal and address margin concerns.

Investor Takeaways

First Advantage’s Q1 results are a reminder that acquisitions are a double-edged sword: they boost revenue rapidly but strain margins until synergies materialize. The stock, down 12% year-to-date through May 9, reflects this tension. Key questions remain:
- Can the company achieve its $60–70 million synergy target, or will cost savings fall short?
- Will AI investments and cross-selling efforts offset margin pressures in 2025 and beyond?
- How will the FA 5.0 strategy differentiate the company in a crowded HR tech space?

The path to profitability is narrowing. While the integration progress is encouraging, the adjusted EBITDA margin drop and flat EPS suggest execution risks. Investors should watch for margin recovery in Q2 and Q3, as well as concrete metrics on customer expansion and technology adoption. Until then, FA’s valuation—trading at 16x 2025E adjusted EBITDA—leans toward speculative unless management delivers clear margin stabilization.

Conclusion
First Advantage’s Q1 results paint a company at a crossroads. The Sterling acquisition has turbocharged revenue but left profitability under strain, with margins eroding despite early synergy gains. Management’s reaffirmed guidance signals optimism, but investors must reconcile the $2.2 billion price tag with the reality of integration costs. The FA 5.0 strategy unveiled at the May 28 investor day will be pivotal: if it outlines a clear path to margin expansion and top-line growth beyond the acquisition, the stock could rebound. For now, FA remains a high-risk, high-reward bet on the HR tech sector’s consolidation wave—one that demands patience and confidence in execution.

Data Note: First Advantage’s Q1 results reflect a transitional phase. Investors should analyze GAAP metrics alongside adjusted figures, noting that non-GAAP measures exclude $56.5 million in one-time costs and amortization.