First Advantage Corp Q4 FY2024 Earnings Call

Good day, everyone. My name is David, and I'll be your conference operator today. I would like to welcome you to the First Advantage Fourth Quarter and Full Year 2024 Earnings Conference Call and Webcast. Hosting today's call from First Advantage is Stephanie Gorman, Vice President of Investor Relations. Please note today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.

Thank you, David. Good morning, everyone, and welcome to First Advantage's Fourth Quarter and Full Year 2024 Earnings Conference Call. In the Investors section of our website, you will find the earnings press release and slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on our Investor Relations website. Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2023 Form 10-K and our 2024 Form 10-K to be filed with the SEC. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website. To facilitate comparability, we will also discuss pro forma combined company results consisting of First Advantage and Sterling Check Corp historical results and certain pro forma adjustments as if the acquisition of Sterling had occurred on January 1, 2023. The pro forma information does not constitute Article 11 pro forma information. I'm joined on our call today by Scott Staples, our Chief Executive Officer; and Steven Marks, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.

Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. 2024 was a big year for First Advantage as we advanced on our strategy and announced and closed on the Sterling acquisition. I am very proud of our team's dedication to execution and consistently delivering results, keeping our customers at the center of everything we do. I am also excited to provide an update on our fourth quarter and full-year accomplishments and to discuss our outlook for 2025. We have four key messages for today. First, we generated solid results for the fourth quarter and full year amid an uncertain macro environment. We also maintained our cost discipline to sustain robust margins within the Legacy First Advantage business and produce strong cash flow. Second, as you know, we closed on our $2.2 billion strategic acquisition of Sterling, which leads me to the third point that we are underway in rolling out our updated strategy, which we call FA 5.0. And as we discussed last quarter, our organization and management team have been optimized to deliver growth. With the additional scale and capabilities of Sterling and FA 5.0, we are accelerating our strategic progress. Our key strategic objectives in 2025 are to action our synergy targets, deleverage our balance sheet, successfully execute our integration plan, and accelerate our go-to-market strategy focused on product, technology, and innovation. We are tracking well on our synergy execution. And today, we are pleased to be increasing the lower end of our targeted range with our updated net cost synergy target range of $60 million to $70 million, an improvement from our previous target range of $50 million to $70 million. Over time, our synergy realization will help to stabilize and expand Sterling's margins. We are focused on deleveraging our balance sheet and have gotten a fast start on the Sterling integration while continuing to provide our customers with the service and quality they know they can expect from us. At the same time, we are maintaining our focus on innovation in order to position our business for future growth. Fourth, we are introducing our full-year 2025 guidance. We are entering 2025 in a strong business position, encouraged by recent pipeline success, reducing headwinds as recent JOLTS data continues to normalize and feedback from our customers. That said, in view of the current macro environment, which continues to be uncertain, we are maintaining a cautiously optimistic outlook. Steven will cover our guidance and key assumptions in greater detail in the financial section shortly. We remain confident in our strategy and our positioning to create long-term shareholder value in 2025 and beyond. In view of the new U.S. administration, I also wanted to share a few comments on potential policy impacts on our business. We do not have meaningful direct exposure to federal government hiring and therefore, do not expect to be directly impacted by efforts to streamline federal government spending. In some respects, government efficiency efforts could potentially be a tailwind for First Advantage if there are efforts to outsource and privatize work that is currently done by the government. To date, there has not been a noticeable impact from government efficiency efforts on our business. While tariffs may impact our customers and overall economic growth, we do not have any significant direct exposure to tariffs. And as a reminder, 87% of our 2024 pro forma revenues were generated in the U.S. Turning to Slide 5 and an updated view of our enhanced profile with the addition of Sterling. Our combined capabilities position us as a leader and increase our customer value proposition, offering differentiated technology platforms and a broad collection of innovative solutions across a comprehensive range of verticals. As a reminder, with the closing of Sterling on October 31, our reported fourth quarter and full-year results include two months of Sterling's performance. In order to provide comparability to previous periods, we are showing First Advantage and Sterling on a pro forma basis with combined financial data for 2023 and 2024 throughout this presentation and plan to continue to do so in the future. In 2024, we delivered sustained profitability while managing through the Sterling closing and kicking off integration. Our pro forma full-year revenues were approximately $1.5 billion, with $397 million in pro forma adjusted EBITDA or $458 million on a synergized basis. In 2024, our approximately 10,000 team members completed nearly 190 million screens on behalf of our 80,000 active customers across 200 countries and territories. This includes over two-thirds of Fortune 100 companies and approximately one-half of Fortune 500 companies. Our gross retention remains at approximately 96%. We now have over 900 million records in our proprietary databases, and we have over 100 integrations with Applicant Tracking Systems and Human Capital Management partners, giving us a unique competitive advantage. For the fourth quarter and full year, combined upsell, cross-sell, and new logo rates performed in line or better than Legacy First Advantage and Sterling's historical growth algorithms. Retention rates also performed in line for both businesses. Together, we had 25 enterprise bookings in the fourth quarter and 88 in the last 12 months, each with $500,000 or more of expected annual contract value, including two notably large U.S. deals. Looking into 2025, we have been seeing our pipeline momentum continue. We have recently won a large deal with a significant retail customer in the gig economy. We were able to leverage existing relationships and trust to unlock critical business issues, drive the business to RFP, and ultimately be awarded this deal. Also in 2025, we won our largest international contract in the past years with a new logo in Australia. As you can see, our sales engine continues to deliver consistent results. Additionally, our verticalized go-to-market approach remains a differentiator and a key driver of our growth strategy. We offer deep subject matter expertise in our industry segments, and we use industry-specific data to advise our customers on topics such as leading practices and product optimization. Our largest verticals are healthcare, transportation and retail, and e-commerce. While First Advantage has historically been more oriented toward hourly workers within high-volume hiring verticals, Sterling brings a strong portfolio of verticals focused on salaried workers, resulting in our pro forma revenue mix being more equally weighted between the two. Our balance across a diverse range of verticals and between hourly and salaried workers enables us to weather a variety of macroeconomic scenarios and makes us less dependent on any one sector or customer. On the slide, we have provided an updated view of our verticals for 2024 on a pro forma basis. During the year, we grew our footprint in healthcare and transportation as both verticals, particularly healthcare, proved themselves to be resilient amid macro challenges and had strong upsell, cross-sell results. Our other verticals changed only modestly from the prior year, with some headwinds experienced in our retail and staffing verticals. Steven will share more about the underlying dynamics shortly. Turning to Slide 6. Since closing, we have been laser-focused on executing our strategic post-close priorities, enabled by our integration playbook. These priorities are focused on continuity with our customers, a smooth integration process, synergies, and deleveraging our balance sheet. We have seen early success in leveraging each Legacy company's technology and processes since closing. Fundamentally, we are applying a best-of-breed approach on tech and product stacks to meet the needs of our customers. For example, First Advantage was recently awarded a large deal in the healthcare vertical, and we determined that Sterling's platform was actually best suited to this customer's requirements. So, this is the tech platform they will use. This type of flexibility enhances our customer value proposition, offering more options for our customers and the market. We have also identified automation opportunities where one company may have automated criminal court records in a jurisdiction that the other had not yet, allowing us to simply turn on that service for all of our customers, creating synergy opportunities and expanding our combined capabilities. We are also very pleased that there have not been disruptions to customers throughout the integration process. Our executive team has communicated regularly with our large customers who have shared that they are excited to benefit from the best of both worlds from First Advantage and Sterling. They are optimistic about our approach to integration and what it means for their background screening programs, including improved turnaround times, new products and services, and enhanced platform functionality. They are eager to see new technology as it becomes available and experience performance improvements from our combined capabilities. We continue to drive innovation to maintain our competitive advantage and ensure we are offering the best solutions to our customers, and we're doing all of this under our high-performing culture. Our commitment to innovation supports our customers' priorities of speed, cost, and efficiency. We continue to integrate AI capabilities into our workflow, helping us increase our efficiency and provide greater customer service. By streamlining workflows and automating processes, we can leverage technology to meet business needs without increasing headcount. Our combined technologies distinguish us from the competition and are a clear competitive advantage that enables us to expand our businesses by offering a unique customer experience. And with that, I will now turn the call over to Steven.

Thank you, Scott, and good morning, everyone. Today, I will provide color on our results, an update on our synergy progress and targets, and walk you through our guidance for full year 2025. I'll start with our fourth quarter results on Slide 8. Please note that as we continue to swiftly execute our integration program, we plan to focus on the consolidated business, particularly with the implementation of our FA 5.0 strategy. Our fourth quarter pro forma revenues were $375 million, up 0.9% year-over-year. Our combined business continued to face year-on-year base headwinds as hiring volumes continue to stabilize with the base remaining negative on a year-on-year basis. In our Legacy First Advantage segment, Americas segment, revenues of $172 million were down 5.5% from the prior year. These results were impacted by the uncertainty among American consumers during Q4, which affected our retail and transportation customers' hiring levels. As such, seasonal hiring revenues in Q4 were slightly weaker than expected and lasted for a notably shorter duration compared to the prior year and our expectations. Going forward, on a total company basis, we expect that our increased diversification with the broader Sterling base will help mitigate seasonality impacts on our business. Our Legacy First Advantage International segment continued to show green shoots across all regions and performed better than we anticipated, with revenues increasing 8.9% to $24 million. On a constant currency basis, Legacy First Advantage International revenues were up 7.0% year-over-year. In our Legacy Sterling segment, pro forma revenues for Q4 were $181 million, up 7% year-over-year with a 6% contribution from the Vault acquisition. Base trends in the Legacy Sterling business largely performed in line with Legacy First Advantage Americas. Pro forma adjusted EBITDA for the fourth quarter was $100 million, and our pro forma adjusted EBITDA margin was 26.7%, down approximately 300 basis points versus the prior year. Legacy First Advantage continued to drive margins of nearly 32% as we focus on maintaining our variable cost structure consistent with our historical approach despite the base and seasonal peak headwinds I previously mentioned. Legacy Sterling continued to operate at a lower margin relative to Legacy First Advantage as a result of its continued shifting mix to lower margin services, its lower margin from the Vault acquisition, and its historical operating methodology that results in a more fixed cost approach to fulfillment than Legacy First Advantage. As part of our integration plans, we are working to adapt the Legacy Sterling business to have a more variable cost structure, including First Advantage's historical model for fulfillment workforce management. During the fourth quarter, we also identified cost savings above and beyond our normal levers through headcount management even while diligently integrating Sterling. Turning to full year results on Slide 9. Our overall annual performance was solid and closely in line with our combined company 2024 guidance ranges for reported revenues, adjusted EBITDA, adjusted net income and adjusted diluted EPS. This is further evidence that we continue to be diligent and successful at controlling what can be controlled within our business despite the uncertain macro environment and its impact on our base volumes. Total pro forma revenues were $1.5 billion, up approximately 2% year-over-year. In our Legacy First Advantage Americas segment, for 2024, revenues of $659 million were down 2.1% from the prior year. In our Legacy First Advantage International segment, revenues of $97 million were flat versus the prior year. But on a constant currency basis, Legacy First Advantage International revenues were $96 million or down 0.7% year-over-year. In total, Legacy First Advantage revenues were down 2.2%. And in our Legacy Sterling segment, pro forma revenues were $763 million, up 6% year-over-year with 6.9% growth from the Vault acquisition. Pro forma adjusted EBITDA for the year was $397 million, and our pro forma adjusted EBITDA margin was 26.3%, approximately 220 basis points lower year-over-year. This decline, as previously noted, was driven by Sterling's revenue mix towards lower-margin products and the margin impact of the Vault acquisition. Turning to Slide 10. We are showing the detailed adjusted diluted EPS bridge from full year 2023 to full year 2024, given all of the unique moving parts. Our full year 2024 adjusted net income was $124 million, adjusted diluted EPS was $0.82, and our adjusted effective tax rate was 24.9%. As noted, when we gave our initial 2024 guidance last year, 2024 adjusted diluted EPS growth was impacted by several of our historical capital allocation actions, including our 2023 one-time special dividend, our 2023 share repurchases, and an expiration of favorable interest rate swaps. Also, as we noted during last quarter's call, the Sterling acquisition was not expected to provide immediate adjusted diluted EPS accretion as the Sterling results were initially more than offset by the incremental interest on the transaction financing and the impact of the share dilution from the issuance of the acquisition shares. All these items were in line with our previous commentary. Over time, as we realize synergies, we continue to anticipate delivering double-digit adjusted diluted EPS accretion, as mentioned in previous quarters. On Slide 11, you can see how we are making great progress on actioning our synergy program. We previously communicated a goal of achieving $50 million to $70 million in run rate target synergies, which was updated from our original target of $50 million plus. Today, we are again updating our target range to $60 million to $70 million of expected synergies to be actioned within two years of close. When we presented last quarter, we highlighted $10 million of synergies already actioned, and we finished 2024 at approximately $20 million actioned, representing substantial progress towards our synergy goals. Our dedicated integration management function, led by product and operations leaders, are driving the execution of our plans. As we have been actioning synergies in our integration plans, we have uncovered additional opportunities for cost savings, giving us confidence to raise the lower end of our target range today. Our current focus has been on reducing duplicative costs in our corporate and internal functions and reducing certain redundancies in our fulfillment and commercial departments, and we have been able to action these savings more quickly than previously expected. As a result, we now expect to action over 50% of our target synergies within the first six months post-closing, a meaningful acceleration from our previous objective of achieving the same goal within the first year. On Slide 12, we are showing key growth metrics for Legacy First Advantage and Legacy Sterling. Over time, both businesses have consistently delivered strong historical performance for upsell and cross-sell, new customer logos and attrition, demonstrating our ability to manage and deliver on what we can control with the variation being driven by the base. This has been true throughout 2024, including the fourth quarter. I am pleased that both businesses combined upsell, cross-sell and new logo performance, as well as retention, have broadly aligned with historical revenue growth rates. This was propelled by our go-to-market momentum throughout the year and ending the year with a strong pipeline and gross retention remained healthy and stable. In the fourth quarter, base revenues continued to be a headwind with Legacy First Advantage impacted by weaker-than-expected Q4 seasonal hiring as the softer hiring peak ended earlier than normal in mid-November. Legacy Sterling saw parallel headwinds as similar late Q4 base softness was seen in Legacy Sterling's Americas business. Base growth at Legacy Sterling has lagged Legacy First Advantage as Legacy Sterling verticals have been more impacted by the normalization of hiring patterns. We believe that when the macro environment stabilizes, our base growth will normalize towards our historical rates. Now turning to cash flow and net leverage on Slide 13. Over the last 12 months, we generated adjusted operating cash flows of $165 million, a 1% increase on a year-over-year basis as we continue to closely manage our working capital and focus on cash flow conversion with our DSOs remaining in check. Our cash balance at December 31, 2024, was $169 million, finishing above our desired minimum cash level of $150 million. During the quarter, we used $10 million for purchases of property and equipment and capitalized software development costs. This was $32 million for the full year. Our synergized pro forma adjusted EBITDA net leverage ratio at year-end was 4.4x. We remain committed to our goal of reducing net leverage towards approximately 3x synergized pro forma adjusted EBITDA within 24 months post-close and to our long-term net leverage target of two to 3x. Moving to Slide 14 and our 2025 guidance. I'll start by noting that all year-over-year comparisons are on a pro forma basis to allow for easy comparability. We expect 2025 total revenues in the range of $1.5 billion to $1.6 billion, adjusted EBITDA of $410 million to $450 million, and adjusted diluted EPS of $0.86 to $1.03. For revenue, this range represents flat to a little over 5% year-over-year pro forma growth. At our guidance midpoint, we expect to expand full-year adjusted EBITDA margins by approximately 150 basis points. Also factored into our 2025 guidance are our current assumptions related to sustained mix shifts within our business, primarily within the Sterling segment, which do impact adjusted EBITDA margins. Our guidance reflects 2025 in-year realized synergies in the range of $25 million to $30 million with our focus being to accelerate our savings wherever possible. Our guidance also includes our latest view on the macro environment and labor market. While the labor market broadly looks to be more stable entering 2025, we have not yet seen a return of investment hiring in our verticals. As such, our guidance reflects a prudent posture towards growth in 2025, particularly in the first half of the year. Looking at our growth algorithm in more detail, we do not expect to fully lap prior year base declines until the middle of 2025. Therefore, our guidance is based on the expectation that base will remain a growth headwind through the middle of the year, improving sequentially and turning to neutral and then slightly positive later in the year. Said more simply, we are modeling slight to modest full-year base revenue declines across our entire guidance range. With that said, we do expect continued productivity of upsell and cross-sell and new logo growth consistent with historical trends. We also expect customer retention to remain in line with our strong historical performance of around 96% to 97%, even as we continue to integrate the Sterling acquisition. While recently, foreign exchange has not been a big headwind for our business, recent strengthening of the U.S. dollar has led to an expectation that FX will have a slightly larger impact on our business in 2025, an important factor as we have seen our international markets stabilize and return to growth. Looking now at the quarterly phasing of our 2025 guidance, we expect Q1 year-over-year revenues to decline by approximately 1% to 4% and expect quarterly year-over-year revenue growth to sequentially improve for the first three quarters of 2025 with the fourth quarter being more on par with the third. This change in anticipated sequential and seasonal growth dynamics is a result of our Sterling acquisition, the diversification of vertical exposure, and how that projects over the year. We expect our Q1 adjusted EBITDA margin to be in the mid-23% to mid-24% range, which reflects the blended impact of Legacy First Advantage margins historically in the high 20s and Legacy Sterling's margins, which have been closer to 20% during the first quarter as seasonal revenues have yet to ramp. Additionally, our pace of synergy realization is expected to drive additional sequential adjusted EBITDA margin expansion during the year. Starting with Q2, we expect adjusted EBITDA margins to be above 28%. Overall, we believe that we are extremely well positioned to benefit when the macro environment improves. We expect Q1 adjusted diluted EPS to be between $0.12 and $0.15 due to the seasonality I just mentioned and the impact of the full $2.2 billion acquisition financing. After Q1, we expect considerable adjusted diluted EPS improvement as revenue ramps. We recognize that this guidance implies a meaningful improvement during the year, which is primarily driven by the impacts of the Sterling acquisition and our new seasonality and to a much lesser extent, the evolution of our expected macro stabilization. We expect our adjusted diluted EPS to range between the mid- to low $0.20s to $0.30 per share for each of the last three quarters. We have also provided a summary of selected 2025 modeling assumptions in the presentation appendix. Moving to Slide 15, we have provided an adjusted diluted EPS bridge, which illustrates the puts and takes from our 2024 adjusted diluted EPS to our 2025 guidance that I just mentioned. This is very important to understand as the Sterling financing and share issuance have 10 months of year-over-year impact in 2025. Even in our projected neutral macro environment and after adjusting for the Sterling acquisition items, expected synergy realization, and 2025 growth and investments, we expect 2025 adjusted diluted EPS expansion of over 15% at the midpoint. This sets us up well to continue expanding adjusted diluted EPS in the coming years, which is aligned with our previous messaging. With that, let me turn it back to Scott for closing remarks before we open the line for questions.

Thank you, Steven. Moving to Slide 17 and a few closing comments. First, we are excited to be hosting our inaugural Investor Day on May 28. At that event, we plan to share more about our FA 5.0 strategy and an update on our integration program as well as long-term targets that will guide our business over the coming years. I hope you will be able to participate, and look for more information coming soon. Second, I would like to emphasize our consistent focus at First Advantage. We continue to deliver solid results and execute on priorities. We remain focused on delivering on our value creation playbook and shaping the future of our company to better serve our customers. With that, we will open the line for questions.

We'll take our first question from Shlomo Rosenbaum with Stifel. Please go ahead. Your line is open.

Hi, good morning. Thank you for taking my questions. Could you provide a little bit more detail about some of the weakness in seasonal hiring in retail and transportation? Just a little bit more color on what your clients were telling you about why it happened, the duration? And is this something that you're- is this translating into other areas at all through the first quarter of the year? Or, and then I'd like to ask you a follow-up.

Yes, Shlomo, I think it's a great point because this, let's call it, a trend has now happened for the last couple of years where we're basically seeing less of those peaks and valleys and more of a normalization as we go into the seasonal hiring period. And what we've seen over the last couple of years is that hiring is starting to slow down around mid-November and continues all the way through the month of December but then picks back up in January, as if we're back on to normal course. So, for the last couple of years, what we've seen is a fairly slow half of November, most of December, but no impact going into Q1 as hiring then continues to ramp back up. So, we have factored that into our 2025 guidance that we expect something similar again later this year. So that has definitely been factored into our guidance.

Okay. And then just the comment that you made about the big win in the healthcare space using the Sterling platform. I think what we discussed in the past was the thought that you would move clients, or incremental clients would be on the First Advantage platform but using kind of the Sterling front end. And I guess the question I've got is that it's great to win with the Sterling platform. Does that mean that you're going to indefinitely be supporting really the back end of Sterling for a long period of time?

Yes, Shlomo, I got to give a huge shout out to our product and tech teams for coming up with some great innovative ideas here. The whole goal of this integration with Sterling was no disruption to customers. And I think you can see that in our retention numbers that we've put out. Our retention has been in line with normal. So, we are not seeing any client disruption as part of this acquisition. And that's primarily because of the technology and product vision that our teams have created. They have come up with a very innovative way for customers to leverage the best of both worlds from both platforms regardless of where they are around the world. Essentially, the technology solutions that we're going to be creating will allow us to tap into both platforms and the best-in-breed approach from both platforms without the clients having to do any migrations. So, consider this as a series of upgrades. And yes, that does mean we have to maintain both platforms, but not in the same way they're being maintained today. So, we can effectively reduce our headcount and overhead in supporting the platforms because of the solution the tech team has come up with. This approach will continue to drive our synergies with no impact to our original plan there. We just think this will be a great experience for clients and for the clients' candidates.

We'll take our next question from Andrew Steinerman with JPMorgan. Please go ahead. Your line is open.

Hi, I definitely heard your comments on how flexible the client approach has been post-merger. I was wondering if you're tracking a Net Promoter Score and particularly pre-merger, post-merger so that we could keep an eye on that. And also, if you can go back to talking about your verified database now that you have kind of Sterling's information in that database, could you talk about how much revenues or savings the verified database is producing?

Yes, and Andrew, we will continue. First Advantage has always been a big believer in Net Promoter Scores on not just our customers but also their candidates' experience. So, we continue to measure that, both candidate experience, we measure the onboarding experience of new logos, and we measure the ongoing Net Promoter Scores. We've taken it a step further because of the acquisition that we are actively in front of especially the Sterling customer base on a regular basis, more than usual, just to ensure we're hearing all of their needs and concerns and addressing things. I will tell you, they are extremely excited about this acquisition because they are now going to be able to tap into the best-of-breed from First Advantage, which is basically what I was talking about with Shlomo's question. So, customers are looking forward to great products and services from First Advantage on the Sterling platform. They will get the best of both worlds, which is going to be a great situation for them. Regarding the database, on the verified side, you heard in my prepared remarks that our proprietary database records are now up to 900 million. The breakdown of that is that Verified is now up to 120 million and our National Criminal database is 780 million. It's interesting to note that none of that increase includes the Sterling data yet. We have not tapped into that yet. There are teams working on it, but we haven't used Sterling data in the database increases, which are because of new third-party data provider partnerships we formed across multiple areas, allowing us to increase the size of the database. Ultimately, we will be adding the Sterling data to this, but that will probably be a later in the year project because it takes a long time to clean and format and move over data. But that's what the teams are working on.

We'll take our next question from Andrew Nicholas with William Blair. Please go ahead. Your line is open.

Hey guys, this is Daniel Maxwell on for Andrew today. I appreciate all the commentary on guidance and cadence and everything. Maybe on the top line range, do you feel that the low end of the guide embeds some leeway for a slower-than-expected recovery in base growth? It seems like a fairly quick recovery that's being embedded from the lower-than-expected Q4 to the breakeven point in the second half. So maybe your thoughts there.

Yes. Daniel, a couple of things to keep in mind. As I mentioned in the remarks, across all ranges of our guidance, we still expect base to be negative for the year. And when you really start to break that down then sequentially, it is a little bit more front-weighted to your point. If you've been following First Advantage and Sterling long enough, our base decline really started Q3 of 2022. So, this is kind of a three-year evolution cycle where we start to have steady comps when we get to the back half of the year that have those three years of compounded base declines in them already. When you look at the macro data and the stabilization cycle that's been going on, the pace of change in the hiring trend has flattened out a lot. So, when we looked at our guidance and our budget and our modeling for 2025, we feel good in terms of our base range. We've got a fairly wide range of scenarios covered. Obviously, it projects the current stabilization trend to keep going on. But as you get towards the middle of the year, you have those compounding comps from the prior years. And like I mentioned earlier, we've also got great productivity out of pipeline, new logo, upsell, cross-sell triggering as they always have for both client bases and our combined client base. And as Scott mentioned, we're laser-focused on retention, and those 96%, 97% retention levels are now our norm.

And Daniel, I'll add a few things. We're entering 2025 in a very strong position with macro normalization plus strong pipeline conversion. So, let's relook at some of the things we talked about in the opening script. If you look at a year ago, Q4 2023, stand-alone First Advantage landed 10 new wins with ACV of $500,000 or more. The combined Sterling First Advantage team landed 25 wins in Q4. And we are having a very good start from a pipeline standpoint in 2025, which gives us confidence in the guidance. We mentioned the large healthcare win, but we also discussed two other significant U.S. wins, which were not the healthcare win. These two wins have the potential to be top 10 customers of First Advantage. While it may take a few months to generate revenue, we expect that revenue to start coming in the second half. When you can start a year as fast as we have from a sales and pipeline standpoint and secure two potentially top 10 customers, that gives us strong confidence in the second half of the year.

Great. Super helpful. And then if I can squeeze in one follow-up. Maybe more broadly, have you guys gotten any significant insights from customer conversations so far in 2025? And any changes you're seeing to package density or more broadly, any changes to client behavior sort of post-election?

Yes. We're probably talking to customers more now than we ever did because, as we've said a couple of times, our laser focus is on customer retention. We want to ensure that communication is crystal clear about our product strategy, platform strategy, and how it will benefit our customers. We're hearing normal hiring from our clients, who anticipate normal growth. It's the new normal hiring. The administration's impact on hiring strategies is minimal because nothing substantial has been rolled out yet, making it a non-event in our customers' eyes right now. Until the government takes action, we will continue to monitor the situation.

We'll take our next question from Manav Patnaik with Barclays. Please go ahead. Your line is open.

Hi, good morning, this is Ronan Kennedy on for Manav. Can I just confirm with the acceleration of the realization for synergies where the bulk of those are coming from and if the actions going forward within the target areas of internal ops, fulfillment, products, and commercial have changed or the expectation for realization of benefits there?

Yes, Ronan. The acceleration was across the board. We talked last call; our initial focus was on those public company costs, deduping executive leadership, and baseline M&A-type items. As a management team, we challenged ourselves to find avenues to accelerate those synergies, which also helps with some of the internal integration efforts. Thus, it contributed almost from every line of the P&L. Our identified playbook helped us achieve that. That's why we didn't take the full range up; we were able to gain confidence in some programs and accelerate as many as we could into '24 or earlier into '25, leading us to expect over 50% actioned by the six-month mark, which was previously one year. We actively focus on reducing duplicative costs in our corporate and internal functions and reducing redundancies in fulfillment and commercial departments, allowing us to action these savings more quickly than expected.

And then, I guess, more broadly speaking, regarding the Sterling acquisition and integration progress thus far. That's a positive development with regard to acceleration of the synergies. Any other positive developments or surprises, whether it's enhanced customer value proposition, innovation, product, or seasonality? And then anything that has been a potentially unpleasant surprise or that you’re learning versus your expectations?

The biggest pleasant surprise has been the culture match. It's amazing how well these teams are working together, especially on the go-to-market side and on product and operations. Those are the three big areas where teams are working very well together due to this culture match. The biggest thing that can derail any M&A is cultures that don't match. We've got two high-performing cultures working effectively. We're finding insightful opportunities regarding product and API integration with data. This backstory lines up with the best-of-breed comment, where we've identified good products that Sterling was implementing and benefits from First Advantage's technological advancements. We are rolling these out to Legacy First Advantage and Legacy Sterling customers progressively, and clients will start to feel the positive changes soon. As for the negative side, the main concern is margins, which will drag on us a bit, but we've got a solid plan in place.

We will take our next question from Jeff Silber with BMO Capital Markets. Please go ahead. Your line is open.

Thank you so much. Just wanted to go back to the synergies. You talked about First Advantage being more of a variable model than what you've seen in Sterling. Can we give some examples of how you're doing that; what you're doing from Sterling's Legacy business to change that?

Certainly, Jeff. First Advantage has always viewed our fulfillment and operations functions as highly variable. Our third-party cost of sales are nearly 100% volume variable. On the labor side, we maintain a very flexible staffing approach. We do our modeling on volumes and then staff accordingly, using overtime and variable shifts to align labor with inbound orders in a close matching ratio. Many others in our industry, including Sterling, operate under a more fixed cost mindset. Our operations team has been focusing on adapting Sterling's business to have a more variable cost structure, similar to First Advantage. We're about 120 days in and close to having some of these methodologies implemented. This is how we manage staffing and the margin difference between First Advantage and Sterling has also resulted from some mix shift as discussed earlier.

Yes, Jeff, let me add that we also have a plan to reduce headcount on the Sterling side through automation. First Advantage was highly automated, and as we roll out that best-of-breed automation to Legacy Sterling clients, it will allow us to provide flexibility on headcount. For example, we've talked for over a year about our CLICK. CHAT. CALL. functionality on Customer Care. Sterling doesn't have that. We'll be rolling it out to Legacy Sterling customers very soon, providing them the advantage of using chat to check order status, which will help rationalize our headcount on that side. Furthermore, with the implementation of Agentic AI, we expect to see further synergies in terms of headcount flexibility. We're optimistic about how we can optimize both organizations' headcount through automation.

And then in your press release, you said you expect the base to remain a headwind through the middle of the year. Is it just that the comps get easier in the back half of the year? Are you expecting any major changes from a macro perspective? Any color would be great.

Yes. The fundamental reasons include, first, easier comps. Also, it’s your third year of compounded base declines when you reach mid-year. Additionally, we have seen a broad stabilization trend and anticipate it will continue. When you assess hiring volumes and other metrics, they've been declining for a couple of years, but the rate of decline has flattened in the last three to six months. We expect base growth to normalize as we approach the back half of the year, but keep in mind that across all parts of our range, we still expect base to be negative for the year.

The only thing I'd add is that our sales engine has been firing on all cylinders for a while now. We expect some revenue conversion from new logos and upsell, cross-sell that will start helping us in the latter half of the year.

We'll take our next question from Kyle Peterson with Needham. Please go ahead. Your line is open.

Great morning guys. Thanks for taking the questions. I wanted to start off on some of the expectations for vertical performance this year. I know there's some moving pieces and different mixes, especially between Legacy First Advantage and Sterling. So, I guess any color or assumptions embedded in your guidance for whether there are verticals that you expect to be particularly strong or bigger headwinds in 2025 would be really helpful.

Certainly, Kyle. Not many specific verticals stand out from a base perspective because the normalization trend has significantly affected all verticals. In the past, we highlighted the strength of retail and transportation on the Legacy FA side; however, updated assumptions for peak are now baked into our guidance. Overall guidance accommodates this stabilization trend across all verticals. The notable strength we've seen in the pipeline and momentum in go-to-market is significant. We've also highlighted recent wins in retail and healthcare that will drive strength in those segments.

We also expect an international rebound to persist. The results from international markets in the last two quarters have been very promising, and we anticipate that growth to continue, even though it accounts for only 13% of the business.

And I guess just a follow-up, switching over to the balance sheet and leverage. I appreciate all the color on margins, which are solid and expected to improve as the year progresses. But how are you guys thinking about the pace of deleveraging and priorities here, regarding building cash and scaling EBITDA? Or could you be considering prepaying some debt? How should we think about your plans for the balance sheet over the next few quarters?

Certainly, Kyle. To start, we do have about $5 million mandatory prepayments that we'll make on schedule at the end of each quarter. This starts here in March, with roughly $22 million incorporated into our model as a baseline. We expect free cash flow to be positive, in the range of $55 million to $85 million based on our guidance. While there will be modest deleveraging, the full-year run rate benefit from synergy programs won't materialize until 2026. However, we do anticipate some gradual deleveraging through 2025.

We'll take our next question from Scott Wurtzel with Wolfe Research. Please go ahead. Your line is open.

Hey, good morning, guys. Thank you for taking my questions. I wanted to touch on the acceleration in growth on the Legacy Sterling upsell, cross-sell. If you could elaborate on what has driven that over the last couple of quarters? Also, is there anything on their go-to-market side that they're executing on, which you think can be folded into the FA sales force for potentially incremental upsell and cross-sell acceleration on your side?

Mechanically, on the Legacy Sterling side, they had a couple of larger upsells. They announced this during their last earnings call, but it marked the largest upsell on their healthcare side, coming to fruition at the end of 2023 for 2024. Their entire sales force, including the Legacy Sterling team, has shown phenomenal productivity. Last year, the stand-alone First Advantage team achieved 10 new wins, while the combined Sterling First Advantage team secured 25 wins in Q4. The transaction did not distract productivity, and we've actually outperformed the prior year.

I’d like to add that our teams are now functioning as one, and the sales synergy has been remarkable. We’ve had several significant wins recently, including those we discussed regarding pipeline expansion in both retail and healthcare. Leading into 2025, our joint strengths and tech story are resonating with the market, returning positive sentiment around new logos. Importantly, we’re not only seeing significant numbers; we’re changing the market perception with this merger and paving the way for sustained success.

Regarding Legacy First Advantage growth for the year, the results are largely in line with each other. As I noted, the two segments or historical businesses operate in accordance with historical growth algorithms—upsell, cross-sell, new logo, and retention rates largely matching. We've consolidated our operations and shifted our focus—looking at synergies moving forward. We won’t perceive significant differentiation between the segments, as we are now combining strengths into one cohesive approach moving forward.

Let me add that it's crucial to note that we no longer think about Legacy First Advantage and Legacy Sterling as separate entities. We have embraced a unified mentality, which has helped drive our momentum and galvanized the team. This cultural shift has significantly contributed to our performance and positioning in the market.

And there are no further questions on the line at this time. I will turn the program to our speakers for any closing remarks.

I want to thank everybody for joining the call today. Thanks for the continued support of the First Advantage story. We look forward to connecting with you again. Take care.