First Advantage Corp Q4 FY2025 Earnings Call

Good morning, everyone. My name is Bo, and I will be your conference operator today. I would like to welcome you to the First Advantage Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Ms. Stephanie Gorman, Vice President of Investor Relations. Please note today's event is being recorded. It is now my pleasure to turn the meeting over to Ms. Stephanie Gorman. Please go ahead, ma'am.

Thank you, Bo. Good morning, everyone, and welcome to First Advantage's Fourth Quarter and Full Year 2025 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 2024 Form 10-K and our 2025 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's 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. Today, we have five key messages. First, we delivered what we believe was our best quarter ever with exceptional Q4 results capping off an impressive 2025. We exceeded our previously updated expectations on all guidance metrics with particularly notable adjusted diluted EPS growth of 67% in the fourth quarter. We continue to be a category leader, supported by our go-to-market success with a robust 17% growth contribution from new logo and upsell, cross-sell, resulting in 12% overall pro forma revenue growth in the quarter. When combined with our diverse vertical mix, consistently high customer retention, and focus on cost discipline, it is clear that we are driving outstanding results amid this dynamic macroeconomic environment. Second, we are pleased to share that we have completed our core integration activities for the Sterling acquisition, and we are seeing the strategic and financial benefits as promised. While we continue to action additional synergies, looking forward, we are turning the page from primarily an integration focus to one of innovation and are committed to accelerating our growth through our scaled and strengthened business, which brings me to our third point. We are executing and in fact, accelerating our FA 5.0 growth strategy. Through our best-of-breed product and platform approach, we are winning with our enhanced customer value proposition and expanded offerings and are poised to capture meaningful opportunities in growth areas such as digital identity, our differentiating co-selling relationship with Workday, ongoing new product releases, and international account expansion. Building upon our success in 2025, we are allocating additional resources in 2026 to further accelerate our go-to-market and product capabilities. We expect these actions will drive incremental organic revenue growth and sustainable long-term value creation. Fourth, today, we are announcing two strategic capital allocation actions, both of which are supported by the success of our business, our strong cash flow generation, and our confidence in our continued growth. First, in February, we are voluntarily prepaying $25 million of debt, maintaining our consistent trend and commitment to reducing net leverage. Second, we are announcing a new $100 million share repurchase authorization. Our strong position today gives us the ability to both pay down our debt and simultaneously buy back our shares, which we believe do not currently reflect the value of our business. And finally, we are introducing our full year 2026 guidance. We saw more stabilization across market conditions in the fourth quarter, and we are seeing our positive top line momentum carrying into 2026. This strong performance is reflected in our bottom line earnings as well, with our two-year compound annual adjusted diluted EPS growth rate from 2024 to the 2026 guidance midpoint expected to be approximately 20%. While we are maintaining a modestly cautious outlook on base performance, expecting it to remain slightly negative for the year, we are bullish on 2026 given our go-to-market and recent pipeline success. We remain confident in our positioning to create long-term shareholder value and deliver consistent progress towards our 2028 long-term targets. Turning to Slide 5 and an updated view of First Advantage at the end of 2025. We continue to be a category leader in our industry. Our customer value proposition offers differentiated technology platforms, proprietary data, and a broad collection of innovative solutions across a comprehensive and diversified range of verticals. In 2025, we delivered impressive full year revenues, which grew from $1.57 billion with $441 million of adjusted EBITDA. Our pro forma adjusted EBITDA growth of 11% with pro forma adjusted EBITDA margin expansion of 170 basis points and adjusted diluted EPS growth of 27% were enabled by the completion of the core integration activities for the Sterling acquisition, successfully delivering on our synergy plan, and the execution of our FA 5.0 growth strategy. We completed over 200 million screens across more than 200 countries and territories on behalf of our 80,000-plus customers with the average tenure of our top 100 customers increasing to over 13 years. Our diverse customer base includes approximately two-thirds of Fortune 100 companies and more than half of Fortune 500 companies. Our gross retention remains high at approximately 96% for the year, having risen to 97% in the second half of the year. We have over 100 integrations with applicant tracking systems and human capital management partners, including our market-differentiating global co-selling relationship with Workday, giving us a unique competitive advantage in several of our key verticals. And speaking of competitive differentiation, this year, we crossed the milestone of accumulating over 1 billion records in our two proprietary databases, a ten percent increase year-over-year, providing our customers with a more comprehensive and powerful data foundation that enables the speed and efficiency we are known for. Our national criminal record file database now contains well over 900 million U.S. criminal history records, and our verified database contains approximately 135 million work history and education records. 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 enterprise customers' diverse vertical mix, global reach, and diligent focus on controlling the controllables make our business resilient and able to perform well through macroeconomic cycles. On this slide, we have provided an updated view of our vertical mix for 2025. We continue to feel confident in our strategic focus on health care, transportation, and retail and e-commerce, which represent our three largest verticals, all with near- and long-term growth levers. We believe that each offers substantial runway for new upsell and cross-sell expansion supported by favorable underlying market trends. Now turning to Slide 6 and a closer look at our outstanding performance in the fourth quarter. We generated meaningful revenue, adjusted EBITDA, adjusted EBITDA margin, and adjusted diluted EPS growth with results exceeding our updated expectations. Impressively, in Q4, our combined upsell, cross-sell, and new logo growth rate was 17%, significantly outperforming our long-term growth algorithm target. This was enabled by our robust go-to-market momentum, including material contribution from a number of key 2025 wins, and gives us momentum for stable yet elevated 2026 growth. Retention remained high at 97%. Base revenue performance again improved sequentially, remaining just below neutral and spot on with our expectations. Our go-to-market teams continue to deliver as further demonstrated by our 17 enterprise bookings in the fourth quarter, bringing us to a robust 66 for 2025, each deal with $500,000 or more of expected annual contract value. These wins are some of the many reasons we have confidence in our ability to continue generating new logo and upsell, cross-sell revenue and help support our outlook for expected strong growth in 2026. Additionally, we are encouraged by the continued strength and increase in our late-stage pipeline, measuring at near record highs, including a meaningful volume that incorporates our digital identity product. Looking at our verticals in the fourth quarter, our balanced and resilient vertical strategy supported our standout performance despite how headline economic data portrayed the higher environment. We saw strength in retail and e-commerce, driven by new upsell and cross-sell along with a stable base with the seasonal peak hiring duration and volumes improving compared to last year and more in line with historical trends. Health care showed nice year-over-year growth driven by new logos, upsell, and cross-sell despite notable base weakness in certain health care-related sub-verticals. Transportation and logistics saw growth in Q4, driven by positive base demand with strong traction during the peak season. General staffing, manufacturing and industrials, and technology also showed positive year-over-year growth in Q4, partially powered by the success in our new logo and upsell, cross-sell programs. Business and professional services, gig economy, and financial services verticals experienced some pressure in the fourth quarter, but did not meaningfully inhibit our overall fourth quarter performance. January and initial February order volumes reflect trends generally consistent with what we saw in Q4. Our international business for Q4 continued to sustain strong year-over-year revenue growth in all regions, giving us confidence in our prospects for further international expansion. Although macro uncertainty persists in the fourth quarter, we saw many of our customers shifting to a more encouraging tone, and we are seeing this continue into 2026, regardless of the headlines you may be reading. We continue to remain confident that our diversified mix of verticals, customer segments, and geographies provides a meaningful degree of resiliency to AI impacts and will allow us to capitalize on future growth opportunities. Additionally, we recently completed our annual trends report based on insights from thousands of enterprise-focused HR leaders and job seekers worldwide. The report will be published in the coming weeks. The data highlights strong demand for expanded screening services, risk mitigation as the number one new top priority, and rising identity-related challenges as the biggest trend. These trends reinforce our growth expectations and positioning as an identity provider. Now turning to Slide 7 and a summary of our key accomplishments in 2025 and focus areas for 2026. Our 2025 organizational performance exceeded our expectations. We closed on the transformational acquisition of Sterling in October 2024, and we are incredibly pleased with the results, particularly in regard to customer retention, which has actually improved over the past two quarters. Synergy capture and realization, cultural alignment, and our best-of-breed approach to technology and products have really resonated with our customers. In 2025, we executed and completed the core elements of our integration process while delivering a seamless customer experience throughout as evidenced by our high retention levels of 96% to 97% during the year, and the favorable feedback we received from customers. We also significantly advanced our synergy realization efforts, reaching $55 million in run rate synergies actions and made progress on deleveraging our balance sheet. We had a number of impressive new logo wins in 2025, providing us momentum as we exited the year and substantial revenues already booked as we enter 2026. One win in particular has the potential to be a top five customer and has already been driving significant growth. Adding to our success, we are seeing a very nice trend of winning back some customers who tried the competition and decided to return due to our outstanding platform, proprietary data, speed, and service quality. As we have discussed before, we continue to take a proactive and strategic approach to AI. To be clear, we see AI as an enabler of our strategy, not a disruptor of our business model. We are executing from a foundation of long-standing technology leadership and deep tech experience across our management team. We have been building and deploying AI data and machine learning solutions since 2021, including Gen AI rollout since 2024. Some of these solutions are behind the scenes, helping us operate more efficiently, and some are customer-facing, such as our Agentic AI and chatbots. We are also accelerating adoption of AI-powered development tools across the organization with hundreds of engineers leveraging AI capabilities to optimize our platform faster than we have ever been able to do. With our progress, scale, and strategy, we believe we are well-positioned in our industry to be a winner regarding where we have deployed AI solutions across our products, technology, and operations, including the following: AI is fully embedded in our next-gen Profile Advantage applicant portal, increasing efficiency, improving the user experience, and reducing call center contact rates by approximately 50%. AI is also an essential element of our SmartHub AI intelligent router, which is now available for all U.S. customers for use within the verification process, as well as our digital identity solutions supporting our competitive advantage. We also began deploying AI-enabled capabilities in our criminal records processing workflows to help streamline operational steps, manage volumes, and identify items for additional review while maintaining a human-in-the-loop process for all record matching, adjudication, and reportability determinations. Internally, we have also leveraged AI to enhance the productivity of our engineering staff, automate tasks, enhance our product capabilities, and help our go-to-market teams with customer acquisition activities. AI governance is also critical in our industry, as we operate in a highly regulated high-stakes environment where accuracy, auditability, and compliance are non-negotiable. Our customers rely on our solutions to make informed employment decisions that carry legal, regulatory, and human consequences. Trust is foundational to our brand. Our screens and verifications must be explainable, auditable, and compliant across jurisdictions and geographies, and seamlessly integrated into customers' HCM and ATS workflows. What we offer is not simply a software problem or a data search exercise. What we offer requires deep domain expertise, regulatory infrastructure, and a consultative service model that is tailored to the specific regulatory and operational needs of the industries we serve. It also requires knowledge about the complexities of compliance with federal, state, and regional laws like the FCRA in the U.S. and GDPR in Europe, along with many subject matter-specific regulations like DOT and BIPA, which makes operational scale well beyond software and data all the more important. We operate in a fragmented global landscape that often extends beyond the digital world. The data we use is not simply consumed off the Internet. Our platform is supported by thousands of direct relationships for criminal records access, both digitally and in many jurisdictions physically, a proprietary third-party network of over 20,000 brick-and-mortar locations for drug testing and health screening, and a proprietary network of over 1,000 in-person physical fingerprinting collection kiosks that enable a number of our solutions. The combination of proprietary data assets with more than 1 billion proprietary records, large-scale proprietary physical fulfillment networks, long-standing compliance capabilities, consultative expertise, and deep system integration is difficult to replicate and positions us to continue to responsibly deploy AI, enhance efficiency, and create durable long-term shareholder value in a rapidly evolving technology landscape. Looking at 2026, we have multiple other initiatives in flight, focusing on scaling in ways that continue to improve speed, consistency, and efficiency. Our focus is on redesigning key workflows with AI at the center. This includes expanding our use of AI agents, enhancing document classification and extraction capabilities, and applying AI-enabled automation in verification and fulfillment processes, all while maintaining disciplined governance to support and ensure responsible and compliant use of AI. We believe our focused innovative approach to leveraging AI positions First Advantage to create long-term value. Also in 2025 and into 2026, we continue to see strong and growing customer interest in our market-differentiating digital identity products, which enable our customers to address the increasing concerns of identity fraud. Customers are seeing the benefits of our cohesive offering, and it is helping us win in the market, creating opportunities that were not there before. Digital identity is a key selling point for customers despite being a small component of overall contract value. In several recent large wins, we actually started with digital identity as the focus of an RFP, then we were able to significantly expand our scope when our customers recognize the benefits of our integrated solution, driving pipeline momentum. During 2025, a number of Fortune 500 companies went live with our digital identity product, and we expect to see this momentum continue. We are building on the early successes of these products, and we expect penetration to accelerate meaningfully in 2026 as customers increasingly recognize the need for the benefits of our highly sophisticated fully integrated solutions. As we progress through 2026, we are well-positioned to maximize the benefits of our strengthened business to continue to win in the market, drive synergy realization, and further accelerate our performance. Building upon the great success we have seen to date with our FA 5.0 growth strategy, in 2026, we are enhancing our product, sales, and marketing capabilities to continue to deliver meaningful, sustained value for our customers and stakeholders. These efforts include further leveraging AI across our product portfolio, increasing our identity fraud-related product penetration, creating brand-new products, and expanding our international business. We will keep you updated on our progress in the coming quarters.

Thank you, Scott, and good morning, everyone. I'll start with fourth quarter results on Slide 9. As Scott mentioned, we believe Q4 was the best quarter in First Advantage's history. Our fourth quarter revenues were up 12% versus last year on a pro forma basis, coming in at $420 million, with our year-over-year revenue growth rate meaningfully increasing from Q3. Our go-to-market success significantly exceeded our long-term growth algorithm as the combined contribution of new logo, upsell, and cross-sell revenues delivered exceptional growth of 17% in the quarter, our highest in recent history. Part of the uptick in Q4 new logo upsell and cross-sell relates to order volume in Q4 from our new wins, part of which would have otherwise been recognized in the third quarter as certain new customers deferred their screening until they were live on our platform. Into 2026, as these customers ramp, we expect quarterly revenue to normalize and translate into steady, sustainable growth going forward. Our retention remained extremely high at 97%. We saw more consistent customer demand during the peak hiring season than last year and closer to being in line with historical norms. The trends in our base performance continued to improve on par with how we had forecasted the fourth quarter with base remaining slightly negative. Adjusted EBITDA for the fourth quarter was $117 million, up an impressive 17% versus last year on a pro forma basis. Our adjusted EBITDA margin of 27.8% exceeded our expectations, representing an improvement of 110 basis points versus the prior year on a pro forma basis, despite being slightly lower sequentially from Q3 due to mix. This mix shift was driven by the sizable incremental upsell, cross-sell, and new logo revenue from our go-to-market wins in 2025, which had a larger mix of products with higher relative third-party data pass-through costs. Overall, our robust revenues were enabled by our continued focus on accelerating synergies, our disciplined approach to cost management, and the scalable nature of our business. Adjusted diluted EPS was $0.30, a 67% increase year-over-year and also ahead of our expectations. The benefits of our greater scale, expense, and capital management and lower interest expense as a result of our debt repricing and voluntary debt repayments to date have supported our per share earnings growth. Turning to full year results on Slide 10. Not only do we believe Q4 was our best quarter ever, but we believe 2025 was our best year ever. Our full year 2025 performance exceeded our most recent guidance ranges for 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 and the resiliency of our diversified business model and our industry leadership position enable us to navigate the uncertain macro environment. On Slide 11, you can see how we are continuing to make great progress on our synergy program. As of quarter end, we had actioned $55 million in acquisition synergies, moving closer to our total synergy goal. We realized $8 million of incremental synergies in the fourth quarter, bringing our total 2025 incremental realization to $38 million or $42 million realized over the transaction lifetime. Now turning to cash flow, net leverage and capital allocation on Slide 12. We are incredibly pleased that for the year, we generated adjusted operating cash flows of $232 million, a substantial increase of $67 million or 41% on a year-over-year basis. This impressive performance was driven by the larger scale of our business, the benefit of the OBBBA tax law, which reduced our required cash tax payments, and our overall focus on cash flow. Our cash balance at December 31, 2025, was $240 million. Our synergized adjusted EBITDA net leverage ratio at year-end was 4x and represents a decrease of 0.4x from a year ago when we had closed the Sterling acquisition. Additionally, as Scott mentioned, today, we are announcing two key capital allocation actions. First, continuing our commitment to consistently paying down debt. And subsequent to the end of the quarter, this week, we are making an additional voluntary prepayment of $25 million, bringing our total debt repayment since closing to $95.5 million. Second, today, we have announced a new $100 million share repurchase authorization, which we will opportunistically execute over the coming quarters. The success of our business strategy and the strength of our balance sheet and cash flow profile have allowed us to make the strategic decision to allocate a portion of our capital towards share repurchases. The reality of our recent repurchases as a strategic use of capital that maximizes shareholder value creation and is an opportunistic method to deploy capital in an environment where we believe the market is not reflecting the long-term prospects of our company. Said simply, at our current valuation, this is just prudent corporate finance. Enabled by the strength of our financial position, we are able to pursue a balanced capital allocation strategy that includes both voluntary debt repayment and opportunistic share repurchases while maintaining our focus on deleveraging, liquidity, and long-term value creation. As we strategically balance our capital allocation priorities, our near-term deleveraging timeline may change modestly. However, our long-term leverage objectives remain unchanged, and we expect to continue to reduce leverage towards our long-term target of 2 to 3x. Moving to Slide 13 and our 2026 guidance. We expect 2026 total revenues in the range of $1.625 billion to $1.7 billion, adjusted EBITDA of $460 million to $485 million, and adjusted diluted EPS to $1.25 per share. For revenue, this represents approximately 6% year-over-year growth at the midpoint, with upside potential driven by the success of our go-to-market initiatives. We expect to expand full year adjusted EBITDA margin by approximately 40 basis points at the midpoint as we continue to leverage synergies and scale our growth. On top of this, we expect impressive adjusted diluted EPS at the midpoint. When compared to our 2024 adjusted diluted EPS following the Sterling acquisition, this represents a robust 20% two-year CAGR. Our 2026 guidance builds off the success we had in 2025, including our outstanding go-to-market wins as we maximize the benefits of our stronger business and enhance our competitive strength. Our guidance includes assumptions for synergies, go-to-market strength, investment in organic growth, shifting product mix, and our current view of the macro environment. Specifically, it assumes actioned synergies within our full year target range of $65 million to $80 million by the end of the year. We expect our exceptional go-to-market productivity to continue with robust upsell, cross-sell, and new logo growth during the year, coming in at the high end, if not slightly above our long-term growth algorithm. As we have mentioned, in 2026, we expect order volumes from our newer wins to normalize over the course of the year. We expect momentum in the first half of the year, continuing what we saw in Q3 and Q4, driven by the large deals that went live in 2025. We also expect customer retention to remain in line with our strong historical performance of around 96% to 97%. Factored into our 2026 guidance are the impacts of our strategic investments in organic growth, including enhancing our product, sales, and marketing capabilities, as well as expanding our international business opportunities. While we anticipate the near-term revenue and margin contributions to be more limited during the initial phase due to the offsetting effects of the investments themselves, we will establish a solid foundation for additional future growth. We expect growth to accelerate in the second half and meaningfully by year-end, propelling revenue performance and margin expansion in the mid and long term. In addition to these factors, we also expect the more recent impacts of higher out-of-pocket pass-through fees in our current product mix to continue as the newer deals mentioned before roll over into 2026, providing a modest headwind to margin percentages, although dollar profitability of these deals is very attractive. As it relates to the macro environment, the labor market we broadly serve looks to be more stable entering into 2026, continuing the trend of a relatively flat hiring environment we saw in 2025. With this in mind, for 2026, we expect that base growth will remain modestly negative between 0 and negative 2% for the year. Looking at quarterly phasing in 2026, with a more stable macro backdrop, strong rollover from upsell, cross-sell, and new logo, and our go-to-market growth initiatives driving second half growth, we expect all four quarters to have revenue growth rates in the mid- to high single digits. We do expect base growth to be slightly higher in Q3 and then lower in Q4 as revenue smooths out to a more normalized quarterly distribution, which includes the impacts of the 2025 wins I just mentioned. We expect Q1 adjusted EBITDA margins to be around 26%. While we have some incremental benefit from the more recent synergies, the impact of revenue mix and initial growth investments affects early year margin appreciation. As revenue scales up seasonally, we expect margins to improve meaningfully in Q2 towards 28% before reaching the 29% range in the second half of the year. Similarly, for adjusted diluted EPS, we expect meaningful year-on-year expansion in all four quarters, with Q1 expected to be at or just above $0.20 per share with a ramp to the high $0.20 range in Q2 and improving to the mid- to upper $0.30 range in both Q3 and Q4. We anticipate free cash flow for the year in the range of $160 million to $190 million. This notable year-over-year increase reflects our ability to generate incremental cash flow from better working capital management and a significant decline in integration-related costs while also investing in accelerating our growth. We have provided additional assumptions in the appendix of our presentation. Overall, we enter 2026 in a position of strength with the opportunity to continue to build on our success through our FA 5.0 growth strategy.

Thank you, Steven. In closing, we delivered outstanding results in 2025 and are carrying our strong execution momentum into 2026. Looking ahead, as a clear leader in our space, we remain focused on consistently winning by delivering best-in-class solutions for our customers. We remain confident in our ability to achieve consistently strong results and are progressing well toward the four-year financial targets we established during our Investor Day in May 2025. I would like to thank the First Advantage team for your continued dedication to supporting our customers. With that, we will open the line for questions.

We'll go first this morning to Shlomo Rosenbaum of Stifel.

It was really a strong quarter, and the commentary suggests that things are improving. To start, what are your clients saying about their hiring plans? Specifically, how are they considering the evolution of AI in their strategies? Are you at all worried that their plans might change suddenly because they might realize they don't need as many people as they initially thought? The business can be sensitive to short-term changes, and the visibility regarding sudden shifts might not be very clear.

Yes, Shlomo, I think I'll start by how customer-focused we are. And I think you know we spend a lot of time with our customers. We are talking to them daily, weekly, monthly, quarterly. We are actively involved in their hiring process and in their planning. So we have pretty good visibility and a lot of what I would call sample data to basically base our 2026 plans off of. So what you're seeing in the media doesn't match what our customers are saying. And keep in mind, we primarily have an enterprise focus. So we're talking to the larger customers. I'd say if you look at the media, you'll hear a neutral to negative tone. But when you talk to our customers, we're hearing a neutral to positive tone. I don't recall a single customer conversation that I've had going into 2026, where a customer has mentioned a decline in hiring. We are only hearing flat to positive. And we're actually also hearing that in certain verticals, which are surprising where you feel like there may be AI disruption. We are not hearing that at all. We are hearing that they're actually hiring more people or planning to hire more people in 2026. So we're hearing a neutral to positive tone from our customers, and that's encouraging.

Okay. And then there was a comment about there was a certain amount of delayed volumes in 3Q that ended up in 4Q because of the timing, I guess, of full implementation. Are you able to quantify what the impact of that was or at least estimate what that was in terms of the revenue growth, they contributed to the revenue growth in the fourth quarter?

Yes, Shlomo, it actually wasn't a delay. What ended up happening is that a couple of customers were waiting to go onboard with us and held screening volume back from their previous provider. So it's not really a delay. It's more of a kind of a reflection of the value proposition we bring. And that's why I kind of mentioned in the prepared remarks that there'll be a small flip in base growth between Q3 and Q4 if you're just doing your quarterly pacing because when that normalizes out, we'll just have a shift. And it's not huge, but it's a couple of percentage points probably that shift between the two quarters.

Thanks for providing those detailed insights in the prepared remarks around more about AI, the AI integration, implementation plans, and efficiency. I was just wondering if it's possible to quantify or provide an anecdotal example of the benefits from the AI adoption. Maybe if you could provide any insights into software development, product rollout, customer service? And also if you've started to see any benefit from your AI adoption in terms of new wins and upsell, cross-sell. So any kind of benefits, both internal or external from AI?

Yes, Ashish, I will provide a broad answer to that question because it's extremely challenging to quantify since it's literally everywhere. It’s integrated into all of our products and many of our new successes. As I mentioned earlier, we have AI incorporated throughout our product platform, including our SmartHub technology, which significantly impacts verifications. We've secured several deals in 2025 where clients specifically stated they chose us because of our SmartHub verification product. It's gaining traction. AI is also part of our digital identity products, and we have numerous successes in 2025 where digital identity has been pivotal. The issue of identity fraud is currently widespread, and our products are resonating well with customers. There have been cost savings from AI, such as in our customer care center where fewer agents are needed due to our use of chatbots. We've achieved wins thanks to AI and technology. However, quantifying this impact is difficult because I believe this is the new First Advantage. Everything we're discussing from sales to operations incorporates these elements, making it hard to isolate. Nonetheless, I would say the impact has been tremendous.

That's great color. And obviously, it's reflected in the results as well. I also wanted on the solid cross-sell, upsell momentum of 12% in the quarter. I understand a lot of it is driven by this new win momentum. But I was wondering if you could provide incremental color around what's driving that cross-sell? Are we adding more business units, geographic expansion? And where are you winning these businesses from? So any more color on those fronts will be very helpful.

Yes, our main focus is on the enterprise sector, and many of our deals are with larger companies. I'm pleased to share that our sales engine is performing exceptionally well, better than I've ever seen. Our sales pipeline is at an all-time high, and total new enterprise business is up 24% year-over-year, which is significant. Additionally, our average deal size is increasing, indicating that we are not only winning more deals but also larger ones. These larger deals tend to be more bundled and complex, with an increase in average deal sizes in double digits. The momentum in sales is largely driven by package density, which is thriving. We consistently engage with our customers, and recently launched our annual trend survey, which involved over 2,000 HR professionals. One striking finding is that 89% of employers plan to introduce more screening products in the next 1 to 2 years, primarily due to the current challenging and sometimes dangerous environment. Risk protection has become the number one priority for our customers, which marks a notable shift from previous years when speed and cost were the primary concerns. This change is largely influenced by the rise in identity fraud incidents. According to our upcoming survey results, 76% of respondents have encountered falsified employment details, and 45% have dealt with candidate identity misrepresentation. These issues present significant opportunities for us, as we focus on digital identity solutions. Our product offerings are designed to integrate seamlessly for customers, covering the entire process from recruitment and background screening to onboarding and ongoing monitoring. This holistic approach is appealing to our customers because it provides an embedded workflow rather than just a standalone solution.

This is Alex Hess standing in for Andrew Steinerman. I wanted to ask about the margin guidance for 2026. Could you explain the factors influencing that, particularly your approach to reinvesting and the reasons for the current level of reinvestment, which seems to relate to the benefits from cost synergies? Additionally, could you discuss any challenges related to the mix of newer clients?

Yes, Alex, good question and obviously, kind of a core theme of the guidance that we talked about. So a few factors that are headwinds and tailwinds in terms of just margin percentages. But overall, really feel good about the net dollar productivity at a margin. So I think we've talked about margin mix for the last couple of quarters, and especially with some of these newer deals and the verticals that they're in and the product suites that were sold, there is just a relatively higher mix of those out-of-pocket fees, which are all pass-throughs to the customer, but that do dilute you on a margin percentage basis. So that's certainly a factor in there. And you saw that a little bit in Q4. And obviously, as that rolls over through Q1, 2, and 3 next year, that will normalize out a little bit. Obviously, we’re spending some work on the initiatives Scott talked about automation and some of our data products to try and offset some of that, but that's certainly a factor. On the headwind or the tailwind side, we'll have some of the rollover from synergies and incremental synergies. But as you called out, we are prioritizing some incremental investment. And I think the rationale there is really we see ourselves creating some really strong competitive differentiation. If you look at some of the HCM and ATS partner success that Scott highlighted in the prepared remarks, some of the product success and really just using the success of the integration, the stability in the customer base and looking at how we're positioned in the market right now, it's just an opportunistic time to invigorate incremental growth by putting some dollars towards product, sales, and marketing, which are areas that we've invested in the past and always seen really strong returns out of.

And Alex, I'll just add on why now. As I mentioned, we're talking to our customers every day, and they're sending us really good buying signals. So the decision to invest now has become straightforward for us. We have an actual pipeline that supports many of these investments we're making. We're not using a build-it-and-they-will-come approach; instead, we're committing resources with a clearly defined pipeline, where our customers have indicated that if we develop this, they will purchase it. Therefore, the decision-making process has become quite simple, and that provides insight into the timing of our actions.

This is Daniel Maxwell on for Andrew today. I was wondering if you can give a little more detail on how you're thinking about the ROI from each of your capital allocation priorities heading into the new year. Definitely sounds like repurchases are incrementally attractive at this price. But is there a willingness to sacrifice some free cash flow that would go to deleveraging in favor of repurchases? Or are those truly not mutually exclusive?

No. As mentioned in my prepared remarks, it's an and equation, not an or. We are fortunate to have a free cash flow guide of $160 million to $190 million and ended 2025 with $240 million in cash on the balance sheet. Last year, we generated $70 million in net cash flow. Consequently, as we announced, we were able to pay down $25 million of debt this quarter and also authorize a $100 million buyback. With the buybacks, we will be opportunistic at the current valuation levels. It is very advantageous from an earnings per share perspective, and any corporate finance calculation supports share repurchases at this valuation, especially given our numbers and price-to-earnings ratios. We have the capacity and flexibility to generate solid cash flow. Regarding the success of the integration, we completed it with 96% to 97% customer retention, reduced many one-time expenses, and now have strong free cash flow for the future, which makes it a good time to revisit our valuation. If the market doesn't correct, we will gladly buy back some of those shares. However, this will not come at the expense of debt repayment; we will pursue both simultaneously.

This is Ronan Kennedy on for Manav. Can you please talk at a high level to the puts and takes that would take you to the respective low and high end of the guided revenue range, whether it be the macro and your base or cross-sell new or other components, please?

Yes. Ronan, and you kind of hit on the two main ones. So certainly, as we talked about 6% growth at the midpoint, kind of assumes that flat hiring environment, as I shared, embedded in the range at the upper and lower end is we think base is still between 0 and negative 2%. It's that continuing flat environment. Obviously, there's all the policy uncertainty that comes out of Washington these days that could always move that towards that upper or lower end. But as Scott just mentioned, we're hearing very positive tones and very consistent tones across the enterprise customer portfolio. And then, certainly, we've got good rollover momentum going into 2026. So we feel good about delivering higher end of our algorithm on the new logo and upsell, cross-sell front. But as we have our deals that are already in pipeline, how those ramp plus the investments we're making and the incremental growth that we can get there, that's what pushes us probably from that midpoint toward the upper parts of the guidance range would be the success of those as well. So those are really the two main factors. We are very pleased with the consistency and stability within retention. And that part of the algorithm, we don't take it for granted, but it's such a core part of what we do here and our focus on our customers that that 96% or 97% retention number can be modeled in very consistently.

I know it's late. I'll just ask one. You alluded a few times in your prepared remarks to the digital identity practice. Is it possible to quantify that for us either as a percentage of revenues or growth? And what's embedded in guidance for 2026?

Yes, it's becoming increasingly difficult to quantify since it's part of a bundled solution. We plan to provide some quantification of the impact of Digital ID in about six months as we allow the situation to develop further. There are two main aspects to consider: one aspect can be quantified as a stand-alone operation, while the other, which is integrated with several other products, is harder to quantify. However, I can share that anecdotally, it is significantly impacting our pipeline and leading to numerous successful implementations in Q4 with major clients. We anticipate being able to quantify the revenue increase and believe it also adds substantial stickiness, which should enhance customer retention since we're closely integrated with their Digital ID throughout the background check and onboarding process. We will attempt to provide more detailed quantification in about six months, but I can confirm it is positively influencing our results.

I have a question about Identity as well. In terms of its effect on margins, how does Identity impact margins compared to some of your other products?

No, it's certainly a higher-margin product because you don't have to go out and acquire court data or driver record data or drug screening costs, things like that. So it is a higher-margin product. It's really a core tech service at its heart. But as Scott mentioned, it's getting harder and harder to break apart the discrete impact of it because it's either embedded and bundled into other services. And to Scott's other point, it's driving and it's the reason a lot of customers are looking at and/or choosing First Advantage. So you could argue it's tremendously benefit from a margin standpoint because you're winning opportunity, it's almost a marketing mechanism at this point.

Nice results I'll just ask one as well. I wanted to ask a little bit on upsell, cross-sell, particularly package density. That's been a really nice tailwind for you guys for quite a while here. I guess if you guys had to guess what inning would you say that we're in here? Like is there still a lot of progress? Is this going to continue to support pretty sustained growth over the next couple of years? Or a lot of the packages kind of fully densified? Just any color as to where we are would be really helpful.

Yes, using the sports analogy, I believe that the game has restarted. A year ago, we were about halfway through, but now it feels like we've entered a new phase. We're in the early stages of a new generation focused on package density with digital identity at its core. However, the current global situation is quite difficult, as I noted in our trends report. Risk and risk mitigation have become the top priority for our customers, leading to an increased demand for package density as they seek more protection for their employees, brands, offices, and shareholder value. Whenever we introduce improved data searches, new product offerings, or innovative verification methods, we receive positive feedback from our customers because their executives are continually searching for additional solutions. Thus, I believe we are starting anew, with digital identity playing a crucial role, and First Advantage is positioned well to meet this demand.

And ladies and gentlemen, that is all the questions we have today. So that will bring us to the conclusion of today's conference call. We'd like to thank you all so much for joining the First Advantage Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast. At this time, you may disconnect your line, and have a wonderful day. Goodbye.