FA - NASDAQ

Good day, everyone. My name is Ashley and I will be your conference operator today. I would like to welcome you to the First Advantage Third Quarter 2024 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. [Operator Instructions] 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, Ashley. Good morning everyone, and welcome to First Advantage's third quarter 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, our Form 10-Q for the third quarter of 2024 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 the 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. I am joined on our call today by Scott Staples, our Chief Executive Officer, and Steven Marks, our Chief Financial Officer and David Gamsey, Outgoing 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. This morning, I am pleased to provide you with an update on our business and our planned path forward with the addition of Sterling. We are thrilled to have closed our $2.2 billion acquisition of Sterling on October 31, what a tremendous opportunity for all of us. Now nearly twice as large, we have over 10,000 highly skilled, motivated and excited employees. On an LTM basis, as of September 30, 2024, we have combined revenues of approximately $1.5 billion and adjusted EBITDA of approximately $407 million or $457 million to $477 million, including our targeted run rate synergies of $50 million to $70 million, which we expect to action within two years post-closing. I would like thank our combined team for the great work they have done over the past several months to get us to this point. Since closing the acquisition, we have hit the ground running, focused on our products and customers while endeavoring to conduct a smooth integration, maintain customer continuity, action synergies and reduce net leverage. We have also unveiled our new logo and branding for our unified company, which you will see in our presentation materials today. We were pleased to deliver another quarter of strong financial performance. And today, we are maintaining our full year 2024 First Advantage stand-alone guidance ranges and providing new combined company guidance. David and Stephen will cover this in greater detail in the financial section. Turning to slide 5. I'm excited to show the strong profile of our combined company and reiterate why Sterling is such an outstanding strategic fit and benchmarks First Advantage well among our technology-based info services peers. Our combined capabilities position us as a leader offering differentiated technology platforms and a broad range of innovative solutions. With the Sterling acquisition completed, we have essentially doubled in size by most measures, including the size of our combined sales forces and customer success organizations. Combined, we conduct over 200 million background screens annually for customers across more than 200 countries and territories, and we have a robust average retention rate of over 96%. We have been an early adopter AI and utilized the strong tool throughout multiple areas of our organization. We believe that our large proprietary data sets and AI-driven intelligent routing allow us to reduce our reliance on third-party vendors and deliver cost-effective solutions to our customers. We expect that our now larger and more extensive network of automated and integrated third-party data providers will continue to enable us to address each customer's unique requirements with leading solutions. With additional customers and capabilities from Sterling, we have increased the diversification of our verticals and geographies, reducing customer concentration and seasonality and increasing resilience. This helps to support our extremely diversified, focused vertical go-to-market strategy centered around enterprise clients and specific industries, all supported by exceptional technology. Going forward, with increased resources dedicated to our targeted verticals, we believe that we will be able to provide deeper and more comprehensive industry-level expertise customers across the globe. Leveraging our complementary footprints, we have expanded both our US and international presence and see tremendous opportunities to advance our growth outside the US in attractive geographies like EMEA, APAC, LatAm and India. Our enhanced reach and diversification set us up to deliver a stronger, more comprehensive value proposition to customers in a large, growing and highly fragmented $13 billion total addressable market. On top of this, with greater capacity for investment, we anticipate that the go-forward company will further accelerate innovation, focus on artificial intelligence and machine learning, robotic process automation and next-generation digital identification technologies, building on our already robust foundation. All of these factors enable First Advantage's position as a leading provider of critical high-technology, digitally enabled info services. Turning to slide 6. Now that we are post close, our focus is on delivering the strategic and financial benefits, we have been discussing with you since we announced the planned acquisition. We have begun executing our detailed integration plan focused on a seamless process for our customers and employees, actioning our synergy targets and deleveraging our balance sheet while retaining customers and ensuring that they do not experience disruptions remains our top priorities. We are also uncovering ways to enhance our customer value proposition and unlock cross-sell and upsell opportunities. At the same time, we will continue to drive innovation and foster the high-performing culture we are known for. In tandem with our work on the transaction, we have been developing an updated strategy that incorporates the Sterling acquisition and is heavily focused on rapidly growing and innovating our business through new technology, AI and product initiatives. We are calling this FA 5.0, and I'm excited to share the organizational part of this strategy with you today. On Slide 7, you'll see the senior management team who is responsible for executing our FA 5.0 strategy. As recently announced, Joelle Smith has been promoted to the role of President. Joelle knows our company very well, having held leadership roles within First Advantage since 2017, most recently as President, Data, Technology and Experience. In this new role, Joelle will continue to strategically lead the product data and technology organizations and will also take on responsibility for our go-to-market teams, including sales, customer success and marketing. Our new structure, which aligns product and technology organizations globally includes the introduction of General Manager positions strategically aligned to verticals or regions reporting to Joelle. We have combined the capabilities of our go-to-market teams, including our direct sales and customer success functions under our GMs. This organization is a blend of First Advantage and Sterling's incredible talent and is focused on customer retention and satisfaction, along with new business sales and upsell, cross-sell. Additionally, Doug Nairne, who joined First Advantage in 2021 as International Chief Operations Officer, following his time as CEO of an international screening company has been named to the expanded role of Chief Operating Officer, in which he is overseeing all of our US and international operations, customer care, and customer onboarding teams. As we noted last quarter, this will be David's last earnings call as he is retiring with Steven Marks taking over the role of CFO. Steven is an accomplished finance professional and respected leader. He joined First Advantage 8.5 years ago and has served as our Chief Accounting Officer, since February 2022. Our Board composition is unchanged post-acquisition. Overall, we believe that our new organizational structure will improve the applicant and customer experience through enhanced operational efficiency, improve how we partner with and sell to our customers and set us up for success as we commence our FA 5.0 journey. We will share more about the FA 5.0 strategy as we move into 2025. Turning to Slide 8. The closing of our acquisition of Sterling not only provides a great opportunity to update our strategy, but to also rebrand the company. This is an excellent example of our pre-integration planning work coming to life, as it represents a joint effort between the Sterling and First Advantage teams over many months. Our new logo gives us a clean, modern look and feel that represents our commitment to leading-edge technology and the use of responsible AI and also symbolizes the joining of the two companies. The racetrack logo represents interconnectivity of speed and quality, which is what separates us in the market. The continuous line that makes up the abstract FA of the logo reinforces strength of the two companies coming together as one. We are very excited to time to launch of our new branding with the close of this transaction. Turning to slide 9. As part of the Sterling acquisition, we are committed to delivering $50 million to $70 million of million of run rate cost synergies. We have already made significant progress towards this target with over $10 run rate cost synergies actioned on day 1. These savings consist primarily of reductions from combining executive teams, removing duplicative public company costs and combining insurance programs. We have also already identified additional synergy opportunities that are expected to approximately double the action synergies within the next 100 days. We have a detailed plan in place to capture the full extent of synergies available. Key categories that we to address over time include international operations, fulfillment, product development and commercial costs with the objective of actioning our targeted run rate within 24 months. In addition to these cost synergies, we believe there is also opportunity to uncover potential revenue synergies. We will continue to execute and plan to update you on our on our synergy progress future earnings calls. Finally, to summarize position post closing on the Sterling acquisition, we have a go-forward organization with outstanding leadership, a fresh new brand identity that excites the future of First Advantage, a tremendous combination of growth-related resources and product offerings, strong customer relationships, diversified across verticals and geographies, resulting in lower customer concentration, ambitious and achievable synergy targets and detailed integration plans, which are in place and being executed. We have a lot of work to do in the coming months and years, and we are energized by our opportunities to accelerate growth and deliver value. Turning to slide 10. Before I turn the call over to David, I'd like to briefly comment on our stand-alone third quarter results and the progress we have made on sustainability. We are very pleased to report that First Advantage's combined up-sell, cross-sell and new logo rates are as well as retention rate again performed in line with our historical revenue growth algorithm. First Advantage had 16 total enterprise bookings in the third quarter and 53 in the last 12 months, each with $500,000 or more of expected annual contract value. Our sales engine continues to deliver consistent results. From a vertical perspective, First Advantage's transportation and staffing verticals saw positive growth versus the prior year, while Financial Services was flat. Our other verticals were down in the single digits year-over-year, except for technology which while down slightly more, only represents 2% of our standalone business. Third quarter stand-alone results reflect a macroeconomic picture of continued normalization and stabilization within our business. We are also seeing this play out with key labor metrics, including quits, hires and openings as job trends returned to pre-pandemic levels. Overall, our customers continue to hire, albeit at a more modest level. Before switching gears, I want to call attention to the recent release of First Advantage's third annual sustainability report. This report reiterates our commitment to our core values and demonstrates the progress we are making across ethical governance, climate, employee engagement and inclusion and bolstering the resilience of our company. I encourage you to review the full report on our website. As this is David's last earnings call, I would like to sincerely thank him for his distinguish service to First Advantage and for his partnership over the past eight-plus years. We wish you the very best in his next chapter, David. And with David's well-earned retirement, we are very excited to welcome Steven, who has now taken over as our CFO. And with that, I will now turn the call over to David.

Thank you, Scott, and good morning, everyone. As Scott mentioned, this will be my last earnings call prior to my retirement, but I promise you that I will be carefully following First Advantage's future success going forward. It has been an honor to have been a part of the First Advantage management team. We have achieved much together, and there is still much more to be accomplished. This quarter, Steven and I will be providing color on First Advantage standalone results, Legacy Sterling results and a combined view to give you a clearer picture of our new profile, before concluding with thoughts around our full year guidance. Turning to our standalone third quarter results on Slide 12. In line with our previously communicated expectations, First Advantage's results for the third quarter improved sequentially over our second quarter results. Our third quarter revenues were $199.1 million, roughly in line with the prior year and $14.6 million or 8% greater than in Q2. For comparison purposes, note that Q3 of 2023 includes a one-time specific customer project, representing approximately $4 million. Our Americas segment was roughly flat as base growth was lower than anticipated, primarily due to a later start and normal holiday hiring. International performed better than anticipated, increasing 3.2% with green shoots across all regions. For the total standalone company, adjusted EBITDA was $64 million, also roughly the same as in the prior year, but sequentially up $8.2 million or 15% greater than Q2. Adjusted EBITDA margin improved sequentially 200 basis points to 32.2%, due to our highly variable, flexible cost structure and disciplined approach to managing costs. We continue to carefully manage our business to match the current demand environment. As a reminder, our cost structure is highly flexible and over 70% of our cost of sales are third-party costs, which are volume variable. We are constantly reviewing and adjusting our spending and modulating our investments to ensure that we are operating optimally and delivering results. Adjusted diluted earnings per share was $0.26. Legacy Sterling results for the third quarter are shown on Slide 13. Revenue for the quarter was $195.5 million, up $14.9 million or 8.3% versus prior year. Revenue growth was led by the Americas, which grew on an organic constant currency basis and also benefited from the impact of the Vault acquisition. International sales, excluding Canada, were overall flattish in the quarter with strength in EMEA, offset by softness in APAC. In terms of verticals, healthcare, retail, tech media and Industrials delivered growth year-over-year, while staffing and government saw declines. Adjusted EBITDA of $45.3 million was down $2.3 million versus the prior year comparable quarter, resulting in a margin of 23.2%. Adjusted EBITDA margins for the third quarter were impacted by base declines and some attrition of higher-margin customers as well as new business sales of lower-margin products such as drug and healthcare testing. Additionally, overall margins were impacted by inorganic Vault revenues with margins in the teens, which is the legacy Sterling management team did not yet address through the execution of their initial synergy plans. Adjusted net income of $22.7 million declined approximately $2 million versus Q3 of the prior year, driven by lower adjusted EBITDA. Now turning to combined LTM results on Slide 14. Giving effect to the acquisition of Sterling, we have essentially doubled our revenues and adjusted EBITDA, which reflects the significant scale we have added to the business. While combined adjusted EBITDA margins of approximately 27% are lower than First Advantage standalone, we are confident that once our cost synergies are achieved and we execute on our integration plan, over time, we will be able to return combined adjusted EBITDA margins back to above 30% with potential for future upside. On Slide 15, you can see that our first advantage standalone historical performance for upsell, cross-sell, new customer logos and attrition has been consistent and demonstrates that we are managing and delivering on what we can control with the variation being driven by the base. Looking specifically at First Advantage. Revenues from upsell and cross-sell alone nearly offset our base decline for the quarter and contributed 7% to our Q3 growth. New customer logos contributed an additional 3%, which was impacted by some delayed customer go-lives, which have already partially cleared in the fourth quarter. Attrition improved to 3.6%. Base results, driven primarily by our Americas segment declined 8%, which was below our expectations and was driven by continued uncertainty in the macro related to inflation, interest rate cuts, the recent election and prolonged uncertainty in the geopolitical environment. We also experienced a delayed start to seasonal hiring in September, but based on October results, we have seen seasonal hiring pick up. Looking at legacy Sterling. Overall, new and up-sell cross-sell growth drivers were strong offset by continued base headwinds. Upsell cross-sell contributed 10% to growth in Q3 with new logos contributing another 7%. Both of these growth rates reflected some acceleration compared to Q2. Gross retention remained stable with attrition of less than 4%. Base growth remained negative at approximately 12%, though improving versus prior quarters. Base growth at legacy Sterling has lagged First Advantage's as their verticals have been more impacted by the normalization of hiring patterns. I will now turn the call over to Steven to discuss our cash flow, net leverage profile and outlook for the remainder of the year.

Thank you, David, and good morning, everyone. I'd like to first take a moment to express my sincere gratitude to David. I have had the honor to work with him for over eight years and have been able to learn from his exceptional leadership and dedication. His contributions have laid a strong foundation for our success, and First Advantage is a far better company today, thanks to his contributions. I would also like to thank Scott and our Board of Directors for their trust as I step into this role. I'm excited about the opportunity to work alongside such a talented team and to continue driving our company's growth. And certainly to our investors, I look forward to continuing engage with you in the future as we work together to achieve our shared goals. Now, turning to cash flow and net leverage on slide 17. In Q3 2024, First Advantage stand-alone generated strong adjusted operating cash flows of $45.3 million, a robust 32% increase versus prior year, driven by expense management, cash tax planning and year-over-year decreases in our receivables. Sequentially, adjusted operating cash flow increased 11% from Q2. First advantage of cash balance at September 30, 2024, was $307.4 million as we're building cash to help fund the Sterling close. Over the last 12 months, we generated adjusted operating cash flows of $181.8 million a 3% increase on a year-over-year basis. During the quarter, First Advantage grew $7.9 million for purchases of property and equipment and capitalized software development costs. Legacy Sterling generated adjusted operating cash flows of $30.9 million in Q3 and at $75 million at September 30, having repaid $20 million of its outstanding debt in Q3. Year-over-year trends in cash flow exceeded the trend in adjusted EBITDA due to Sterling's working capital management, especially related to cash collections. We are actively on ways to further enhance cash flow from the Sterling business. Turning to slide 18. In support of the Sterling acquisition, we successfully secured amended financing of a $2.185 billion -- amended financing of $2.185 billion in the form of a seven year term loan due in October 2031, of which approximately $1.1 billion was used to fund the Sterling acquisition and the balance was used to refinance the existing debt of both companies. We were very pleased that the company was able to maintain its existing credit ratings with the rating agencies on our refinanced debt underscoring the strength of our business post closing. After considering our cash at close, we have approximately $2 billion of net debt and a pro forma synergized net leverage ratio of approximately 4.4 times in line with the expectations we shared last quarter. As part of our financing agreement, we upsized our revolver availability to $250 million to provide additional liquidity, and we extended the maturity date through October 2029. And there are no amounts currently outstanding under the revolver. We remain committed to our goal of reducing net leverage towards approximately three times run rate adjusted EBITDA within 24 months post-close and to our long-term net leverage target range of two to three times. We believe that continued interest rate cuts will help us accomplish this goal. Additionally, in August, First Advantage entered into a new $160 million swap agreement through the end of 2026. And just last week, we added an additional $275 million swap agreement through October 2027. As a result, about 40% of our post-acquisition debt have now had a fixed rate. Moving to Slide 19. I want to talk about our combined company guidance, which maintains our previously provided First Advantage standalone guidance and include the expected Sterling contributions for November and December, including the benefit of action synergies and the capital structure impacts from the transaction. For the combined company, we expect total revenues in range of $858 million to $918 million and adjusted EBITDA of $250 million to $274 million. After accounting for the impact of transaction financing and the new shares issued at close, we expect adjusted diluted EPS to be in the range of $0.83 to $0.95 for 2024. While our FA standalone guidance ranges are unchanged in light of the current macro conditions and base growth coming in lower than we had previously anticipated in the third quarter, we anticipate First Advantage standalone 2024 revenues and adjusted EBITDA to come in above the low end of the standalone range, but below the standalone midpoint. Looking at the fourth quarter on a standalone basis for First Advantage, we still expect sequential quarter-over-quarter growth for revenues and adjusted EBITDA. The lower half of our standalone guidance range also assumes macro-driven base declines of around 2% to 4% in Q4, representing an improvement over the trends we saw in the third quarter. Our early read on standalone October results gives us confidence in the fourth quarter shaping up, as I have outlined. Looking closer at our expectations for Sterling's contributions in Q4, we are expecting full fourth quarter revenues to come in between $170 million and $185 million. Of this, only November and December are included in our combined company guidance range and are expected to deliver between $108 million and $118 million of revenue. Monthly results are influenced by the typical seasonality of the business and holiday timing. We are expecting November and December adjusted EBITDA for Sterling between $2.2 million and $26 million and adjusted diluted EPS between $0.05 to $0.07. Moving to slide 20, which illustrates our bridge from First Advantage stand-alone adjusted diluted EPS guidance to our full year combined guidance. First Advantage stand-alone adjusted diluted EPS guidance is maintained at $0.88 to $0.98 with a midpoint of $0.93. To that, we add Sterling's expected contribution for November and December and then account for the impact of additional issuance and transaction financing resulted in our updated guidance midpoint of $0.89. On slide 21, we illustrate a double-digit adjusted diluted EPS accretion we expect from the acquisition on a synergized pro forma LTM September 30 basis. On this basis, we estimate accretion of approximately 15% plus. As a reminder, we expect to action our run rate synergy targets within two years post close, of which only a portion is expected to be actioned in the balance of 2024 and during 2025. On this note, as you model your future projections, please keep in mind that as we consolidate Sterling's results and the capital structure impact of the acquisition as well as account for the pacing of synergy capture and achievement adjusted diluted EPS accretion in our actual reported results for 2025 will be more neutral. As the synergies are fully achieved, we anticipate the expected adjusted diluted EPS accretion will be attained. We plan to provide more reporting on this as part of our 2025 guidance, including a framework to understand synergy attainment over time, which will be discussed on our next earnings call. We are incredibly proud of the results produced by First Advantage in Q3 and are looking forward to the opportunity to create additional shareholder value as we execute our Sterling integration plans and the FA 5.0 strategy. With that, let me turn it back to Scott for closing remarks before we open the line for questions.

Thank you, Steve. We continue to deliver solid results and execute on our priorities. Most notably, we closed the Sterling acquisition and are moving ahead quickly to integrate and capture the benefits and synergies. We remain focused on delivering on our value creation playbook and shaping the future of First Advantage to better serve our customers. With that, we will open the line for questions.

Certainly. Thank you. We will now begin question-and-answer session. [Operator Instructions] Our first question is coming from Shlomo Rosenbaum with Stifel. Please go ahead.

Hi. Thank you very much for taking my questions. I just wanted to ask you a little bit about the comment that you made about on Sterling, some attrition of higher-margin customers, the biggest risk, you and I have discussed this is the retention or the potential churn of some of these customers. Maybe you can give us a little bit more clarity as to what happened over there? Are you expecting that to continue? Or is there -- was that kind of anomalous? And just how should we think about that? And after that, I have a follow-up.

Yes. Shlomo, I mean nothing, I would say, notable in terms of a change from historical trends. Sterling retention in the last few quarters has actually been high and historical destructive, 97%, 96%, was 96% in Q3. It was really just a mixed item. Lately, they've been having a lot of upsell success in that drug and health care space, which is bringing margins down. And the margin -- and the couple of attrition, which, again, I would categorize as normal course did happened to be more in that traditional screening space, which is higher margin relatively speaking, which just pulled down a handful of bps, if you will, margin.

So you're saying it's not -- there was not a change in the iteration, it's just the reading of where the attrition came from I just want to clarify that for over the next one?

Yes, exactly. The mix of the lost business versus the mix of the added business kind of had a little bit of a market headwind to it.

Okay. Thanks. And then if you don’t mind just -- you talked about some of the base business coming in lower than expected. And maybe you could just talk about the operating environment in general. How you changed over the last quarter? What are clients telling you about their hiring expectations? And importantly, does anything change -- changes in administration? In other words, are you thinking that, that increases the chance of more hiring, decreases or really doesn't make a difference in the way that you're thinking about things?

Yes, Shlomo. So everybody is obviously focused on the macro. And as you know, we are in constant communication with our customers. So, our data points are what we're seeing from government data, but more importantly, what we're hearing from customers. And I don't think we're seeing anything different. It's a lot of more of the same. So what we've been talking about maybe for the last couple of quarters, even maybe last year or so is sort of a continued stabilization and normalization, not only in this quarter, but in previous quarters as well. We do believe that now that the US election is behind us and the potential rate cuts are coming up that some of the uncertainty will go away. But it's clear that job openings continue to decline and things are sort of going back to what we see as prepandemic levels. But that sort of has a normal thing for us. And we -- and that sort of helps us with planning. And I think what we're hearing from customers is that [Technical Difficulty]

All right. We do have our speakers back with this. I do apologize, we will continue on with our question from Shlomo Rosenbaum.

Shlomo, where were we when I dropped off.

And Shlomo, you are still connected, and your line is open, if you can hear us. Okay. I do apologize. It seems he's not connected. We will go next to Andrew Steinerman with JPMorgan. Please go ahead. Andrew, your line is open. And we'll take our next question from Nicholas -- Andrew Nicholas with William Blair. Please go ahead. Andrew, your line is open. We'll take our next question from Manav Patnaik with Barclays. Please go ahead. [Operator Instructions] I'll take our next question from Scott Wurtzel with Wolfe Research. Your line is open. Please go ahead. [Technical Difficulty] Operator: All right. I do apologize that we had experience a technical difficulties. I do apologize for that. We are going to continue our question-and-answer queue with Shlomo Rosenbaum. Please go ahead. [Technical Difficulty] We’ll take our next question from Scott Wurtzel with Wolfe Research. Your line is open. Please go ahead. [Technical Difficulty] We do appreciate your patience. Please continue to stand-by. [Technical Difficulty]

All right. And I do apologies that we had experience a technical difficulty. I do apologies for that. We are going to continue our question-and-answer queue with Shlomo Rosenbaum. Please go ahead.

Scott. Are you there. Can you hear me?

Yes. Shlomo, we can hear you. Can we hear me?

Yes, I can hear you fine. I mean I have a pop-up question to whether some of the cost efficiencies came on the conference call hosting company over.

I'm not that expressive Shlomo, I'm sorry.

Okay. When you

…going forward here.

All right. I mean you were in the middle of just describing what customers are telling you, and that's where the audio went out.

Okay. Great. Yeah. So I won't go back over kind of the macro stuff. But customers are telling us the same thing they've been telling is almost all year. So almost no change. Again, I mentioned that we believe with the US election behind and some rate cuts coming that the macro will improve. But as of right now, we're still seeing what we've been talking about all year, stabilization and normalization. It just continued. So most of our customers are still hiring, albeit at modest levels. They're focused largely on backfills, which hasn't changed all year. They are still doing new hire -- hiring. But they're doing it. I think I've said this for the last couple of quarters, they really turned to a just-in-time hiring model. So they're not going to hire ahead of the curve and just-in-time hiring models rather are not an issue because, as you know, our technology and our market position is all around speed. So if our customers want to do just-in-time hiring, that's fine with us, we get a quick turnaround time. So that's...

Okay. I think the reason what I was trying to get at is just the midpoint of the guidance was where we reported to last quarter and this quarter, it seemed to come down a little bit, and you talked about the volumes coming in base a little bit lower. So I was just trying to gather whether that's an erosion of what's going on or just bouncing around the bottom. That's the gist that I was trying to get at the question.

Yeah. I think bouncing around a little bit on the bottom is probably the best way to view it. A couple of good data points for you in international is now back two quarter [Technical Difficulty] but this is really more a [Technical Difficulty] keep also in mind that we still are doing really good on the things we can control. [Indiscernible] great et cetera. So the base was a little lower than we thought it would be this quarter, and -- still doing well. But yes, a little bit of bouncing around the bottom. I really like that analogy.

Okay. Thanks. Just giving you a heads up the audio is still a little choppy.

Okay. Thank you.

Thank you. We'll take our next question from Andrew Steinerman with JPMorgan. Please go ahead.

Hi, it's Andrew. The comment about 2025 being more neutral in terms of EPS accretion. To me, that sounds like a change, I remember 2025 being accretive and given the size of the deals and the opportunity, I just wanted to confirm if that's a change and what drove that change to be more neutral in 2025 for the combined organizations?

Andrew, not really a change. When we're talking about that, we're talking about what will be realized and reported. And based on when we action the synergies and that obviously, when you action it, you don't realize it all upfront, it takes 12 months to have that fully become part of your reported results. We just wanted to make sure the interest expense is all there today. The dilution is all there today, and we just wanted to help start to build out some of those models. I wouldn't really call it a change at all. We haven't changed our synergy outlook. We really haven't changed really anything. In fact, we've got locked in a couple of swaps to help offset some of those interest expense items for next year, so really not a change. We really just wanted to make sure we're making the obvious point around when the synergies will hit our actual P&L.

Okay. And since you've mentioned 2025 here, I know it's in the context of EPS accretion; do you have an underlying assumption for base revenues, like if, for example, the Sterling side had lower base revenues or higher base revenues than in your model, wouldn't that affect be EPS accretion assumption?

We're little early to get into exact science on 2025, Andrew. I think again, we just wanted to make sure we got everyone's models oriented in the right direction. I mean, you're right, obviously, Sterling, the volume and quantum of Sterling results impact that accretion I think the biggest moving factors that we're trying to help models with today is just on the synergy pacing, obviously, some of the interest expense and dilution impacts.

Okay. Thank you very much.

Thank you. We will take our next question from Andrew Nicholas with William Blair. Please go ahead.

Hi. Thank you and good morning. I wanted to ask a question on upsell, cross-sell. The metrics there for both First Advantage and legacy Sterling are pretty impressive, accelerating sequentially. Is there anything that you can do to unpack that a little bit more for both entities? And maybe to the extent that there are growth drivers in there that can drive revenue synergies for the combined firm too, it would be great to hear on that.

Yeah. We're, obviously, very happy where both companies are in up-sell, cross-sell. And if you remember last quarter, we announced two very large deals that we won in the quarter that were both up-sell, cross-sell. So those are revenuing now. In fact, they both revenue within days of closing. So we're riding pretty nicely on those two wins from last quarter Sterling, we still need to get into more of the details. The deal is only 12 days old, but they've had some success with up-sell, cross-sell as well as you can tell from their results. So I think the highlight here, Andrew, is that customers are still prioritizing safety and compliance shareholder value and brand protection over cost cutting. And that is leading to deeper and deeper package density. And we think the up-sell, cross-sell numbers will not only continue to perform well in the future with just general package density on digital identity solutions, which we think will be hot sellers in the market. So this is a number that we are -- we think is going to be a strong number for the next couple of quarters for sure.

Great. Thank you. And I realize it's early to talk about specific 2025 numbers. But just as we think about kind of the integration here, how much distraction risk, do you feel that there is with the sales force, in particular, is it fair for us to assume some sort of haircut to new logo growth or upsell, cross-sell absent the tailwinds that you just described over the first couple of quarters of this combined company? Or how are you thinking about that holistically? Thanks.

Yes. I think we're doing a really good job of coordinating the front-end go-to-market teams. We've got daily standup calls in place. We're mapping joint R&P deals that we're on. We're talking to customers. I think what's really interesting is when the deal was closed, we obviously communicated to all Sterling customers. And then we actually spoke in person to all of their large customers. And there was just really good excitement about the deal and customers are feeling really good about it. So you're right in that when you put things together, it does bring in some potential distraction and risk. I don't think we will see a deterioration of any of those key metrics. They may stay stable for a while. But we actually think in the long run, some of these should improve. But I would say you could probably have a period of stabilization around that as we put the front end together.

Great. Thank you.

[Operator Instructions] We will take our next question from Manav Patnaik with Barclays. Please go ahead.

Thank you. Good morning. Scott, I just wanted to touch on your plans around the integration of the platforms. I'm guessing those are multiple platforms here. And so just what are your plans around that? And all this new innovation front-end integration, et cetera, I'm guessing that's not contingent on those back homes combining to one.

Hey, Manav, great to have you back. And great question. So obviously, this is probably the number one focus area of the company is to make sure that we get this right. And I think you've heard consistently from us, since we announced the deal that there -- our goal is to not disrupt the existing client base with their platform selections. And we've been out talking to customers, and we're not going to force migrate customers onto a given platform because we one don't need to. Our synergy numbers don't require that. We are also going to -- as we roll out new features and functionalities as we figure out, which products stays, which products go, we view that as keeping the better of the two. And so ultimately, what our customers -- what our combined customers should feel is an upgrade of service and an upgrade of products. And we're going to be very, very thoughtful and cautious about how we do this. There's no time line. It will take us many months to come up with what those strategies are because due to the HSR process, we could really get under the cover too much, and now we're starting to do that, and we're obviously looking at what we're seeing. But we'll be very thoughtful as to how we roll that out.

Okay. Fair enough. And then just you talked about -- I think you mentioned a few times about job trends getting back to pre-pandemic levels. Just wondering how -- like we don't really have the history pre-2021, so you or Sterling for that matter. So just wondering with the combined company, how you think you perform in that kind of a normal environment? Like do you long-term algorithms change a little bit?

Yes. I think the growth algorithm, which I'll cover again just real quickly, so everybody is on the same page. But our growth algorithms are typically where we see base growth of 2% to 4%, upsell, cross-sell of 4% to 5%, new logos of 5% 6% and then backing out attrition of 3% to 4%, put you -- put us in that 8% to 10% growth range. And really, we are firing on all cylinders except base right now. So for the last – literally for the last two-plus years, if you go back and look at the -- I think this is our 14th earnings call. If you go back and look at the data, it's been so consistent on upsell, cross-sell, new logo and attrition. And the only thing that fluctuates really is base. So as we look into future modeling, we don't think, as I mentioned just earlier, we don't think that there will be any change to our growth algorithm on upsell, cross-sell, new logo, attrition. And again, ultimately, there should be improvement there. Although it should remain stable, maybe for 2025 and then start to improve as we put things together. So it's just always coming down to base right now. And again, we're sort of seeing that stabilization and normalization, which has us in the -- still in the low single-digit declines in base right now.

Yes. Thank you, Scott.

Yes, Scott, we don't have a direct debt paydown schedule yet. I mean the new debt agreement does have 1% annual prepayment amortization to it. On a capital allocation approach, -- number one priority is finishing the integration. We just closed, as Scott mentioned a few minutes -- barely weeks ago. So integrating the two businesses we're going to go get all those synergies. We're going to retain the customers and then we're going to be bringing down that net leverage number to our target range, and that will be done through a combination of debt pay down, cash flow generation, et cetera.

I've got one more thing. This is not [indiscernible] Sterling customer base is also extremely excited to be to attend our collaborate event, which we have every April. The Sterling reps have been talking about it. There's Sterling never had an annual customer event. And the Sterling customers are just really excited about getting together with other clients in their industry to share best practices and talk about other learnings. So I think our annual customer event in April, in Miami this year is going to be extremely well at [indiscernible]

Awesome. Thank you, guys.