FA - NASDAQ

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yes. Daniel, a couple of things to keep in mind. As I mentioned in the remarks, across all ranges of our guidance, we still expect base to be negative for the year. And when you really start to break that down then sequentially, it is a little bit more front weighted to your point. But if you've been following First Advantage and Sterling long enough, our base decline really started Q3 of 2022. So, this is kind of a 3-year evolution cycle where we start to have the steady comps when we get to the back half of the year that have those three years of compounded base declines in them already. And then when you also look at the macro data and just kind of the stabilization cycle that's been going on, the pace of change in the hiring trend has flattened out a lot. So, when we looked at our guidance and our budget and our modeling for 2025, we feel good in terms of our base range in there that we've got kind of a fairly wide range of scenarios covered. Obviously, it projects the current stabilization trend to keep going on. But as you get towards the middle of the year, you have those compounding comps from the prior years. And then like I mentioned in the call earlier, and then like Scott's mentioned, we've got great productivity out of pipeline, new logo, upsell, cross-sell, those are triggering as they always have for both client bases and our combined client base. And as Scott just mentioned a few minutes ago, we're laser-focused on retention and those 96%, 97% retention levels are now our norm.

And Daniel, I'll add a few things. We're entering 2025 in a very strong position with macro normalization plus strong pipeline conversion. So, let's just relook at some of the things we talked about in the opening script. If you look at a year ago, Q4 2023, stand-alone First Advantage landed 10 new wins with ACV of $500,000 or more. The combined Sterling First Advantage team landed 25 wins in Q4. And we are having a very good start from a pipeline standpoint of 2025, which gives us confidence in the guidance. In fact, we did mention the large healthcare win, which Shlomo asked about. But in the script, we also talked about two other very large U.S. wins, which were not that healthcare win. These are two other ones. Those two wins have a potential to be-both of them to be top 10 customers of First Advantage. And probably it will take a few months to get revenue going, but we expect that revenue to start coming in second half. So again, when you can start a year as fast as we have from a sales and pipeline standpoint, and you can land two deals that potentially could be top 10 customers for you, that gives us really strong confidence in the second half of the year.

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

Yes. We're probably talking to customers more now than we ever did because, as we've said a couple of times, our laser focus is on customer retention, and we want to make sure that the communication is crystal clear about our product strategy, about our platform strategy and that how it will benefit our customers. So yes, we are having more discussions with our customers. And I assume your question is more around what are we hearing from the hiring side. And we are hearing normal hiring. We are hearing that customers are planning on normal hiring. But again, it's the new normal hiring. It's not the post-pandemic hiring, it's the pre-pandemic hiring. It's normal cycles. They're anticipating normal growth. And I don't think the administration has had any impact on their hiring strategies because there's nothing that's really been rolled out from the new administration yet. So, we're not hearing anything negative or even positive about that. It's really kind of a non-event in our customers' eyes right now. And until the government rolls out something, then we'll obviously react.

We'll take our next question from Manav Patnaik with Barclays, please go ahead, your line is open.

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

Yes. Ronan, I mean, the acceleration almost was across the board. We talked last call, our initial focus was on those kind of public company costs, deduping executive leadership, some of those baseline M&A 101 type items. As a management team, we kind of challenged ourselves to find avenues to accelerate those synergies and also just it helps with some of the internal integration efforts. So quite literally, it contributed almost from every line of the P&L. We got at the actions. It was a lot of our identified playbook. That's why we didn't take the full range up. We were just able to get confidence in some of the programs we had and then try to accelerate as many of them as we could either into '24 or earlier into '25, which is why we now think we're over 50% actioned by the six-month mark. That was a year, that was the one-year mark when we had talked previously. And you don't get there by just by one function contributing, it was across all of our work streams.

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

Yes. I think, listen, it's been a big effort. We got a lot of people working on this. And obviously, we closed on Halloween. So, we really couldn't get under the hood until November 1st. I'd say the biggest pleasant surprise by far has been the culture match. It's just amazing how well these teams are working together, especially on the go-to-market side and on the product side and operations side. Those are the three big areas where the teams are working so well together, and it's really because there's a culture match. I think the biggest thing that can derail any M&A is cultures that don't match. And we've got two high-performing cultures that are working really well together.bWe're also finding a lot of good, like I would call them nuggets on the product side and on the API integration side with data. So again, this goes back to the best-of-breed comment where we have found that Sterling was doing some good things on the tech and pro uct side. Obviously, First Advantage has been doing a lot of great things on the tech, product, and automation side. And what we'll be able to do is turn on those things for Legacy First Advantage customers that we feel that Sterling was doing a good job on and Legacy Sterling customers for the things that First Advantage is doing a good job on. And these will all be behind-the-scenes type of upgrades that clients really won't see but will feel. And they'll feel in output in terms of faster turnaround times, higher quality, et cetera. So that's why the clients are so excited about where this tech journey can bring them because they're seeing the best of both world products that are, and platforms that are out there, and they're going to have, they're going to start tapping into these. And we're already rolling these out. These are things that we've already started rolling out to Legacy Sterling clients and Legacy First Advantage clients. And we have product road maps where we're going to be rolling out nice upgrades almost monthly now. So, clients will really start to feel and see this. On the negative side, not really. Obviously, the big concern is margins, and that's still going to drag a bit for us, but we've got a good plan. And obviously, you guys know our track record on margins. I mean, look at Q4 alone, it was down from a base standpoint, but we delivered 32% EBITDA margin on Legacy First Advantage. So, we know how to improve margins, and we've just got some work to do on it, but we've got a great plan in place.

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

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

Yes, Jeff, and welcome to the calls. Certainly, First Advantage, we've always looked at our fulfillment and operations functions as having a highly variable nature to them. Our third-party cost of sales, and that's fairly consistent with Sterling are almost 100% volume variable. But certainly, on the labor side, we have a very flexible staffing approach where we do our modeling on volumes and then staff to a metric related to that and then use overtime, variable shifts, weekends, et cetera, to modulate the available labor to the inbound orders in a pretty 1:1 matching ratio. I think a lot of others in our industry and Sterling included had a little bit more of a fixed cost mindset where they staff to a kind of an underlying assumption and then it was a fixed cost. They had 40 hours per week per employee, if you will. And we've looked at some of that margin there, that tail end of the base volumes as we can use that variable function of our labor. And that workforce management, it takes some time to adapt and kind of put the right tracking tools and forecasting tools and then planning tools in place, but that's been a focus of the operations team since day one. We're, call it, 120 days in, and we're getting very close to having some of those methodologies across the board. So that's how we handle it from a staffing standpoint. And then I think the other big margin difference between First Advantage and Sterling has just been some of the shift in mix. And as we've talked about a couple of times, and this is coupled into our integration and synergy program, Sterling with their Vault acquisition had their Legacy drug and healthcare wellness program. They had the one they acquired from Vault. First Advantage has all of that in our wellness platform as well. So, part of our synergy and integration program is harmonizing that down instead of having three of everything effectively to get to best-in-class. So, between instilling that workforce management and then kind of deduplicating the fulfillment of some of those wellness, which are the lower mix services that we've been referring to, lower margin mix that we've been referring to, that's all on our game plan for 2025 and part of that 150-basis point lift at the EBITDA margin at the midpoint.

Yes. Jeff, let me add that we also have a plan to reduce headcount on the Sterling side through automation. First Advantage was highly automated. And as we, again, roll out that best-of-breed automation to Legacy Sterling clients, that will allow us to give some flexibility on the headcount side. And a great example of that is, I think you guys have heard for over a year now about our CLICK. CHAT. CALL. functionality on Customer Care. And Sterling doesn't have that. And so, we'll be rolling that out in the very near term to Legacy Sterling customers, which will give them the advantage of using chat, AI chat to get order status and things like that, which will allow us to rationalize some of the headcount on that side. And as we roll out even things like Agentic AI, we expect even further synergies on the headcount side. So, we're feeling pretty good about how we can optimize both organizations headcount with automation.

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

Yes. I mean, Jeff, that's the fundamentals of it is, a, you've got easier comps. And as I mentioned a little while ago, right, it's your third year of compounded base declines when you get to the middle of the year. So that certainly is a major factor. And then also, it's just there has been a broad stabilization trend, and we're just seeing that start to play out. When you look at the hiring volumes and some of the other metrics, the those have all been declining now for a couple of years, but the pace of decline has flattened out a lot over the last three to six months. And we kind of expect that normalization and stabilization to continue. And then once you get to the middle of the year, you've got that stabilization trend compounded with those easier comps is kind of what drives it. But like I've said a couple of times, when you zoom out and look at the year as a total, we still expect at all parts of our range, base to be negative.

The only thing I would throw in there, too, is the sales engine has been firing on all cylinders for a while now. So, we will be -- we'll get some revenue conversion that things that go from new logo or upsell, cross-sell into base, that will start helping us in the latter half of the year as well.

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

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

Yes, Kyle, I think not a lot of specific verticals to call out from a base perspective because that normalization trend and now that we're kind of hitting year three, it's kind of made its way through all of them. I know in the past on the Legacy FA side, we've highlighted the strength of retail and transportation. But like Scott mentioned not that long ago, the updated assumptions and trends around peak are certainly baked into our guidance.And I think the guidance pretty well now has it baked in across all verticals, that stabilization trend. I think the call out that I would sa y, and like Scott just mentioned, is the pipeline and momentum in go-to-market, we highlighted the deal in retail, the deal in healthcare that Scott's talked about. Those will help drive strength in those, obviously. But from that controllable revenue standpoint, that upsell, cross-sell, new logo. And then retention trends are strong across all verticals.

And also, Kyle, we expect that international rebound will continue. What we've seen out of international in the last two quarters has been very encouraging. So, we expect international, even though it's only 13% of the business, we expect that to continue to rebound nicely.

And I guess just a follow-up and kind of switching over to the balance sheet and leverage. I appreciate all the color and the margins are solid and should get better as the year progresses. But how are you guys thinking about the pace of deleveraging and priorities here, whether it's just building cash and scaling EBITDA or are you guys looking at potentially prepaying some debt? Like how should we kind of think about your plans for the balance sheet over the next few quarters here?

Yes. Well, certainly, Kyle, to start, right, we do have some, a little about $5 million mandatory prepayments that we'll make on schedule at the end of every quarter. That starts here in March. So, there'll be, there's about $22 million of that baked into our model and should be baked into assumptions at a minimum. We do expect free cash flow to be positive, obviously, in the year, somewhere in the $55 million to $85 million range is based on our guidance. And then when you kind of convert that over to leverage, there will be some deleveraging. But the synergy programs, even if we've got half of those executed midway through the year, let's call it, 2026 will be the real year of deleveraging because you'll have the full year run rate benefit of those in your actual results and in your cash flow. But there will be some modest deleveraging in 2025.

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

Hey, good morning, guys. Thank you for taking my questions. Just wanted to touch on the acceleration in growth on the Legacy Sterling upsell, cross-sell. And if you could touch on what has driven that over the last couple of quarters? And then if there is anything on their go-to-market side that they're executing on that you think you can maybe fold into the FA sales force to maybe realize some incremental upsell, cross-sell acceleration growth on your side as well?

So, Scott, mechanically on the Legacy Sterling side, they had a couple of larger upsells. I think they announced it on the last time they did earnings, but it was the end of 2023 that went live in 2024 that was on their healthcare space and in some of those medical services, that was their largest ever upsell. So obviously, we got the full year benefit of that essentially in their 2024 results. And I'll let Scott give some more color on it in a second. But the Sterling productivity out of, frankly, the entire sales force, including the Sterling team has been phenomenal. We've got -- even if you look at the more recent success, 25 enterprise bookings in Q4. If you look at last year, stand-alone FA was only 10. So not only did the transaction not distract the teams from productivity, but we've actually outperformed the prior year, if you will. If you just double them up from kind of the relative scale. So, I think the Vault acquisition they did, while the margins aren't what we would desire, it gave Sterling a couple of new avenues to cross-sell into their base, and they've done a really nice job of executing on that plan.

Scott, the only thing I would add is, as I mentioned earlier, that especially the go-to-market teams are working extremely well together. It's almost like we've been together for years now, not months. And I think, one, it's important to talk about numbers, like 25 wins last quarter and obviously, a great start to the year. So, the numbers are significant. But what's more important is that, that shows that there's no hesitation in the market about this acquisition, that new logos are still coming to us and actually now maybe are coming to us at an accelerated rate because of the combined entity, the tech story, the best-of-breed story that's out there, the deep vertical story that we've got. So, we're obviously encouraged by the numbers themselves. But what's more important is that the sentiment in the new logo space is certainly in favor of the merger.

And then just as a quick follow-up on guidance. I know you're orienting towards the pro forma growth. But just wondering if there's any color you could give on your expectations for Legacy First Advantage growth for the year.

Yes. I mean, largely, Scott, I mean, the two segments or the two historical businesses are relatively in line. As I mentioned, we're kind of expecting the historical growth algorithms, upsell, cross-sell, new logo and retention to be in line. Candidly, like you've heard the story Scott mentioned, the lines get a little blurred because there's a pipeline that developed out of Legacy First Advantage that the Legacy Sterling front-end platform may be the best solution. And we've had situations where the opposite is true, too. So it's, that's kind of why we're starting to look at things on a consolidated basis because it's we're able to leverage our combined strength to impact the consolidated customer base versus kind of looking at the businesses as two stand-alones. But I would, just looking at the trends, largely the base trends are in line and new logo cross-sell between the two Legacy businesses are largely in line. There's nothing distinct between the two that makes you say one is going to completely perform differently than the other.

I would just add that I think it's important to note we're not thinking that way anymore. I think what's given us a lot of success in the early days of this integration is to not think about Legacy First Advantage and Legacy Sterling. In fact, those are words we don't use anymore internally. We'll use them with you today because obviously, there's financial things we need to separate. But we don't say those words anymore internally. We're operating as one company. So, I think when you look at what's going to happen in these businesses, we see it as one business going forward. And that's, you can also see in our org structures. And if you look at our go-to-market team, for example, it's about 50-50 Sterling leaders, First Advantage leaders. And we've got Sterling leaders now running First Advantage accounts and First Advantage leaders running Sterling accounts. It's one company going forward. It's this new co-mentality that has really galvanized the team and have given us a lot of momentum. So, I appreciate the question, but I just think it's important to note that culturally and organically and structurally, we are not thinking Legacy anything anymore.

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