FA - NASDAQ

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

Thank you, Bo. Good morning, everyone, and welcome to First Advantage's Fourth Quarter and Full Year 2025 Earnings Conference Call. In the Investors section of our website, you will find the earnings press release and slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on our Investor Relations website. Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2024 Form 10-K and our 2025 Form 10-K to be filed with the SEC. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website. To facilitate comparability, we will also discuss pro forma combined company results, consisting of First Advantage and Sterling Check Corp's historical results and certain pro forma adjustments as if the acquisition of Sterling had occurred on January 1, 2023. The pro forma information does not constitute Article 11 pro forma information. I'm joined on our call today by Scott Staples, our Chief Executive Officer; and Steven Marks, our Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand the call over to Scott.

Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. Today, we have 5 key messages. First, we delivered what we believe was our best quarter ever with exceptional Q4 results capping off an impressive 2025. We exceeded our previously updated expectations on all guidance metrics with particularly notable adjusted diluted EPS growth of 67% in the fourth quarter. We continue to be a category leader, supported by our go-to-market success with a robust 17% growth contribution from new logo and upsell, cross-sell, resulting in 12% overall pro forma revenue growth in the quarter. When combined with our diverse vertical mix, consistently high customer retention and focus on cost discipline, it is clear that we are driving outstanding results amid this dynamic macroeconomic environment. Second, we are pleased to share that we have completed our core integration activities for the Sterling acquisition, and we are seeing the strategic and financial benefits as promised. While we continue to action additional synergies, looking forward, we are turning the page from primarily an integration focus to one of innovation and are committed to accelerating our growth through our scaled strengthened business, which brings me to our third point. We are executing and in fact, accelerating our FA 5.0 growth strategy. Through our best-of-breed product and platform approach, we are winning with our enhanced customer value proposition and expanded offerings and are poised to capture meaningful opportunities in growth areas such as digital identity, our differentiating co-selling relationship with Workday, ongoing new product releases and international account expansion. Building upon our success in 2025, we are allocating additional resources in 2026 to further accelerate our go-to-market and product capabilities. We expect these actions will drive incremental organic revenue growth and sustainable long-term value creation. Fourth, today, we are announcing 2 strategic capital allocation actions, both of which are supported by the success of our business, our strong cash flow generation and our confidence in our continued growth. First, in February, we are voluntary prepaying $25 million of debt, maintaining our consistent trend and commitment to reducing net leverage. Second, we are announcing a new $100 million share repurchase authorization. Our strong position today gives us the ability to both pay down our debt and simultaneously buy back our shares, which we believe do not currently reflect the value of our business. And finally, we are introducing our full year 2026 guidance. We saw more stabilization across market conditions in the fourth quarter, and we are seeing our positive top line momentum carrying into 2026. This strong performance is reflected in our bottom line earnings as well with our 2-year compound annual adjusted diluted EPS growth rate from 2024 to the 2026 guidance midpoint expected to be approximately 20%. While we are maintaining a modestly cautious outlook on base performance, expecting it to remain slightly negative for the year, we are bullish on 2026 given our go-to-market and recent pipeline success. We remain confident in our positioning to create long-term shareholder value and deliver consistent progress toward our 2028 long-term targets. Turning to Slide 5 and an updated view of First Advantage at the end of 2025. We continue to be a category leader in our industry. Our customer value proposition offers differentiated technology platforms, proprietary data and a broad collection of innovative solutions across a comprehensive and diversified range of verticals. In 2025, we delivered impressive full year revenues, which grew from $1.57 billion with $441 million of adjusted EBITDA. Our pro forma adjusted EBITDA growth of 11% with pro forma adjusted EBITDA margin expansion of 170 basis points and adjusted diluted EPS growth of 27% were enabled by the completion of the core integration activities for the Sterling acquisition, successfully delivering on our synergy plan and the execution of our FA 5.0 growth strategy. We completed over 200 million screens across more than 200 countries and territories on behalf of our 80,000-plus customers with the average tenure of our top 100 customers increasing to 13-plus years. Our diverse customer base includes approximately 2/3 of Fortune 100 companies and more than 1/2 of Fortune 500 companies. Our gross retention remains high at approximately 96% for the year, having risen to 97% in the second half of the year. We have over 100 integrations with applicant tracking systems and human capital management partners, including our market differentiating global co-selling relationship with Workday, giving us a unique competitive advantage in several of our key verticals. And speaking of competitive differentiation, this year, we crossed the milestone of accumulating over 1 billion records in our 2 proprietary databases, a 10%-plus increase year-over-year, providing our customers with a more comprehensive, powerful data foundation that enables the speed and efficiency we are known for. Our national criminal record file database now contains well over 900 million U.S. criminal history records and our verified database contains approximately 135 million work history and education records. Our verticalized go-to-market approach remains a differentiator and a key driver of our growth strategy. We offer deep subject matter expertise in our industry segments, and we use industry-specific data to advise our customers on topics such as leading practices and product optimization. Our enterprise customers' diverse vertical mix, global reach, mix of hourly and salary focused customers and diligent focus on controlling the controllables make our business resilient and able to perform well through macroeconomic cycles. On this slide, we have provided an updated view of our vertical mix for 2025. We continue to feel confident in our strategic focus on health care, transportation and retail and e-commerce, which represent our 3 largest verticals, all with near- and long-term growth levers. We believe that each offers substantial runway for new upsell and cross-sell expansion supported by favorable underlying market trends. Now turning to Slide 6 and a closer look at our outstanding performance in the fourth quarter. We generated meaningful revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted diluted EPS growth with results exceeding our updated expectations. Impressively, in Q4, our combined upsell, cross-sell and new logo growth rate was 17%, significantly outperforming our long-term growth algorithm target. This was enabled by our robust go-to-market momentum, including material contribution for a number of key 2025 wins and gives us momentum for stable yet elevated 2026 growth. Retention remained high at 97%. Base revenue performance again improved sequentially, remaining just below neutral and spot on with our expectations. Our go-to-market teams continue to deliver as further demonstrated by our 17 enterprise bookings in the fourth quarter, which brings us to a robust 66 for 2025. Each deal with $500,000 or more of expected annual contract value. These wins are some of the many reasons we have confidence in our ability to continue generating new logo and upsell, cross-sell revenue and help support our outlook for expected strong growth in 2026. Additionally, we are encouraged by the continued strength and increase in our late-stage pipeline, measuring at near record highs, including a meaningful volume that are incorporating our digital identity product. Looking at our verticals in the fourth quarter, our balanced and resilient vertical strategy supported our standout performance despite how headline economic data portrayed the higher environment. We saw strength in retail and e-commerce, driven by new, upsell and cross-sell along with a stable base with the seasonal peak hiring duration and volumes improving compared to last year and more in line with historical trends. Health care showed nice year-over-year growth driven by new logos, upsell and cross-sell despite notable base weakness in certain health care-related subverticals. Transportation and logistics saw growth in Q4, driven by positive base demand with strong traction during the peak season. General staffing, manufacturing and industrials and technology also showed positive year-over-year growth in Q4, partially powered by the success in our new logo and upsell cross-sell programs. Business and professional services, gig economy and financial services verticals experienced some pressure in the fourth quarter, but did not meaningfully inhibit our overall fourth quarter performance. January and initial February order volumes reflect trends generally consistent with what we saw in Q4. Our international business for Q4 continued to sustain strong year-over-year revenue growth in all regions, giving us confidence in our prospects for further international expansion. Although macro uncertainty persists in the fourth quarter, we saw many of our customers shifting to a more encouraging tone, and we are seeing this continue into 2026, regardless of the headlines you may be reading. We continue to remain confident that our diversified mix of verticals, customer segments and geographies provides a meaningful degree of resiliency to AI impacts and will allow us to capitalize on future growth opportunities. Additionally, we recently completed our annual trends report based on insights from thousands of enterprise-focused HR leaders and job seekers worldwide. The report will be published in the coming weeks. The data highlights strong demand for expanded screening services, risk mitigation as the #1 new top priority and rising identity-related challenges. as the biggest trend. These trends reinforce our growth expectations and positioning as an identity provider. Now turning to Slide 7 and a summary of our key accomplishments in 2025 and focus areas for 2026. Our 2025 organizational performance exceeded our expectations. We closed on the transformational acquisition of Sterling in October 2024, and we are incredibly pleased with the results, particularly in regard to customer retention, which has actually improved over the past 2 quarters. Synergy capture and realization, cultural alignment and our best-of-breed approach to technology and products, which has really resonated with our customers. In 2025, we executed and completed the core elements of our integration process while delivering a seamless customer experience throughout as evidenced by our high retention levels of 96% to 97% during the year, the favorable feedback we received from customers. We also significantly advanced our synergy realization efforts, reaching $55 million in run rate synergies actions and made progress on deleveraging our balance sheet. We had a number of impressive new logo wins in 2025, providing us momentum as we exited the year and substantial revenues already booked as we enter 2026. One win in particular, has the potential to be a top 5 customer and has already been driving significant growth. Adding to our success, we are seeing a very nice trend of winning back some customers who tried the competition and decided to return due to our outstanding platform, proprietary data, speed and service quality. As we have discussed before, we continue to take a proactive and strategic approach to AI. To be clear, we see AI as an enabler of our strategy, not a disruptor of our business model. We are executing from a foundation of long-standing technology leadership and deep tech experience across our management team. We have been building and deploying AI data and machine learning solutions since 2021, including Gen AI rollout since 2024. Some of these solutions are behind the scenes, helping us operate more efficiently and some are customer-facing, such as our Agentic AI and chatbots. We are also accelerating adoption of AI-powered development tools across the organization with hundreds of engineers leveraging AI capabilities to optimize our platform faster than we have ever been able to do. With our progress, scale and strategy, we believe we are well positioned in our industry to be a winner with regard to of where we have deployed AI solutions across our products, technology and operations include the following: AI is fully embedded in our next-gen Profile Advantage applicant portal, increasing efficiency, improving the user experience and reducing call center contact rates by approximately 50%. AI is also an essential element of our SmartHub AI intelligent router, which is now available for all U.S. customers for use within the verification process. as well as our digital identity solutions supporting our competitive advantage. We also began deploying AI-enabled capabilities in our criminal records processing workflows to help streamline operational steps, manage volumes and identify items for additional review while maintaining a human-in-the-loop process for all record matching, adjudication and reportability determinations. Internally, we have also leveraged AI to enhance the productivity of our engineering staff, automate tasks, enhance our product capabilities and help our go-to-market teams with customer acquisition activities. AI governance is also critical in our industry as we operate in a highly regulated high-stakes environment where accuracy, auditability and compliance are nonnegotiable. Our customers rely on our solutions to make informed employment decisions that carry legal, regulatory and human consequences. Trust is foundational to our brand. Our screens and verifications must be explainable, auditable and compliant across jurisdictions and geographies and seamlessly integrated into customers' HCM and ATS workflows. What we offer is not simply a software problem or a data search exercise. What we offer requires deep domain expertise, regulatory infrastructure and a consultative service model that is tailored to the specific regulatory and operational needs of the industries we serve. It also requires knowledge about the complexities of compliance with federal, state and regional laws like the FCRA in the U.S. and GDPR in Europe, along with many subject matter specific regulations like DOT and BIPA, which makes operational scale well beyond software and data, all that more important. We operate in a fragmented global landscape that often extends beyond the digital world. The data we use is not simply consumed off the Internet. Our platform is supported by thousands of direct relationships for criminal records access, both digitally and many jurisdictions physically, a proprietary third-party network of over 20,000 brick-and-mortar locations for drug testing and health screening and a proprietary network of over 1,000 in-person physical fingerprinting collection kiosks that enable a number of our solutions. The combination of proprietary data assets with more than 1 billion proprietary records, large-scale proprietary physical fulfillment networks, long-standing compliance capabilities, consultative expertise and deep system integration is difficult to replicate and positions us to continue to responsibly deploy AI, enhance efficiency and create durable long-term shareholder value in a rapidly evolving technology landscape. Looking at 2026, we have multiple other initiatives in flight, focusing on scaling in ways that continue to improve speed, consistency and efficiency. Our focus is on redesigning key workflows with AI at the center. This includes expanding our use of AI agents, enhancing document classification and extraction capabilities and applying AI-enabled automation in verification and fulfillment processes. all while maintaining disciplined governance to support and ensure responsible and compliance use of AI. We believe our focused innovative approach to leveraging AI positions First Advantage to create long-term value. Also in 2025 and into 2026, we continue to see strong and growing customer interest in our market differentiating digital identity products, which enable our customers to address the increasing concerns of identity fraud. Customers are seeing the benefits of our cohesive offering, and it is helping us win in the market, creating opportunities that were not there before. Digital identity is a key selling point for customers despite being a small component of overall contract value. In several recent large wins, we actually started with digital identity as the focus of an RFP, then we were able to significantly expand our scope when our customers recognize the benefits of our integrated solution, driving pipeline momentum. During 2025, a number of Fortune 500 companies went live with our digital identity product, and we expect to see this momentum continue. We are building on the early successes of these products, and we expect penetration to accelerate meaningfully in 2026 as customers increasingly recognize the need for the benefits of our highly sophisticated fully integrated solutions. As we progress through 2026, we are well positioned to maximize the benefits of our strengthened business to continue to win in the market, drive synergy realization and further accelerate our performance. Building upon the great success we have seen to date with our FA 5.0 growth strategy, in 2026, we are enhancing our product, sales and marketing capabilities to continue to deliver meaningful, sustained value for our customers and stakeholders. These efforts include further leveraging AI across our product portfolio, increasing our identity fraud-related product penetration, creating brand-new products and expanding our international business. We will keep you updated on our progress in the coming quarters. With that, I will now turn the call over to Steven.

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

Thank you, Steven. In closing, we delivered outstanding results in 2025 and are carrying our strong execution momentum into 2026. Looking ahead, as a clear leader in our space, we remain focused on consistently winning by delivering best-in-class solutions for our customers. We remain confident in our ability to achieve consistently strong results and are progressing well toward the 4-year financial targets we established during our Investor Day in May 2025. I would like to thank the First Advantage team for your continued dedication to supporting our customers. With that, we will open the line for questions.

[Operator Instructions] We'll go first this morning to Shlomo Rosenbaum of Stifel.

Really a strong quarter and the commentary seems like things are improving and getting better. The question I have is to start out with is what are your clients telling you about their own hiring plans? And in particular, how are they taking the AI evolution into consideration? And are you concerned at all that their plans might change on a dime because all of a sudden, they feel that they may not need the amount of people that they were thinking of doing -- having before? Because the business is subject to short-term changes and with the visibility not necessarily as great for when things all of a sudden change on a dime.

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

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

Yes, Shlomo, it actually wasn't a delay. What ended up happening is that a couple of customers were waiting to go on board with us and held screening volume back from their previous provider. So it's not really a delay. It's more of a kind of a reflection of the value proposition we bring. And that's why I kind of mentioned in the prepared remarks that there'll be a small flip in base growth between Q3 and Q4 if you're just doing your quarterly pacing because when that normalizes out, we'll just have a shift. And it's not huge, but it's a couple of percentage points probably that shift between the 2 quarters.

We'll go next now to Ashish Sabadra of RBC Capital Markets.

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

Yes, Ashish, I will -- I'll give you a broad answer to that question because it's extremely hard to quantify because it's literally everywhere. And it's embedded in all of our products and in a lot of our new wins. So as I mentioned in the in the prepared script that we've got AI all throughout our product platform, whether it's our SmartHub technology, which has a very large impact on verifications. We actually have a number of wins in 2025 where they have specifically told us that they came to us because of our SmartHub verification product. So it's starting to catch on. AI is embedded in our digital identity products. And we have a lot of wins in 2025 where a digital identity has been the tip of the spear. It's amazing, I will call it an absolute epidemic right now that customers are experiencing with identity fraud. And our products are really resonating with our customers. So yes, there's been cost savings from AI, whether it's in our customer care center where we don't need as many agents because we're doing things through chatbots. There's been wins because of AI and because of technology. But it's just so hard to quantify because I just think this is the new first advantage. This is -- all of what you're asking is embedded in everything we're talking about from a sales standpoint to an operational standpoint. So very hard to carve out, but I would say the impact is phenomenal.

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

Yes. Again, keeping in mind that our focus is more on the enterprise side. So a lot of these deals are with the larger companies. But I'll make a couple of high-level comments. First of all, in general, our sales engine is humming. I mean this is the best I've ever seen it. The pipeline is the highest it's ever been. And if you look at our total enterprise new business across new logos, upsell and cross-sell, it's actually up 24% year-over-year. That's a massive increase. And what we're also seeing is our average deal size is increasing. So not only are we winning deals, we're winning larger deals. And I would say these larger deals are more bundled and they're more complex. And average deal double digits. So there's a lot of good momentum on the sales side. So in general, what's driving it is package density. Package density is booming, I would tell you that right now. So I mentioned in the script that we -- again, we talk about how we're talking to customers every day. But I also mentioned in the script how we launched our annual trend survey just recently. And we talked to literally well over 2,000 HR professionals and very interesting what we're hearing from them. 89% of employers plan to add additional screening products in the next 1-year to 2 years. And a lot of that is driven by the challenging and even at sometimes dangerous world that we live in. And our customers are looking for more risk protection. So what was also mentioned in the script was risk is now the #1, by far, top priority for our customers. If you ask me that question 3, 4, 5 years ago, it was always speed and then it was cost. Now it's risk, speed and then cost. And that's a dramatic shift. A lot of this has been driven by, again, the epidemic that we're seeing in identity fraud. Again, going back to that survey, which we will release over the next couple of weeks, 76% have experienced falified employment details and 45% have experienced candy identity misrepresentation. These are huge openings for us, as I mentioned, digital identity as the tip of the spear. But what's beautiful about our product offerings is that we can integrate all of this for the customer. Just think about where we touch. We touch everywhere from recruiting through the background screening through onboarding all the way to I-9 and their first day of work and even beyond through monitoring. So customers are really liking our product suite because it's not a point solution. It's an embedded workflow that touches all the things that they're worrying about.

We go next now to Andrew Steinerman of JPMorgan.

This is Alex Hess on for Andrew Steinerman. I wanted to just ask a quick question about the margin guide for 2026. Can you walk us through some of the puts and takes there, how to think about the degree to which you're reinvesting and sort of the why now behind reinvesting so much of the -- what seems to be the cost synergy benefit as well as can you highlight any of the mix headwinds from newer logos? Maybe unpack that a little more.

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

And Alex, I'll just add on why now. As I mentioned, we're talking to our customers every day, and they're sending us really good buying signals. So it's -- why now has really become an easy decision for us. We've got actual pipeline that will -- that is backing up a lot of these investments that we're making. So we're not making these investments in a build it and they will come model. We're actually making these investments with already defined pipeline where our customers are saying, if you build this, we'll buy it. So these decisions actually became pretty easy, but that gives you a little more color on why now.

Got it. That's super helpful. And then as we think about those -- that pipeline of defined investments, can you walk us through internally how you think about the payback period that's required to make incremental investments back into the business? Is this something where in -- we see the momentum on the top line continue into '27 because of these investments? Or is this a '28, '29, 2030 type of payoff?

No, yes, you'll see impact in the second half of this year. There'll be some in-year impact because of these investments. And they certainly will carry into '27 and '28. And the good news about a lot of these investments is we don't think we need to actually do them again in '27 and '28. So that would -- that's going to help EBITDA in the future as well. But Steven, you might add a little more color.

Exactly right, Scott. I think, obviously, you invest early in the year. We expect good returns in the second half of the year. Like a lot of our go-to-market success, when you have that back half of the year success, you get the rollover impact into the future periods. And like Scott said, these aren't -- a lot of these aren't permanent additions. These are either onetime development exercises or rebranding and some other stuff like that of making sure that we can accelerate over the short term and then create long-term value.

We'll go next now to Andrew Nicholas of William Blair.

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

No. As you heard in my prepared remarks, it's an and equation, not an or. I think we're very fortunate. We've got a -- you heard our free cash flow guide of $160 million to $190 million, finished the 2025 with $240 million of cash on the balance sheet. We generated $70 million of net cash flow last year in 2025. So we're able to -- as you heard us announce, pay down $25 million of debt this quarter and able to also announce $100 million of buyback authorization. With the buybacks, we'll obviously be a little bit opportunistic there at the current valuation levels. It's very accretive from an EPS and just any kind of corporate finance math you run, it makes sense to do share repurchases at this valuation, especially with our numbers and P/E ratios and things like that. But we have the ability and flexibility of generating good cash flow the success of the integration, we talked about this on the prepared remarks, but to finish the integration with 96% to 97% customer retention, curtailing a lot of the onetime expenses and now having strong free cash flow into the future, it was an opportunistic time to look back and say, we don't think we're being valued correctly. And if the market doesn't correct, we'll happily buy back some of those shares. But it's not to the sacrifice of debt prepayment. We'll do both at the same time.

Great. That's helpful. And then as my follow-up, you guys had some good commentary on which verticals were doing well and which are still kind of lagging moving into the new year. I was curious if there's -- there were anything in the quarterly results that kind of came as a surprise, particularly on base growth front or if there was especially strong momentum in any given area on the sales front?

Yes. I mean just a couple of things there. One, what we were happily surprised about was the quarter resembled what our normal peak season would look like. So if you recall, we had back-to-back years of a sluggish peak. We had a great peak. It started when we thought it would start. It lasted well into -- well past Thanksgiving into December. We had a great December as well. So peak was very encouraging, and that's great for retail, e-commerce, transportation. They're all kind of aligned there. I don't think we had any surprises either negative or positive across any of the verticals. They all kind of came in line with what we thought. And I think geographically as well, as we mentioned, our international business was firing on all cylinders across all regions, not singling out a single one as a star performer or a laggard. They were all firing on all cylinders, which was great. So I think the signaling to us that the peak season was back was great. It obviously made for our best quarter ever in Q4. It's just -- I think what's interesting maybe is it sort of goes against what you read in the media or you're seeing and hearing because this is not what our customers are feeling.

We'll go next now to Manav Patnaik at Barclays.

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

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

Got it. And then on the synergies, can I confirm, I think you've actioned $55 million run rate as of '25, targeting the $65 million to $80 million. Can you reconfirm reported synergy benefit realized in '25 4Q and what the guide assumes for synergy realization benefit?

Yes. So you're right, Ronan. So as of the end of the year, we had actioned $55 million of the $65 million to $80 million target. $8 million was incrementally realized in Q4 of 2025. If you recall, when we closed the deal on October 31, '24, we did some day 1 synergies and realized $4 million in 2024. So that $8 million is incremental to that. So for the year, the incremental synergy realization was $38 million.

Okay. And what's assumed for the realization for '26?

Yes. I mean, obviously, we have some rollover from what we've already actioned. Our first priority for the year is growth. The synergies, we said we'll get to the targets by year-end. It's probably more second half of the year when we action those synergies just because as we've talked about on some of the last few questions, we're using 2026 and the momentum we have going into the year to help propel incremental growth. We've got a great action plan on getting those synergies, which are primarily in cost of sales and optimizing data acquisition costs and things like that. But we know we'll get it. We'll just be a little later in the year. That's just kind of the balance of growth versus synergies.

We'll go next now to Jeff Silber of BMO Capital Markets.

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

Yes. I think it's becoming harder and harder to quantify because it's embedded in a bundled solution. We will try to give you some sort of quantification of the impact of Digital ID probably in another 6 months. We just let this pan out a little further. But there's really 2 aspects to it. There's one where it can be quantified as a stand-alone operation and two, where it's embedded in -- with a number of other products a little harder to quantify. But I can tell you anecdotally that it's having a tremendous impact on the pipeline and our -- and a number of go-lives in Q4 with very large customers. So one, we're going to get a quantification of a revenue lift Two, we believe it also brings a lot of stickiness with it. So it should even help retention because now you're really embedded with a customer when you're handling their Digital ID all through their background check and onboarding. So we will give -- try to give you a little more quantification flavor of that in about another 6 months, but I can anecdotally tell you it's having a really nice impact.

We'll go next now to Scott Wurtzel of Wolfe Research.

I'll just ask one as well and actually on Identity too. Just in the context of like mix impact on margins, what sort of -- I guess, what sort of impact does identity have on margins, I guess, relative to some of the other products that you have?

Yes, go ahead, Steven. Yes.

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

We'll go next now to Kyle Peterson with Needham.

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

Yes. Staying with the sports analogy, Scott. I would say that actually, the game has started all over again. So where we were probably a year ago is maybe halfway through the game. But I'd say the game has completely started over. So it's first inning of the next generation of package density with digital identity being at the center. It's also -- I hate to say this, but turn your TV on it night and the world is very challenging right now. And as I mentioned with our trends report, risk and risk mitigation has leapfrogged to our customers, our buyers' #1 concern. And what that then means is package density because they're just looking for more and more protection. They want to protect their employees. They want to protect their brand. They want to protect their offices, their physical infrastructure. They want to protect their shareholder value. So any time we can come up with more data searches, better data searches, we can come up with new offerings, new product lines, new ways of doing verifications, new ways of doing identity, we seem to be catching a very welcoming ear at our customers because their C-suite and their boards are continuously asking them what else can we be doing. So I'd say the game has started over with digital identity being the cleanup hitter in your metaphor, where it's really an epidemic right now and First Advantage is really in a good position.