Q4 2021 Sterling Check Corp Earnings Call
Hello, everyone and welcome to the Sterling fourth quarter Chico's for 'twenty, one and is called my name is Victoria and or what is your pool today, if you'd like to ask a question. During the presentation you might do side by pressing star one on your telephone keypad, if you wish to withdraw your.
A question. Please press star cheap when preparing us to ask a question. Please ensure that your line is on mute the locally.
I'll pass over to your host Gee, that's a cool vice president of Investor Relations to begin. Please go ahead.
Thank you operator welcome to the Sterling fourth quarter 2021 earnings call. Joining me today are John <unk>, Chief Executive Officer of Sterling, and Peter Walker, Chief Financial Officer of Sterling.
We will reference during this presentation can be accessed on Sterling's Investor Relations website under news and events. The slides will be posted at the conclusion of this call and a replay will be made available on the website after.
After prepared remarks, we will open this call for questions before we discuss our results I encourage all listeners to review the legal notice on slide two which explains the risks of forward looking statements and the use of non-GAAP financial measures. Additionally, please refer to our recently filed final prospectus for a discussion of risk factors that could cause.
Actual results could differ materially from these forward looking statements.
Our slide presentation and discussions on this call will include certain non-GAAP financial measures for such measures reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation.
And in our earnings release issued this morning, I will now turn the call over to Josh correct.
Thank you Judah good morning, and thank you for joining us Sterling, It's fourth quarter was exceptional and continued the momentum we saw through the first three quarters of 2021.
We delivered record financial results, including 39% organic constant currency revenue growth.
57% adjusted EBIT growth and 114% adjusted EPS growth.
We are also very excited about our performance thus far this year.
For 2022, we expect to generate revenues of $740 to $755 million representing year over year growth of 15 to 17, 5% adjusted.
Adjusted EBITDA of $205 million to $212 million, representing year over year growth of 14, and a half to 18, 5% and adjusted net income of $112 million to $118 million representing year over year growth of 21.5% to 28%.
<unk> will discuss our 2022 guidance in greater detail, but first I'm going to discuss our macro environment 2021 accomplishments and specific areas of focus for Sterling in 2022.
Starting with slide four Sterling is the world's most trusted provider of background and identity verification services. This slide provides some key stats on our business that we discussed on our third quarter earnings call.
Rather than repeat them now I will call out two <unk> first our gross client retention rate was 96% for full year 2021, and second we are now serving more than 50000 clients, which speaks to the immense success, we've had in winning new clients of all sizes and.
Retaining them.
This success has been driven by our company's strategic focus over the past few years on client service technology and product innovation.
Turning to slide five Sterling operates in a highly attractive global market with a total addressable market of 16 billion as of 2020 growing at a 12% CAGR to $29 billion by 2025.
Importantly, the industry remains highly fragmented and the majority of this opportunity is outside of the U S, where we have a leading position and continue to grow share.
I wanted to take a few moments now to touch on the macro environment and its effect in our market.
In the fourth quarter of 2021, and thus far in the first quarter of 2022, our macroeconomic environment has remained strong.
With the great resignation, continuing and broad employee turnover remaining a key theme in the employment market.
The number of U S job openings is at near record highs and the pace of labor separations remains high as well.
Additionally, the secular demand drivers most relevant to sterling continue to be robust and create strong tailwind for comprehensive background screening solutions. These.
These include the fast growth of the gig economy, the increasing use of contingent workforces and freelancers and the increasing prevalence of remote work.
We believe these trends existed before the pandemic and have accelerated over the past couple of years. They have led to a structural shift in the workforce with greater velocity and employee turnover persisting for years to come.
While there is clearly a lot of uncertainty in the overall economy related to inflation rising interest rates and geopolitical tensions these items have not impacted the demand for our services and our underlying fundamentals remain strong.
As a result, we believe our growth algorithm is sustainable and we will continue to outpace overall job growth.
I'll now take you through some highlights of 2021, which was by all accounts an exceptional year for Sterling.
Slide six lists some of the many accomplishments, which our team delivered <unk>.
Firstly, our organic constant currency revenue growth for the full year was 39% and we expanded our adjusted EBIT margins by approximately 600 basis points I am, particularly proud that every one of our verticals and regions grew by double digits during 2021.
Yeah.
Peter will provide more details on our results, but I want to start off by thanking the sterling team for executing on our strategy and driving this tremendous success.
A second highlight from 2021 was the traction we gained in identity.
Identity remains a crucial part of our overall growth strategy and we feel it's significantly distinguishes us from our background screening competitors.
During 2021, we embarked on two key exclusive partnerships, one with IV me and one with FINRA, which will be pillars of our strategy as we continue to expand our identity offerings.
Another critical accomplishment in 2021 was the expansion of our global footprint as we grew our international revenues by 55%.
International revenues COVID-19% of our revenues during 2021 up from 17% in 2020.
As I outlined earlier over half of the global addressable market for our services sits outside the U S and we plan to further capitalize on this opportunity for years to come.
The fourth item worth highlighting from 2021 was our successful IPO on the NASDAQ Global select market in September .
Going public enabled us to enhance our capital structure, while continuing to invest in the organic initiatives driving our strong growth.
Our IPO was a proud moment for Sterling and I would like to thank our team who supported that successful process as well as our clients and partners for their continued support of our business.
The final highlight I'll mention is our acquisition of EBIT, a U S based background screening provider, which we expect to contribute over $30 million in revenues during 2022 with robust synergy is expected as we integrate over the next 12 to 18 months.
We view synergistic tuck in M&A as a strategic lever to complement our organic revenue growth ambitions and we are enthusiastic to make our first acquisition since NCC in 2018.
EBIT is highly complementary to our core strategy and accretive to our financial results and we continue to explore additional similar deals with a healthy and building pipeline.
Turning now to 2022, we see a lot of opportunity for continued success.
Slide seven lists for such areas, including expanding identity accelerating growth in key U S verticals, continuing our international expansion and complementing our strong organic growth with M&A.
I'll start with identity on slide eight.
Identity services represent a tremendous growth opportunity for us and creates significant differentiation as we are far ahead of our competition due to our strategic focus and innovation based approach.
To execute on this large opportunity we have built a dedicated business unit called Sterling identity.
Let me frame the opportunity there.
The vast majority of existing background checks around the globe do not have identity verification included.
This alone represents a significant opportunity for Sterling as we believe identity should be the first step of any background screening process and thereby increase our package density.
Beyond making identity verification. The first step in every background check we have a large opportunity to sell identity services on a standalone basis identity verification and digital identity services are fast growing and in high demand as governments and organizations struggle to keep up with the rise in Ida.
Entity fraud, increasing data breaches and the shift to remote work.
In 2021, we took two important steps towards capturing this opportunity.
First we're excited about our exclusive partnership with IDB are best in class identity verification and digital wallet provider with over 70 million verified users by far the largest such network.
Through this partnership candidates need only verify their identities once and they are then able to reuse it as part of the largest trusted digital identity network in the U S.
Sterling and ideally have combined to offer robust and configurable identity services, including video chat and in person verification auctions. This powerful platform is central to our go forward strategy and includes many innovative solutions currently in development.
Second our partnership with FINRA solidifies us as a leading provider of biometric based identity solutions with a specialization in the financial services space.
We run the nation's only single source National Fingerprinting network available in all 50 States. Our state of the art technology is custom built in house and provides a fully touch screen and modern fingerprinting experience.
Through our relationship with FINRA, we now service over 3800 financial services firms and 12 background checks and fingerprinting providers processing hundreds of thousands of annual transactions.
Even more importantly, this deal is a testament to our leadership in the identity space and is serving as a strong lead generation tool within the financial services industry, which brings us to our next strategic priority for 2022 growing in key U S verticals.
In 2021, we had several verticals and geographies, which saw particularly outstanding results and we are excited about the market opportunities and many of them going forward.
One such vertical I would like to spotlight today is financial and business services shown on slide 10.
In this vertical we saw greater than 50% organic revenue growth in 2021, driven by robust base growth cross sell upsell and new customer growth.
We touched on the FINRA partnership earlier, which in just a few months since going live is already driving increased penetration in pipeline in the financial services industry.
Our fin bids vertical has built a strong reputation for best in class regulatory expertise.
Customers in industries, such as financial services must navigate complex and evolving regulatory regimes and our <unk> team is highly proficient and the rules to serve clients and maintain compliance.
This is especially crucial during the ongoing war for talent when labor turnover often leads to gaps in client service and regulatory knowledge.
Moreover, many multinational companies are looking to simplify processes and consolidate global spend with best in class service providers, our ability to navigate cross border regulatory challenges creates a distinct competitive advantage that is helping us win and retain business.
The fill this team exemplifies the success of our Verticalizing model and has built new solutions tailored to their clients.
One such example is our liens judgments in bankruptcy solution.
With the implementation of new standards for public records, a few years ago, all civil judgments and most tax liens were removed from consumer credit reports, providing a challenge for financial institutions to obtain comply and information for risk assessment and reporting to FINRA.
Using our solution Sterling clients can assess risk associated with new hires and existing employees, helping determine whether there is a need to disqualify them from performing securities related functions or establish supervisory controls for safety and security.
The <unk> team's relentless commitment to identifying and covering gaps in clients' workflows has driven significant success in winning and retaining customers their customer retention rate is even higher than the 96% rate for sterling as a whole and.
And the pipeline for new wins remains robust.
Our film business vertical is only one example of the success of our vertical lives model and we look forward to sharing spotlights on future call about other use vertical displaying similarly, great momentum.
Our next 2022 strategic priority is expanding our global scale, which we show on slide 11.
I pointed out earlier that the majority of our large and growing Tam sits outside the U S. The international market is even more fragmented and less penetrated than in the U S, making international expansion a compelling opportunity for us to pursue.
A key driver of this opportunity is increasing adoption of background screening outside the U S. Many international markets are only just beginning to view employment background checks as critical components of their hiring functions, which presents tremendous upside for our business.
We believe we are already the leading global background screening provider in 2021, we expanded to 19% of revenues outside the U S with 55% year over year revenue growth, including 44% organic constant currency revenue growth.
We see opportunity to continue growing our market share outside the U S.
The secret to our success internationally is that we empower local leaders and teams to make decisions that serve local customers in this way we deliver the boutique feel of a local firm while also delivering the scale and capabilities of a leading global player.
This duality underpins our ability to win both local deals overseas as well as large global deals serving multi national companies.
The final strategic focus I'll discuss is M&A.
Our priority remains organic revenue growth through share gains and market growth, but we see a compelling opportunity to complement our strong growth with M&A.
We have the appetite and capacity for deals of varying size and type, but we are most focused on tuck in deals that complement our core strategy with upside from synergistic integration.
Epi is a great example of this approach and as highlighted on slide 13.
EBIT as a high quality background screening provider with a strong reputation for client service and a commitment to compliance and I can say that we are even more impressed with the team now that they have joined the Sterling family.
The Abi deal grows our share in key U S verticals with a blue chip enterprise focused client base. Moreover, <unk> client base is highly diversified with minimal single client or vertical concentration.
From a financial perspective, we expect the acquisition to be accretive to our results as we paid a reasonable price well within our M&A tuck in framework and we see robust synergy potential from migrating clients to our platform and fulfillment.
Integration will take 12 to 18 months once that process is complete we expect <unk> revenues to flow through at a 45% to 50% rate similar to our underlying incremental margins.
Our pipeline for attractive tuck ins is deep and growing and we hope to announce additional similar deals during 2022.
Additionally, we expect an accelerating pace of consolidation in our industry over the next couple of years as smaller competitors struggle to compete and are more macro sensitive compared to scale providers, we plan to be a significant player in that consolidation.
In conclusion, we enter 2022 with a lot of enthusiasm confident in our ability to execute organically and to build for the future with great strategic opportunities regardless of the direction in which the economy goes.
And now I will hand, it over to Peter Walker, our CFO to take you through our financial results and 2022 guidance Peter.
Thank you Josh and good morning, everyone, turning now to an overview of our most recent quarterly performance on slide 16.
We reported company record quarterly revenues of $174 million.
This was a 35, 1% increase compared to the fourth quarter of 2020, including 32, 3% organic constant currency revenue growth too.
Two 3% contribution from M&A, and 50 basis point benefit due to the foreign currency translation the.
The organic revenue increase included 23, 1% of base revenue growth, including cross sell upsell net of attrition and nine 6% of new customer growth.
Revenue in our U S business grew 36% compared to the fourth quarter of 2020, we saw double digit revenue growth in all our industry verticals with particularly exceptional results in our industrials and gig verticals.
Revenue in our international business grew 17%.
On an organic constant currency basis during the fourth quarter.
The quarter's strong results included some expected slowdown from earlier in 2021 due to lapping strong growth in <unk> 'twenty.
Due to our strong topline results and attractive incremental margins fourth quarter, adjusted EBITDA was $44 million representing.
Representing a 58% year over year increase compared to the fourth quarter of 2020 adjust.
Adjusted EBIT margin for the fourth quarter of 'twenty. One was 25, 4% at 370 basis point expansion from the fourth quarter of 2020.
This was the company's fourth consecutive quarter with adjusted EBIT margin expansion of greater than 300 basis points proving that our net profitability scales as revenue scale.
<unk> incremental margins were tempered a bit by a full quarter of public company costs and the EBIT lower margin in December the impact to margins from public company costs in EBIT will continue during 2022, but should moderate over the course of the year as we lap our September IPO as well.
<unk> integrate the <unk> acquisition and realized cost synergies.
We had adjusted net income of $22 6 million or 23 cents per diluted share in the fourth quarter of 2021, representing year over year growth in adjusted earnings per share of 130%.
This growth is primarily driven by strong year over year growth in revenues and operating income.
Our effective tax rate in the fourth quarter is 21% due to several discrete items, which benefited us.
We expect the rate to return to our normalized 26% rate for 2022.
Slide 17 shows our financial results for full year 2021.
<unk> had an excellent 2021 in all facets of our business with record levels of revenue and profitability and the strong results have continued thus far in 2022.
For the full year 2021, we reported revenues of $642 million, reflecting a 41, 4% increase compared to 2020 includes.
Including 39% organic constant currency revenue growth.
One 7% benefit from foreign currency translation, and 70 basis points contribution from M&A.
The organic revenue increase included 28, 4% of base revenue growth, including cross sell upsell net of attrition and 12, 3% of new customer growth, notably our investments in technology and product coupled with our best in class turnaround times and customer.
Our first focus drove a 200 basis point improvement during 2021, and our gross retention rate from 94% to 96%.
Revenue in our U S business grew organically by 38% compared to 2020, we saw broad based strength across industry verticals with particularly exceptional results in our tech media and our fin bids verticals as we executed our growth playbook in the U S economy benefited from <unk>.
Strong macroeconomic factors.
In recent years, we have been strategic in selecting high growth verticals with significant opportunity for our business. We saw those efforts pay off during 2021 and expect this momentum to continue into 2022.
Approximately 19% of revenue was generated outside of the U S. In 2021 compared to 17% of revenue generated outside the U S. In 2020.
International revenue grew 44% on an organic constant currency basis during 2021, demonstrating our growing international presence as Josh discussed we saw double digit organic constant currency revenue growth in all three of our international regions.
Adjusted EBITDA for the full year was $179 million, representing a 79% year over year increase compared to 2020 adjusted EBIT margin for the year was 27, 9% or 590 basis point expansion from 2020.
Incremental adjusted EBIT margins of 42%.
2021 was a great demonstration of the operating leverage in our business as we benefited from strong revenue growth as well as automation and cost optimization initiatives, which have streamlined our cost base.
For 2021, we had adjusted net income of $92 million or 97 cents per diluted share representing year over year growth in adjusted earnings per share of 223%.
This growth was driven by strong year over year revenue growth and improved operating leverage as well as an improvement in DNA and interest expense.
As seen on slide 18, our average organic constant currency revenue growth has been 17% since the beginning of 2020.
Looking at our profitability trends on slide 19, our adjusted EBIT growth has been 44% since the beginning of 2020 following a similar path to revenues. This data demonstrates that we have been organically growing on average at or above the 9% to 11% framework with robust margin expansion.
And since we launched our new strategy three years ago.
Turning to slide 20, we generated free cash flow in 2021 of $84 million.
Normalized for one time cash and non operating charges related to the IPO. This was an increase of $64 million or 328% over 2020 and was due to strong revenue growth as well as permanent expense reductions implemented during 2020.
Our year end 2021, net leverage was two six times net debt to adjusted EBITDA squarely inside our two to three times net leverage target. We ended the year with total debt of $510 million in cash and cash equivalents of $48 million, which reflects the use of 100 million.
Most of which we received from the IPO to pay down our first lien credit facility as well as 67 million to acquire epi.
Let's now turn to slide 21 to touch on our capital allocation priorities.
First we remain focused on internal investment opportunities new product development and other projects that would increase organic growth and continued improvement in operating leverage through robotics process automation and vendor network optimization.
Second we have a robust pipeline of acquisition opportunities. We are primarily focused on targets that are U S. Tuck in similar to epi.
Or provide us with increased scale in existing international markets or expand us into new geographies.
And finally, we are committed to maintaining a strong balance sheet with a targeted long term leverage ratio of two to three times net debt to adjusted EBITDA absent any temporary variations as a result of potential future scale acquisitions.
On slides 22, and 'twenty three we provide our guidance for 2022.
For 2022, we expect to generate revenues of $740 to $755 million representing year over year growth of 15 to 17, 5%.
Adjusted EBITDA of $205 million to $212 million, representing year over year growth of 14, five to 18, 5%.
And adjusted net income of $112 million to $118 million representing year over year growth of 21, 5% to 28%.
As shown on slide 23, our guidance includes organic constant currency revenue growth of 10% to 12%, we're assuming five to five 5% contribution from the acquisition of Evi and no material impact from the fluctuation in foreign currency 2022, we'll continue to notable strength we displayed.
During 2021, albeit at a naturally more moderate pace given that we will be growing over a year of 41% growth. Our 2022 organic constant currency revenue guidance of 10% to 12% is above our long term framework of 9% to 11% per year. We are confident in achieving these two.
'twenty two targets because of our encouraging client conversations new wins coming online during 2022, and our deep pipeline of prospects.
We expect strong year over year growth throughout the year, but forecast <unk> 2022 to have our strongest growth rate as we are comping off our lowest revenue quarter in 2021 based on what we've seen to date, we expect revenue growth for the first quarter of 2022 to end up solidly above.
The high end of our guidance range, which is why we have lifted our full year organic revenue growth guidance above the typical 9% to 11% range turning to margins. Our 'twenty two guidance implies an adjusted EBIT margin of 28% at the midpoint, which would be in line with 2021 2022 underlying margin.
Expansion of at least 100 basis points is muted by the absorption of three quarters of public company costs and acquisition of lower margin <unk> business prior to full integration.
The year over year impact to margins of public company costs and Abi will be felt most at the beginning of the year, but should steadily alleviate as we go through 2022 and benefit from lapping the IPO plus Abi cost synergies. We currently expect Q1 to be our lowest margin quarter of the year.
<unk> with approximately 25% margins.
Finally, turning to our adjusted net income growth guidance of $21, 5% to 28% we will benefit this year from reduced interest expense and D&A, which should drive strong growth to the bottom line well in excess of our revenue and adjusted EBIT growth. We are encouraged by the level of leverage in our financial model.
Diving strong adjusted net income growth during 2022, even as adjusted EBIT margins remained similar to 2021.
To further help with your modeling of 'twenty, two we're assuming capex of approximately $18 million.
Stock compensation expense of approximately $23 million.
Tech transformation of <unk> integration costs of approximately $16 million.
Interest expense of approximately $27 million DNA.
DNA net of intangible amortization of $26 million and effective tax rate of 26% and diluted share count of $101 million I'll close our prepared remarks with our long term targets on slide 24, as we mentioned during our <unk> 'twenty one earnings call.
For the next three to five years, we are targeting an annual organic revenue growth rate of 9% to 11% with adjusted EBIT margins, ultimately expanding to 29% to 32% or more over that period. We have also now added our long term target for annual adjusted net income.
<unk> growth of 15% to 20% per year.
We're thrilled with the trajectory of our company and look forward to sharing that success with you as we execute on our strategy for years to come.
That concludes our prepared remarks at this time operator, please open up the line for questions.
Thank you we will now.
I'll start our Q&A session, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
To withdraw your question Please press star one.
Ask your question. Please ensure that your line is underneath that likely.
And our first question comes from Toni Kaplan from Morgan Stanley . Please go ahead.
Thanks, so much.
It sounds like the labor market conditions have been really strong.
Just wanted to understand what is sort of built into the guidance is it really a.
<unk> current trends or some sort of reversion to more normal levels and.
Help us assess the conservatism, there and and what risks do you see sort of that current strength continuing.
Good morning, Tony and thanks for the question it's Josh.
I think our assumption is that there is going to be a sustained level of job churn.
And there are near record levels as I mentioned in my prepared remarks of open jobs remaining not just in the U S. But really in many many markets around the globe. So even if that were to be muted a bit through the year, we think that our guidance is.
Well in line with covering for that but we do expect the levels of job churn to actually continue into the future at an elevated rate from before the pandemic.
Don't see that returning to those lower levels and we talked about that on some previous calls but.
Looking at the way.
Gen Z millennials, others look at staying in jobs and think about their careers looking at the opportunities around the remote work and people being able to more easily get new jobs switch jobs do multiple jobs with gig work. Those we think are demographic changes that will continue for years to come probably not at the <unk>.
Same levels that we saw last year or that we're seeing right now but at levels that are certainly high enough to support our long term guidance that we've provided.
Great I wanted to ask about international as well.
You just talk about are you seeing a little bit of a different mix versus the U S. In terms of where your growth comes from.
Whether it be taking share market growths are up selling and when you think about like Europe and APAC for example, ace.
Is competition, they're more regional or local focused.
Just sorry, a who is who are the main competitors that we should be paying attention to there.
Great. Thanks, Toni So I think as I mentioned in my prepared remarks, and last call. We just really love our position in the international markets, where we have a scaled team in a scaled business in each of the three regions that we primarily operate in today, Canada, EMEA and Asia Pacific and we've been very thoughtful.
About how we're targeting and investing in those markets and we are growing share relative to competitors and taking wins away from them, both local and global competitors frankly in those markets generally for the local businesses that are the majority of our business internationally, we're taking those from local competitors or.
Or they are just coming online and doing background screening for the first time because as we mentioned these markets are much less mature in our industry.
In the U S market, which has been doing background screening for an extended period of time. We also are seeing.
Great success in the global gig economy outside the U S, where we think we are the market leader by far and so we are seeing significant wins, there where it is often not from competition. It's just replacing either in house solutions, where they're first time going and doing the screening. We also see good base growth and good <unk>.
Up sell cross sell in these markets. So we're very excited about the international opportunity and we do continue to expect to see it be a good growth driver for us going forward.
That's great and congrats on that really strong results.
Thank you so much Tony.
Okay.
Perfect. Thank you Tony for your question. Our next question comes from.
Shlomo Rosenbaum.
Please go ahead your line is open.
Yeah.
Hi, Thank you very much for taking my questions, Hey, Josh maybe I can ask you a little bit about the <unk> acquisition.
Can you talk about.
For the period of 12 to 18 months of integration how should we think about the EBITDA contributing to 2022 and then just in general how many acquisitions are there like this does this kind of unique or is this one where you could repeat it because it looks like if you look out like two years or something you're on a synergize.
Youre going to be getting this thing at like four times EBITDA or below.
Okay.
Yeah.
Thanks very much for the question Shlomo it's good to talk to you. So I'm going to make a couple of comments on <unk> and then I'll, let Peter walked through some of the math for you to think about for this year and a little more detail. So.
So first of all we're extremely pleased with this acquisition. It was definitely one of the targets we had at the top of our list for the last couple of years.
And we were very pleased when Rick did reach out the former owner and said he was finally ready to sell the asset I think our perspective is that there are actually a lot of companies that looked like this today. Both in terms of this size slightly bigger slightly larger and also we believe that there are.
There are small players that we're starting to see consolidate and roll up themselves to get to this size. So we actually think there will be a strong pipeline for the next few years of these deals and as I mentioned in my remarks, we do think that the consolidation, we're seeing that accelerate and we plan to be at the front end of helping that happen and taking advantage of that.
Complement our strong organic growth and.
And I think that our view is these do ultimately drop through at our long term rate of 45% to 50% based on what we're seeing and we expect to get to that as we fully synergize.
The synergies are largely accomplished not entirely but largely accomplished by us taking these clients and putting them onto the sterling platform. The moment, we do that our fulfillment engine goes through when we get our better gross margin and we stopped paying the technology costs to run the platform that we acquired which in this case is <unk>.
Third party platform. So it's just literally dollars out the door to a third party that go away as soon as we finished migrating those clients in terms of the 12 months to 18 months timeline that is probably longer than what we would normally think of for an acquisition of this size and the reason for that is a lot of the work is similar to the transport.
Work that we're already doing in our last phase of project ignite. So we have to work the evi transports in along with.
Our project ignite work and so we will come back and talk more about that in our first quarter call and give you more specificity of exactly when we think we'll finish the ibs UBI work and if that has any impact on project ignite, but right. Now we think it's safe to say that we will get to that full synergy rate in 12 months to 18 months in terms of how to think about what might.
There might not be flowing through in the guidance. We've provided for this year, let me turn it to Peter to give you some of those details Shlomo. So hey, good morning, Shlomo as we shared with you adjusted EBIT margin guidance for 'twenty, two is going to be 28%. This year, we expect that would be 100 beds or more.
It wasn't for the Evi acquisition and public company cost and Thats, because the evi acquisition from an adjusted EBIT margin will be operating lower than the 45 to 50 cents.
Then it will operate at when it's ultimately integrated.
Okay.
And then can you give an update just on where you stand with project ignite and.
Are you on pace to finish it in the time when you want it and when do you expect to finish it.
Yes. Thanks Shlomo so at this point, we remain on target with project ignite Peter shared sort of a combined technology costs related to the project as well as some of the UBI work.
In his prepared remarks, I think the only thing we will say and I'll come back on this in the next quarter call is.
Given that we can have some really good synergies potentially faster from UBI. It's possible, we'll choose to restock some of the work to front end, the evi work, which could lead.
For the transport project piece of project ignite to go a quarter or two longer but we're not in a position to tell you that yet we haven't factored that into our numbers, yet and we will come back I think by the first quarter call. We should have some good visibility into how we've chosen to lay out that work.
And the costs are projected at night.
We then add backs because theyre nonrecurring closing down platform cost, but the other benefit to think about that youre not seeing is that we do and the project. We do expect capex to go down by about 30% as it will just be spending less capitalized dollars on that initiative.
Thank you.
Perfect. Thank you so much for your question.
Next question comes from Andrew Nicholas from William Blair. Please go ahead. Your line is open.
Hi, Good morning. Thanks. This is actually Trevor Romeo in for Andrew I. Appreciate you taking the questions.
The first one was just kind of thinking about your 2022 revenue guidance I think you mentioned the deep line of prospects for new logos, just kind of wondering if there are any particular areas, where the pipeline for new logos with particularly strong whether that's kind of by vertical geography client size.
Any characteristics, where youre seeing particular.
Strong influx of potential new clients.
Thanks, Trevor and good to talk to you. So we don't usually break down our pipeline.
Specifically, just because again, we like to focus on the business. We know when we have it but our pipeline is strong across all of our verticals and all of our regions right now and I think it speaks to the fact that we made deliberate choices in terms of what markets to focus on and what verticals to focus on because we believe that they are.
All the markets.
And verticals, where we have.
Solutions that are competitively advantaged and gives us a right to win the business. So we're very encouraged with our pipeline really across the board.
Okay, great. Thanks, that's helpful and then.
Just kind of wondering how the inflationary environment is impacting sterling kind of both from a cost perspective, and a pricing perspective are you seeing any increasing.
I guess accelerating cost increases right now and if so.
How confident are you in the ability to pass those along in the form of higher prices.
<unk>.
Yes, so I would say in terms of delivering our products and services.
Been able to manage quite a few of the price increases so we're not seeing a significant.
Increase in costs related to cost.
I would say that we are seeing some marginal wage inflation in our labor cost that sits in our cost of revenues and in our Opex.
Great. Thanks again.
Yes, thanks, so much.
Okay.
Perfect. Thank you so much for your question and our next question comes from George Tong from Goldman Sachs. Please go ahead.
Hi, Thanks, good morning.
Your midpoint of guidance assumes minimal EBITDA margin expansion in 2022, acknowledging epi has about a 100 basis point drag to margins. This year can you discuss overall puts and takes that may impact margin performance for 2022.
Yeah, Hey, good morning, George Nice to hear from you.
If you think about let's take the midpoint of the organic growth range of 11%. If we think about that call. It $71 million of revenue that will put on in 'twenty. Two that's going to have a flow through rate is call it 40% to 45% a little bit muted off the 45 to 50 because of the wage inflation components, we just covered.
Yeah.
And so based on that we would have seen EBITDA margin expansion.
100 basis points or more so call. It 29, plus in 'twenty, two but what we're seeing is a drag really from two things one is evi.
Not operating yet at the 45% to 50% drop through which they will have full integration, which will occur call. It 12 to 18 months and then also the onetime lift from three quarters of public company costs.
Got it.
One.
Owned <unk> now for several months can you discuss how EBIT growth compares with Sterling and.
Talk about progress with synergy realization.
Yeah. Thanks, George It's Josh. Thank you for the question good to talk to you.
So I think that the main comment I would say is that EBIT growth is strong.
I think that it's.
We weighed in looking at the business one thing I will note is that when we model acquisitions, we don't model new business growth as part of that acquisition because of course, that's pipeline that we also could have and that we can't count on so just looking at their kind of base growth Cross.
Sell up sell.
It was a little bit slower than what we would've seen on the Sterling side. However, we think that we have a great opportunity to improve the cross sell upsell within the EBIT base, because we have a lot more products that we can add on.
And the ability to support incremental divisions of some of their clients that they were not able to support a given the characteristics of those so we're very excited and believe that it is going to be consistent with our growth algorithm and not a drag on that over time, which is what we really like about these synergistic tuck in in terms of progress with integration.
<unk>.
We feel really good that the team is kind of integrated with us and we're working well and we've got a good team now working on moving the clients over and as the clients move individual team members are able to move into our verticals as well with their clients. So that's part of the work that will go on through the year and we will be able to use some of the great talent that we found that API to <unk>.
We'll open positions at Sterling that like everyone else, we've been out there recruiting and trying to bring in people. So that is part of part and parcel of our synergy case, and we think that the progress. Thus far is exactly where we would have wanted it to be.
Very helpful. Thank you.
Sure. Thanks George.
Thank you so much George for your question and our next question comes from Andrew <unk> from JP Morgan. Please go ahead.
Hi, Josh two questions. The first one is on recruiting in general when I look at open positions in the background check industry. There's just a lot of open positions right now, particularly maybe at a 50000 dollar level area. My question is.
How contingent is it for you to achieve your guidance to hit your recruiting goals internally and how has the recruiting and retention been.
At the beginning of the year relative to plan I have one more question.
Okay. So first of all thanks, Andrew and good to talk to you I appreciate the question.
A couple of comments first I think that.
Long term for us it is critical that we're able to fill these roles because many of those positions that youre seeing at those levels are ultimately for client support.
And to be able to manage the clients to the level of service that they've grown accustomed to with Sterling.
For us we believe the evi team helps us to fill some of those gaps immediately but we do need to go and fill those that will not impact our guidance for this year, but long term health of the business maintaining those retention rates, we've given the kind of long term buildup to that in the kind of $95 96.
Percent keeping that requires that level of service for us keep hiring is actually in our captive.
Entities in Asia, both in India and.
And in the Philippines, and other places where most of our fulfillment resources sit and there we've actually been able to.
To fill our open roles successfully and bring people in and also when necessary to use vendors in order to augment given the very large volumes that we've been seeing and we in our guidance and otherwise we are.
Planning and expecting to be staffing for the peak earlier than we normally do because we keep seeing such strong volumes. We do have very very high employee engagement and employee net promoter scores, which we think will help us with retention, but we do see a lot of the trends that many people see in terms of job churn in it.
Being able to recruit so I think Andrew we're not worried about it from hitting our guidance for this year, but longer term in order to maintain our growth numbers, which really is around the the retention rate, we do need to make sure. We fill those roles as we have them posted.
Great. My other question is about package density package density.
It's such a tight labor market here for employers and I, just feel like perhaps employers might be hesitant to increase their package density meaning to make more factors in their background check but of course that will read out more candidates and so my question is you know as <unk>.
You look at 'twenty two do you feel like package density will go up from 21 and is my.
Just a suggestion.
Sensitivity to employers that you are seeing that they might be hesitant to increase package density because it decreases their pool of candidates.
So Andrew Thank you very much for the question and Im going to answer it in a few parts. So let me just start with what we what we saw last year, which we've given the best metric we've given for package density and it's not an exact.
Apple to apples is our cross sell up sell metric with the $4 to 5% annual growth, whereas last year, we saw.
Eight.
Percent, so almost double the low end of that and substantially above so we're very very pleased with that so we did see package density increase in addition to cross selling increase last year.
In our guidance this year and again, we've raised our range from our long term targets.
Start the year, we do expect to continue to see each of our elements potentially over perform and that's part of why we're so optimistic about our ability to hit our guidance. This year. So that we raised it. So that's sort of just want to start with a general answer to say we have built in at a minimum are 4%.
<unk> long term target with some upside to that in the cross sell upsell, which speaks to our expectations on package density as a whole.
In terms of what we're likely to see going forward.
Your hypothesis two things one I have not seen a single client shrink the density of their package and take more risk in order to hire the main thing for them is speed right. So as long as the background screen is occurring within the timeframes. They need so they don't lose the candidate along the way.
They are continuing to.
Really at least at the minimum due the same background screening that they were that they were going to do so that is a trend that is a trend where we're seeing and.
We expect to keep seeing that.
That's the long tail on our background screening is often the drug screening the people who are doing the drug and health screening are required to do so and theyre not getting rid of it.
So that would be the thing you would look at first we're not seeing that trend and don't expect to see at the last point I would make we think on the package density side identity in particular and as I said in my remarks, adding identity at the front end of a background check that actually speeds up the background checks and makes it more accurate and will allow them to more quickly.
Weed out candidates that they don't want so we actually think that provides a tremendous opportunity for us to increase package density while actually helping our clients to bring in their candidates more quickly and effectively so hopefully that helps give you some color on what we're thinking.
That's well said Josh Thank you.
Okay.
Thank you very much for your question. Our next question comes from Jason <unk> from Keybanc capital. Please go ahead.
Great. Thanks for fitting me in.
First with the FINRA partnership I think you initially outlined the potential for this partnership to drive demand.
Incremental wins in that.
Trailing platform.
I think in your prepared comments, you said that it was already driving some pipeline maybe can you just talk about some of the trends youre seeing there.
Yes first good to talk to Jason Thanks for the question so.
We have seen a significant increase in our pipeline in the financial services sector, and particularly in particular coming out of the FINRA partnership they know that we're processing their fingerprints for them. Even if they were currently giving them through a competitive background check provider or other fingerprint Chandler and I mentioned, we're serving a number of those now.
Through this partnership where we are basically sitting behind the scenes and processing for them like a toll booth, which is a wonderful business to be in from my Mastercard days I'd just love those kinds of businesses. So that's very attractive to us, but then the clients are saying Gee, if I'm already processing with you on the fingerprint side, let's see what else you have to offer and so.
We've seen a really robust pipeline there.
Some certainly in the large enterprise banks, where they realize the importance of that relationship, but we're actually really seeing it enable us to penetrate mid and smaller size banks, where we typically have not had a significant amount of business and they are now seeing a reason to do business with us which is great. So we see a robust pipeline building.
I'll provide more color on that as we close those deals and bring them online in future calls.
Okay excellent and then maybe a quick clarification and question for Peter I think.
And the guidance commentary you said that Q1 growth would be at the high end of the full year guide.
If we kind of think about the rest of the year should we think of the deceleration beginning in <unk> is maybe just a function of the growth comps.
That's correct so.
We're comping over a low one Q2 1, so that's why we're seeing such a large growth rate thus far in <unk> 'twenty. Two we do expect the rest of the quarters to be within.
The range of guidance that we gave you a 10% to 12.
Perfect. Thanks.
Thanks, Jason.
Perfect. Thanks, Josef quick question and our next question comes from Andre Childress from Baird. Please go ahead.
This is Andre childress onto Mark Mark Hahn, congratulations on a strong quarter and thank you for taking our questions. So I just wanted to follow up on a question earlier about employment trends. One thing you see in Q4 and what are you seeing in Q Q1 regarding the speed of hiring I know Q4 has some seasonality, but how did the speed of hiring.
Compared to what you were internally expecting regarding the seasonality and is there a pace of acceleration as it kind of stayed the same or maybe slow down a bit just some color there would be very helpful.
Yes, so thanks Andre for the question.
It's Josh let me, let me try to unpack your question in two different ways and then we can see if that answers. It so first.
In terms of speed of hiring.
In terms of like clients like how much hiring they're doing we don't think anything has been kind of pulled forward. If thats. The question, we think that our clients are hiring within their within their plans. They are trying to bring people onboard faster.
Simply because they have so many open roles and they really need to fill those seats and we are seeing that trend continue in Q1. However, what we're seeing which we think is a benefit as that.
I have to they have to go through the process often with more than one candidate in order to fill it because candidates do have multiple choices of jobs that they can choose in many cases on these lower end jobs, which drive the majority of our volume and so they have to move fast, but they also are not going to get 100% of the people who even get through there.
Ground screen and are offered the opportunity to come and work. So I think that in some ways that does mean that the rules get filled slower simply because they don't get their first choice in many cases, but they do run multiple background screens than when thats. The case, so I think that hopefully answers your question, but it's both in terms of.
There is a need to fill roles faster because there are so many open and people are trying to do that but in the end because they are losing candidates. If you asked me what's the average time to hire from somebody posting a roll to getting them to start working.
Don't know that that has moved materially over time.
What we're seeing is just that it's harder for them to actually fill it but when they find people. They are moving them through the funnel faster, but as an average it's probably averaging out to where it was before.
And I would just add with <unk> being a record revenue quarter for the year, we really have seen a change in the business.
Around seasonality, where we don't expect to see that <unk> that we used to see and again, it's just because of a better spread of.
Clients that we have today and diversification and then your other question on pull through as we said you know we're expecting.
First quarter of 'twenty, two thus far to be at the high end of the guidance.
Really demonstrating that we're continuing to see that performance.
Great. Thanks, so much and Josh on that.
First point you made is there any sort of metrics you can provide in terms of like before the pandemic, you've kind of might've seen one one background checks per successful higher because it's kind of like that employee reneging.
Or is it maybe that's now one point or one five or do you have any metrics to provide I would imagine it makes sense, but there's going to be a lot more employees getting multiple offers and taking one of the core by law because they may have and I can.
To provide a lot more.
Screens per higher for you guys.
Yes, Andrew it's a great question I don't have hard data that I can give you will look to see what we can find.
They are publicly or from our clients in and see if we can give you some metrics around that to help in the future.
Awesome well, thanks, so much and congratulations on the strong quarter.
Thank you so much.
Thank you very much Andre for your question and our final question comes from Manav Patnaik from Barclays. Please go ahead.
Good morning. This is the only Kennedy on for Manav. Thank you for taking my question just wanted to if I may on pack with regards to the tremendous opportunity.
Identification verification.
The differentiator in the dark meat offering I think we had previously talked about.
I'd verification and post hire monitoring being approximately 10% of the mix is that would it still it still is and also I'm, assuming but want to confirm that your guidance, even with the 10 to 12 above the typical 9% to 11 doesn't contemplate the <unk> contribution.
Okay.
Okay. Thanks, Ron and it's Josh So I think first of all your assumption is correct that our numbers do currently still reflect roughly 10% from the.
The pre hire identity and post hire monitoring and Onboarding type solutions and our guidance for.
<unk> hundred 22 does not reflect a change in that mix, but as we've said on previous calls we do ultimately expect that mix to shift, particularly from what we're seeing with identity become higher than 10%, but that is not baked into our current assumptions and as soon as we see that trajectory.
The shift in a meaningful way, we will share that with you.
Okay. Thank you and then just one last quick one if I may please in the competitive dynamic obviously, some insight into it based on what you've talked about what you're seeing from new business wins from the vertical international standpoint, and also the acceleration of consolidation in the industry.
Anything else, you're seeing with regards to differentiation between yourself and the big three.
And then kind of the competitive dynamic with the more medium players like <unk> and accurate and then what youre seeing from checker and good hire.
Are you seeing true disruption, there or or anything of that nature.
Sure. So I think you listed a lot of competitors rather than going kind of one by one I think what I'll say is that we like our chances versus everyone.
And it's very much because of our vertical and regional strategy. So typically when we're talking to a client we are able to talk their language in terms of the industry. They are in not just our sales team not just our service team, but our product team our implementation teams our technology teams and that's why we've organized the way we.
Half and being able to do that locally around the world and in the various verticals that we serve and I gave some detail on how that works with the financial and business services sector. Today, we think that allows us to unearth pain points that our clients are having because we're seeing it across so many and to bring solutions to the clients in a way.
Where we compete very effectively with the big players who are more generalized providers than we are because we're very verticalizing that way, but it also allows us to compete with the boutique firms who may specialize in one industry or one vertical like when you mentioned Chuck are higher and so we like our chances there as well and we are good.
And rates against all of them I think my my commentary more on the consolidation is I think it just gets harder and harder for some of the smaller and specialty players to compete over time, which will lead to the consolidation because of the scale that a business like ours is able to have and therefore.
What we're able to do in terms of servicing the clients, but I will tell you our true secret sauce, we've got.
Our market, leading turnaround times market, leading quality metrics, we think our technology tools are the best but in the end we win because of our people is about that ability to speak to and work with the client at a very detailed level and that's why I highlighted the great work of the financial and business services team today, but that's true in all our verticals and all are.
Geographies and we look forward to sharing more about some of those on future calls so hopefully that helps with your question.
Yes. Thank you.
Perfect. Thank you Manav for your questions. At this time there are no further questions and I'd like to thank everybody for joining today's call. You may now disconnect your lines.
Okay.
Okay.
Yes.