Q4 2022 HireRight Holdings Corp Earnings Call
Speaker 2: Good afternoon ladies and gentlemen and welcome to Higher Right's fourth quarter 2022 conference call.
Speaker 2: At this time, all participants are in a listen-only mode. I remind everyone that management will refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures is included in the press release issued today, which is available in the investor relations section of Higher Rights' website. Also during this call, management's remarks will include forward-looking statements, including related to macroeconomic conditions, demand for the company's services and the company's technology improvement, and cost reduction initiatives. Such statements, our predictions, and actual results may differ materially.
Speaker 2: Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the Form 10-K filed with Securities and Exchange Commission. In the sections of the document entitled Risk Factors, Forward-Looking Statements, and Management Discussion and Analysis of Financial Condition and Results of Operations.
Speaker 3: Thank you operator and good afternoon everyone. I appreciate everyone taking the time with us today as we share our fourth quarter and full year 2022 results. To begin I am very pleased that despite continued macroeconomic headwinds we achieved strong results in 2022 and exceeded the guidance we provided on our third quarter earnings call. As we noted during that call we observed a slowing trend in hiring volumes which continued throughout the fourth quarter with many companies announcing staffing reductions or the delay in hiring driven primarily by a general nervousness on the economic outlook.
Speaker 3: With that said, our revenue for fourth quarter was $175 million, down 12% versus the prior year period. It is important to note that the significant majority of the decline came from just two verticals, technology and government, both of which saw a 30% decline. Technology sector layoffs and slowing of replacement hiring is not surprising, given the press we've all read for the last six months. In the case of the government sector, the slowdown appears to have more to do with difficulty in finding qualified applicants than an elimination of positions.
Speaker 3: excluding these two verticals.
Speaker 3: Q4 showed a much more modest decline of 4% relative to the prior year.
Speaker 3: As you have heard me say many times, quality and thoroughness in our investigations remain key selling points for us, particularly in our core markets that tend to be more demanding, and our single global platform and automation initiatives continue to be differentiators. To leverage these strengths, our account management and go-to-market teams continue to focus on developing and expanding new global client relationships. During the quarter, we added 42 new enterprise customers.
Speaker 3: two-thirds of which are distributed across our four core verticals. Turning to profitability, our adjusted EBITDA margin improved 70 basis points over the prior year period on adjusted EBITDA of 38.9 million dollars.
Speaker 3: Despite the challenging demand environment, we were able to increase our gross margins over 300 basis points to 47.3%.
Speaker 3: This improvement was driven by increased automation,
Speaker 3: rebalancing our labor mix by increasing our offshore presence and increased cost management of data providers. All these initiatives are focused on reducing the cost of delivering our services. Turning to our annual results, we generated revenue of 807 million dollars, a ten and a half percent increase from fiscal year 21, our gross margin increased 169 basis points to 46 percent, adjusted EBITDA grew 18 percent to 188 million dollars, an adjusted net income including the effects of the reversal of our deferred tax asset valuation allowance.
Speaker 3: increased 148% to $194 million from $78 million.
Speaker 3: Our industry leadership continues to be evidenced by the performance of our top-tier customer base and our core verticals of healthcare, technology, financial services, and transportation. Annually, despite the lower Q4 hiring trends, our core verticals collectively grew 14% versus 2021, led by healthcare, which grew 23%. Transportation continued its rebound from pandemic lows, growing 17%, while financial services and technology grew 11% and 7% respectively.
Speaker 3: I would also like to highlight our recent announcement that we have entered into a partnership with Griffin HR, a Form I-9 and E-Verify compliance solutions provider that will allow higher ed customers to benefit from access to their interactive I-9 program dashboards.
Speaker 3: self-service reporting, customized workflows, auditing capabilities, and real-time platform updates to help meet regulatory compliance requirements. As we previously stated, we are always looking for ways to bolster our services and to offer our customers innovative background screening solutions.
Speaker 3: Lastly, I would like to provide an update on our platform and fulfillment technology initiatives.
Speaker 3: As the improving margin results validate, we are already benefiting from automation of our back office fulfillment processes, a project that began in the fall of 2021.
Speaker 3: We have completed the build-out of the core platform and several key pieces of functionality.
Speaker 3: We are continuing to scale that new platform with our US customers and will soon be extending it internationally.
Speaker 3: We will continue to enhance our overall delivery platform in a measured manner while keeping an eye on the broader macro environment.
Speaker 3: This will enable us to further control costs while making incremental improvements to automation, quality and profitability.
Speaker 3: We continue to expect modest financial benefits in 2023 from these initiatives and remain committed to overall margin expansion this year and in the foreseeable future. In closing, we're pleased with our results given the backdrop of the broader macro environment.
Speaker 3: And as is always the case, the macrocycle will run its course.
Speaker 3: and we will be well positioned as a leaner and more efficient organization as the hiring market picks up yet again whether this year or next.
Speaker 3: The underlying demand for talent remains strong and the underlying drivers of increased hiring velocity we believe are here for the long term.
Speaker 3: In the meantime, we will continue to focus on expanding margins.
Speaker 3: upselling to existing customers, adding new logos, and growing our core verticals through new global client relationships while continuing to manage costs.
Speaker 3: Our talented and dedicated teams focus on these principles, gives us confidence in the long-term outlook and our ability to create significant shareholder value over time.
Speaker 3: With that, I'll turn the call over to Tom for a closer look at our fourth quarter financial performance and our outlook for 2023. Tom?
Speaker 3: Thank you Guy. Good afternoon everyone and thank you for joining our call today.
Speaker 4: As Guy mentioned, our fourth quarter revenue was $175 million, down 12% versus the prior year.
Speaker 4: This includes a 1% negative impact from foreign currency as well as a 30% decline from a technology and government vertical.
Speaker 4: Excluding these two verticals and the foreign currency impact, revenue would have been down 3% versus the prior year.
Speaker 4: Revenue from new customers and upsells exceeded $13 million in the quarter, partially offsetting existing customer declines.
Speaker 4: Diving deeper into Q4 revenue, a few of the more resilient verticals were manufacturing and transportation. The Q4 revenue was also a major part of the Q4 revenue.
Speaker 4: each of which posted modest gains in the quarter over the prior year.
Speaker 4: Additionally, healthcare and retail and hospitality showed only modest reductions compared to the prior year.
Speaker 4: Healthcare, with its strong growth over the prior year, is now our largest vertical.
Speaker 4: Our core four verticals of healthcare, technology, transportation, and financial services continue to represent approximately 56% of total revenue.
Speaker 4: Looking at our geographic split, international revenue based on applicant location remains steady at approximately 15% of total revenue. International markets reported a similar decline to the U.S. and North America. India, which is largely driven by our multinational technology clients, declined 22% in the quarter.
Speaker 4: One of the clear highlights of the quarter was our continued margin improvement.
Speaker 4: For the quarter, we reported a 308 basis point improvement in gross margin to 47.3%, up from Q4 2021's 44.2%.
Speaker 4: demonstrating our ability to manage variable costs despite the revenue decline.
Speaker 4: Fourth quarter adjusted EBITDA margin improved to 22.2%, a 70 basis point improvement over Q4 2021, driven by our focus on managing data costs, optimizing our onshore and offshore labor mix, and multiple ongoing operating efficiency projects.
Speaker 4: We continue to flex and rebalance our labor in response to the slower market demand.
Speaker 4: Total SG&A expenses in the quarter, excluding stock-based compensation and the prior year Facility Cease Use charge of $9 million, improved by approximately $1 million versus Q4 2021, driven largely by lower third-party fees and expenses.
Speaker 4: Adjusted net income for the quarter, including the tax valuation allowance reversal, increased 15% to $26.8 million largely driven by our gross margin improvements.
Speaker 4: And lastly, adjusted diluted EPS for the quarter was 34 cents, up from 33 cents the prior year.
Speaker 4: Turning to a review of full year results, revenue was $807 million, up 10.5% from the prior year, led by our healthcare vertical, which was up 23% for the year, and quickly followed by transportation, which was up 17%.
Speaker 4: As mentioned earlier, healthcare is now our largest vertical at approximately 16% of revenue.
Speaker 4: Gross margins showed a 169 basis point improvement for the year to 46%, primarily driven by operational labor efficiencies.
Speaker 4: For the full year, SG&A increased by $12.6 million. This annual increase is primarily due to higher personnel costs of $19 million and higher public company costs of $5.1 million.
Speaker 4: Employee costs were driven by investments in technology and go-to-market, as well as higher stock comp and employee benefits.
Speaker 4: Public company costs consist of insurance, accounting, audit, and legal fees.
Speaker 4: The increases were partially offset by a decrease in facility-related expenses of $14.9 million as we right-sized our real estate footprint in the prior year due to the increased remote work environment.
Speaker 4: We reported adjusted net income of $194 million, including our tax valuation allowance reversal.
Speaker 4: The tax evaluation allowance reversal has no impact on our TRA calculations or the timing of payments.
Speaker 4: We expect to make our first payment in Q1 2024 following the filing of our federal tax returns.
Speaker 4: We do not anticipate paying any U.S. federal taxes in 2023 as we utilize the tax allowance. And our tax rate is based primarily on our international revenues and subject to change based on revenue mix. Even though market interest rates are significantly higher than Q4 2021, we benefited from a reduction in interest expense of $43 million.
Speaker 4: largely driven by our improved capital structure compared to a year ago.
Speaker 4: I would also like to provide some color on our cash flow generation, liquidity, capital allocation, and balance sheet. This is another area where we have delivered exceptional results with full year operating cash flow of nearly $108 million.
Speaker 4: up from $47 million in 2021.
Speaker 4: Excluding our technology initiative, operating cash flow from operations was $138 million.
Speaker 4: Free cash flow increased 172% to $91 million, an increase of $57 million versus 2021.
Speaker 4: At quarter end, we had no draws against a revolver and had approximately $700 million outstanding on our first lien loan.
Speaker 4: Our leverage ratio ended the year at 2.85 times, an improvement versus the 3.7 times at the end of 2021.
Speaker 4: We also ended the year with $162 million of unrestricted cash on the balance sheet, up from $111 million.
Speaker 4: This increase in cash was driven by our team's attention to driving working capital improvement.
Speaker 4: program authorizing the repurchase of up to $100 million over a two-year period.
Speaker 4: Through December 31, 2022, the company repurchased over 1.5 million shares of common stock for $16.8 million. We believe currently, as we continue to evaluate cash allocation options, the repurchase program is the right use of our excess capital and reflects our confidence in our...
Speaker 4: may continue to defer some hiring decisions primarily driven by uncertainty regarding the sustained direction of the macro environment.
Speaker 4: As we've noted on previous calls, Q4 and Q1 have historically been our seasonally lower quarters, with Q2 and Q3 being stronger and in line with each other. With this in mind, we are providing the following guidance for full year 2023. Revenue in a range of $720 million to $745 million
Speaker 4: a fully diluted share count of 77 million.
Speaker 4: We will continue to monitor the macro environment, actions by the Federal Reserve, hires, quits, and job openings, and actively engage with our customers to monitor demand, manage vendor relationships and costs, and adjust our operating practices to reflect market conditions, maximize margins, and create long-term shareholder value.
Speaker 4: With that operator, we can open the call for questions.
Speaker 2: Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 at this time. If you'd like to remove yourself from the queue, please press star 2. One moment please while we poll for questions.
Speaker 2: Our first question today is coming from Andrew Nicholas from William Blair. Your line is now live. Hi guys, this is Daniel Maxwell on for Andrew today. Just to start off, you mentioned the cost savings coming from the automation project as having a modest impact in 2023. Is there any way to quantify that as far as the cost savings that you expect?
Speaker 3: and we will continue to drive margin improvement going into next year despite potentially declining revenue environment.
Speaker 3: to drive margin improvement going into next year despite potentially declining revenue environment. So it will be effective.
Speaker 5: And then maybe on a vertical basis across the core verticals, any assumptions that are baked in across those four main verticals and any qualitative details you can give at that level. I think just what we quoted in just a few minutes ago in terms of...
Speaker 3: What we're seeing overall is technology as a sector has had the biggest decline. If you remember in the last call, I talked about the volume that we were seeing is sort of an inch deep and a mile wide. I would tell you that that's not the case anymore. It just seems that it's impacted technology and government for two different reasons. Technology is just laying off people, not hiring. Government having a difficult time.
Speaker 3: technology, hopefully government recovers by finding better qualified candidates and the other verticals sort of in the relatively modest position that we saw them coming out of the last half of this year. Okay, that's helpful. And if I can squeeze one more in on backgroundchecks.com and how the performance there has been over the past.
Speaker 4: SMB market, I think, in the latest JOLTS number that was reflected. So it's been...
Speaker 4: slightly improving, but nothing noticeable, to be honest with you. It's been a pretty steady state.
Speaker 2: Thanks a lot, guys. Thanks, Andrew. Thank you. Next question today is coming from Kyle Peterson from Needham & Company. Your line is now live. Hi, everyone.
Speaker 5: Hey guys, this is actually Sam Salvis on for Kyle today. Thanks for taking the questions and nice results here. Wanted to start off just getting your thoughts about how you guys are thinking about growth in 23 and balancing that between new client additions, existing client growth, cross-sell, up-sell. This is not an easy question, for me personally, or as it were, more of an aside answer. In this country, it's more and more interesting to what people want, a voice that leads to other people.
Speaker 4: and then churn in the year. Yeah, sure. I mean, the pattern, you know, largely follows what we've seen historically with the exception of the base growth. So we haven't seen anything change in the outlook from a buying pattern from our clients that would indicate that we wouldn't.
Speaker 4: on new logos and upsells. So we expect to continue to see those be meaningful contributors to the overall growth profile. Obviously the biggest driver of the guidance and the decline though is kind of what we call the same store sales or the base level, right? That base level in our long-term growth algorithm, you know, we've said is kind of a...
Speaker 4: 96% range, so that'll be consistent. There's always gonna be some natural level of attrition with the client base, but growth from upsells and new business, we're pretty optimistic about. The strong pipeline that we have and that we've seen even building in the last half of this year, so.
Speaker 3: All aspects of the business, including by the way our progression, are in pretty strong shape. The one unknown that we always face is, as Tom mentioned, same store sales. We can't control what our clients are going to do in terms of what they see in the hiring outlook.
Speaker 5: And then just a quick follow-up, good to see the leverage ratio coming down a bit, and I know you guys talked about the buyback as well.
Speaker 6: But just wanted to get your thoughts on M&A and how you guys are thinking about M&A. Is this a priority that's kind of top of mind for you guys?
Speaker 3: You know is the buyback and debt pay down still the priority here? Yeah, the buybacks certainly been been a priority I mean our M&A Strategy hasn't changed Part of it you could sort of stick an investment that we did we didn't you know? I9 is one of those solutions that we we felt very very good in
Speaker 3: and was very innovative in the space. Rather than acquire the company, we did an investment in them to ensure that we could also drive product development. The other M&A pipeline that we show tends to be either geographic-based, but nothing substantial.
Speaker 3: In terms of size, we don't see that as a high invest use of capital right now. Yep, got it. All right, awesome. Thanks guys.
Speaker 2: Thank you. Thank you. Next question is coming from Kevin McVay from Credit Suisse. Your line is now live. Great. Thanks so much and congratulations on the results.
Speaker 4: Is there any way to frame the potential revenue associated with those new enterprise wins? Yeah, I mean you can generally think of –
Speaker 4: I didn't quote a number though, we just quoted the number of customers. But historically when we think about that new logo contribution to our growth year over year, that is in the neighborhood of, you know,
Speaker 4: 35 to 45 million dollars a year. It's kind of an average year for us. It's helpful. And then it's kind of interesting like technology is laying off, government can't find people.
Speaker 5: Is that a broader observation across more verticals too? I mean, it seems like it's more pronounced in tech and government, but are you seeing any timing in terms of laid off workers getting kind of redeployed to other verticals, or is that, is there a skills mismatch? I guess my question is...
Speaker 3: Is it skills mismatch from kind of having those folks get hired elsewhere, or is it just kind of timing and you expect those folks to get absorbed? Yeah, Kevin, we really don't have that kind of insight into who our clients are hiring, whether or not folks are moving around like that. The reason why we highlighted, you know, government is because absent those two verticals, we saw a modest decline, not anything.
Speaker 3: precipitous. In fact, if you sort of look at the other verticals that we have, it's much more moderate, including, you know, some growth and in a couple of other areas. The government one is a little bit of a strange one. I mean, we've seen this pattern before, where, you know, they will advertise heavily for workers and...
Speaker 2: right from open sex science
Speaker 4: Hi, thanks. Good afternoon. You talked about seeing a slowdown in base hiring in 4Q. Can you discuss how volume trends have performed in January and February relative to December ?
Speaker 3: Now George, good to hear from you. Basically you just have to sort of look at the guidance we gave to draw your own conclusions. As you know from what we said before, typically Q1 and Q4 are slower quarters, 2 and Q3 are larger quarters, and they also tend to be fairly close.
Speaker 3: in demand historically. So Q4 and Q1 will tend to be close. Q2 and Q3 will tend to be close, albeit at a higher level. That's about the most we can tell you.
Speaker 4: Okay, got it. And then as you think about organic revenue growth on a year-over-year basis, what are your thoughts around the cadence of how the growth performs moving through the year? And how would margins perform by quarter as well moving through the year?
Speaker 4: Yeah sure, I tried to give you a little bit of insight into the seasonal patterns that we expected as Guy just mentioned. You know we would expect to see as we always do improved starting in the second quarter and lasting kind of through the the middle two quarters of the year.
Speaker 4: then a seasonal slowdown in the summer. We typically get a little bit of a spike you know coming after the summer kind of in that September-October timeframe then again slow down in the holiday season because we don't have a lot of retail exposure driving Q4 sales.
Speaker 4: You know, obviously when you look at a year-over-year comparison, our first half of the year is going to be a very tough comparison because we had such a strong first half of 2022.
Speaker 4: We do expect that comparison to get slightly favorable by the By the end of the year, but you know certainly the first half of the year will be a bit of a challenge from a comp perspective Great and margins Yeah, margins. There's two things you know demand driving that but we're not you know sitting back as evidenced by what we did in Q4
not sitting back and waiting for, you know, operating leverage to drive margin. We're really attacking it at the gross profit and gross margin level. We'll continue to see improvement in gross margin across the year.
Got it. Very helpful. Thank you. Thanks. Thank you. Next question is coming from Stephanie Moore from Jeffries. Your line is now live. You're live.
Hi this is Hans Hoffman on for Stephanie. Thanks for taking my question and congrats on the results. Just want to touch on you know guidance and sort of the underlying assumptions there. You know just kind of curious are you guys assuming you know any sort of recovery at any point in 2023 just from a broader hiring environment.
No, I would say just what I said to George there, we really assume kind of, you know, steady state from a macro environment, and then we've layered in our typical seasonality, which we expect to see regardless of the macro environment. And then the last thing I would say, just as I reiterated a minute ago, is expect to see some favorability from a growth perspective, clearly because of
but because of a comparable comparison to the prior year when we start to get into September , October , November of next year. So it is what I would again, but I would it's assuming kind of steady state from an overall macro not really baking in any real change to the macro environment in the second year. Okay understood and then you know just for my follow-up, you know,
know, kind of what's still to come.
Yes, so we're, I mean, we'll sort of break that down into a few areas, Hans. So first and foremost, the automation work that we've done, that we started, you know, in the fall of 2021 is well underway and yielding benefits, as you can see, in particular from the improvements in growth. With our efforts to drive both employee efficiency and employee performance,
productivity through new systems. So, the automation from two standpoints, one is the elimination of labor, second is the productivity of the existing employees. That work is yielding results. As we also continue to increase the pace of offshoring.
labor, you know always sort of looking for the labor arbitrage to ensure that we can take advantage of that and then you know we've we've made some some good headway as well and just looking at the overall cost structure on on SG&A and we'll continue to you know to make some efforts there.
to improve margins that way. So that's why we feel comfortable committing to continued margins, even if it's a down year, in terms of revenue.
improve margins that way. So that's why we feel comfortable committing to continued margins, even if it's a down year, in terms of revenue. Got it. Thank you.
Thank you. Next question is coming from Anant Patnaik from Bark Lazer Line. He's now live. Hi, Jorge. This is Ronan Kennedy. I'm from Anant. Thank you for taking my questions. May I ask, on the 42 new enterprise clients that you added, you indicated they were distributed across the four core verticals. Could you provide some color on the distribution from a size of the enterprise?
competitor and possibly by region? And then also your comments on what you're seeing from a competitive dynamic standpoint within the industry? Yes, I'll take a couple of those. One is we don't comment at that level of detail. The enterprise client is by definition a large client, right? So someone at scale that does.
hiring, but we don't really break it out by region or industry. One of the things that we did say was two-thirds of those clients came from our core four verticals, which is not unusual given our expertise in those in those four sectors and our ability to be very competitive and and ability to take share.
as well. And you know from a competitive dynamic standpoint, I would tell you well, you know we're you know, we're continuing to take to take share. I think a lot of it comes from some of the regional players, smaller players who just can't keep up with the pace of technology investments that are required to satisfy the needs of an enterprise business.
Anything else?
Anything else? Yes please, thank you.
quoted that as being down. But again, that had as much debt.
sector, not just that client, having difficulty finding people to employ.
And the first part of the question...
The trends and outlook for third-party data costs, your pricing and kind of screen economics. Yeah, so I mean, again, it's a big focus for us. It's a big line item on the P&L for us. We're looking to continue to drive that number down as an overall percentage.
to Only 23.
Thank you.
Thank you. Next question is coming from Mark, Mark Hahn from Bear Gal
Good afternoon Guy and Tom. With regards to the seasonality
discussion that you had and just to help us lay out reasonable expectations.
Would you basically suggest that Q1 is going to be similar to the Q4 that we just ended up seeing? Just broadly speaking, we're basically in the third month here of the quarter, so you've got pretty good visibility. This is an open conference call. Yeah, that's right, Mark.
to with that about Q4 and Q1 tend to be in line with each other unless something you know, drastically changes. And then we would expect that the seasonal peak in Q2 and Q3.
Okay, great. And then in terms of the hiring trends outside of the two verticals that you cited, were you seeing moderation in terms of the hiring trends in the other sectors as well? Or...
Were those just basically staying steady state and just chugging right along? No, it is moderating. That's one of the things that we said is if you backed out, you know, transportation, sorry, technology and government, the rest of the business would still have been down, you know, just about four points. So there's definitely moderating..
hiring trends across the board. It's just some industries not nearly as much. And there are a couple, transportation happened to be one that fell up year over year. There are others as well. It tended to be in the markets sectors that were the slowest from the pandemic.
we're showing more growth to some extent because of a weaker comp from prior rather than an overall robust hiring environment.
if you take out those two verticals I talked about, I would characterize the rest of it as still moderately down. Got it. And then with regards to technology, was your retention rate in the tech vertical as consistent with...
with the overall retention stats that you gave us? Higher actually. The tension in technology is almost as close to 100% as you can get. The big names are all of our big global clients and watching what happens.
quarter was a little bit of a surprise. If you go back to, if you remember when we third quarter last year, the one second that was down year over year was technology, and they were down like 1% in the third quarter. So you take down 1% in the third quarter to down 30% in the fourth quarter, that's a pretty big drop in hiring.
that we witnessed, but retention is extremely solid. Okay, and on the government side, is it just that one big client that we all know about that's having issues? Or why on earth would the rest of the government be having?
issues in terms of this finding qualified candidates? We report government as a major sector, as you know, so you can sort of conclude from that how much of that sector might be a large client, but we did, you know, You probably know from, you know, from daily interaction
that the job openings are there, it's just they're having a difficult time getting people to fill the jobs.
that the job openings are there, it's just they're having a difficult time getting people to fill the jobs.
The choice I mean we've seen this before I mean this is a long-standing client We've seen this before so that I think is just a an anomaly But you know we'll see how it goes this this next few months. Yeah, I was just just another tidbit of information regarding
Our governance sector also includes education, primarily higher education where we have a pretty good footprint. And that actually segment of that segment performed okay. So you're hitting the nail on the head Mark kind of where the softness is coming from.
Okay, great. And then with regards to, you indicated that your overall assumption for revenue is based on the environment staying roughly the same.
you know, can you talk a little bit about the levers, let's say the environment deteriorates, like you did a great job in terms of expanding the margins here, how should we think about margins if, let's say, the economic environment worsens, you know, as obviously the feds trying to slow things down? Yeah, they're doing their best.
So what I would say is that, as I said before, we were going to focus on that gross margin line. We talked a lot about how variable our cost model is at the cost of sales line. We'll focus on that. We'll continue to drive margin kind of regardless of the
the demand environment, where it becomes trickier is when you get into the overhead or the SG&A expenses, right? And that's when we have to make decisions about whether or not we have to take out some of that overhead. But at the gross profit and gross margin level, we feel very confident, even if the demand is softer than what we're currently looking at now.
to generate better margins regardless at the gross margin level? Yeah, I think just to make sure everybody remembers, we have the labor that we use to fulfill our services is in that line, right? So the automation efforts that we have to both eliminate labor, offshore labor, and then improve productivity of the systems that are used, regardless of land environment, that work will continue and will continue to deliver improvement in margin. And then of course, as Tom pointed out, we'll get and have been aggressive in ensuring we take G&A cost out.
is quickly down as well so there's not too much risk to leverage. And I mean with regards to just capital allocation I mean
M&A is off the table, but any thoughts with regards to thinking about debt repayment relative to buybacks if the environment worsens?
Of course, I mean, it's something we discussed with our board, you know, on a monthly basis, to be honest with you, trade-off between M&A debt repurchase and share repurchase.
Yes, it's top of mind. We think about all the time right now we feel confident about the long term Business, you know, certainly there's certainty over the next, you know handful of quarters, but we think long term We like I should in the industry where this company can go A market we were that will ultimately deliver shareholder value
We think that investment in our shares today is an attractive return. Right, thank you. Thank you. Next question today is coming from Shlomo Rosenbaum from Steve. Your line is now live. Hi, thank you for taking my questions. I want to follow up a little bit about that large customer that was you know deciding not to do the employment history reports.
we talked you said you were going to be looking for like alternatives for Employment history reports because of the you know skyrocketing costs from the main provider in that industry Is there any progress over there in terms of? Alternatives that you can offer your customers
Yeah, absolutely. Good to hear from you, Shlomo. So that supplier is one supplier, right? They happen to be a fairly high volume supplier, but there are a lot of alternatives for us including...
using our own data and manually verifying, you know, employment, previous employment and current employment in a number of ways and implemented that and rolled that out for a lot of clients as well. So, the product understands their options and are evaluating.
Their option I think as I had mentioned free they were they were pretty upset since there were a major data supplier to this To this vendor, so this is not a fast moving fast moving client But we have all we've presented alternatives to them in them, and they're considering them And we do the same with all of our clients
You know, I don't want to overstate that vendors, you know, influence. They're not the only, they're certainly not the only game in town. There are lots of options, you know, some that are already, that we are already taking into account, availing ourselves of services, as well as doing manual verifications through the systems that we've built. We just built and deployed a new, entirely new, various module just for education and employment. And we're finding, you know, All new.
Okay, and then, is it fair to assume, you said that that 6 million is really basically a pass-through, so should I assume that the lack of that pass-through provided about 120 basis points of gross margin improvement and then you had like 185 or so.
from the company's own efforts in terms of, you know, everything that you're doing internally together with, you know, the new cost initiatives and new technology program. Is that the right way to think about it?
That's a bit of an oversimplification. The $6 million is not 100% pass-through. This vendor in question is only a portion of that because any large customer of ours who does an employment verification, I don't know if I should quote the stats, but it is certainly less than half the time.
for and some of those carry margin with them obviously.
Okay, got it. Thank you. Okay. Thank you. Next question is coming from Andrew Jeffery from Truist. Your line is now live. Hey, guys. It's Gus stepping on for Andrew. Thank you for taking our questions. The first question I have is, can you talk a little bit about the competitive environment?
One change is sort of the same as it's been. We do see, in particular, one of the things we do with our business is with the platforms, a lot of the new enterprise wins that we take.
are for multi-country clients taking advantage of that platform. I wouldn't say that
the performance in the fourth quarter or our outlook for next year reflects any change in the competitive environment other than we'll continue to be aggressive in the market with our proven technology and You know our emphasis quality and thoroughness is playing well with with clients and prospects
we will continue to get that message, and continue to do our best to take share in the market. Adam O'Brien Got it, perfect. And my last question is, can you talk a little bit about what you are seeing in terms of applicants for opening, checks for opening, employment velocity in general? Do we think that this is still going to remain elevated?
kind of what we saw in 2020-21. Yeah. Yeah, I think that is clearly normalized over the last three to five months. That phenomenon that we saw, and perhaps that is what contributed to the strength we saw in the first half of the year, that.
Although we don't have hard data on it, we get it from our clients and we definitely think that has normal demand.
And the competitive nature is just not as strong as it was nine months ago. That's helpful. Appreciate the time guys.
Yep. Thank you. Next question is coming from Ashish Sabhadra from RBC Capital Markets. He writes, is there a lie?
Thanks for taking my question. Just a quick question on package density and pricing. I was wondering, have you seen any changes on that front? Is there more adoption of services that existing customers, increasing package density? Thanks. Yeah, and that's a big piece of what we focus on, right, is upselling our clients. We call it upsell and package expansion.
You know, some people say those are the same thing. We have a nuance, upsell minds could be, you know, selling a new region, selling a completely new program where package expansion is more along the line what you're talking about in terms of package density. We kind of combine those when we quote the $13 million number.
in our script that you know includes both of those. We continue to do a really good job. I can tell you the team that is responsible for that exceeded all their goals for 2022. In fact, we were very with the there despite kind of the soffity macro environment. We'll continue to focus on that. We continue to focus on driving kind of a higher.
package order value. And you know I'm not going to give quote specific numbers but it was high in 22 over 21 and we try to drive it higher in 23 as well.
That's very helpful, Color. And then maybe just a quick follow-up on better managing the data costs. Does that also give you a competitive edge in the sense that is that a pitch, a part of the pitch to new customers in lowering their total cost of employment screening or background screening? Colorier- Yeah, definitely. Our customers do want to understand kind of what the total cost of-
our clients and I think our clients are appreciative to offer them less expensive solutions. That's very helpful, Kallur. Thanks again.
The next question is coming from Jason Salino from Key Bankerliders.
Hey guys, thanks for taking my question. You know, Guy, you know, as we think about new business activity, in a tougher macro environment, is a typical customer more willing or less willing to change a background check vendor? I guess my question is, does the business environment impact the customer's decision to switch?
You know, Jason, it's a great, it's a great and interesting question. So what I can tell you is, you know, we have...
pipeline of business opportunities that we're negotiating and closing. I don't know that the environment changes it. We also did great during the pandemic. I mean, when companies were really, really focused on just basic liquidity and staying in business, we were still seeing a healthy activity. Now, sometimes that could be procurement or business wanting to...
Just put a program out to RFP because they're cost conscious and it gives us an opportunity to go win a new piece of business but I'll Generally, if if a company is frustrated with their current provider Mistakes missing hits not servicing them. Well We find times in these down environments companies uses an opportunity to switch out because it's such an important
part of their compliance program. I mean, you can't have a existing provider who keeps missing convictions and missing hits, which we find provides us an opportunity as well. So, I don't know, we haven't done the direct correlation, but I can just tell you we have a strong pipeline. We had a strong pipeline during the pandemic and closed a lot of new business then and we have a strong pipeline.
sitting in front of us now even despite of the macro environment. Okay, perfect. Very helpful. Thanks.
of the macro environment. Okay, perfect, very helpful, thanks. You bet.
Thank you. We have reached the end of our question and answer session. I'll turn the floor back over to management for any further closing comments. Thanks, operator. Appreciate everybody joining us. And I think as you gathered from the call, we had a very solid year. Underlying demand drivers apparent, and with new logos attracted by our quality approach and our ability to take share, we're making...