Q4 2024 First Advantage Corp Earnings Call
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David: Good day, everyone. My name is David and I'll be your conference operator today I would like to welcome you to the first advantage fourth quarter and full year 2024 earnings conference call and webcast hosting today's call from first advantage is Stephney Corbett Vice president of Investor Relations.
Speaker Change: At this time, all participants have been placed in a listen only mode to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Operator 2: If you would like to ask a question during that time, please press star and one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star and two. Lastly, if you should require operator assistance, please press star and zero. Please note today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.
I would like to ask a question during that time. Please press star one on your telephone keypad. If at any point. Your question has been answered you may remove yourself from the queue by pressing star and two.
Speaker Change: Lastly, if you should require operator assistance. Please press Star then zero.
Speaker Change: Please note today's event is being recorded.
Speaker Change: It is now my pleasure to turn the call over to Stephanie Gorman you may begin.
Stephanie Gorman: Thank you, David. Good morning, everyone, and welcome to First Advantage's Q4 and full year 2024 Earnings Conference Call. In the Investors section of our website, you will find the earnings press release and slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on our investor relations website. Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2023 Form 10-K and our 2024 Form 10-K to be filed with the SEC.
Speaker Change: Thank you David Good morning, everyone and welcome to first advantages fourth quarter and full year 2024 earnings conference call.
Speaker Change: In the investors section of our website you will find the earnings press release and slide presentation to accompany today's discussion.
Speaker Change: Webcast is being recorded and will be available for replay on our Investor Relations website.
Speaker Change: Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward looking statements.
Speaker Change: Such forward looking statements are not guarantees of future performance.
Speaker Change: <unk> results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2023 Form 10-K, and our 2024 Form 10-K to be filed with the SEC such factors may be updated from time to time.
Stephanie Gorman: Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures, to the extent available without unreasonable effort, appear in today's earnings press release and presentation, which are available on our investor relations website. To facilitate comparability, we will also discuss pro forma combined company results consisting of First Advantage and Sterling Check Corp historical results and certain pro forma adjustments as if the acquisition of Sterling had occurred on 1 January 2023. The pro forma information does not constitute Article 11 pro forma information. I am joined on our call today by Scott Staples, our Chief Executive Officer, and Steven Marks, our Chief Financial Officer.
Speaker Change: And our periodic filings with the SEC and we do not undertake any obligation to update forward looking statements.
Speaker Change: Throughout this conference call. We will also present and discuss non-GAAP financial measures reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measure to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website.
Speaker Change: To facilitate comparability, we will also discuss pro forma combined company results consisting of first advantage and Sterling check Corp historical results and certain pro forma adjustments as if the acquisition of Sterling had occurred on January one 2023.
Speaker Change: The pro forma information does not constitute article 11 pro forma information.
I'm joined on our call today by Scott <unk>, Our Chief Executive Officer, and Steven <unk>, Our Chief Financial Officer. After our prepared remarks, we will take your questions I will now hand, the call over to Scott.
Stephanie Gorman: After our prepared remarks, we will take your question. I will now hand the call over to Scott.
Scott Staples: Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. 2024 was a big year for First Advantage as we advanced on our strategy and announced and closed on the Sterling acquisition. I am very proud of our team's dedication to execution and consistently delivering results, keeping our customers at the center of everything we do. I am also excited to provide an update on our Q4 and full-year accomplishments and to discuss our outlook for 2025. We have 4 key messages for today. First, we generated solid results for the Q4 and full year amid an uncertain macro environment. We also maintained our cost discipline to sustain robust margins within the legacy First Advantage business and produce strong cash flow. Second, as you know, we closed on our $2.2 billion strategic acquisition of Sterling.
Scott: Thank you Stephanie and good morning, everyone.
Speaker Change: Thank you for joining our call.
Speaker Change: <unk> 24 was a big year for first advantage as we advance on our strategy and announced and closed on the Sterling acquisition I am very proud of our team's dedication to execution and consistently delivering results keeping our customers at the center of everything we do.
Speaker Change: I am also excited to provide an update on our fourth quarter and full year accomplishments and to discuss our outlook for 2025.
Speaker Change: We have four key messages for today first we generated solid results for the fourth quarter and full year.
Speaker Change: <unk> and uncertain macro environment. We also maintained our cost discipline to sustain robust margins within the legacy first advantage business and produced strong cash flow.
Speaker Change: Second as you know we closed on our $2 $2 billion strategic acquisition of Sterling.
Scott Staples: Which leads me to the third point, that we are underway in rolling out our updated strategy, which we call FA 5.0. As we discussed last quarter, our organization and management team have been optimized to deliver growth. With the additional scale and capabilities of Sterling and FA 5.0, we are accelerating our strategic progress. Our key strategic objectives in 2025 are to action our synergy targets, de-leverage our balance sheet, successfully execute our integration plan, and accelerate our go-to-market strategy focused on product, technology, and innovation. We are tracking well on our synergy execution, and today, we are pleased to be increasing the lower end of our targeted range with our updated net cost synergy target range of $60 to $70 million, an improvement from our previous target range of $50 to $70 million. Over time, our synergy realization will help to stabilize and expand Sterling margins.
Speaker Change: Which leads me to the third point that we are underway in rolling out our updated strategy, which we call F. A five dot O.
Speaker Change: And as we discussed last quarter, our organization and management team have been optimized to deliver growth.
Speaker Change: With the additional scale and capabilities of Sterling and F. A five that Oh, we are accelerating our strategic progress.
Speaker Change: Our key strategic objectives in 2025 are to action, our synergy targets deleverage our balance sheet successfully execute our integration plan and accelerate our go to market strategy focused on product technology and innovation.
Speaker Change: We are tracking well on our synergy execution and today, we are pleased to be increasing the lower end of our targeted range with our updated net cost synergy target range of $60 million to $70 million, an improvement from our previous target range of $50 million to $70 million.
Speaker Change: Over time.
Speaker Change: Our synergy realization will help to stabilize and expand sterling margins.
Scott Staples: We are focused on de-leveraging our balance sheet and have gotten a fast start on the Sterling integration while continuing to provide our customers with the service and quality they know they can expect from us. At the same time, we are maintaining our focus on innovation in order to position our business for future growth. Fourth, we are introducing our full year 2025 guidance. We are entering 2025 in a strong business position, encouraged by recent pipeline success, reducing headwinds as recent JOLTS data continues to normalize, and feedback from our customers. That said, in view of the current macro environment, which continues to be uncertain, we are maintaining a cautiously optimistic outlook. Steven will cover our guidance and key assumptions in greater detail in the financial section shortly. We remain confident in our strategy and our positioning to create long-term shareholder value in 2025 and beyond.
Speaker Change: We are focused on deleveraging our balance sheet and have gotten a fast start on the sterling integration, while continuing to provide our customers with the service and quality. They know they can expect from us at the same time, we are maintaining our focus on innovation in order to position our business for future growth.
Speaker Change: And fourth we are introducing our full year 2025 guidance, we are entering 2025 and a strong business position encouraged by recent pipeline success, reducing headwinds as recent jolts data continues to normalize.
Speaker Change: Feedback from our customers.
Speaker Change: That said in view of the current macro environment, which continues to be uncertain, we are maintaining a cautiously optimistic outlook Steve.
Speaker Change: Steven will cover our guidance and key assumptions in greater detail in the financial section shortly.
Steven: We remain confident in our strategy and our positioning to create long term shareholder value in 2025 and beyond.
Scott Staples: In view of the new US administration, I also wanted to share a few comments on potential policy impacts on our business. We do not have meaningful direct exposure to federal government hiring and therefore do not expect to be directly impacted by efforts to streamline federal government spending. In some respects, government efficiency efforts could potentially be a tailwind for First Advantage if there are efforts to outsource and privatize work that is currently done by the government. To date, there has not been a noticeable impact from government efficiency efforts on our business. While tariffs may impact our customers and overall economic growth, we do not have any significant direct exposure to tariffs. As a reminder, 87% of our 2024 pro forma revenues were generated in the US. Turning to slide 5 and an updated view of our enhanced profile with the addition of Sterling.
Speaker Change: In view of the New U S Administration I also wanted to share a few comments on potential policy impacts on our business we.
Speaker Change: We do not have meaningful direct exposure to federal government hiring and therefore do not expect to be directly impacted by efforts to streamline federal government spending.
Speaker Change: In some respects government efficiency efforts could potentially be a tailwind for first advantage. If there are efforts to outsource and privatize work that is currently done by the government.
Speaker Change: To date, there has not been a noticeable impact from government efficiency efforts on our business.
Speaker Change: While tariffs may impact our customers and overall economic growth, we do not have any significant direct exposure to tariffs and as a reminder, 87% of our 2020 for pro forma revenues were generated in the U S.
Speaker Change: Turning to slide five and an updated view of our enhanced profile with the addition of Sterling.
Scott Staples: Our combined capabilities position us as a leader and increase our customer value proposition, offering differentiated technology platforms and a broad collection of innovative solutions across a comprehensive range of verticals. As a reminder, with the closing of Sterling on October 31st, our reported Q4 and full year results include 2 months of Sterling's performance. In order to provide comparability to previous periods, we are showing First Advantage and Sterling on a pro forma basis with combined financial data for 2023 and 2024 throughout this presentation, and plan to continue to do so in the future. In 2024, we delivered sustained profitability while managing through the Sterling closing and kicking off integration.
Speaker Change: Our combined capabilities position us as a leader and increase our customer value proposition.
Speaker Change: Offer it offering differentiated technology platforms, and a broad collection of innovative solutions across a comprehensive range of verticals.
Speaker Change: As a reminder, with the closing of Sterling on October 31st our reported fourth quarter and full year results include two months of Sterling performance.
Speaker Change: In order to provide comparability to previous periods, we are showing first advantage and sterling on a pro forma basis with combined financial data for 2023 and 2024 throughout this presentation and plan to continue to do so in the future.
Speaker Change: In 2024, we delivered sustained profitability, while managing through the Sterling closing and kicking off integration.
Scott Staples: Our pro forma full year revenues were approximately $1.5 billion, with $397 million in pro forma adjusted EBITDA, or $458 million on a synergized basis. In 2024, our approximately 10,000 team members completed nearly 190 million screens on behalf of our 80,000 active customers across 200 countries and territories. This includes over two-thirds of Fortune 100 companies and approximately one-half of Fortune 500 companies. Our gross retention remains at approximately 96%. We now have over 900 million records in our proprietary databases, and we have over 100 integrations with applicant tracking systems and human capital management partners, giving us a unique competitive advantage.
Speaker Change: Our pro forma full year revenues were approximately $1 $5 billion with $397 million in pro forma adjusted EBITDA or $458 million on a synergize basis.
Speaker Change: In 2024 are approximately 10000 team members completed nearly 190 million screens on behalf of our 80000 active customers across 200 countries and territories.
This includes over two thirds of fortune 100 companies and approximately one half of fortune 500 companies.
Speaker Change: Our gross retention remains at approximately 96%.
Speaker Change: We now have over 900 million records in our proprietary databases and we have over 100 integrations with applicant tracking systems and human capital management partners, giving us a unique competitive advantage.
Scott Staples: For the Q4 and full year, combined upsell, cross-sell, and new logo rates performed in line or better than legacy First Advantage and Sterling's historical growth algorithms. Retention rates also performed in line for both businesses. Together, we had 25 enterprise bookings in the Q4 and 88 in the last 12 months, each with $500,000 or more of expected annual contract value, including two notably large US deals. Looking into 2025, we have been seeing our pipeline momentum continue. We have recently won a large deal with a significant retail customer in the gig economy. We were able to leverage existing relationships and trust to unlock critical business issues, drive the business to RFP, and ultimately be awarded this deal. Also in 2025, we won our largest international contract in the past years with a new logo in Australia.
Speaker Change: For the fourth quarter and full year combined upsell cross sell and new logo rates performed in line or better than legacy first advantage and Sterling historical growth Eichler algorithms.
Speaker Change: Retention rates also performed in line for both businesses together, we had 25 enterprise bookings in the fourth quarter and 88 in the last 12 months, each with $500000 or more of expected annual contract value, including two notably large U S D.
Speaker Change: Fields.
Speaker Change: Looking into 2025, we have been seeing our pipeline momentum continue.
Speaker Change: We have recently won a large deal with a significant retail customer in the gig economy, we were able to leverage existing relationships and trust to unlock critical business issues drive the business to RFP and ultimately be awarded this deal.
Speaker Change: Also in 2025, we won our largest international contract in the past years with a new logo in Australia.
Scott Staples: As you can see, our sales engine continues to deliver consistent results. Our verticalized go-to-market approach remains a differentiator and a key driver of our growth strategy. We offer deep subject matter expertise in our industry segments, and we use industry-specific data to advise our customers on topics such as leading practices and product optimization. Our largest verticals are healthcare, transportation, and retail and e-commerce. While First Advantage has historically been more oriented toward hourly workers within high-volume hiring verticals, Sterling brings a strong portfolio of verticals focused on salaried workers, resulting in our pro forma revenue mix being more equally weighted between the two. Our balance across a diverse range of verticals and between hourly and salary-focused customers enables us to weather a variety of macroeconomic scenarios and makes us less dependent on any one sector or customer.
Speaker Change: As you can see our sales engine continues to deliver consistent results.
Speaker Change: Additionally, our vertical is go to market approach remains a differentiator and a key driver of our growth strategy.
Speaker Change: We offer deep subject matter expertise and our industry segments, and we use industry specific data to advise our customers on topics, such as leading practices and product optimization.
Speaker Change: Our largest verticals are health care transportation and retail and e-commerce.
Speaker Change: While first advantage has historically been more oriented toward hourly workers within high volume hiring verticals Sterling brings a strong portfolio of verticals focused on salaried workers, resulting in our pro forma revenue mix being more equally weighted between the two.
Speaker Change: Our balance across a diverse range of verticals and between hourly and salary focused customers enables us to weather a variety of macroeconomic scenarios and makes us less dependent on any one sector or customer.
Scott Staples: On the slide, we have provided an updated view of our verticals for 2024 on a pro forma basis. During the year, we grew our footprint in healthcare and transportation as both verticals, particularly healthcare, proved themselves to be resilient through the macro and had strong upsell, cross-sell results. Our other verticals changed only modestly from the prior year, with some headwinds experienced in our retail and staffing verticals. Steven will share more about the underlying dynamics shortly. Turning to slide 6. Since closing, we have been laser-focused on executing our strategic post-close priorities, enabled by our integration playbook. These priorities are focused on continuity with our customers, a smooth integration process, synergies, and de-leveraging our balance sheet. We have seen early success in leveraging each legacy company's technology and processes since closing.
Speaker Change: On this slide we have provided an updated view of our verticals for 'twenty 'twenty four on a pro forma basis. During the year, we grew our footprint in health care and transportation as both verticals, particularly health care proved themselves to be resilient through the macro and had strong upsell cross sell results.
Speaker Change: Our other verticals changed only modestly from the prior year with some headwinds experienced in our retail and staffing verticals.
Speaker Change: Stephen will share more about the underlying dynamics shortly.
Speaker Change: Turning to slide six.
Speaker Change: Since closing we have been laser focused on executing our strategic post close priorities, enabling bi enabled by our integration playbook.
Speaker Change: These priorities are focused on continuity with our customers a smooth integration process synergies and deleveraging our balance sheet.
Speaker Change: We have seen early success in leveraging each legacy company's technology and processes since closing funding.
Scott Staples: Fundamentally, we are applying a best of breed approach on tech and product stacks to meet the needs of our customers. For example, First Advantage was recently awarded a large deal in the healthcare vertical. We determined that Sterling's platform was actually best suited to this customer's requirements.
Speaker Change: Fundamentally we are applying a best of breed approach on tech and product stacks to meet the needs of our customers.
Speaker Change: For example, first advantage was recently awarded a large deal in the health care vertical and we determined that Sterling platform was actually best suited to this customer's requirements. So this is the tech platform. They will go on.
Speaker Change: This type of flexibility enhances our customer value proposition offering more options for our customers and the market.
Speaker Change: We have also identified automation opportunities, where one company may have automated criminal court records in a jurisdiction that the other had not yet, allowing us to simply turn on that service for all of our customers, creating synergy opportunities and expanding our combined capabilities.
Speaker Change: We are also very pleased that there have not been disruptions to customers throughout the integration process our.
Speaker Change: Our executive team has communicated regularly with our large customers who have shared that they are excited to be able to benefit from the best of both worlds from first advantage and Sterling they.
Speaker Change: They are optimistic about our approach to integration and what it means for their background screening programs, including improved turnaround times, new products and services and enhanced platform functionality.
Speaker Change: They are eager to see new technology as it becomes available and experienced performance improvements from our combined capabilities.
Speaker Change: We are also getting strong traction with prospects, who are excited about our deeper global presence and our ability to leverage regional skills from both organizations. In addition, our increased vertical expertise is compelling for prospects, who are looking for thought leadership and want to work with experts who understand their businesses.
Speaker Change: Prospects are also intrigued to hear how we will leverage our large amounts of data and how the work we are doing to innovate within verifications will benefit them.
Speaker Change: We continue to drive innovation to maintain our competitive advantage and ensure we are offering the best solutions to our customers and we're doing all of this under our high performing culture.
Speaker Change: Our commitment to innovation supports our customers' priorities of speed cost and efficiency, we continue to integrate AI capabilities into our workflow, helping us increase our efficiency and provide greater customer service by streamlining workflows and automating processes, we can leverage technology to meet.
Speaker Change: Is this needs without increasing head count.
Speaker Change: Our combined technologies distinguish us from the competition and are a clear competitive advantage that enables us to expand our businesses by offering a unique customer experience.
Steven: And with that I will now turn the call over to Steven.
Steven: Thank you Scott and good morning, everyone today I'll provide color on our results and update on our synergy progress and targets and walk you through our guidance for full year 2025.
Steven: I'll start with our fourth quarter results on slide eight. Please note that as we continue to swiftly execute our integration program. We plan to focus on the consolidated business, particularly with the implementation of our F. A five <unk> strategy.
Steven: Our fourth quarter pro forma revenues were $375 million of 0.9% year over year.
Steven: Our combined business continue to face year on year base headwind as hiring volumes continued to stabilize with base remaining negative on a year on year basis.
Steven: This aligns with the trends in the jolt and other data over the last number of quarters.
Steven: And our legacy first advantage segment Americas segment revenues of $172 million were down five 5% from the prior year. These results were impacted by the uncertainty among Americans tumors during Q4, which affected our retail and transportation customers hiring levels.
Steven: As such seasonal hiring revenues in Q4 were slightly weaker than expected and lasted for a notably shorter duration compared to prior year and our expectations.
Steven: Going forward on a total company basis, we expect that our increased diversification with the broader Sterling base will help mitigate seasonality impacts on our business.
Steven: Our legacy first advantage International segment continued to show Green shoots across all regions and performed better than we expected we anticipated with revenues, increasing eight 9% to $24 million on a constant currency basis legacy first advantage international revenues were up seven.
Steven: Zero percent year over year.
Steven: And our legacy Sterling segment pro forma revenues for Q4 were $181 million up 7% year over year with a 6% contribution from the vault acquisition base.
Steven: Base trends in the legacy Sterling business largely performed in line with legacy first advantage Americas.
Steven: Pro forma adjusted EBITDA for the fourth quarter was $100 million and our pro forma adjusted EBITDA margin was 26, 7% down approximately 300 basis points versus the prior year legacy first advantage and continue to drive margins of nearly 32%.
Steven: As we focus on maintaining our variable cost structure consistent with our historical approach despite the base and seasonal keep headwinds I previously mentioned.
Steven: Legacy Sterling continue to operate at a lower margin relative to legacy first advantage as a result of its continued shifting mix to lower margin services.
Steven: Lower margin from the volt acquisition and its historical operating methodology that results in a more fixed cost approach to fulfillment than legacy first advantage.
Steven: As part of our integration plans, we are working to adapt the legacy Sterling business to have a more variable cost structure.
Steven: Including F as historical model for fulfillment workforce management.
Steven: During the fourth quarter, we also identified cost savings above and beyond our normal levers through head count management, even while diligently integrating sterling.
Steven: Turning to full year results on slide nine.
Steven: Our overall annual performance was solid and closely in line with our combined company 2024 guidance ranges for reported revenues adjusted EBITDA adjusted net income and adjusted diluted EPS. This is further evidence that we continue to be diligent and successful at controlling what can be controlled within our business.
Steven: Despite the uncertain macro environment and its impact on our base volumes.
Steven: Total pro forma revenues were $1 $5 billion up approximately 2% year over year.
Steven: And our legacy first advantage America's segment for 2024 revenues of $659 million were down two 1% from the prior year and our legacy first advantage International segment revenues of $97 million were flat versus the prior year, but on a constant currency basis.
Steven: The legacy first advantage international revenues were $96 million or 0.7 are down <unk>, 7% year over year.
Steven: In total legacy first advantage revenues were down two 2%.
Steven: And in our legacy Sterling segment pro forma revenues were $763 million up 6% year over year with six 9% growth from the bolt acquisition.
Steven: Pro forma adjusted EBITDA for the year with $397 million and our pro forma adjusted EBITDA margin was 26, 3% approximately 220 basis points lower year over year. This.
Steven: This decline as previously noted was driven by Sterling revenue mix towards lower margin products and the margin impact of the bolt acquisition.
Steven: Turning to slide 10, we are showing a detailed adjusted diluted EPS bridge from full year 2023 to full year 2024, given all of the unique moving parts.
Steven: Our full year 2024, adjusted net income was $124 million adjusted diluted EPS was zero point or $1 82, sorry 82 cents.
Steven: And our adjusted effective tax rate was 24, 9%.
Steven: As noted when we gave our initial 2024 guidance last year 2024, adjusted diluted EPS growth was impacted by several of our historical capital allocation actions, including our 2023, one time special dividend, our 2023 share repurchases and an exploration of favorable <unk>.
Steven: First rate swaps.
Steven: Also as we noted during last quarter's call. The Sterling acquisition was not expected to provide immediate adjusted diluted EPS accretion as the Sterling results were initially more than offset by the incremental interest on the transaction financing and the impact of the share dilution from the issuance of the acquisition shares.
Steven: All all of these items.
Steven: We're in line with our previous commentary over time as we realize synergies we continue to anticipate delivering double digit adjusted diluted EPS accretion as mentioned in previous quarters.
Steven: On Slide 11, you can see how we are making great progress on Actioning. Our synergy program. We previously communicated our goal of achieving $50 million to $70 million and run rate target synergies, which was updated from our original target of $50 million plus.
Steven: Today, we are again updating our target range to $60 million to $70 million of expected synergies to be action within two years of close.
Steven: When we presented last quarter, we highlighted $10 million of synergies already actions and we finished 2024 at approximately $20 million of <unk>.
Steven: $20 million action, representing substantial progress towards our synergy goals, our dedicated integration management function led by product and operations leaders are driving the execution of our plans.
Steven: As we have been as we have been actioning synergies and our integration plans, we have uncovered additional opportunities for cost savings, giving us confidence to raise the lower end of our target range. Today. Our current focus has been on reducing duplicative costs in our corporate and internal functions and reducing certain redundancies in our fulfillment.
Steven: In commercial department, and we have been able to action these savings more quickly than previously expected.
Steven: As a result, we now expect to action, 50% plus of our target synergies within the first six months post closing a meaningful acceleration from our previous objective.
Steven: Of achieving the same goal within the first year.
Steven: On slide 12, we are showing key growth metrics for legacy first advantage and legacy Sterling.
Steven: Over time, both businesses have have consistently delivered strong historical performance for upsell and cross sell new customer logos and attrition demonstrating our ability to manage and deliver on what we can control with the variation being driven by base.
Steven: This has been true throughout 2024, including the fourth quarter and we have been pleased that both businesses combined upsell cross sell and new logo performance as well as retention have broadly aligned with historical revenue growth rates.
Steven: This was propelled by our go to market momentum throughout the year and ending the year with a strong pipeline and gross retention remained healthy and stable.
Steven: In the fourth quarter base based revenues continue to be a headwind with legacy first advantage impacted by weaker than expected Q4 seasonal hiring as the softer hiring peak ended normal or ended earlier than normal in mid November.
Steven: The legacy Sterling saw parallel headwinds as similar late Q4 base softness was seen in legacy Sterling America's business base.
Steven: Base growth at legacy Sterling had lag legacy first advantages as legacy Sterling vertical have been more impacted by the normalization of hiring patterns.
Steven: We believe that when the macro environment stabilizes, our base growth will normalize towards our historical rates.
Steven: Now turning to cash flow and net leverage on slide 13.
Steven: Over the last 12 months, we generated adjusted operating cash flows of $165 million, a 1% increase on a year over year basis. As we continue to closely manage our working capital and focused on cash flow conversion with our DSO is remaining in check.
Steven: Our cash balance at December 31, 2024 was $169 million, finishing above our desired minimum cash level of $150 million.
Steven: During the quarter, we used $10 million for purchases of property and equipment and capitalized software development costs. This was $32 million for the full year.
Steven: Our synergize pro forma adjusted EBITDA net leverage ratio at year end was four four times.
Steven: We remain committed to our goal of reducing net leverage towards approximately three times synergize pro forma adjusted EBITDA within 24 months post close and to our long term net leverage target of two to three times.
Moving to slide 14, and our 2025 guidance.
Steven: I'll start by noting that all year over year comparisons are on a pro forma basis to allow for easier comparability.
Steven: We expect 2025 total revenues in the range of one five to $1 6 billion adjusted EBITDA of $410 million to $450 million and adjusted diluted EPS of <unk> 86 cents to $1 <unk>.
Steven: For revenue this range represents flat to a little over 5% year over year pro forma growth.
Steven: At our guidance midpoint, we expect to expand full year adjusted EBITDA margins by approximately 150 basis points.
Steven: Also factored into our 2025 guidance, our current assumptions related to sustained mixed shifts within our business, primarily within the Sterling segment, which do impact adjusted EBITDA margins.
Steven: Our guidance reflects 2025 and year realized synergies in the range of $25 million to $30 million with our focus being to accelerate our savings wherever possible.
Steven: Our guidance also includes our latest view on the macro environment and labor market.
Steven: While labor market broadly looks to be more stable entering 2025, we have not yet seen a return of investment hiring in our verticals.
Steven: As such our guidance reflects a prudent posture towards growth in 2025, particularly in the first half of the year.
Steven: Looking at our growth algorithm in more detail, we do not expect to fully lap prior year base declines until the middle of 2025.
Steven: Therefore, our guidance is based on the expectation that base will remain a growth headwind through the middle of the year, improving sequentially and turning to neutral and then slightly positive later in the year.
Steven: Said more simply we are modeling slight to modest full year base revenue declines across our entire guidance range.
Steven: With that said, we do expect continued productivity of upsell and cross sell and new logo growth consistent with historical trends. We also expect customer retention to remain in line with our strong historical performance of around 96% to 97% even as we continue to integrate the Sterling acquisition.
Steven: <unk>.
Steven: While recently FX has not been a big headwind for our business recent strengthening of the U S. Dollar has led to an expectation that FX will have a slightly larger impact on our business in 2025, an important factor as we have seen our international markets stabilize and return to growth.
Steven: Looking now at the quarterly phasing of our 2025 guidance.
Steven: We expect Q1 year over year revenues to decline by approximately 1% to 4%.
Steven: We expect quarterly year over year revenue growth to sequentially improve for the first three quarters of 2025 with the fourth quarter more on par with the third.
Steven: This change in anticipated sequential and seasonal growth dynamics as a result of our Sterling acquisition, the diversification of vertical exposure and how that projects over the year.
Steven: We expect our Q1 adjusted EBITDA margin to be in the mid 20 threes to mid 24% range, which reflects the blended impact of legacy first advantage margin historically in the high Twenty's and legacy Sterling's margins, which have been closer to 20% during the first quarter as seasonal revenues have.
Steven: Yet to ramp.
Steven: Additionally, our pace of synergy realization is expected to drive additional sequential adjusted EBITDA margin expansion during the year.
Steven: Starting with Q2, we expect adjusted EBITDA margins to be above 28%.
Steven: Overall, we believe that we are extremely well positioned to benefit when the macro environment improves.
Steven: We expect Q1 adjusted diluted EPS to be between 12, and 15 cents due to the seasonality I just mentioned and the impact of the full $2 2 billion dollar acquisition financing.
Steven: After Q1, we expect considerable adjusted diluted EPS improvement as revenue ramps, we recognize that this guidance implies a meaningful improvement during the year, which is primarily driven by the impacts of the Sterling acquisition, and our new seasonality and to a much lesser extent.
Steven: Pollution of our expected macro stabilization.
Steven: We expect our adjusted diluted EPS to range between the mid to low twenty's to 30% or 30 per share for each of the last three quarters.
Steven: We have also provided a summary of selected 2025 modeling assumptions in the presentation appendix.
Steven: Moving to slide 15, we have provided an adjusted diluted EPS bridge, which illustrates the puts and takes from our 2024 adjusted adjusted diluted EPS to our 2025 guidance I just mentioned.
Steven: This is very important to understand as the sterling financing and share issuance have 10 months of year over year impact in 2025.
Steven: Even in our projected neutral macro environment.
Steven: And after adjusting for the Sterling acquisition items expected synergy realization in 2025 growth and investment we expect 2025 adjusted diluted EPS expansion of over 15% at the midpoint.
Steven: This sets us up well to continue expanding adjusted diluted EPS in the coming years, which is aligned to our previous messaging.
Scott: With that let me turn it back to Scott for closing remarks before we open the line for questions.
Scott: Thank you Steven.
Speaker Change: Moving to slide 17, and a few closing comments first we are excited to be hosting our inaugural Investor day on May 28.
Speaker Change: At that event, we plan to share more about our F. A five dato strategy an update on our integration program as well as long term targets that will guide our business over the coming years I Hope you will be able to participate look for more information coming soon.
Speaker Change: Second I would like to emphasize our consistent focus at first advantage, we continue to deliver solid results and execute on priorities. We remain focused on delivering on our value creation playbook and shaping the future of our company to better serve our customers with that we will open the line for questions.
Speaker Change: Okay.
Speaker Change: Thank you we will now begin the question and answer session. At this time. If you have a question. Please press the star and one on your telephone keypad. If at any point. Your question has been answered you may remove yourself from the question queue by pressing star and two if.
Speaker Change: You are using a speaker phone, we request pick up your handset to provide optimal sound quality.
Speaker Change: We will take our first question from Shlomo Rosenbaum with Stifel. Please go ahead. Your line is open.
Shlomo Rosenbaum: Hi, Good morning. Thank you for taking my questions could you provide a little bit more detail about some of the weakness in seasonal hiring in retail and transportation just a little bit more of color on what your clients were telling you about why it happened the duration and is this something that you're.
Shlomo Rosenbaum: Is this translating into other areas it all through.
Shlomo Rosenbaum: The first quarter of the year or and then I'd like to ask you a follow up.
Shlomo Rosenbaum: Yes, I think I think it's a great point because this this let's call it a trend.
Shlomo Rosenbaum: Now happened for the last couple of years, where we're basically seeing is less of that of the peaks and the valleys and a little bit just more of a more normalization as we go into the seasonal hiring period and what we've seen over the last couple of years is that high.
Shlomo Rosenbaum: Hearing is starting to slow down around mid November.
Shlomo Rosenbaum: And continues all the way through the month of December.
Shlomo Rosenbaum: But then picks back up in January as if we're back onto a normal course, so for the last couple of years. What we've seen is fairly slow half of November most of December but no impact going into Q1 as hiring then continues to ramp back up so we have factored.
Shlomo Rosenbaum: That into our 2025 guidance that we expect something similar again later this year. So that is definitely factored into our guidance.
Shlomo Rosenbaum: Yeah.
Shlomo Rosenbaum: Okay. Thanks, and then.
Shlomo Rosenbaum: Just the comment that you made about the big win.
Shlomo Rosenbaum: In the health care space using the Sterling.
Shlomo Rosenbaum: Platform I think what we discussed in the past was.
Shlomo Rosenbaum: The thought that you would move clients or incremental clients would be on the first advantage platform, but using kind of the sterling front end.
Shlomo Rosenbaum: And I guess the question I've got is that it's great to win with the strong platform does that mean that youre going to indefinitely be supporting really the backend of sterling for for a long period of time.
Shlomo Rosenbaum: Yeah, So am I going to give a huge shout out to our product and tech teams for coming up with some great innovative ideas here.
Shlomo Rosenbaum: Our whole goal of this integration with Sterling was.
Shlomo Rosenbaum: No disruption to customers.
And I think you could see that in our.
Shlomo Rosenbaum: Retention numbers that we've that we've put out you know we our retention is bad in line with normal. So we are not seeing any client disruption as a part of this acquisition and that's primarily because of the technology and product vision that our teams have created.
Shlomo Rosenbaum: So they have it.
Shlomo Rosenbaum: It's a very complicated in depth thing, but I'll give you a high level here they have come up with a very innovative way for customers to leverage the best of both worlds from both platforms.
Shlomo Rosenbaum: Regardless of where they are around the world.
Shlomo Rosenbaum: And essentially.
Shlomo Rosenbaum: The technology solutions that we're gonna be recreating will allow us to tap in to both platforms.
Shlomo Rosenbaum: And the best the best in breed approach from both platforms without the clients having to do any migrations. So consider this as a series of upgrades.
Shlomo Rosenbaum: And yes that does mean, we have to maintain both platforms, but not in the same way they're being maintained today. So we can.
Shlomo Rosenbaum: Actively reduce.
Shlomo Rosenbaum: Our head count in overheads in supporting other platforms by because of the solution and the tech team has come up with so that'll continue to drive our synergies with no impact to our original plan there, but we just think this is going to be a great experience for clients and for the clients candidates.
Shlomo Rosenbaum: Thank you.
Speaker Change: We will take our next question from Andrew Steinman with J P. Morgan. Please go ahead. Your line is open.
Speaker Change: Hi, I definitely heard your comments how flexible the client approach has been post merger I was wondering if you're tracking a net promoter score.
Speaker Change: And to get out, particularly kind of pre merger post merger, so that we could keep.
Speaker Change: And I on that and and also if you could go.
Speaker Change: Go back to talking about your verified database now that you know that you have kind of sterling's.
Speaker Change: Information in that database could you talk about how much revenues or savings the verified database is producing.
Speaker Change: Yeah, and Andrew we we will continue first advantage has always been a big believer in it.
Speaker Change: And net promoter scores on not just our customer.
Speaker Change: Customers, but also their their candidates experience. So we continue to measure that both candidate experience.
Speaker Change: We measure the the Onboarding experience of new logos, and we measure the ongoing net promoter scores.
Speaker Change: And I think we've taken it a step further because of the acquisition that we are actively.
Speaker Change: Actively in front of especially the Sterling customer base on a on a regular basis more than usual just to make sure. We're hearing all of their needs and concerns and addressing things that Mike and I will tell you. They are extremely excited about this acquisition.
Shlomo Rosenbaum: Because they are now going to be able to tap into the best of breed stuff from first advantage, which is kind of what I was talking about with Shlomo question.
Shlomo Rosenbaum: So customers are definitely anticipating getting.
Shlomo Rosenbaum: The the great products and service from from first advantage on the Sterling platform. So they're going to get the best of both worlds, which is going to be a great situation for us. So that's where we're pretty bullish on our retention numbers and our client satisfaction numbers.
Shlomo Rosenbaum: On the database on the verified side you heard in my prepared remarks that.
Shlomo Rosenbaum: Our proprietary database records are now up to 900 million.
Shlomo Rosenbaum: The breakdown of that is that verified is now up to $120 million.
Shlomo Rosenbaum: And our National Criminal database is 700 <unk>.
Shlomo Rosenbaum: <unk>.
Shlomo Rosenbaum:
Shlomo Rosenbaum: The interesting point about that number is that none of that increase includes the sterling data, yet and we havent, we have not and we have not tapped into that yet you know their teams working on it but we haven't used that we haven't been a tap the sterling data into that database is the the <unk>.
Shlomo Rosenbaum: Database increases are because of new third party data provider partnerships that we've formed across multiple areas.
Shlomo Rosenbaum: And that's allowed us to increase the size of the database, but ultimately we also will be adding the sterling data to.
Shlomo Rosenbaum: To this but we just that'll probably be a later in the year.
Shlomo Rosenbaum: Project, because it takes a long time to clean.
Shlomo Rosenbaum: Clean and format and move over data, but that's what the teams are working on.
Shlomo Rosenbaum: Thank you.
Speaker Change: We'll take our next question from Andrew Nicholas with William Blair. Please go ahead. Your line is open.
Speaker Change: Hey, guys. This is Daniel Maxwell on for Andrew today.
Speaker Change: Appreciate all the.
Speaker Change: Commentary on guidance and cadence and everything maybe.
Speaker Change: On the on the top line range.
Speaker Change: Do you feel that the low end of the guide in beds.
Speaker Change: Some leeway for for a slower than expected recovery in base growth. It seems like a fairly quick.
Speaker Change: Covering thats being embedded from from the lower than expected Q4 to the breakeven point.
Speaker Change: Second half so maybe your thoughts there.
Speaker Change: Daniel a couple things to keep in mind.
Speaker Change: Hey, you know as I mentioned in the remarks.
Speaker Change: Cross all ranges of our guidance, we still expect base to be negative for the year.
Speaker Change:
Speaker Change: And when you really start to break that down and then sequentially. You know it is a little bit more front weighted to your point, but if you've been following first advantage in and Sterling long enough.
Speaker Change: Base declines really started Q3 of 2022. So this is kind of a three year evolution cycle.
Speaker Change: We start to have.
Speaker Change: The steady comps when we get to the back half of the year that have those three years of compounded base declines in them already.
Speaker Change: And then when you also look at the macro data and just kind of the stabilization cycle, that's been going on the pace of change and the hiring trend has flattened out a lot. So when we looked at our guidance and our budget in our modeling for 2025.
Speaker Change: We feel good.
Speaker Change: In terms of our base range in there.
Speaker Change: That we've got kind of a fairly wide range of.
Speaker Change: Scenarios covered obviously.
Speaker Change: Rejects the current stabilization trend to keep going on but as you get towards the middle of the year you have those compounding comps from the prior years.
Speaker Change: And then like I mentioned in the call earlier.
And then like Scott mentioned, we've got great productivity on our pipeline new logo upsell cross sell those are triggering as they always have for both client bases than our combined client base and as Scott just mentioned a few minutes ago. We're laser focused on retention in those 90, 697% retention levels are now our norm.
Speaker Change: And then I'll add a few things.
Entering 2025, and a very strong position with macro normalization plus strong pipeline conversion. So let's just let's just.
Speaker Change: Re look at some of the things we talked about in the opening script.
Speaker Change: If you look at a year ago Q4, 2023 stay.
Speaker Change: Standalone first advantage landed 10, new new wins with a C V of of 500 mm.
Speaker Change: K or more.
Speaker Change: The combined Sterling first advantage team landed 25.
Speaker Change: <unk> wins in Q4.
Speaker Change: And we.
Speaker Change: We're having very very good start from a pipeline standpoint of 2025, which gives us.
Speaker Change: Confidence in the guidance in.
Speaker Change: In fact it is.
Shlomo Rosenbaum: We did mentioned the large health care win which Shlomo asked about but in.
Shlomo Rosenbaum: In the script, we also talked about two other very large U S wins, which were not bad health care. When this was these are two other ones.
Shlomo Rosenbaum: Those two wins.
Shlomo Rosenbaum: Have a potential to beat both of them to be top 10 customers of first advantage.
Shlomo Rosenbaum: And probably it will take a few months to get revenue going but we expect that revenue to start coming in second half.
Shlomo Rosenbaum: So again when you can start a year as fast as we have from a sales and pipeline standpoint.
Shlomo Rosenbaum: And you can land to deals that potentially could be top 10 customers for you.
Shlomo Rosenbaum:
Shlomo Rosenbaum: That gives us really really strong confidence in the second half of the year.
Shlomo Rosenbaum: Okay.
Shlomo Rosenbaum: Great Super helpful. And then if I can squeeze in one follow up maybe more broadly have you guys gotten any any significant insights from customer conversations so far.
Shlomo Rosenbaum: In 2025 and any.
Shlomo Rosenbaum: As Youre seeing two package density or more broadly any changes to client behavior.
Shlomo Rosenbaum: Post election.
Shlomo Rosenbaum: Yeah.
Shlomo Rosenbaum: Probably talking to customers more now than we ever did because as we've said couple of times, our laser focus on customer retention and we wanted to make sure that the communication is crystal clear about our product strategy about our platform strategy and that how it will benefit our customers.
Shlomo Rosenbaum: So yes, we are having more discussions with our customers and I assume your question is more around what are we hearing from the hiring side.
Shlomo Rosenbaum: And we are hearing normal hiring we are hearing that customers are planning on normal hiring.
Shlomo Rosenbaum: But again, it's the new normal hiring it's not the post pandemic hiring it's the pre pandemic hiring it's normal cycles they are anticipating.
Shlomo Rosenbaum: Normal growth.
Shlomo Rosenbaum: And I don't think the administration has had any impact on their hiring strategies. Because there is nothing that's really been rolled out from the new administration yet so.
Shlomo Rosenbaum: So we're not hearing anything negative or even positive about that it's really kind of a non event in our customers' eyes right now and until the government rolls out something then we'll obviously react.
Shlomo Rosenbaum: Great. Thanks.
Speaker Change: Well take our next question from Manav Patnaik with Barclays. Please go ahead. Your line is open.
Kennedy: Hi, Good morning. This is running Kennedy on for Manav. Thank you for taking my question can I, just confirm with the acceleration of the realization for synergies where the bulk of those are coming from and if the actions going forward within the target areas of internal ops fulfillment products in commercial have changed or the expectation for realized realization of bench.
Speaker Change: If it's there.
Speaker Change: Yeah, Ronan I mean, the acceleration almost was across the board you know when we talked last call. Our initial focus was on those kind of public company costs do do do do do being executive leadership some of those <unk>.
Speaker Change: <unk> signed M&A 101 type items.
As a management team, we kind of challenged ourselves to find avenues to accelerate those.
Speaker Change: Synergies and also just it helps with some of the internal integration effort. So I'm quite literally have contributed almost every line of the P&L.
Speaker Change: We got at the actions it was a lot of our identified playbook. That's why we didn't take the full range up we were just able to get confidence in some of the programs. We had and then tried to accelerate as many of them as we could either into 'twenty four earlier into 25, which is why we you know we now think we're over 50% action by the six month Mark that was a <unk>.
Speaker Change: That was the one year Mark when we had talked previously.
Speaker Change: You don't get there by just one why one function contributing it was across all of our work streams.
Speaker Change: Got it. Thank you that's helpful. And then I guess more broadly speaking with regards to the Sterling acquisition and integration progress thus far.
Speaker Change: That's a positive development with regards to acceleration of the synergies any other positive developments or surprises, whether it's you know enhance customer value prop the innovation the product the resilience seasonality and then anything that has been essentially an unpleasant surprise or youre kind of learning versus your expectations.
Speaker Change: Yeah, I think you know listen it's been a it's been a big effort. We've got a lot of people working on this and obviously we closed on on Halloween. So we really couldn't get under the Hood until November 1st I'd say the biggest pleasant surprises by far has been the culture match.
Speaker Change:
Speaker Change: It's just amazing how well these teams are working together, especially on the go to market side and on the product side and operations side. Those are three big areas, where the teams are working so well together and it's really because there's a culture match.
Speaker Change: I think the biggest thing that can derail any M&A is is cultures that don't match and we've got two high performing cultures that are working really well together.
Speaker Change: We're also finding a lot of good like I would call them Nuggets on the product side and on the API integration sides with data.
Speaker Change: So again this goes back to the best of breed comment where we.
Speaker Change: We have found that sterling.
Speaker Change: Doing some good things.
Speaker Change: On the tech and product side.
Speaker Change: Obviously first advantage has been doing a lot of great things on the tech product and automation side.
Speaker Change: And what we'll be able to do is turn on those things for legacy first advantage customers that we feel that Sterling was doing a good job on and legacy Sterling customers for the things that first advantage is doing good good job on and these will all be behind the scenes type of upgrades that client.
Speaker Change: Really won't see but we'll feel in there.
Speaker Change: They'll feel in the output in terms of faster turnaround times higher quality et cetera. So that's why the clients are so excited about where this tech journey can bring them because they are seeing the best of both worlds products that are in platforms that are out there and theyre going to have they're going to be start tapping into these.
Speaker Change: And we're already rolling these out these are things that we've already started rolling out to our legacy Sterling clients and legacy first advantage clients and we have product Roadmaps, where we're gonna be rolling out nice upgrades almost monthly now.
Speaker Change: So clients will really start to feel and see this on the negative side you know it's not really.
Speaker Change: You know obviously the.
Speaker Change: The big concern is is margins.
Speaker Change: And that's still going to drag.
Speaker Change: A bit for us, but we've got a good plan and and obviously you guys know our track record on on margins I mean look at Q4 alone.
Speaker Change: It was down from a base standpoint, but we delivered 32%.
Speaker Change: EBIT margin on legacy first advantage. So we know how to improve margins and we've just got some work to do on it but we've got a great plan in place.
Speaker Change: Okay.
Speaker Change: Thank you I appreciate it.
Speaker Change: We will take our next question from Jeff Silber with BMO capital markets. Please go ahead. Your line is open.
Speaker Change: Thank you so much just wanted to go back to the synergies you talked about first advantage being more of a variable model than what you've seen in sterling can we get some examples.
Speaker Change: How youre doing that what you're doing from sterling's legacy business to change that.
Speaker Change: Yeah, Jeff and welcome to the calls.
Speaker Change: Certainly I you know first advantage, we've always looked at our fulfillment and operations functions as having a highly variable nature to them are third party cost of sales and that's fairly consistent with Sterling are almost 100% volume variable, but certainly on the labor side.
Speaker Change: We have a very flexible staffing approach where we.
We do our modeling on volumes and then staff to a to a metric related to that and then use overtime variable shifts weekends et cetera to modulate the available labor to the inbound orders in a pretty one to one matching ratio.
Speaker Change: I think a lot of others in our industry and Sterling included hadn't had a little bit more of a fixed cost mindset, where they staff to our kind of our underlying assumption and then it was a fixed cost. They had 40 hours per week per employee if you will and we've looked at some of that that margin there that tail end of the of the base volumes as we can use that.
Speaker Change: Variable function of our labor and that workforce management. It takes some time to adapt.
Speaker Change: And kind of put the right tracking tools and forecasting tools and then planning tools in place, but that's been a focus of the operations team since day one.
Speaker Change: We're call it 120 days in and we're getting very close to having some some of those methodologies across the board. So that's how we handle it from a staffing standpoint, and then I think the other big margin difference between first advantage in Sterling has just been some of them the shift in mix and as we've talked about a couple of times and this is coupled into our integration and.
Speaker Change: Synergy program.
Speaker Change: Sterling with their bolt acquisition had their legacy drug in health care Wellness program. They had the one they acquire Commvault first advantage has all of that in Orwell. This platform as well so part of our synergy and integration program is harmonizing that down instead of having three of everything effectively to get to a one best in class so between instilling that.
Speaker Change: Workforce management, and then kind of de duplicating the fulfillment of some of those wellness, which are the lower mix services that we've been referring to a lower margin mix that we've been referring to that that's that's all on our game plan for 2025 and part of that 150 basis point lift out at the EBITDA margin at the midpoint.
Jeff Silber: Hey, Jeff.
Jeff Silber: Yeah definitely add that you know will we also have a plan to reduce head count on the sterling side through automation.
Jeff Silber: First advantage was.
Highly automated and and.
Jeff Silber: As we again rollout that best of breed automation to legacy.
Jeff Silber: Sterling clients that will allow us to give us some flexibility on the head count side and a great example of that is you know I think you guys have heard for over a year now about our click chat call from.
Jeff Silber: Punctuality on customer care and Sterling didn't doesn't have that and so we'll be rolling that out.
Jeff Silber: You know in the very near term to legacy Sterling customers, which will give them the advantage of using chat AI chat too.
Jeff Silber: You know to get order status and things like that which.
Jeff Silber: Will allow us to.
Jeff Silber: Rationalize some of the head count on that side and as we rollout even.
Jeff Silber: Things like a gentex AI.
Jeff Silber: We expect you know you know even further synergies on the head count side. So we're feeling pretty good about how we can optimize both both the organizations head count with with automation.
Speaker Change: Okay. That's really helpful. And then in your press release, you say do you expect the Batesville remain a headwind through the middle of the year is it just that the comps get easier in the back half of the year are you expecting any major changes from a macro perspective any color would be great.
Jeff Silber: Yeah, I mean, Jeff that's the fundamentals of it as hey, you've got easier comps and as I mentioned, a little while ago right. It's your third year of compounded base declines when you get to the middle of the year. So that certainly is a major factor and then also it's just there there has been a broad stabilization trend and we're just seeing that start to play out when you look at the hiring volumes.
Speaker Change: And some of the other metrics.
Speaker Change: Those have all been declining now for a couple of years, but the pace of decline has flattened out a lot over the last three months to six months.
Speaker Change: And we kind of expect that normalization and stabilization to continue and then once you get to the middle of the year, you've got that that stabilization trend compounded with those those easier comps is kind of what drives it but like I said a couple of times when you zoom out and look at the year as a total we still except at all parts of our range base to be negative.
Speaker Change: The only thing I would.
Speaker Change: Throw in there too is.
Speaker Change: The sales engine has been firing on all cylinders for a while now so we will be well get some revenue conversion that things that go from new logo or upsell cross sell into base.
Speaker Change: That will start helping us in the latter half of the year as well.
Speaker Change: Alright, thanks, so much.
Speaker Change: As a reminder, if you'd like to ask a question today. Please press the star and one Keith on your telephone keypad, we will take our next question from Kyle Peterson with Needham. Please go ahead. Your line is open.
Kyle Peterson: Great good.
Kyle Peterson: Good morning, guys. Thanks for taking the questions.
Speaker Change: I wanted to start off on some of the expectations for.
Speaker Change: Vertical performance this year I know, there's some smooth.
Some moving pieces in and different mix, especially between legacy first advantage in Sterling. So I guess any any color or any assumptions embedded in your guidance for whether it's vertical so you expect to be particularly strong or bigger headwinds.
Speaker Change: In 2025, I think would be really helpful.
Speaker Change: Yeah, Kyle I think not a lot of specific verticals to call out from a base perspective, because that normalization trend and now that we're kind of hitting your three it's kind of made its way through all of them I know on the past on the legacy side, we highlighted the strength of our retail and transportation, but like Scott mentioned not that long ago.
Speaker Change: Go.
Speaker Change: The updated assumptions and trends around peak or certainly baked into our guidance and I think that guidance pretty well now has it baked in across all verticals that stabilization trend I think the call out that I would say and like Scott just mentioned.
Speaker Change: The pipeline and momentum in go to market, we highlighted the the deal in retail the deal in health care that Scott's talked about those will help drive strengthen those obviously.
Speaker Change: But from that that controllable revenue standpoint that upsell cross sell new logo and then retention trends are strong across all verticals.
Speaker Change: And also kind of what we can.
We expect that international rebound will continue.
Speaker Change: We've seen out of international in the last two quarters has been very encouraging so we expect international even though even though it's only 13% of the business, we expect that to continue to rebound nicely.
Speaker Change: Got it.
Speaker Change: That's really helpful.
Speaker Change: I guess, just a follow up and kind of switching over to the balance sheet and leverage I. Appreciate all the color and I know the margins are.
Speaker Change: All of it and it should get better as the year progresses, but how are you guys thinking about the piece of Delever.
Speaker Change: Deleveraging and priorities here or whether it's just.
Building cash and scaling EBITDA or are you guys looking at potentially pre.
Speaker Change: Prepaying some debt like how should we kind of think about your plans for the balance sheet.
Speaker Change: The next.
Speaker Change: A few quarters here.
Speaker Change: Yeah.
Speaker Change: Certainly Kyle to start right, we do have some.
Speaker Change: But little about $5 million mandatory prepayments that we'll make on schedule at the end of every quarter that starts here in March so there'll be there's about $22 million of that baked into our model and it should be baked into assumptions at a minimum.
Speaker Change: We do expect free cash flow.
Speaker Change: You know to be positive obviously in the year somewhere in the $55 million to $85 million range is based on our guidance.
Speaker Change: And then when you kind of convert that over to leverage there will be some deleveraging.
Speaker Change: But the synergy programs, even if we've got half of those are executed midway through the year, let's call. It <unk>.
2026 will be the real year of deleveraging because youll have the full year run rate benefit of those in your actual results entered your cash flow.
Speaker Change: But there will be some modest deleveraging in 2025.
Speaker Change: Okay.
Speaker Change: I appreciate all the color and thanks for taking the questions guys.
We will take our next question from Scott Wurtzel with Wolfe Research. Please go ahead. Your line is open.
Scott Wurtzel: Hey, good morning, guys. Thank you for taking my questions just wanted to touch on the acceleration in growth on the legacy Sterling Upsell Cross sell and if you could touch on what has driven that over the last couple of quarters and then if there is anything you know on their go to market side that they are executing on that do you think you can maybe fold into the FAA salesforce.
Scott Wurtzel: To maybe realize some incremental upsell cross sell acceleration growth on your side as well thanks.
Scott Wurtzel: Yeah, So Scott mechanically on the on the legacy Sterling side, they had a couple of larger upsells.
Scott Wurtzel: I think they announced it it was the last time they did earnings but it was the end of 2023 that went live in 2024 that was on their health care space and in some of those medical services that was their largest ever upsell. So obviously, we got the full year benefit of that essentially in their 2024 results.
Scott Wurtzel: And I'll, let Scott give some more color on in a second but the sterling productivity out of frankly, the entire sales force, including the Sterling team has been phenomenal.
Speaker Change: Even if you look at the more recent success 25 enterprise bookings in Q4, if you look at last year Standalone FAA was only 10, so not only did the transaction not distract the team from.
Speaker Change: Productivity, but we've actually outperformed the prior year. If you will can you just double them up from the kind of the relative scale. So I think there the bolt acquisition. They did while the margins are what we would desire a game Sterling a couple of new avenues to cross sell into those to their base and they've done a really nice job of executing on that plan.
Scott Wurtzel: And Scott the only thing I would add is as I mentioned earlier.
Speaker Change: Especially the go to market teams are working extremely well together, it's almost like we've been together for years now not months.
Speaker Change: And I think what one it's important to talk about numbers like 25 wins last quarter and a N and obviously a great start to the year. So the numbers are significant but what's more important is that that shows that there's no hesitation in the market about this acquisition that new logo.
Speaker Change: <unk> are still coming to us and actually now maybe are coming to us at an accelerated rate.
Speaker Change: Because of the combined entity the Tech story, the best of breed story, that's out there that the deep vertical story that we've got so we're obviously encouraged by the numbers themselves.
Speaker Change: But what's more important is that the sentiment and the in the new logo space.
Speaker Change: It's certainly in favor of the merger.
Speaker Change: Got it that's Super helpful. And then just as a quick follow.
Speaker Change: Follow up on guidance I know, you're orienting towards the pro forma growth, but I'm just wondering if theres any color you could give on your expectations for legacy first advantage growth for the year.
Speaker Change: Yeah.
Speaker Change: Yeah I mean.
Speaker Change: Largely.
Scott Wurtzel: Scott I mean, the two the two segments or the two historical businesses are relatively in line as I mentioned, we're kind of expecting the historical growth algorithms upsell cross sell new logo and retention to be in line candidly like you know like you've heard the story as Scott mentioned the lines get a little blurred because theres a pipeline opportunity that <unk>.
Speaker Change: I loved out of legacy first advantage that the legacy Sterling No frontier.
Speaker Change: Front end platform may be the best solution and we've had situations where the opposite is true too. So it's that's kind of why we're starting to look at things on a consolidated basis, because it's we're able to leverage our combined strengths to up to the impact of the consolidated customer base versus kind of looking at the businesses as two stand alone, but yes I would.
Speaker Change: Just looking at the trend largely.
Speaker Change: Base trends are in line and new logo cross sell between the two legacy businesses are largely in line. There's nothing distinct between the two that makes you makes you.
Speaker Change: Say one's going to completely performed differently than the other.
Speaker Change: I would just add that I think.
Speaker Change: It's important to note, we're not thinking that way anymore, I think what's what's given us a lot of success in the early days of this integration is to not think about legacy first advantage and legacy Sterling. In fact, those are words, we don't use anymore internally, we'll use them with you today, because obviously theres financial things we need to sell.
Speaker Change: But we don't say those words anymore internally, we are operating as one company.
Speaker Change: So I think when you would look at.
Speaker Change: What's going to happen in these these businesses, we see it as one business going forward and.
And that's you can also see in our org structures and if you look at our go to market team. For example, it's about 50 50 Sterling leaders first advantage leaders.
Speaker Change: And we've got Sterling leaders now running first advantage accounts and first advantage leaders running Sterling accounts. It's one company going forward. It's a it is this new co mentality that has really galvanize the team and given us a lot of momentum so I.
Speaker Change: I appreciate the question, but I just think it's important to note that culturally.
Speaker Change: Culturally and organically and structurally we are not thinking legacy anything anymore.
Speaker Change: Got it thanks guys.
Speaker Change: And there are no further questions on the line at this time I'll turn the program to our speakers for any closing remarks.
Speaker Change: Well listen to.
Speaker Change: Want to thank everybody for joining the call today. Thanks for the continued support and the first advantage story I look forward to connecting take care.
Speaker Change: Okay.
Speaker Change: Thank you all for joining us today and thank you for your participation. This concludes the first advantage fourth quarter and full year 2024 earnings conference call and webcast. At this time you may disconnect. Your line and have a wonderful day.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Hmm.
Hum.
Speaker Change: [music].
Speaker Change: Hum.
Speaker Change: Okay.
[music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Hum.