First Advantage Corporation

Good day, everyone. My name is Ashley, and I will be your conference operator today. I would like to welcome you to the First Advantage third quarter 2024 earnings conference call and webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. At this time, all participants have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. Lastly, if you require operator assistance, please press star 0. Please note today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.

Thank you, Ashley. Good morning, everyone, and welcome to First Advantage's third quarter 2024 earnings conference call. In the investor 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 Form 10-Q for the third quarter of 2024 to be filed with the SEC. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to the most directly comparable GAAP financial measures, who they've been available without unreasonable effort, appear in today's earnings press release and presentation, which are available on our Investor Relations website. I'm joined on our call today by Scott Staples, our Chief Executive Officer, Stephen Marks, our Chief Financial Officer, and David Gamzee, our outgoing Chief Financial Officer. After our prepared remarks, we will take your questions. I will now hand this call over to Scott.

Thank you, Stephanie, and good morning, everyone. Thank you for joining our call. This morning, I'm pleased to provide you with an update on our business and our planned path forward with the addition of Sterling. We are thrilled to have closed our $2.2 billion acquisition of Sterling on October 31st. What a tremendous opportunity for all of us. Now nearly twice as large, we have over 10,000 highly skilled, motivated, and excited employees. On an LTM basis, as of September 30th, 2024, we have combined revenues of approximately $1.5 billion and adjusted EBITDA of approximately $407 million or $457 to $477 million, including our targeted run rate synergies of $50 to $70 million, which we expect to action within two years post-closing. I would like to thank our combined team for the great work they have done over the past several months to get us to this point. Since closing the acquisition, we have hit the ground running, focused on our products and customers while endeavoring to conduct a smooth integration, maintain customer continuity, action synergies, and reduce net leverage. We have also unveiled our new logo and branding for our unified company, which you will see in our presentation materials today. We were pleased to deliver another quarter of strong financial performance, and today we are maintaining our full year 2024 First Advantage standalone guidance ranges and providing new combined company guidance. David and Stephen will cover this in greater detail in the financial section. Turning to slide five, I'm excited to show the strong profile of our combined company and reiterate why Sterling is such an outstanding strategic fit and benchmarks First Advantage well among our technology-based info services peers. Our combined capabilities position us as a leader, offering differentiated technology platforms and a broad range of innovative solutions. With the Sterling acquisition completed, we have essentially doubled in size by most measures, including the size of our combined sales forces and customer success organizations. Combined, we conduct over 200 million background screens annually for customers across more than 200 countries and territories, and we have a robust average retention rate of over 96%. We have been an early adopter of AI and utilize this strong tool throughout multiple areas of our organization. We believe that our large proprietary data sets and AI driven intelligent routing allow us to reduce our reliance on third party vendors and deliver cost effective solutions to our customers. We expect that our now larger and more extensive network of automated and integrated third-party data providers will continue to enable us to address each customer's unique requirements with leading solutions. With additional customers and capabilities from Sterling, we have increased the diversification of our verticals and geographies, reducing customer concentration and seasonality, and increasing resilience. This helps to support our extremely diversified yet focused vertical go-to-market strategy centered around enterprise clients and specific industries, all supported by exceptional technology. Going forward, with increased resources dedicated to our targeted verticals, we believe that we will be able to provide deeper and more comprehensive industry-level expertise to customers across the globe. Leveraging our complementary footprints, we have expanded both our U.S. and international presence and see tremendous opportunities to advance our growth outside the U.S. in attractive geographies like EMEA, APAC, LATAM, and India. Our enhanced reach and diversification set us up to deliver a stronger, more comprehensive value proposition to customers in a large, growing, and highly fragmented $13 billion total addressable market. On top of this, with greater capacity for investment, we anticipate that the go-forward company will further accelerate innovation focused on artificial intelligence and machine learning, robotic process automation, and next generation digital identification technologies, building on our already robust foundation. All of these factors enable FirstAdvantage's position as a leading provider of critical, high-technology, digitally-enabled info services. Turning to slide six. Now that we are post-close, our focus is on delivering the strategic and financial benefits we have been discussing with you since we announced the planned acquisition. We have begun executing our detailed integration plan focused on a seamless process for our customers and employees. Actioning our synergy targets and deleveraging our balance sheet while retaining customers and ensuring that they do not experience disruptions remain our top priorities. We are also uncovering ways to enhance our customer value proposition and unlock cross-sell and up-sell opportunities. At the same time, we will continue to drive innovation and foster the high-performing culture we are known for. In tandem with our work on the transaction, we have been developing an updated strategy that incorporates the Sterling acquisition and is heavily focused on rapidly growing and innovating our business through new technology, AI, and product initiatives. We are calling this FA5.0, and I'm excited to share the organizational part of this strategy with you today. On slide seven, you will see the senior management team who is responsible for executing our FA5.0 strategy. As recently announced, Joel Smith has been promoted to the role of president. Joel knows our company very well, having held leadership roles within First Advantage since 2017, most recently as president data, technology, and experience. In this new role, Joel will continue to strategically lead the product, data, and technology organizations and will also take on responsibility for our go-to-market teams, including sales, customer success, and marketing. Our new structure, which aligns product and technology organizations globally, includes the introduction of general manager positions strategically aligned to verticals or regions reporting to Joelle. We have combined the capabilities of our go-to-market teams, including our direct sales and customer success functions under our GMs. This organization is a blend of First Advantage and Sterling's incredible talent and is focused on customer attention and satisfaction, along with new business sales and upsell cross-sell. Additionally, Doug Narn, who joined First Advantage in 2021 as International Chief Operations Officer, following his time as CEO of an international screening company, has been named to the expanded role of Chief Operating Officer, in which he is overseeing all of our U.S. and international operations, customer care, and customer onboarding teams. As we noted last quarter, this will be David's last earnings call as he is retiring, with Stephen Marks taking over the role of CFO. Stephen is an accomplished finance professional and respected leader. He joined First Advantage eight and a half years ago and has served as our chief accounting officer since February 2022. Our board composition is unchanged post-acquisition. Overall, we believe that our new organizational structure will improve the applicant and customer experience through enhanced operational efficiency, improve how we partner with and sell to our customers, and set us up for success as we commence our FA 5.0 journey. We will share more about the FA 5.0 strategy as we move into 2025. Turning to slide 8. The closing of our acquisition of Sterling not only provides a great opportunity to update our strategy, but to also rebrand the company. This is an excellent example of our pre-integration planning work coming to life, as it represents a joint effort between the Sterling and First Advantage teams over many months. Our new logo gives us a clean, modern look and feel that represents our commitment to leading-edge technology and the use of responsible AI and also symbolizes the joining of the two companies. The racetrack logo represents the interconnectivity of speed and quality, which is what separates us in the market. The continuous line that makes up the abstract FA of the logo reinforces the strength of the two companies coming together as one. We are very excited to time the launch of our new branding with the close of this transaction. Turning to slide nine. As part of the Sterling acquisition, we are committed to delivering $50 to $70 million of run rate cost synergies. We have already made significant progress for this target with over $10 million of run rate cost synergies actioned on day one. These savings consist primarily of reductions from combining executive teams, removing duplicative public company costs, and combining insurance programs. We have also already identified additional synergy opportunities that are expected to approximately double the action synergies within the next 100 days. We have a detailed plan in place to capture the full extent of synergies available. Key categories that we plan to address over time include international operations, fulfillment, product development, and commercial costs, with the objective of actioning our targeted run rate within 24 months. In addition to these cost synergies, we believe there is also opportunity to uncover potential revenue synergies. We will continue to execute and plan to update you on our synergy progress on future earnings costs. Finally, to summarize our position post-closing on the Sterling acquisition, we have a go-forward organization with outstanding leadership, a fresh new brand identity that exemplifies the future of First Advantage, a tremendous combination of growth-related resources and product offerings, strong customer relationships diversified across verticals and geographies resulting in lower customer concentration, ambitious and achievable synergy targets, and detailed integration plans which are in place and being executed. We have a lot of work to do in the coming months and years, and we are energized by our opportunity to accelerate growth and deliver value. Turning to slide 10. Before I turn the call over to David, I'd like to briefly comment on our standalone third quarter results and the progress we have made on sustainability. We are very pleased to report that First Advantage's combined upsell, cross-sell, and new logo rates, as well as retention rates, again performed in line with our historical revenue growth algorithm. First Advantage had 16 total enterprise bookings in the third quarter and 53 in the last 12 months, each with $500,000 or more of expected annual contract value. our sales engine continues to deliver consistent results. From a vertical perspective, FirstAdvantage's transportation and staffing verticals saw positive growth versus the prior year, while financial services was flat. Our other verticals were down in the single digits year over year, except for technology, which, while down slightly more, only represents 2% of our standalone business. Third quarter standalone results reflect a macroeconomic picture of continued normalization and stabilization within our business. We are also seeing this play out with key labor metrics, including quits, hires, and openings as job trends return to pre-pandemic levels. Overall, our customers continue to hire, albeit at a more modest level. Before switching gears, I want to call attention to the recent release of First Advantage's third annual sustainability report. This report reiterates our commitment to our core values and demonstrates the progress we are making across ethical governance, climate, employee engagement and inclusion, and bolstering the resilience of our company. I encourage you to review the full report on our website. As this is David's last earnings call, I would like to sincerely thank him for his distinguished service to First Advantage and for his partnership over the past eight-plus years. We wish you the very best in this next chapter, David. And with David's well-earned retirement, we are very excited to welcome Stephen, who has now taken over as our CFO. And with that, I will now turn the call over to David.

Thank you, Scott, and good morning, everyone. As Scott mentioned, this will be my last earnings call prior to my retirement, but I promise you that I will be carefully following First Advantage's future success going forward. It has been an honor to have been a part of the First Advantage management team. We have achieved much together, and there is still much more to be accomplished. This quarter, Stephen and I will be providing color on first advantage standalone results, legacy Sterling results, and a combined view to give you a clearer picture of our new profile before concluding with thoughts around our full year guidance. Turning to our standalone third quarter results on slide 12. In line with our previously communicated expectations, First Advantage's results for the third quarter improved sequentially over our second quarter results. Our third quarter revenues were $199.1 million, roughly in line with the prior year, and $14.6 million, or 8% greater than in Q2. For comparison purposes, note that Q3 of 2023 includes a one-time specific customer project representing approximately $4 million. Our America segment was roughly flat as base growth was lower than anticipated, primarily due to a later start in normal holiday hiring. International performed better than anticipated, increasing 3.2% with green shoots across all regions. For the total standalone company, adjusted EBITDA was $64 million, also roughly the same as in the prior year, but sequentially up $8.2 million, or 15% greater than Q2. Adjusted EBITDA margin improves sequentially 200 basis points to 32.2% due to our highly variable, flexible cost structure and disciplined approach to managing costs. We continue to carefully manage our business to match the current demand environment. As a reminder, our cost structure is highly flexible, and over 70% of our cost of sales are third-party costs, which are volume variable. We are constantly reviewing and adjusting our spending and modulating our investments to ensure that we are operating optimally and delivering results. Adjusted diluted earnings per share was $0.26. Legacy sterling results for the third quarter are shown on slide 13. Revenue for the quarter was $195.5 million, up $14.9 million, or 8.3% versus prior year. Revenue growth was led by the Americas, which grew on an organic constant currency basis and also benefited from the impact of the vault acquisition. International sales, excluding Canada, were overall flattish in the quarter, with strength in EMEA offset by softness in APAC. In terms of verticals, healthcare, retail, tech media, and industrials delivered growth year over year, while staffing and government saw declines. Adjusted EBITDA of $45.3 million was down $2.3 million versus the prior year comparable quarter, resulting in a margin of 23.2%. Adjusted EBITDA margins for the third quarter were impacted by base declines and some attrition of higher margin customers, as well as new business sales of lower margin products, such as drug and healthcare testing. Additionally, overall margins were impacted by inorganic vault revenues with margins in the teens, which the legacy Sterling management team did not yet address through the execution of their initial synergy plans. Adjusted net income of $22.7 million declined approximately $2 million versus Q3 of the prior year, driven by lower adjusted EBITDA. Now turning to combined LTM results on slide 14. Giving effect to the acquisition of Sterling, we have essentially doubled their revenues and adjusted EBITDA, which reflects the significant scale we've added to the business. While combined adjusted EBITDA margins of approximately 27% are lower than first advantage standalone, we are confident that once our cost synergies are achieved and we execute on our integration plan, over time we will be able to return combined adjusted EBITDA margins back to above 30% with potential for future upside. On slide 15, you can see that our first advantage standalone historical performance for upsell, cross-sell, new customer logos, and attrition has been consistent and demonstrates that we are managing and delivering on what we can control, with the variation being driven by the base. Looking specifically at first advantage, Revenues from upsell and cross-sell alone nearly offset our base decline for the quarter and contributed 7% to our Q3 growth. New customer logos contributed an additional 3%, which was impacted by some delayed customer go-lods, which have already partially cleared in the fourth quarter. Attrition improved to 3.6%. Base results, driven primarily by our America segment, declined 8%, which was below our expectations and was driven by continued uncertainty in the macro related to inflation, interest rate cuts, the recent election, and prolonged uncertainty in the geopolitical environment. We also experienced a delayed start to seasonal hiring in September, but based on October results, we have seen seasonal hiring pick up. Looking at legacy sterling. Overall, new and upsell cross-sell growth drivers were strong, offset by continued base headwinds. Upsell cross-sell contributed 10% to growth in Q3, with new logos contributing another 7%. Both of these growth rates reflected some acceleration compared to Q2. Gross retention remained stable, with attrition of less than 4%. Base growth remained negative at approximately 12%, though improving versus prior quarters. The base growth at Legacy Sterling has lagged first advantages as their verticals have been more impacted by the normalization of hiring patterns. I will now turn the call over to Stephen to discuss our cash flow, net leverage profile, and outlook for the remainder of the year.

Thank you, David, and good morning, everyone. I'd like to first take a moment to express my sincere gratitude to David. I've had the honor to work with him for over eight years and have been able to learn from his exceptional leadership and dedication. His contributions have laid a strong foundation for our success, and First Advantage is a far better company today thanks to his contributions. I would also like to thank Scott and our board of directors for their trust as I stepped into this role. I'm excited about the opportunity to work alongside such a talented team and to continue driving our company's growth. And certainly to our investors, I look forward to continuing to engage with you in the future as you work together to achieve our shared goals. Now turning to cash flow and net leverage on slide 17. In Q3 2024, First Advantage Standalone generated strong adjusted operating cash flows of $45.3 million, a robust 32% increase versus prior year, driven by expense management, cash tax planning, and year-over-year decreases in our receivables. Sequentially, adjusted operating cash flow increased 11% from Q2, First Advantage's cash balance at September 30, 2024 was $307.4 million as we were building cash to help fund the Sterling close. Over the last 12 months, we generated adjusted operating cash flows of $181.8 million, a 3% increase on a year-over-year basis. During the quarter, First Advantage used $7.9 million for purchases of property and equipment and capitalized software development costs. Legacy Sterling generated adjusted operating cash flows of $30.9 million in Q3 and had $75 million of cash in September 30, having prepaid $20 million of its outstanding debt in Q3. Year-over-year trends in cash flow exceeded the trends in adjusted EBITDA due to Sterling's working capital management, especially related to cash collections. We are actively working on ways to further enhance cash flow from the Sterling business. Turning to slide 18, in support of the Sterling acquisition, we successfully secured amended financing of a $2.185 billion loan amended financing of $2.185 billion in the form of a seven-year term loan due in October 2031, of which approximately $1.1 billion was used to fund the Sterling acquisition, and the balance was used to refinance the existing debt of both companies. We were very pleased that the company was able to maintain its existing credit ratings with the rating agencies on our refinance debt, underscoring the strength of our business post-closing. After considering our cash at close, we have approximately $2 billion of net debt and a pro forma synergized net leverage ratio of approximately 4.4 times in line with the expectations we shared last quarter. As part of our financing agreement, we upsized our revolver availability to $250 million to provide additional liquidity, and we extended the maturity date through October 2029. There are no amounts currently outstanding under the revolver. We remain committed to our goal of reducing net leverage towards approximately three times run rate adjusted EBITDA within 24 months post-close and to our long-term net leverage target range of two to three times. We believe that continued interest rate cuts will help us accomplish this goal. Additionally, in August, First Advantage entered into a new $160 million swap agreement through the end of 2026. And just last week, we added an additional $275 million swap agreement through October 2027. As a result, about 40% of our post-acquisition debt now has a fixed rate. Moving to slide 19. I want to talk about our combined company guidance, which maintains our previously provided first advantage standalone guidance and includes the expected sterling contributions for November and December, including the benefits of action synergies and the capital structure impacts from the transaction. For the combined company, we expect total revenues in the range of 858 to $918 million and adjusted EBITDA of 250 to $274 million. After accounting for the impact of the transaction financing and the new shares issued at close, we expect adjusted diluted EPS to be in the range of 83 to 95 cents for 2024. While our FAA standalone guidance ranges are unchanged, in light of the current macro conditions and base growth coming in lower than we had previously anticipated in the third quarter, we anticipate first advantage standalone 2024 revenues and adjusted EBITDA to come in above the low end of the standalone range but below the standalone midpoint. Looking at the fourth quarter on a standalone basis for first advantage, we still expect sequential quarter-over-quarter growth for revenues and adjusted EBITDA. The lower half of our standalone guidance range also assumes macro-driven base declines of around 2% to 4% in Q4, representing an improvement over the trends we saw in the third quarter. Our early read on standalone October results gives us confidence in the fourth quarter shaping up as I have outlined. Looking closer at our expectations for Sterling's contributions in Q4, we are expecting full fourth quarter revenues to come in between $170 million and $185 million. Of this, only November and December are included in our combined company guidance range and are expected to deliver between $108 and $118 million of revenue. Monthly results are influenced by the typical seasonality of the business and holiday timing. We are expecting November and December adjusted EBITDA for Sterling between $22 and $26 million and adjusted diluted EPS between 5 to 7 cents. Moving to slide 20, which illustrates our bridge from first advantage standalone adjusted diluted EPS guidance to our full year combined guidance, First Advantage standalone adjusted diluted EPS guidance is maintained at $0.88 to $0.98 with a midpoint of $0.93. To that, we add Sterling's expected contribution for November and December and then account for the impact of additional share issuance and transaction financing, resulted in our updated guidance midpoint of $0.89. On slide 21, we illustrate the double-digit adjusted diluted EPS accretion we expect from the acquisition on a synergized pro forma LTM September 30 basis. On this basis, we estimate accretion of approximately 15% plus. As a reminder, we expect to action our run rate synergy targets within two years post-close. of which only a portion is expected to be actioned in the balance of 2024 and during 2025. On this note, as you model your future projections, please keep in mind that as we consolidate Sterling's results and the capital structure impact of the acquisition, as well as account for the pacing of synergy capture and achievement, adjusted diluted EPS accretion in our actual reported results for 2025 will be more neutral. As the synergies are fully achieved, we anticipate the expected adjusted diluted EPS accretion will be attained. We plan to provide more reporting on this as part of our 2025 guidance, including a framework to understand synergy attainment over time, which will be discussed on our next earnings call. We are incredibly proud of the results produced by First Advantage in Q3 and are looking forward to the opportunity to create additional shareholder value as we execute our Sterling integration plans and the FA 5.0 strategy. With that, let me turn it back to Scott for closing remarks before we open the line for questions.

Thank you, Stephen. We continue to deliver solid results and execute on our priorities. Most notably, we closed the Sterling acquisition and are moving ahead quickly to integrate and capture the benefits and synergies. We remain focused on delivering on our value creation playbook and shaping the future of First Advantage to better serve our customers. With that, we will open the line for questions.

Certainly. Thank you. We will now begin the question and answer sessions. At this time, if you have a question, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. If you are using a speakerphone, we request that you pick up your handset while asking your question to provide optimal sound quality. Thank you. Our first question is coming from Shlomo Rosenbaum with Steve. Please go ahead.

Hi. Thank you very much for taking my questions. I just want to ask you a little bit about the comment that you made about on sterling some attrition of higher margin customers. The biggest risk, you know, even though I've discussed this, is, you know, the retention or the potential churn of some of these customers. Maybe you can give us a little bit more insight. clarity as to what happened over there. Are you expecting that to continue, or was that kind of anomalous? And just how should we think about that and, you know, after that, have a follow-up.

Yeah, Shlomo, I mean, nothing I would say notable in terms of a change from historical trend. You know, sterling retention the last few quarters has actually been high in historical perspective, 97%, 96% was 96% in Q3. It was really just a mixed item. You know, lately they've been having a lot of upsell success in that drug and healthcare space, which is bringing margins down. And the couple attrition, which, again, I would categorize as normal course, just happened to be more in that traditional screening space, which is higher margin, relatively speaking, which just pulled down a handful of bips, if you will, of margin.

So you're saying it was not a change in the attrition, it's just the leading of where the attrition came from. If I just clarify that for you, go to the next one.

Yeah, exactly. The mix of the lost business versus the mix of the added business kind of had a little bit of a market headwind to it.

Okay, thanks. And then if you don't mind, you talked about some of the base business coming in lower than expected. And maybe you could just talk about the operating environment in general. How has it changed over the last quarter? What are clients telling you about their hiring expectations? And importantly, does anything change or changes in administration? In other words, are you thinking that that, you know, increases the chance of more hiring, decreases, or really doesn't make a difference in the way that you're thinking about things?

Yes, Tomo. So, Everybody is obviously focused on the macro, and as you know, we are in constant communication with our customers. So our data points are, you know, what we're seeing from government data, but, you know, but more importantly what we're hearing from customers. And I don't think we're seeing anything different. It's a lot of more of the same. So what we've been talking about maybe for the last couple of quarters, even maybe last year or so, is sort of a continued stabilization and normalization, not only in this quarter but in previous quarters as well. We do believe that now that the U.S. election is behind us and the potential rate cuts are coming up, that some of the uncertainty will go away. But it's clear that job openings continue to decline, and things are sort of going back to what we see as pre-pandemic levels. But that's sort of a normal thing for us, and it sort of helps us with planning. And I think what we're hearing from customers

And I apologize, we are currently experiencing technical difficulties. Please continue to stand by one moment. We apologize for the inconvenience. We are experiencing some technical difficulties at this moment. Your program will begin and will resume in just one moment. All right, we do have our speakers back with us. I do apologize. We will continue on with our question from Shlomo Rosenbaum.

Shlomo, where were you when I dropped off?

And Sloan, you're still connected and your line is open if you can hear us. Okay, I do apologize. It seems he's not connected. We will go next to Andrew Steinerman with JPMorgan. Please go ahead. Andrew, your line is open. Okay, we'll take our next question from Andrew Nicholas with William Blair. Please go ahead. Andrew, your line is open. Okay, we'll take our next question from Manav Patnak with Barclays. Please go ahead. And again, if you would like to ask a question, please press star 1.

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

um um © transcript Emily Beynon oh oh Thank you.

To all sites on hold, we do appreciate your patience. Please continue to stand by.

Thank you. Thank you.

All right, and I do apologize that we had experience of technical difficulties. I do apologize for that. We are going to continue our question and answer queue with Shlomo Rosenbaum. Please go ahead.

Hey, Scott, are you there? Can you hear me?

Yeah, Shlomo, we can hear you. Can you hear me?

Yes, I can hear you fine. I mean, I have a pop-up question of whether some of the cost efficiencies came on the conference call hosting company over there.

I'm not that aggressive, Shlomo. I'm sorry.

Okay.

Going forward here, Shlomo.

All right. You were in the middle of just describing what customers are telling you, and that's where the audio went out. Okay, great.

Yeah, so I won't go back over, you know, kind of the macro stuff, but customers are telling us the same thing they've been telling us almost all year. So almost no change. Again, I mentioned that, you know, we believe with the U.S. election behind and some rate cuts coming that the macro will improve. But as of right now, we're still seeing what we've been talking about all year, stabilization and normalization.

It's discontinued.

So most of our customers are still hiring, albeit at modest levels. They're focused largely on backfill, which hasn't changed all year. They are still doing new hiring, but they're doing it, I think I said this for the last couple quarters, they've really turned to a just-in-time hiring model. So they're not going to hire ahead of the curve. And just-in-time hiring models for us are not an issue because, as you know, Our technology and our market position is all around speed. So if our customers want to do just-in-time hiring, that's fine with us. We give you quick turnaround time. So that's kind of it.

Okay. I mean, the reason what I was trying to get at is just the midpoint of the guidance was where we reported to last quarter, and this quarter it seemed to come down a little bit. And you talked about, you know, the volumes coming in base a little bit lower. So I was just trying to gather whether that's an erosion of what's going on or, you know, just bouncing around the bottom. That's the gist of what I was trying to get at, the question.

Yeah, I think – Bouncing around a little bit on the bottom is probably the best way to view it. A couple of good data points for you is international, you know, is now back two quarters. So this is really important. Keep also in mind that we still are doing really good on the things we can control. Our process was great. And et cetera. So it really is. The base was a little lower than we thought it would be this quarter. And it's also, you know, certain intervals still doing well. But, yeah, it's a little bit of bouncing around the bottom. I really like that analogy.

Okay, thanks. Just giving you a heads-up, the audio is still a little choppy. Okay. Thank you.

Thank you. We'll take our next question from Nick. Andrew Steinerman with J.P. Morgan. Please go ahead.

Hi, it's Andrew. The comment about 25 being more neutral in terms of EPS accretion, to me that sounds like a change. I remember 25 being accretive and kind of giving the size of the deals and the opportunity to I just wanted to confirm that that's a change, and what drove that change to be more neutral in 25 for the combined organizations?

Andrew, not really a change. You know, when we're talking about that, we're talking about what will be, you know, realized and reported. And, you know, based on, you know, when we action the synergies and, you know, that obviously when you action it, you don't realize it all up front. It takes 12 months to have that, you know, fully become part of your reported results. We just wanted to make sure, you know, the interest expense is all there today, the dilution is all there today, and we just wanted to help start to build out some of those models. I wouldn't really call it a change at all. We haven't changed our synergy outlook. We really haven't changed, you know, really anything. In fact, we've, you know, got locked in a couple swaps to help offset some of those interest expense items for next year. So really not a change. We really just wanted to make sure, you know, we're kind of making the obvious point around when the synergies will hit our actual P&Ls.

And since you've mentioned 25 here, I know it's in the context of EPS accretion. Do you have an underlying assumption for base revenues? Like, you know, if For example, you know, the Sterling side, you know, had lower base revenues or higher base revenues than in your model. Would that affect the EPS accretion assumption?

We're a little early to get into exact science on 2025, Andrew. Again, we just wanted to make sure we got everyone's models oriented in the right direction. I mean, you're right. Obviously, sterling, you know, the volume and quantum of sterling results impact that accretion. You know, the biggest moving factors that we're trying to help models with today is just on the synergy pacing, obviously some of the interest expense and dilution impacts.

Okay. Thank you very much.

Thank you. We will take our next question from Andrew Nicholas with William Blair. Please go ahead.

Hi. Thank you and good morning. I wanted to ask a question on upsell, cross-sell. The metrics there for both First Advantage and Legacy Sterling are pretty impressive, accelerating sequentially. Is there anything that you can do to unpack that a little bit more for both entities? and maybe to the extent that there are growth drivers in there that can drive revenue synergies for the combined firm, too, it would be great to hear on that. Yeah.

We're obviously very happy where both companies are in upsell, cross-sell. And if you remember – last quarter, we announced two very large deals that we won in the quarter that were both upsell, cross-sell. So those are revenue-ing now. In fact, they both revenue-ed within days of closing. So we're riding pretty nicely on those two wins from last quarter. Sterling, we still need to get into more of the details. The The deal is only 12 days old, but they've had some success with upsell, cross-sell as well, as you can tell from their results. So I think the highlight here, Andrew, is that customers are still prioritizing safety and compliance and shareholder value and brand protection. over cost cutting, and that is leading to deeper and deeper package density. And we think the upsell cross-sale numbers will not only continue to perform well in the future with just general package density, on digital identity solutions, which we think will be hot sellers in the market. So this is a number that we think is gonna be a strong number for the next couple of quarters for sure.

Great, thank you. And I realize it's early to talk about specific 25 numbers, but just as we think about kind of the integration here, How much distraction risk do you feel that there is with the sales force in particular? Is it fair for us to assume some sort of haircut to new logo growth or upsell, cross-sell, you know, asking the tailwinds that you just described over the first couple quarters of this combined company? Or how are you thinking about that holistically? Thanks.

Yeah, I think we're doing a really good job of coordinating the front end go-to-market teams. We've got daily stand-up calls in place. We're mapping, you know, joint R&P, you know, deals that we're on. We're talking to customers. I think what's really interesting is, you know, when the deal was closed, we obviously communicated to all Sterling customers, and then we actually spoke in person to all their large customers. And there was just really good excitement about the deal, and customers were feeling really good about it. So you're right in that when you put things together, you know, it does bring in some potential distraction and some risk. I don't think we will see a deterioration of any of those key metrics. They may stay stable for a while, but we actually think, you know, in the long run, some of these should improve. But I would say you could probably have a period of stabilization around that as we put the front end together.

Great. Thank you.

And once again, as a reminder, that is star 1 for any questions. We will take our next question from Manav Patnaik with Barclays. Please go ahead.

Thank you. Good morning. Scott, I just wanted to touch on, you know, your plans around the integration of the platforms. You know, I'm guessing there's multiple platforms here. And so, you know, just what are your plans around that and, you know, all this technology? new innovation, front-end integration, et cetera, I'm guessing that's not contingent on those platforms combining to one?

Hey, Manav, great to have you back. And great question. So obviously this is probably the number one focus area of the company is to make sure that we get this right. And I think you've heard consistently from us since we announced the deal that Our goal is to not disrupt the existing client base with their platform selections. And we've been out talking to customers, and we're not going to force migrate customers onto a given platform because we, one, don't need to. Our synergy numbers don't require that. We are also going to, as we roll out new features and functionalities and as we figure out, which products stay and which products go. We view that as keeping the better of the two. And so ultimately what our customers what our combined customers should feel is an upgrade of service and an upgrade of products. And we're going to be very, very thoughtful and cautious about how we do this. There's no timeline. It'll take us many months to come up with, you know, what those strategies are because Due to the HSR process, we couldn't really get under the cover too much, and now we're starting to do that, and we're obviously liking what we're seeing. But we'll be very thoughtful as to how we roll that out.

Okay, very nice. And then just, you know, you talked about, I think you mentioned a few times about job trends getting back to pre-pandemic levels. Just wondering how, you know, like you don't really have the history pre-2021 to you or Sterling for that matter. So just wondering, you know, with the combined company, how you think you perform in that kind of a normal environment? Like do your long-term algorithms, you know, change a little bit?

Yeah, I think the growth algorithm, which I'll cover again just real quickly so everybody's on the same page. But our growth algorithms are typically where we see base growth of 2% to 4%, upsell, cross-sell of 4% to 5%, new logos of 5% to 6%, and then backing out attrition of 3% to 4%. Put us in that 8% to 10% growth range. And really, we are firing on all cylinders except base right now. So, you know, for the last – literally for the last two-plus years, if you go back and look at the – I think this is our 14th earnings call. If you go back and look at the data, it's been so consistent on upsell, cross-sell, new logo, and insertion. And the only thing that fluctuates really is base. So as we look into future modeling, we don't think, as I mentioned just earlier, We don't think that there will be any change to our growth algorithm on upsell, cross-sell, new local nutrition. And, again, ultimately there should be improvement there, although it should remain stable maybe for 2025 and then start to improve as we put things together. So it's just always coming down to pace right now. And, again, we're sort of seeing that stabilization and normalization, you know, which has us in the – Still in the low single-digit declines at base right now.

Okay. Thank you, Scott.

Thank you. We will take our next question from Scott Wurzel with Wolf Research. Please go ahead.

Hey, good morning, guys. Thank you for taking my question. I wanted to go back to some of the conversations that you're having with customers, specifically, you know, the ones that are coming over, you know, from Sterling. And maybe we'd love to just hear kind of, you know, maybe what they're most, you know, excited about being under the combined companies, whether that's products they're looking forward to or features or being able to rationalize costs, anything there would be very helpful.

Yeah. So, again, this is – fairly a non-event for first advantage customers. So we did obviously reach out to talk to all our first advantage customers and there's not a lot of change. Service models aren't changing. So most of the focus has been on the Sterling customers. And, again, we wanted to be very proactive here, introducing a new leadership team and reinforcing that there will be no disruption in service and product And I think some of the things that they're extremely excited to hear more about from First Advantage, one, on the automation. As you guys know, we've always felt we're the most automated in the industry, and automation brings, obviously, speed. Speed is a big seller in this space, so they can lever our robotics and our API and our overall automation. and we'll start mapping that as to how we can start bringing that. One of the low-hanging fruits, which they all really want, is our chat feature in service, so click chat call. We've been talking about it for almost a year now. Sterling did not have a chat feature, so this is something that will probably be the number one rollout that we'll do. This is probably the first thing that we'll bring to Sterling customers is, giving their candidates and applicants and their recruiters a chance to just chat with customer care to find out that if or whatever it might be. Customers are super excited to hear that that would be a feature that they would put in their hands within maybe a four to six month at maximum time period. So stuff like that, you know, we'll start rolling out. But there's overall just general excitement about what this potentially can bring to them.

Got it. That's helpful. And just a reminder on the capital allocation side, how you guys are thinking about debt pay down and cadence of that, you know, following the closing of the deal.

Yeah, Scott, we don't have a direct debt pay down schedule yet. I mean, the new debt agreement does have 1% annual prepayment amortization to it. You know, on a capital allocation approach, your number one priority is, you know, finishing the integration. We just closed. Scott mentioned a few minutes ago. barely two weeks to go. So integrating the two businesses, we're going to go get all those synergies, we're going to retain the customers, and then we're going to be bringing down that net leverage number to our target range, and that will be done through a combination of debt pay down, cash flow generation, et cetera.

It's got one more thing, and this is, you know, not just about Sterling customer base. It's also extremely excited to be able to attend our Collaborate event, which we have every April. The Sterling reps have been talking about it. You know, Sterling never had an annual customer event, and the Sterling customers are just really excited about getting together with other clients in their industry to share best practices and talk. about other learning. So I think our annual customer event in April in Miami this year is going to be extremely low.

Awesome. Thank you guys.

And I see that there are no further questions in the queue at this time. And this will conclude today's first advantage search quarter 2024 earnings conference calling webcast. Thank you all for your participation. At this time, you may disconnect your line and have a wonderful day.