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spk05: Hello everyone and welcome to the Stirling fourth quarter 2021 earnings call. My name is Victoria and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. If you wish to withdraw your question, please press star 2. When preparing to ask your question, please ensure that your line is unmuted locally. I will now pass over to your host, Judith Hochul, Vice President of Investor Relations to begin. Please go ahead.
spk07: Thank you, Operator. Welcome to Sterling's fourth quarter 2021 earnings call. Joining me today are Josh Perez, Chief Executive Officer of Sterling, and Peter Walker, Chief Financial Officer of Sterling. The slides we will reference during this presentation can be accessed on Sterling's Investor Relations website under News and Events. The slides will be posted at the conclusion of this call, and a replay will be made available on the website. After prepared remarks, we will open this call to questions. Before we discuss our results, I encourage all listeners to review the legal notice on slide two, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our recently filed final perspectives for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued this morning. I will now turn the call over to Josh Perez.
spk08: Thank you, Judah. Good morning, and thank you for joining us. Sterling's fourth quarter was exceptional and continued the momentum we saw through the first three quarters of 2021. We delivered record financial results, including 39% organic constant currency revenue growth, 57% adjusted EBITDA growth, and 114% adjusted EPS growth. We are also very excited about our performance thus far this year. For 2022, we expect to generate revenues of $740 to $755 million representing year-over-year growth of 15 to 17.5%. Adjusted EBITDA of 205 to $212 million, representing year-over-year growth of 14.5 to 18.5%. And adjusted net income of 112 to $118 million, representing year-over-year growth of 21.5 to 28%. Peter will discuss our 2022 guidance in greater detail, But first, I'm going to discuss our macro environment, 2021 accomplishments, and specific areas of focus for Sterling in 2022. Starting with slide four, Sterling is the world's most trusted provider of background and identity verification services. The slide provides some key stats on our business that we discussed on our third quarter earnings call. Rather than repeat them now, I will call out two stats. First, Our gross client retention rate was 96% for full year 2021. And second, we are now serving more than 50,000 clients, which speaks to the immense success we have had in winning new clients of all sizes and retaining them. This success has been driven by our company's strategic focus over the past few years on client service, technology, and product innovation. Turning to slide five, Sterling operates in a highly attractive global market with a total addressable market of $16 billion as of 2020, growing at a 12% CAGR to $29 billion by 2025. Importantly, the industry remains highly fragmented, and the majority of this opportunity is outside of the US, where we have a leading position and continue to grow share. I want to take a few moments now to touch on the macro environment and its effect in our market. In the fourth quarter of 2021 and thus far in the first quarter of 2022, our macroeconomic environment has remained strong, with the great resignation continuing and broad employee turnover remaining a key theme in the employment market. The number of U.S. job openings is at near record highs and the pace of labor separations remains high as well. Additionally, the secular demand drivers most relevant to Sterling continue to be robust and create strong tailwinds for comprehensive background screening solutions. These include the fast growth of the gig economy, the increasing use of contingent workforces and freelancers, and the increasing prevalence of remote work. We believe these trends existed before the pandemic and have accelerated over the past couple of years. They have led to a structural shift in the workforce with greater velocity and employee turnover persisting for years to come. While there is clearly a lot of uncertainty in the overall economy related to inflation, rising interest rates, and geopolitical tensions, these items have not impacted the demand for our services and our underlying fundamentals remain strong. As a result, we believe our growth algorithm is sustainable, and we will continue to outpace overall job growth. I'll now take you through some highlights of 2021, which was, by all accounts, an exceptional year for Sterling. Slide six lists some of the many accomplishments which our team delivered. Firstly, our organic constant currency revenue growth for the full year was 39%. and we expanded our adjusted EBITDA margins by approximately 600 basis points. I am particularly proud that every one of our verticals and regions grew by double digits during 2021. Peter will provide more details on our results, but I want to start off by thanking the Sterling team for executing on our strategy and driving this tremendous success. A second highlight from 2021 was the traction we gained in identity. Identity remains a crucial part of our overall growth strategy, and we feel it significantly distinguishes us from our background screening competitors. During 2021, we embarked on two key exclusive partnerships, one with ID.me and one with FINRA, which will be pillars of our strategy as we continue to expand our identity offerings. Another critical accomplishment in 2021 was the expansion of our global footprint, as we grew our international revenues by 55%. International revenues comprised 19% of our revenues during 2021, up from 17% in 2020. As I outlined earlier, over half of the global addressable market for our services sits outside the US, and we plan to further capitalize on this opportunity for years to come. The fourth item worth highlighting from 2021 was our successful IPO on the NASDAQ Global Select Market in September. Going public enabled us to enhance our capital structure while continuing to invest in the organic initiatives driving our strong growth. Our IPO was a proud moment for Sterling, and I would like to thank our team who supported that successful process, as well as our clients and partners for the continued support of our business. The final highlight I'll mention is our acquisition of EBI, a US-based background screening provider, which we expect to contribute over 30 million in revenues during 2022, with robust synergies expected as we integrate over the next 12 to 18 months. We view synergistic tuck-in M&A as a strategic lever to complement our organic revenue growth ambitions, and we are enthusiastic to make EBI our first acquisition since NCC in 2018. EBI is highly complementary to our core strategy and accretive to our financial results, and we continue to explore additional similar deals with a healthy and building pipeline. Turning now to 2022, we see a lot of opportunity for continued success. Slide seven lists four such areas, including expanding identity, accelerating growth in key U.S. verticals, continuing our international expansion, and complementing our strong organic growth with M&A. I'll start with identity on slide eight. Identity services represent a tremendous growth opportunity for us and creates significant differentiation as we are far ahead of our competition due to our strategic focus and innovation-based approach. To execute on this large opportunity, we have built a dedicated business unit called Sterling Identity. Let me frame the opportunity. The vast majority of existing background checks around the globe do not have identity verification included. This alone represents a significant opportunity for Sterling as we believe identity should be the first step of any background screening process and can thereby increase our package density. Beyond making identity verification the first step in every background check, we have a large opportunity to sell identity services on a standalone basis. Identity verification and digital identity services are fast growing and in high demand as governments and organizations struggle to keep up with the rise in identity fraud, increasing data breaches, and the shift to remote work. In 2021, we took two important steps towards capturing this opportunity. First, we're excited about our exclusive partnership with ID.me, a best-in-class identity verification and digital wallet provider with over 70 million verified users, by far the largest such network. Through this partnership, candidates need only verify their identities once, and they are then able to reuse it as part of the largest trusted digital identity network in the US. Sterling and ID.me have combined to offer robust and configurable identity services, including video chat and in-person verification options. This powerful platform is central to our go-forward strategy and includes many innovative solutions currently in development. Second, our partnership with FINRA solidifies us as a leading provider of biometric-based identity solutions with a specialization in the financial services space. We run the nation's only single source national fingerprinting network available in all 50 states. Our state of the art technology is custom built in house and provides a fully touch screen and modern fingerprinting experience. Through our relationship with FINRA, we now service over 3,800 financial services firms and 12 background check and fingerprinting providers. processing hundreds of thousands of annual transactions. Even more importantly, this deal is a testament to our leadership in the identity space and is serving as a strong lead generation tool within the financial services industry, which brings us to our next strategic priority for 2022, growing in key U.S. verticals. In 2021, we had several verticals and geographies which saw particularly outstanding results. and we are excited about the market opportunities in many of them going forward. One such vertical I'd like to spotlight today is financial and business services, shown on slide 10. In this vertical, we saw greater than 50% organic revenue growth in 2021, driven by robust base growth, cross-sell, up-sell, and new customer growth. We touched on the FINRA partnership earlier, which in just a few months since going live, is already driving increased penetration and pipeline in the financial services industry. Our FinBiz vertical has built a strong reputation for best in class regulatory expertise. Customers in industries such as financial services must navigate complex and evolving regulatory regimes and our FinBiz team is highly proficient in the rules to serve clients and maintain compliance. This is especially crucial during the ongoing war for talent when labor turnover often leads to gaps in client service and regulatory knowledge. Moreover, many multinational companies are looking to simplify processes and consolidate global spend with best in class service providers. Our ability to navigate cross border regulatory challenges creates a distinct competitive advantage that is helping us win and retain business. The FinBiz team exemplifies the success of our verticalized model and has built new solutions tailored to their clients. One such example is our liens, judgments, and bankruptcy solution. With the implementation of new standards for public records a few years ago, all civil judgments and most tax liens were removed from consumer credit reports, providing a challenge for financial institutions to obtain compliant information for risk assessment and reporting to FINRA. Using our solution, Sterling's clients can assess risk associated with new hires and existing employees, helping determine whether there is a need to disqualify them from performing securities-related functions or establish supervisory controls for safety and security. The FinBiz team's relentless commitment to identifying and covering gaps in clients' workflows has driven significant success in winning and retaining customers. Their customer retention rate is even higher than the 96% rate for Sterling as a whole. And the pipeline for new wins remains robust. Our FinBiz vertical is only one example of the success of our verticalized model, and we look forward to sharing spotlights on future calls about other US verticals displaying similarly great momentum. Our next 2022 strategic priority is expanding our global scale, which we show on slide 11. I pointed out earlier that the majority of our large and growing PAM sits outside the US. The international market is even more fragmented and less penetrated than in the US, making international expansion a compelling opportunity for us to pursue. A key driver of this opportunity is increasing adoption of background screening outside the U.S. Many international markets are only just beginning to view employment background checks as critical components of their hiring functions, which presents tremendous upside for our business. We believe we are already the leading global background screening provider. In 2021, we expanded to 19% of revenues outside the U.S. with 55% year-over-year revenue growth, including 44% organic constant currency revenue growth. We see opportunity to continue growing our market share outside the U.S. The secret to our success internationally is that we empower local leaders and teams to make decisions that serve local customers. In this way, we deliver the boutique feel of a local firm while also delivering the scale and capabilities of a leading global player. This duality underpins our ability to win both local deals overseas as well as large global deals serving multinational companies. The final strategic focus I'll discuss is M&A. Our priority remains organic revenue growth through share gains and market growth, but we see a compelling opportunity to complement our strong growth with M&A. We have the appetite and capacity for deals of varying size and type, but we are most focused on tuck-in deals that complement our core strategy with upside from synergistic integration. EBI is a great example of this approach and is highlighted on slide 13. EBI is a high-quality background screening provider with a strong reputation for client service and a commitment to compliance. And I can say that we are even more impressed with the team now that they have joined the Sterling family. The EBI deal grows our share in key U.S. verticals with a blue-chip, enterprise-focused client base. Moreover, EBI's client base is highly diversified with minimal single client or vertical concentration. From a financial perspective, we expect the acquisition to be accretive to our results as we paid a reasonable price well within our M&A tuck-in framework, and we see robust synergy potential for migrating clients to our platform and fulfillment. Integration will take 12 to 18 months. Once that process is complete, we expect EBI's revenues to flow through at a 45 to 50% rate, similar to our underlying incremental margins. Our pipeline for attractive tuck-ins is deep and growing, and we hope to announce additional similar deals during 2022. Additionally, we expect an accelerating pace of consolidation in our industry over the next couple of years as smaller competitors struggle to compete and are more macro sensitive compared to scaled providers. We plan to be a significant player in that consolidation. In conclusion, We enter 2022 with a lot of enthusiasm, confident in our ability to execute organically and to build for the future with great strategic opportunities, regardless of the direction in which the economy goes. And now, I will hand it over to Peter Walker, our CFO, to take you through our financial results and 2022 guidance. Peter?
spk02: Thank you, Josh, and good morning, everyone. Turning now to an overview of our most recent quarterly performance on slide 16. We reported company record quarterly revenues of $174 million. This was a 35.1% increase compared to the fourth quarter of 2020, including 32.3% organic constant currency revenue growth, 2.3% contribution from M&A, and 50 basis points benefit due to the foreign currency translation. The organic revenue increase included 23.1% of base revenue growth, including cross-sell, upsell, net of attrition, and 9.6% of new customer growth. Revenue in our U.S. business grew 36% compared to the fourth quarter of 2020. We saw double-digit revenue growth in all our industry verticals, with particularly exceptional results in our industrials, and gig verticals. Revenue in our international business grew 17% on an organic constant currency basis during the fourth quarter. The quarter's strong results included some expected slowdown from earlier in 2021 due to lapping strong growth in 4Q20. Due to our strong top line results and attractive incremental margins, fourth quarter adjusted EBITDA was $44 million. representing a 58% year-over-year increase compared to the fourth quarter of 2020. Adjusted EBITDA margin for the fourth quarter of 21 was 25.4%, a 370 basis point expansion from the fourth quarter of 2020. This was the company's fourth consecutive quarter with adjusted EBITDA margin expansion of greater than 300 basis points, proving that our net profitability scales as revenues scale. 4Q incremental margins were tempered a bit by a full quarter of public company costs and EBI's lower margin in December. The impact of margins from public company costs and EBI will continue during 2022, but should moderate over the course of the year as we lap our September IPO, as well as integrate the EBI acquisition and realized cost synergies. We had adjusted net income of $22.6 million, or 23 cents, per diluted share in the fourth quarter of 2021, representing year-over-year growth and adjusted earnings per share of 130%. This growth is primarily driven by strong year-over-year growth in revenues and operating income. Our effective tax rate in the fourth quarter is 21% due to several discrete items which benefited us. We expect the rate to return to our normalized 26% rate for 2022. Slide 17 shows our financial results for full year 2021. We had an excellent 2021 in all facets of our business with record levels of revenue and profitability, and the strong results have continued thus far in 2022. For the full year 2021, we reported revenues of $642 million, reflecting a 41.4% increase compared to 2020, including 39% organic constant currency revenue growth, 1.7% benefit from foreign currency translation, and 70 basis points contribution from M&A. The organic revenue increase included 28.4% of base revenue growth, including cross-sell, up-sell, net of attrition, and 12.3% of new customer growth. Notably, our investments in technology and product, coupled with our best-in-class turnaround times and customer-first focus, drove a 200 basis point improvement during 2021 in our gross retention rate from 94% to 96%. Revenue in our U.S. business grew organically by 38% compared to 2020. We saw broad base strength across industry verticals with particularly exceptional results in our tech media and our FinBiz verticals as we executed our growth playbook and the U.S. economy benefited from strong macroeconomic factors. In recent years, we have been strategic in selecting high growth verticals with significant opportunity for our business. We saw those efforts pay off during 2021 and expect this momentum to continue into 2022. Approximately 19% of revenue was generated outside of the U.S. in 2021 compared to 17% of revenue generated outside the U.S. in 2020. International revenue grew 44% on an organic constant currency basis during 2021, demonstrating our growing international presence as Josh discussed. We saw double-digit organic constant currency revenue growth in all three of our international regions. Adjusted EBITDA for the full year was $179 million, representing a 79% year-over-year increase compared to 2020. Adjusted EBITDA margin for the year was 27.9%, a 590 basis point expansion from 2020 with incremental adjusted EBITDA margins of 42%. 2021 was a great demonstration of the operating leverage in our business as we benefited from strong revenue growth, as well as automation and cost optimization initiatives, which have streamlined our cost base. For 2021, we had adjusted net income of $92 million, or $0.97 per diluted share, representing year-over-year growth and adjusted earnings per share of 223%. This growth was driven by strong year-over-year revenue growth and improved operating leverage, as well as an improvement in DNA and interest expense. As seen on slide 18, our average organic constant currency revenue growth has been 17% since the beginning of 2020. Looking at our profitability trends on slide 19, our adjusted EBITDA growth has been 44% since the beginning of 2020, following a similar path to revenues. This data demonstrates that we have been organically growing on average at or above the 9 to 11% framework with robust margin expansion since we launched our new strategy three years ago. Turning to slide 20, we generated free cash flow in 2021 of $84 million, normalized for one-time cash non-operating charges related to the IPO. This was an increase of $64 million or 328% over 2020 and was due to strong revenue growth as well as permanent expense reduction implemented during 2020. Our year-end 2021 net leverage was 2.6 times net debt to adjusted EBITDA, squarely inside our 2 to 3 times net leverage target. We ended the year with total debt of $510 million and cash and cash equivalents of $48 million, which reflects the use of $100 million, most of which we received from the IPO, to pay down our first lien credit facility, as well as $67 million to acquire EVI. Let's now turn to slide 21 to touch on our capital allocation priorities. First, we remain focused on internal investment opportunities, new product development, and other projects that would increase organic growth and continued improvement in operating leverage through robotics, process automation, and vendor network optimization. Second, we have a robust pipeline of acquisition opportunities. We are primarily focused on targets that are U.S. tuck-ins similar to EPI, or provide us with increased scale in existing international markets or expand us into new geographies. And finally, we are committed to maintaining a strong balance sheet with a targeted long-term leverage ratio of two to three times net debt to adjusted EBITDA absent any temporary variations as a result of potential future scale acquisitions. On slides 22 and 23, we provide our guidance for 2022. For 2022, we expect to generate revenues of $740 to $755 million, representing year-over-year growth of 15 to 17.5%. Adjusted EBITDA of $205 to $212 million, representing year-over-year growth of 14.5 to 18.5%. And adjusted net income of $112 to $118 million, representing year-over-year growth of 21.5% to 28%. As shown on slide 23, our guidance includes organic constant currency revenue growth of 10% to 12%. We're assuming 5% to 5.5% contribution from the acquisition of EBI and no material impact from the fluctuation in foreign currency. 2022 will continue the notable strength we displayed during 2021, albeit at a naturally more moderate pace given that we will be growing over a year of 41% growth. Our 2022 organic constant currency revenue guidance of 10 to 12% is above our long-term framework of 9 to 11% per year. We are confident in achieving these 2022 targets because of our encouraging client conversations, new wins coming online during 2022, and our deep pipeline of prospects. We expect strong year-over-year growth throughout the year, but forecast 1Q 2022 to have our strongest growth rate as we are comping off our lowest revenue quarter in 2021. Based on what we've seen to date, we expect revenue growth for the first quarter of 2022 to end up solidly above the high end of our guidance range, which is why we have lifted our full-year organic revenue growth guidance above the typical 9% to 11% range. Turning to margins, our 22 guidance implies an adjusted EBITDA margin of 28% at the midpoint, which would be in line with 2021. 2022 underlying margin expansion of at least 100 basis points is muted by the absorption of three quarters of public company costs and acquisition of lower margin EBI business prior to full integration. The year-over-year impact to margins from public company costs and EBI will be felt most at the beginning of the year, but should steadily alleviate as we go through 2022 and benefit from lapping the IPO plus EBI cost synergies. We currently expect Q1 to be our lowest margin quarter of the year with approximately 25% margins. Finally, turning to our adjusted net income growth guidance of 21.5% to 28%, We will benefit this year from reduced interest expense and DNA, which should drive strong growth to the bottom line, well in excess of our revenue and adjusted EBITDA growth. We are encouraged by the level of leverage in our financial model, driving strong adjusted net income growth during 2022, even as adjusted EBITDA margins remain similar to 2021. To further help with your modeling of 22, we're assuming CapEx of approximately $18 million, stock compensation expense of approximately $23 million, tech transformation EBI integration costs of approximately $16 million, interest expense of approximately $27 million, DNA net of intangible amortization of $26 million, an effective tax rate of 26% and diluted share count of 101 million. I will close our prepared remarks with our long-term targets on slide 24. As we mentioned during our 3-2-21 earnings call, over the next three to five years, we are targeting an annual organic revenue growth rate of 9 to 11%, with adjusted EBITDA margins ultimately expanding to 29 to 32% or more over that period. We have also now added a long-term target for annual adjusted net income growth of 15 to 20% per year. We are thrilled with the trajectory of our company and look forward to sharing that success with you as we execute on our strategy for years to come. That concludes our prepared remarks. At this time, operator, please open up the line for questions.
spk05: Thank you. We will now start our Q&A session. If you'd like to ask a question, please press Start followed by 1 on your telephone keypad. If you'd like to withdraw your question, please press star 2. When preparing to ask your question, please ensure that your line is unmuted locally. And our first question comes from Tony Kaplan from Morgan Stanley. Please go ahead.
spk01: Thanks so much. You know, it sounds like the labor market conditions have been really strong. you know, just wanted to understand what is sort of built into the guidance. Is it really a continuation of current trends or some sort of reversion to more normal levels? And just help us assess the conservatism there and what risks do you see to sort of that current strength continuing?
spk08: Good morning, Toni, and thanks for the question. It's Josh. So I think our assumption is that There's going to be a sustained level of job churn, and there are near record levels, as I mentioned in my prepared remarks, of open jobs remaining, not just in the U.S., but really in many, many markets around the globe. So even if that were to be muted a bit through the year, we think that our guidance is well in line with covering for that. But we do expect the levels of job churn to actually continue into the future at an elevated rate from before the pandemic, and we don't see that returning to those lower levels. And we talked about that on some previous calls, but just looking at the way Gen Z, millennials, others look at staying in jobs and think about their careers, looking at the opportunities around the remote work and people being able to more easily get new jobs, switch jobs, do multiple jobs with gig work, Those we think are demographic changes that will continue for years to come. Probably not at the same levels that we saw last year or that we're seeing right now, but at levels that are certainly high enough to support our long-term guidance that we've provided.
spk01: Great. I wanted to ask about international as well. Can you just talk about, are you seeing a little bit of a different mix versus the U.S. in terms of where your growth comes from, you know, whether it be taking share, market growth, or upselling. And when you think about like Europe and APAC, for example, you know, is competition there more regional or local focused? You know, just sort of who are the main competitors that we should be paying attention to there? Thanks.
spk08: Great. Thanks, Tony. So I think as I mentioned in my prepared remarks and last call, you know, we just really love our position in the international markets where we have a scaled team and a scaled business in each of the three regions that we primarily operate in today, Canada, EMEA, and Asia Pacific. And we've been very thoughtful about how we're targeting and investing in those markets. And we are growing share relative to competitors and taking wins away from them. both local and global competitors, frankly, in those markets. Generally, for the local businesses that are the majority of our business internationally, we're taking those from local competitors, or they are just coming online and doing background screening for the first time, because as we mentioned, these markets are much less mature in our industry than the U.S. market, which has been doing background screening for an extended period of time. We also are seeing great success in the global gig economy outside the U.S. where we think we are the market leader by far, and so we are seeing significant wins there where it is often not from competition. It's just replacing either in-house solutions or their first time going and doing the screening. We also see good base growth and good upsell-cross-sell in these markets, so we're very excited about the international opportunity, and we do continue to expect to see it be a good growth driver for us going forward.
spk01: That's great, and congrats on the really strong results.
spk08: Thank you so much, Tony.
spk05: Perfect. Thank you, Tony, for your question. Our next question comes from Shlomo Rosenbaum. Please go ahead. Your line is open.
spk04: Hi. Thank you very much for taking my questions. Hey, Josh, I thought maybe I can ask you a little bit about the EBI acquisition. Can you talk about over the period of 12 to 18 months of integration, how should we think about the EBITDA contributing to 2022? And then just in general, how many acquisitions are there like this? Is this kind of unique or is this one where you could repeat it? Because it looks like if you look out like two years or something, you're on a synergized basis. You're going to be getting this thing at like four times EBITDA or below.
spk08: Thanks very much for the question, Shlomo. It's good to talk to you. So I'm going to make a couple comments on EBI, and then I'll let Peter walk through some of the math for you to think about for this year in a little more detail. So first of all, we're extremely pleased with this acquisition. It was definitely one of the targets we had at the top of our list for the last, you know, couple years. And we were very pleased when Rick did reach out, the former owner, and said he was finally ready to sell the asset. I think our perspective is that there are actually a lot of companies that look like this today, both in terms of this size, slightly bigger, slightly larger. And also, we believe that there are a number of small players that we're starting to see consolidate and roll up themselves to get to this size. So we actually think there will be a strong pipeline for the next few years of these deals. And as I mentioned in my remarks, we do think that the consolidation, we're seeing that accelerate. We plan to be at the front end of helping that happen and taking advantage of that to complement our strong organic growth. And I think that our view is these do ultimately drop through at our long-term rate of 45 to 50% based on what we're seeing, and we expect to get to that as we fully synergize. The synergies are largely accomplished, not entirely, but largely accomplished by us taking these clients and putting them onto the Sterling platform. The moment we do that, our fulfillment engine goes through and we get our better gross margin, and we stop paying the technology costs to run the platform that we acquired, which in this case is a third party platform. So it's just literally dollars out the door to a third party that go away as soon as we finish migrating those clients. In terms of the 12 to 18 month timeline, That is probably longer than what we would normally think of for an acquisition of this size. And the reason for that is a lot of the work is similar to the transport work that we're already doing in our last phase of Project IGNITE. So we have to work the EBI transports in along with our Project IGNITE work. And so we'll come back and talk more about that in our first quarter call and give you more specificity of exactly when we think we'll finish the EBI work and if that has any impact on Project Ignite, but right now, we think it's safe to say that we'll get to that full synergy rate in 12 to 18 months. In terms of how to think about what might or might not be flowing through in the guidance we've provided for this year, let me turn it to Peter to give you some of those details, Shlomo.
spk02: So hey, good morning, Slow Mo. As we shared with you, adjusted EBITDA margin guidance for 22 is going to be 28% this year. We expect that would be 100 bps or more if it wasn't for the EBI acquisition and public company costs. And that's because the EBI acquisition from an adjusted EBITDA margin will be operating lower than the 45 to 50 cents that it will operate at when it's ultimately integrated.
spk04: Okay. And then can you give an update just on where you stand with Project Ignite, and are you on pace to finish it in the timeline you wanted, and when do you expect to finish it?
spk08: Yeah, thanks, Shlomo. So at this point, you know, we remain on target with Project Ignite. You know, Peter shared sort of the combined technology costs related to the project as well as some of the EBI work in his prepared remarks. I think the only thing we'll say, and I'll come back on this in the next quarter call, is given that we can have some really good synergies potentially faster from EBI, it's possible we'll choose to restack some of the work to front end the EBI work, which could lead for the transport project piece of Project Ignite to go a quarter or two longer, but we're not in a position to tell you that yet. We haven't factored that into our numbers yet, and we'll come back. I think by the first quarter call, we should have some good visibility into how we've chosen to lay out that work.
spk02: And the costs of Project Ignite sit within ad backs because, you know, they're non-recurring, closing down platform costs. But the other benefit to think about that you're not seeing is that when we do end the project, we do expect cap backs to go down by about 30%, as we'll just be, you know, spending less capitalized dollars on that initiative.
spk04: Thank you.
spk05: Perfect. Thank you, Shlomo, for your question. Our next question comes from Andrew Nicholas from William Blair. Please go ahead. Your line is open.
spk12: Hi. Good morning. Thanks. This is actually Trevor Romeo in for Andrew. Appreciate you taking the questions. First one was just kind of thinking about your 2022 revenue guidance. I think you mentioned a deep line of prospects for new logos. Just kind of wondering if there are any particular areas where that pipeline for new logos is particularly strong, whether that's kind of by vertical, geography, client size, any characteristics where you're seeing particular, you know, strong influx of potential new clients.
spk08: Thanks, Trevor, and good to talk to you. So we don't usually break down our pipeline specifically just because, again, we like to focus on the business we know when we have it. But our pipeline is strong. across all of our verticals and all of our regions right now. And I think it speaks to the fact that, you know, we made deliberate choices in terms of what markets to focus on and what verticals to focus on because we believe that they are all the markets and verticals where we have, you know, solutions that are competitively advantaged and give us a right to win the business. So, you know, we're very encouraged with our pipeline really across the board.
spk12: Okay, great. Thanks. That's helpful. And then just kind of wondering how the inflationary environment is impacting sterling, kind of both from a cost perspective and a pricing perspective. Are you seeing any increasing, I guess, accelerating cost increases right now? And if so, how confident are you in the ability to pass those along in the form of higher prices? Thank you.
spk02: Yeah, so I would say in terms of, you know, delivering our products and services, we've been able to manage quite a few of the price increases, so we're not seeing a significant, you know, increase in costs related to our data costs. I would say that we are seeing, you know, some marginal wage inflation in our labor costs that sits in our cost of revenues and in our op-ex.
spk12: Great. Thanks again.
spk08: Yeah, thanks so much, Trevor.
spk05: Perfect. Thank you so much for your question. And our next question comes from George Tong from Goldman Sachs. Please go ahead.
spk06: Hi, thanks. Good morning. Your midpoint of guidance assumes minimal EBITDA margin expansion in 2022, acknowledging EBI has about a 100 basis point drag to margins this year. Can you discuss overall puts and takes that may impact margin performance? for 2022? Yeah.
spk02: Hey, good morning, George. Nice to hear from you. So if you think about, let's take the midpoint of the organic growth range of 11%. If we think about that, call it $71 million of revenue that we'll put on in 22, that's going to have a flow through rate of call it 40 to 45%, a little bit muted off the 45 to 50 because of the wage inflation. components we just covered. And so based on that, we would have seen EBITDA margin expansion of 100 basis points or more. So we call it 29 plus in 22. But what we're seeing is a drag really from two things. One is EBI is not operating yet at the 45% to 50% drop-through, which they will at full integration, which will occur, you know, call it 12 to 18 months, and then also the one-time lift from three-quarters of public company costs.
spk06: Got it. You've known, owned EBI now for several months. Can you discuss how EBI's growth compares with Sterling and talk about progress with synergy realization.
spk08: Yeah, thanks George. It's Josh. Thank you for the question. Good to talk to you. So I think that the main comment I would say is that EBI growth is strong. I think that it's something that we weighed in looking at the business. You know, one thing I will note is that when we model acquisitions, we don't model new business growth as part of that acquisition because, of course, that's pipeline that we also could have and that we can't count on. So just looking at their kind of base growth cross-sell upsell, you know, it was a little bit slower than what we would have seen on the Sterling side. However, we think that we have a great opportunity to improve the cross-sell upsell within the EBI base because we have a lot more products that we can add on and the ability to support incremental divisions of some of their clients that they were not able to support, given the characteristics of those. So we're very excited and believe that it is going to be consistent with our growth algorithm and not a drag on that over time, which is what we really like about these synergistic US tuck-ins. In terms of progress with integration. You know, we feel really good that the team is kind of integrated with us and we're working well. We've got a good team now working on moving the clients over. And as the clients move, individual team members are able to move into our verticals as well with their clients. So that's part of the work that will go on through the year. And we'll be able to use some of the great talent that we found at EBI to fill open positions at Sterling that, like everyone else, we've been out there recruiting and trying to bring in people. So that is part and parcel of our Synergy case, and we think that the progress thus far is exactly where we would have wanted it to be.
spk06: Very helpful. Thank you.
spk08: Sure. Thanks, George.
spk05: Thank you so much, George, for your question. And our next question comes from Andrew Stillman from J.P. Morgan. Please go ahead.
spk09: Hi, Josh. Two questions. The first one is on recruiting. In general, when I look at open positions in the background check industry, there's just a lot of open positions right now, particularly maybe at the $50,000 level area. My question is, how contingent is it for you to achieve your guidance to hit your recruiting goals internally, and how has the recruiting and retention been you know, at the beginning of the year relative to plan. I have one more question.
spk08: Okay. So first of all, thanks, Andrew, and good to talk to you. I'd appreciate the question. So a couple of comments. First, I think that long-term for us, it is critical that we're able to fill these roles because many of those positions that you're seeing at those levels are ultimately for client support and to be able to manage the clients to the level of service that they've grown accustomed to with Sterling. For us, we believe the EBI team helps us to fill some of those gaps immediately, but we do need to go and fill those. That will not impact our guidance for this year, but long-term health of the business, maintaining those retention rates, we've given the kind of long-term buildup to that in the kind of 95, 96%. Keeping that requires that level of service. For us, the key hiring is actually in our captive entities in Asia you know both in India and in the Philippines and other places where most of our fulfillment resources sit and there we've actually been able to fill our open roles successfully and bring people in and also when necessary to use vendors in order to augment given the very large volumes that we've been seeing and we in our guidance and otherwise we are planning and expecting to be staffing for the peak earlier than we normally do because we keep seeing such strong volumes. We do have very, very high employee engagement and employee net promoter scores, which we think will help us with retention, but we do see a lot of the trends that many people see in terms of job churn and being able to recruit. I think, Andrew, we're not worried about it from hitting our guidance for this year, but longer term, in order to maintain our growth numbers, which really is around the retention rate, we do need to make sure we fill those roles as we have them posted.
spk09: Great. My other question is about package density. It's such a tight labor market here for employers, and I just feel like perhaps employers might be hesitant to increase their package density, meaning to make, you know, more factors in their background check because that will weed out more candidates. And so my question is, you know, as you look at 22, do you feel like package density will go up from 21? And is my, you know, let's just say suggestion, a sensitivity to employers that you're seeing that, that they might be hesitant to increase package density because it decreases their pool of candidates.
spk08: So, Andrew, thank you very much for the question, and I'm going to answer it in a few parts. Let me just start with what we saw last year, which, you know, we've given the best metric we've given for package density, and it's not an exact apples to apples, is our cross-sell, up-sell metric with the 4% to 5% annual growth. Whereas last year we saw 8%, so almost double the low end of that and substantially above. So we're very, very pleased with that. So we did see package density increase in addition to cross-selling increase last year. In our guidance this year, and again, we've raised our range from our long-term targets, to start the year, you know, we do expect to continue to see each of our elements, you know, potentially overperform, and that's, you know, part of why we're so optimistic about our ability to, you know, hit our guidance this year so that we raised it. So that's sort of a, just want to start with the general answer to say, you know, we have built in at a minimum our four to five long-term target with some upside to that in the cross-sell upsell, which speaks to our expectations on package density as a whole. In terms of what we're likely to see going forward and your hypothesis, two things. One, I have not seen a single client shrink the density of their package and take more risk in order to hire. The main thing for them is speed. So as long as the background screen is occurring within the timeframes they need so they don't lose the candidate along the way, they are continuing to really at least at the minimum do the same background screening that they were going to do. So that is a trend where we're seeing and expect to keep seeing. You know, the thing that's the long tail on a background screen is often the drug screening. The people who are doing the drug and health screening are required to do so, and they're not getting rid of it. So that would be the thing you'd look at first. We're not seeing that trend and don't expect to see it. The last point I would make, you know, we think on the package density side, identity in particular, and as I said in my remarks, adding identity at the front end of a background check, that actually speeds up the background check and makes it more accurate and will allow them to more quickly weed out candidates that they don't want. So we actually think that provides a tremendous opportunity for us to increase package density while actually helping our clients to bring in their candidates more quickly and effectively. So hopefully that helps give you some color on what we're thinking.
spk09: That's well said, Josh. Thank you.
spk05: Thank you so much for your question. Our next question comes from Jason Salino from KeyBank Capital. Please go ahead.
spk10: Great. Thanks for fitting me in. First, with the FINRA partnership, I think you initially outlined the potential for this partnership to drive demand for incremental wins for the Sterling platform. I think in your prepared comments, you said that it was already driving some pipeline. Maybe can you just talk about some of the trends you're seeing there?
spk08: Yeah, first, good to talk to you, Jason. Thanks for the question. So we have seen a significant increase in our pipeline in the financial services sector, in particular coming out of the FINRA partnership. You know, they know that we're processing their fingerprints for them, even if they were currently giving them through a competitive background check provider or other fingerprint channeler. And I mentioned we're serving a number of those now through this partnership where we are basically sitting behind the scenes and processing for them like a toll booth. which is a wonderful business to be in. From my MasterCard days, I just love those kinds of businesses. So that's very attractive to us. But then the clients are saying, gee, if I'm already processing with you on the fingerprint side, let's see what else you have to offer. And so we've seen a really robust pipeline there, some certainly in the large enterprise banks where they realize the importance of that relationship. But we're actually really seeing it enable us to penetrate mid and smaller-sized banks where we typically have not had a significant amount of business, and they're now seeing a reason to do business with us, which is great. So we see a robust pipeline building. We'll provide more color on that as we close those deals and bring them online in future calls.
spk10: Okay. Excellent. And then maybe a quick clarification question for Peter. You know, I think, you know, in the guidance commentary, you said that Q1 growth would be the high end of the full year guide. You know, if we kind of think about, you know, the rest of the year, you know, should we think of the deceleration beginning in 2Q as maybe just a function of the growth comps?
spk02: That's correct. So, you know, we're comping over a low 1Q21, so that's why we're seeing such a large growth rate thus far in 1Q22. We do expect, you know, the rest of the quarters to be within the range of guidance that we gave you of 10 to 12. Perfect. Thanks.
spk08: Thanks, Jason.
spk05: Perfect. Thank you, Jason, for your question. And our next question comes from Andre Childress from Baird. Please go ahead.
spk11: This is Andre Childress on for Mark Marcon. Congratulations on a strong quarter, and thank you for taking our questions. So I just wanted to follow up on a question earlier about, you know, employment trends. What did you see in Q4, and what are you seeing in Q1 regarding the speed of hiring? I know Q4 has some seasonality, but how did the speed of hiring, you know, compared to what you were internally expecting regarding the seasonality? And is there a pace of acceleration? Has it kind of stayed the same or maybe slowed down a bit? Just in color there would be very helpful.
spk08: Yeah, so thanks, Andre, for the question. It's Josh. Let me try to unpack your question in two different ways, and then we can see if that answers it. So first, in terms of speed of hiring, in terms of clients, how much hiring they're doing. We don't think anything has been kind of pulled forward, if that's the question. We think that our clients are hiring within their plans. They are trying to bring people on board faster simply because they have so many open roles and they really need to fill those seats. And we are seeing that trend continue in Q1. However, what we're seeing, which we think is a benefit, is that you know, they have to go through the process often with more than one candidate in order to fill it because candidates do have multiple choices of jobs that they can choose in many cases on these lower end jobs which drive the majority of our volume. They have to move fast, but they also are not going to get 100% of the people who even get through their background screen and are offered the opportunity to come and work. I think that in some ways that does mean that the roles get filled slower simply because they don't get their first choice in many cases, but they do run multiple background screens then when that's the case. I think that hopefully answers your question, but it's both in terms of there is a need to fill roles faster because there are so many open and people are trying to do that. But in the end, because they are losing candidates, if you ask me what's the average time to hire from somebody posting a role to getting them to start working, I don't know that that has moved materially over time. What we're seeing is just that it's harder for them to actually fill it, but when they find people, they are moving them through the funnel faster. But as an average, it's probably averaging out to where it was before.
spk02: And I would just add with 4Q being our record revenue quarter for the year, we really have seen a change in the business around seasonality where we don't expect to see that dip in 4Q that we used to see. And again, it's just because of a better spread of clients that we have today and diversification. And then your other question on pull-through, as we said, you know, we're expecting first quarter of 22 thus far to be at the high end of the guidance, you know, really demonstrating that we're continuing to see that performance.
spk11: Great. Thanks so much. And Josh, on that, you know, first point you made, is there any sort of metrics you can provide in terms of like before the pandemic you kind of might have seen 1.1 background checks per successful hire because of kind of like that employee reneging um or is is and maybe that's not 1.4 or 1.5 or do you have any metrics to provide like i would imagine it makes sense that there's going to be a lot more employees you know getting multiple offers and you know taking one of the you know four or five offers they may have and that could you know provide a lot more you know your screens per hire um for you guys
spk08: Yeah, Andre, it's a great question. I don't have hard data that I can give you. We'll look to see what we can find, you know, either publicly or from our clients and see if we can give you some metrics around that to help in the future.
spk11: Awesome. Well, thanks so much, and congratulations on the strong quarter. Thank you so much.
spk05: Thank you so much, Andre, for your question. And our final question comes from Manav Patanik from Barclays. Please go ahead.
spk03: Good morning. This is only Kennedy on for Manav. Uh, thank you for taking my question. Just wanted to, if I may unpack with regards to the tremendous opportunity, the ID identification verification, you know, you have the, uh, the differentiator and the ID dot me offering. I think we had previously talked about ID verification and post hire monitoring being approximately 10% of the mix. Is that what it's still, uh, it still is. And, Also, I'm assuming but want to confirm that your guidance, even with the 10 to 12 above the typical 9 to 11, doesn't contemplate the ID.ME contribution?
spk08: Okay, thanks, Ronan. It's Josh. So I think, first of all, your assumption is correct that our numbers do currently still reflect roughly 10% from the pre-hire identity and post-hire monitoring and onboarding type solutions. And our guidance for 22 does not reflect a change in that mix. But as we've said on previous calls, we do ultimately expect that mix to shift, particularly from what we're seeing with identity, to become higher than 10%. But that is not baked into our current assumptions. And as soon as we see that trajectory shift in a meaningful way, we will share that with you.
spk03: Okay, thank you. And then just one last quick one, if I may, please, on the competitive dynamic. Obviously some insight into it based on what you've talked about and what you're seeing from new business wins, you know, from a vertical international standpoint and also the acceleration of consolidation in the industry. Anything else you're seeing with regards to differentiation between yourself and the big three? And then kind of the competitive dynamic with the more medium players, like decisive and accurate. And then what you're seeing from Checker and Goodhire, if you're seeing, you know, through disruption there or anything of that nature.
spk08: Sure. So I think you listed a lot of competitors rather than going kind of one by one. I think what I'll say is that, you know, we like our chances versus everyone. And it's very much because of our vertical and regional strategy. So typically, you know, when we're talking to a client, we are able to talk their language in terms of the industry they're in, not just our sales team, not just our service team, but our product team, our implementation teams, our technology teams, and that's why we've organized the way we have. And being able to do that locally around the world and in the various verticals that we serve, and I gave some detail on how that works with the financial and business services sector today, We think that allows us to unearth pain points that our clients are having, because we're seeing it across so many, and to bring solutions to the clients in a way where we compete very effectively with the big players who are more generalized providers than we are, because we're very verticalized in that way. But it also allows us to compete with the boutique firms who may specialize in one industry or one vertical, like when you mentioned Checkr or Hire. And so we like our chances there as well. and we have good win rates against all of them. I think my commentary more on the consolidation is I think it just gets harder and harder for some of the smaller and specialty players to compete over time, which will lead to the consolidation because of the scale that a business like ours is able to have and therefore what we're able to do in terms of servicing the client. But I will tell you our true secret sauce, you know, we've got you know, market-leading turnaround times, market-leading quality metrics. We think our technology tools are the best. But in the end, we win because of our people. You know, it is about that ability to speak to and work with the client at a very detailed level, and that's why I highlighted the great work of the financial and business services team today. But that's true in all our verticals and all our geographies, and we look forward to sharing more about some of those on future calls. So hopefully that helps with your question, Ronan.
spk03: Yes, thank you.
spk05: Perfect. Thank you, Manav, for your question. At this time, there are no further questions, and I would like to thank everybody for joining today's call. You may now disconnect your lines.
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