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spk00: Good afternoon, ladies and gentlemen, and welcome to the Higher Right fourth quarter 2021 conference call. Joining today's call is the company's president and chief executive officer, Guy Abramo, and chief financial officer, Tom Spaeth. At this time, all participants are in a listen-only mode. I remind everyone that management will refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures is included in the press release issued today, which is available in the Investor Relations section of Higher Rights website. Also during this call, management's remarks will include forward-looking statements related to Higher Rights market opportunity, customer retention, competitive differentiation, pandemic recovery, strategies including technology investment to increase revenue and margins, growth potential for specific customers and industry sectors and our international business, future cash flows, operational improvements, and guidance for 2022 revenue, adjusted net income, adjusted EBITDA, and adjusted EPS. Such statements are predictions and actual results may differ materially. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the Form 10-K filed with the Securities and Exchange Commission on March 21, 2022, in particular in the sections of that document entitled Risk Factors, Forward-Looking Statements, and Management's Discussion and Analysis of Financial Conditions and Results of Operations. Now, it's my pleasure to turn the call over to Guy Abramo.
spk12: Thank you, Operator, and good afternoon, everyone. We're pleased to have you with us today as we discuss HireRite's strong finish to a record-breaking year. During the fourth quarter, we delivered 32% organic revenue growth and 113% adjusted EBITDA growth compared to the fourth quarter of 2020. Additionally, we grew our annual free cash flow and adjusted net income by $29.76 million, respectively. Also key is that the momentum we saw in the second half of 2021 has continued into this year. For this fiscal year, 2022, we are expecting revenues to grow between 10 to 12 percent, adjusted EBITDA to grow between 12 and 19 percent, and adjusted earnings per share to grow between 7 and 17 percent. Now, let's have a look at some of our key accomplishments for 2021 and our key priorities for 2022. I'll start off with some key highlights presented in the deck we posted to our website today. It's important to remember that we are the only global player in this industry that can service multinational customers from a unified global platform. Our scale and scope enables us to conduct global screens, compete worldwide against small local players, and invest in the comprehensive solutions supported by account management demanded by enterprise customers. We achieved revenues of $730 million in 2021, representing growth of 35 percent over 2020. Our adjusted EBITDA of $160 million was a 72 percent increase over 2020. On the customer front, we added $43 million in revenues from new logos during the year and achieved both outstanding gross and net retention rates of 95 and 136 percent, respectively. Our vertical market expertise, as well as our geographic expansion, continue to drive our success. I am pleased to report that revenue derived from international background screens on employees and applicants based outside the U.S. exceeded $100 million in 2021, a real milestone for our global management team. Our strong revenue performance was also reflective of our leadership in the healthcare, financial services, and technology verticals. which combined grew at 48% during 2021. Now let me turn my attention to our vision for the future, our specific growth and margin enhancement strategies, and how our goals align with the secular trends and the opportunities that have been building over the past year. Although HireRate has a diverse international customer base spanning every major industry, our key target industries continue to be the three verticals I mentioned previously, in addition to transportation. These are all industries that tend to have highly complex screening needs driven by the diversity of the roles, the need to source candidates from across the globe, the complexity and reach of regulations that govern their businesses and associated hiring practices, and the need to deploy screening solutions that are very broad in both scope and depth. These challenging criteria are where we excel, hence making us a leader in these demanding markets. For example, During the fourth quarter, we continued to ramp one of the world's leading healthcare service providers, as well as several global pharmaceutical firms. These new customers reflect our continued growth in serving the broader healthcare community, whether in support of hiring related to patient care, research, development, or vaccine distribution. We are pleased to add these marquee customers and have begun to see meaningful incremental order volumes that already contributed to our outstanding fourth quarter results. Another area of focus is to further accelerate our international expansion. HiRite is truly a global player, serving customers in over 200 countries and territories. Our investments in Europe, Asia Pacific, India, and Latin America are driving strong growth in these regions. In fact, our international orders are growing more than twice as fast as U.S. orders, and we expect that to continue as we expand with our large and growing multinational customer base. As I mentioned earlier, our international business for background screens on employees and applicants based outside the U.S. has now surpassed the $100 million mark and represents approximately 15% of our total business, up from 13% in 2019. I also want to provide an update on our plans to significantly improve gross margins over the next two years through continued investment in technology solutions that streamline and automate the fulfillment process while improving the customer and candidate experience. As previously mentioned, we have partnered with a leading global IT services firm to assist us with our focus on automating our back-office processes and maximizing the usage of our industry-leading data assets. Our emphasis is on driving automation and process improvement with the continued use of robotic process automation, natural language processing, and other cloud-delivered technologies that will reduce our cost of fulfilling screens. Combined with our growth strategies, we believe these margin enhancements will allow profitability growth north of 15% annually. We are looking forward to seeing the positive impact of these efforts beginning in the second half of this year. Also important to note is that we continue to see healthy tailwinds and positive secular trends in our business. High demand for labor, rising wages, remote work, and increasing contract and gig employment continues to drive strong demands. We expect many of these tailwinds to be long-term favorable changes to the employment market. And while geopolitical tensions, rising interest rates, and inflation are causing macro uncertainty, demand for our services continues to be strong. Absent global crises such as the 2008 financial crisis and the recent pandemic, higher rate has delivered consistent growth for more than a decade and is only gaining momentum. In closing, I'll reiterate how excited we are to be capitalizing on the positive momentum now building for our business. We're in an attractive growth industry with the broadest suite of services, operational expertise, global reach, and a strong financial foundation that allows us to execute on our strategic business plan and create meaningful long-term shareholder value. With that, I'll turn the call over to Tom for a closer look at our fourth quarter financial performance and our outlook for 2022. Tom?
spk10: Thank you, Guy. Good afternoon, everyone, and thank you for joining our call today. I will echo Guy's remarks that we are excited to be reporting such strong year-end results, and we appreciate you being with us today. Starting with an overview of fourth quarter results, revenue was up a robust 32% year-over-year to $199 million from $150 million in Q4 2020, as demand continues to be strong for our products and services. From an industry perspective, we continue to see the strength in our largest industries, such as healthcare, which grew 49% over Q4 2020, and technology, which grew 46%. And we saw improvements in financial services, up 34%, and retail and hospitality, which grew 26%. International markets saw the biggest gains, with growth rates in all our international markets exceeding 60%. India, APAC, and Latin America nearly doubled their business over the prior year. A quick note on our geographic split. As you will see in our filings, our GAAP-based international revenue represents approximately 8% of total revenue. However, when viewed at the applicant or employee level, our international revenue is more than 15% of total revenue and, in fact, exceeded $100 million for the first time in the company's history. And we continue to expect strong double-digit growth in our international markets. These markets are an important investment area for the company as we look to provide the highest level of support for our multinational customers. We will continue to focus on getting closer to the source of data rather than relying on vendors, which also help to improve margins. That is and will continue to be a key element of our strategy. Our new business bookings or contract signings were strong throughout 2021, and the associated new revenue demonstrated that. After a strong $10 million quarter in Q3, new business revenue exceeded $12 million during Q4. New business revenue for the year was $43 million, and this momentum has continued into the new year. Our adjusted EBITDA of $43 million was up 113% in comparison to the fourth quarter of 2020. This strong performance largely stems from the significant recovery in volumes, coupled with improving leverage in our cost of services. Adjusted EBITDA for the year reached $160 million, an increase of 72% over 2020. Adjusted net income and EPS for the year were $75 million and $1.24 respectively. Adjusted net income reflects, among other things, the add-back of amortization associated with acquired intangible assets. Please note that in our prior earnings release, immediately following the IPO, we did not adjust for purchased intangible asset amortization. In order to be comparable to our peers, we have reflected that adjustment in this quarter's results. Now turning to our balance sheet, which is now a source of strength, allowing us to grow the business and capitalize on attractive opportunities as they arise. With the IPO proceeds, we have reduced our net debt position from $1 billion to just under $600 million. During the quarter, we repaid our $215 million second lien loan in full and $100 million of our first lien debt. and there were no outstanding borrowings on the revolver at the end of the quarter. Our net leverage is now approximately 3.7 times. Additionally, as we reported in February, we retired our outstanding interest rate swap agreements, which had a fixed LIRA cost at 2.874. The cost of that during Q1 was $18.4 million. Lastly, our free cash flow for the year was up nearly $30 million to $33 million, And again, we expect significant improvement to this number this year, even with our technology investments. Turning to our outlook for 2022, while recovery from the global pandemic remains fluid, as does the impact of the conflict in Ukraine, we expect our strong operational and financial performance to continue. With most of the first quarter behind us, we've seen a continuation of favorable trends with strength across the markets we serve. This includes robust strength in our international markets, which we expect to continue. Based on our current expectations and current market conditions, we expect 2022 revenues to be in the range of $805 million to $820 million, adjusted net income to be in the range of $105 million to $115 million, full-year adjusted EBITDA to be in the range of $180 million to $190 million, and adjusted fully diluted EPS to be in the range of $1.32 to $1.45. And while seasonality has become less pronounced, as the diversity of our customers within our target verticals have grown, historically, Q2 and Q3 tend to be peak quarters, while Q1 and Q4 have a slight seasonal effect from the holidays. Also, similar to our reported results, our guidance for adjusted net income and adjusted EPS reflects the add-back of amortization associated with acquired intangible assets in order to provide comparability to our peers. In closing, over the next few years, we expect to deliver high single-digit to low double-digit organic growth, augmented with our strategic and accretive M&A efforts. And given our margin enhancement strategies detailed by Guy, we expect our adjusted EBITDA to grow 15% or more annually over the next three to five years. We look forward to updating you on our progress throughout the year. And with that, operator, if you could please open the line for questions.
spk00: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. The first question comes from Kevin McVey with Credit Suisse. Please go ahead.
spk01: Great. Thanks so much. And really just super, super results. I want to extend my congratulations. Hey, the revenue guidance speaks for itself in terms of 2022. But have you factored in anything for geopolitical or is it just the acceleration on the international side that's helping offset some of that weakness? Because, again, just a super, super outcome in addition to really nice outperformance relative to the 21 God as well. So just maybe any thoughts around there, if we could start there.
spk12: Sure, Kevin. Thanks. For our business. we don't have much exposure to Russia or Eastern Europe itself in terms of revenues. In fact, I think, as you know, our largest international market is the UK, and the UK is about 10% of our total revenues. We did, one time three years ago, we had a tech center in St. Petersburg in Russia and closed that three years ago. So, there's very little exposure to our business for what's going on right now. But, but having said that, I mean, everyone's cautious about geopolitical tensions, but our guidance is based on, you know, the best information we have at the moment and the momentum we have, you know, coming into obviously the first quarter is only a couple of weeks from being completed.
spk01: That's super, super helpful. And then I just want to, Can we talk a little bit about some of the initiatives? I know you committed to about 40, 45 million of OPEX investment. I think there was about 2 million in the third quarter. Remind us how much was done in the fourth quarter and then just how we should think about that over the course of 22.
spk12: Yes, so for us in the tech investments that we talked about extensively, we'll see some benefits of that in the second half of this year. and then benefits will accrue sort of quarter by quarter. We'll realize the full benefit of those investments exiting 2023 and for the full calendar year, fiscal year of 2024.
spk10: And just to be clear, the operating expense you saw, $3 million and change in Q3, was really the early phase of the project that was focused on scoping investments and really didn't get into actually the build yet. Now that we're into the build phase of the project, this is all going to be capitalized.
spk01: Very helpful, and congrats again. Awesome.
spk10: Thank you.
spk12: Thanks, Kevin.
spk00: The next question comes from George Tong with Goldman Sachs. Please go ahead.
spk07: Hi, thanks. Good afternoon. You mentioned that despite the macro uncertainty out there, demand for services remains strong. Can you elaborate on new business trends to start the year and how organic revenue growth should progress as we move through the year?
spk12: Yes, I can comment on new logos. We had a great year in 2021 for new logos, and I can tell you our pipeline continues to reflect that performance this year. We're seeing a whole host of factors about why we're winning business. We're the only global player that can service multinational customers. We get very high marks, and Tom mentioned this in his recordings, we get very high marks for how we service clients with our consultative account management. One of the things that we talked a lot about during the roadshow that we're seeing some ground on new revenue is our emphasis on comprehensive screening. and finding more with the proprietary databases that we have, that is resonating strongly with new clients. In fact, two new clients had us rescreen their existing employee base to see if their previous provider missed anything. And for both of those companies, we found in the neighborhood of close to 1,000 screens each where the incumbent had missed serious convictions. In addition to that, we frequently find hits that were reported that should not have been reported. Sometimes someone has a conviction on their record, but it's not per client guidelines to report it, or it could be noncompliant, or it might be the wrong identity. The reason why I'm mentioning all this is the momentum that we have with new business is in large part due to that single global platform and our ability to be more comprehensive than others in the market. So with the pipeline that we're sitting here with, right now, George, I think reflects a good year for us.
spk07: Great. And then the second part of the question around how you expect organic growth to progress or trend as you move through the year, would you expect the growth to be better in the first half because the comps are easier and then more lower in the second half?
spk10: Yeah. Yeah, of course. Right. So, you know, while we're not giving quarterly guidance, that's why I made the remarks about kind of the seasonal impact into I will say that legacy hire right years ago had a little bit more seasonal impact with the combination of the businesses back in 2018. That has been much more muted over the last couple years, and obviously we haven't had exactly a normal cycle for a couple of years. But what we expect this year is a more normal seasonal curve to our revenue, which would show Q1 and Q4 slightly off Q2 and Q3 from a seasonal perspective, strictly driven by holiday hiring. or lack thereof, during the holidays. So from a year-over-year growth perspective, of course, Q1 is going to be an easier comp than Q2, Q3, and Q4. But from a seasonal ramp perspective, we would expect Q2 and Q3 to be the strongest quarters.
spk07: Great. And just as a follow-up, you mentioned earlier you're investing in technology to streamline and automate the business in order to drive efficiencies and improve the overall margin profile as well as the client experience. Can you talk about what steps you've accomplished so far in your plan to streamline and automate and what remains to be done?
spk12: Sure. Good question, George. As we said, this is a two-year project. The initial parts of the project are building the base foundation of the platform. how workflow works, case management, the core platform itself. I won't comment specifically on what part of the business we're focused on because I don't want my competitors to know that, but the way we broke the project up, you can think about it as us working on the verifications work that we do, criminal work that we do, drug and health screening work that we do. We're anticipating the launch of the first new module will be June 1st. to July of this year. But a lot of that work is also going on in parallel. But there's been significant work done. The program is on track. And the core base platform is built. And the work on the first module is very, very far, far along.
spk07: Great. Thanks very much.
spk00: The next question comes from Hamza Mazari with Jefferies. Please go ahead.
spk09: Hi, this is Mario Cortolacci on for Hamza. Could you just talk about how you're thinking about that international opportunity? Obviously, it's going to be a little bigger than you said, 15% of revenue now. How big could that be over time? And are there any structural differences in the international market that impact your ability to grow even faster? Or also, is there a margin difference between those two businesses?
spk12: Thanks, Mario. Good to hear from you. So I'll take a couple of parts of that. So first, the difficult thing is to define what international means, right? I mean, there's very big differences between Europe, Asia, India, Latin America, Canada. But for the most part, in general, we think that the growth rate that we're seeing now is, again, reflective of the investments that we made in our single global platform. So structurally speaking, I think we're in the best position to capture market share in different regions of the world than any of our competitors. I think that's first and foremost. Second is, you do see, and again, it depends on the region of the world that we're talking about, but those hires and background screens tend to be a little bit more complex as applicants grow in the diversity of the countries that they're in. some of it dependent on the job types that we're doing, and that will tend to lead in some cases in higher revenue per order, higher margin per order. And then there's some regions of the world where it's lower margin, lower revenue, but much higher applicant counts, countries like India that come to mind. We expect and we continue to make investments in those regions of the world. The new platform that we're building takes into account the complexities of doing business in those regions. So we feel good about it continuing to grow at double the pace of the U.S. business for some time to come. Did I leave anything out, Tom?
spk10: No, I think you hit the nail on the head. I mean, really getting down to revenue quarter and profitability, it's customer, industry, and country specific, right?
spk12: And a lot of that growth that we're seeing is coming from large multinational companies that we have business with in other countries. By the way, not just the U.S., right? And because of our single global platform, and they find it easier consolidating their background screening into somebody that can just use one platform, we think that we'll continue to take share for those types of clients.
spk09: Great. And then just for my follow-up... I believe in your prepared remarks, you mentioned your growth rates by verticals, which is helpful. But maybe you could help us understand in those fastest growing verticals, how much of that growth is coming from new clients versus maybe package density?
spk10: Well, I would say, you know, generally speaking, you know, this package density concept has become a new concept everyone wants to talk about. But it definitely has improved. Our average value per order, number of components per order continues to improve generally across the board, I would say. From a vertical specific, you know, when you look at something like healthcare that had an unbelievably tremendous year for us, part of that was organic, but part of that also results from us ramping up quite a few new clients that we've talked about. one of the largest healthcare providers out there as well as a number of pharmaceutical companies. So, pretty well spread about, you know, between recovery and natural organic growth as well as new logos.
spk09: Great, thank you so much.
spk00: The next question comes from Mark Markin with Baird. Please go ahead.
spk11: Hey, good afternoon, and let me add my congratulations on the stellar results. I'm wondering, can you give us a breakout with regards to service versus surcharge as it relates to the quarter and also how you're thinking about that breakout as it relates to the 22 guidance?
spk10: Yeah, so, Mark, we will have that in the K, which will be filed here in the next half an hour. So if you don't mind, I'll refer to the K. It'll be in the revenue footnote. That'll be in there, and we decided not to give guidance split by the service and surcharge.
spk12: Yeah, Mark, to be honest with you, we've found the number of questions we got, and since we were the third guy out and the only one reporting the difference between surcharge and service revenue, we found that that actually became confusing. We had lots of investors thinking our total revenue was service revenue and that service revenue was comparable to our peers, and it just created a ton of confusion, so we just decided... not to split those out openly, but they'll be available in the K. Okay.
spk11: And just as it relates to the way we've modeled it, I mean, should we expect the ratio to stay roughly the same in 22 relative to 21?
spk10: Yeah, roughly within a margin of error, yes.
spk11: Okay, great. And then going to the growth that you're seeing, Like in technology, for example, I mean, you ended up with 46% year-over-year growth. Obviously, that's a very demanding vertical. Can you talk a little bit about some of the drivers there? Was it how much, when we look at technology, you mentioned on healthcare, it was clearly there was a benefit in terms of some of the new logos. But on tech, what were you seeing there?
spk12: So it's interesting. Our tech clients are, you know, tend to be early adopters for a lot of the new products and services we build and geographic expansion. So some of that growth was coming from some of the largest tech logos that we have, selling new and different services too. There's some new logo, obviously new logo growth in that, but it's one of the reasons why we love our position in the tech space is our ability to continue to upsell and cross-sell those clients is substantial. In fact, a lot of the new products that we develop first, tend to be driven by need from those specific clients. And as you know, most of those large logos we had for a long, long period of time. But some of that large number also was some new logo wins as well.
spk11: Great. And in terms of the established logos that that are obviously the bluest of the blue chips, what sort of new packages were they taking on that are kind of setting the pace?
spk12: Yeah, a lot of it monitoring-oriented.
spk11: Oh, sorry, Mark, I thought you were done. No, I am, but we overstepped, so I didn't hear your answer.
spk12: Apologies. So a lot of it were some of our new monitoring products, Some of it was also geographic expansion. And part of it, with technology in particular, technology companies were early adopters of hiring people because of the pandemic impact, hiring people in other geographies than the office they would generally have normally been assigned to. And that has helped increase the average revenue per background screen for those guys as well. So a combination of new monitorings, You know, a change in the practices for which they're hiring, which changes the components of a background screen.
spk11: Right. And then, you know, wage inflation, inflation in general is a big topic. What are you seeing in terms of your ability to change prices over the coming year in order to reflect, you know, some of the inflationary factors that are occurring? You know, obviously, you've got these three-year contracts, but when they come up for renewal, how should we think about that?
spk12: Yeah, so like any other business, I mean, we have rights to increase prices during certain periods of time. Of course, there's some very, very large clients with some specific terms and conditions, but we are able to continue to get an increasing amount for the things that we do, and as part reflected by the average revenue per order continuing
spk10: Yeah, and clearly in this environment, it's something that we're continually evaluating, and you're right, because we have 40,000 clients. It's not something you peanut butter, right? It's something you really need to segment the markets and customers and be thoughtful about how you put those increases through.
spk11: Great. And then on the international, obviously that stands out, you know, in particular some large markets like, say, India and the growth that you're seeing there. What inning are you in? And when we think about the 22 guide, how should we think about the international growth relative to – you did say double digits, but is there any more specificity in terms of how you're modeling things out for 22 in terms of your plan, in terms of the international contribution?
spk10: Yeah, I think what Guy said. said, just to be clear, double the rate of the growth that we're seeing in the U.S., so not necessarily double digits. It could be, you know, higher than, you know, teens' growth, right? So we expect that growth internationally to be north of the teens. Let's put it that way.
spk11: Right. And then one last one. You know, you mentioned, you know, with a couple of the new logos, when you did the re-screens, you ended up finding You know, all these things that had been missed or misclassified. How are you able to translate that into, you know, new pitches? And what are your expectations? How's the pipeline look for new pitches over the coming, say, six months?
spk12: Yeah, so that's a great question, Mark. So we're finding, again, the market for opportunity is robust. The pipeline that we're sitting at as we speak is strong and certainly reflective of the great new revenue results we had last year. We continue to pitch our proprietary databases and our ability to be the best investigators in the business and find things that others simply miss. There are lots of players in this industry who will skip steps and emphasize turnaround time, speed over comprehensiveness. We simply will not do that. And we tell clients and prospects as we're doing pitches is let us do a screen on your existing employee base and we will inevitably find things that your incumbent missed. And that message has been resonating with some of these recent wins. And I gave you two examples. I can't tell you who the clients are, but we continue to pitch that And more and more companies in our pitches are listening to that very carefully and following it up. And I do believe some of the success we had last year was absolutely because of that. And we think that will continue to resonate well with the clients that are in our current pipeline.
spk11: Terrific. Thank you.
spk12: Thanks, Mark.
spk00: The next question comes from Ashish Sabhadra with RBC Capital Markets. Please go ahead.
spk05: Thanks for taking my question. So the revenue growth for 22 guidance 10 to 12 is much stronger than your midterm growth algorithm. I was wondering, obviously you provided a lot of good color around new wins as well as cross-sell, but I was just wondering if you could help quantify where are you tracking ahead of your midterm growth and how should we think about that momentum going forward? Thanks.
spk10: Yeah, sure. So I think you're referring to kind of the long-term growth rates that we talked about were kind of like high single-digit, low double-digits, I think is what we talked about, you know, kind of on the roadshow, that, you know, 8% to 10% range. So we're a little bit higher than that in our guidance in 10% to 12%. I think, you know, George maybe hit on some of that. I mean, we definitely have a better favorable comparison in Q1 this year over last Q1 from 2021 because of the recovery cycle. But generally, we're seeing, you know, positive, you know, higher than outpaced growth that we've seen historically internationally, which is some of the reason why we can, you know, get a little bit more optimistic on the overall growth rate. I think that's a driver of it. And we feel really good about our pipeline right now and our new business, our ability to close new business.
spk05: That's great. And then even on the roadshow, you had mentioned like if you look at the prior cohorts, these new businesses mature in two to three years and they have a potential for delivering somewhere in the 2.3, two and a half times revenues compared to when they first start off. Is that the right way that we should think about the 2021 cohort as well as we think about that $43 million of revenue? the opportunity to almost double or triple it in the next two to three years from those new wins?
spk10: Yeah, that's generally the way we look at it from a cohort perspective. What we close and generate in a given year, you know, as it matures, should be able to drive, you know, two to three X that over time.
spk05: That's very helpful, Kalar. And maybe one final question. Maybe, sorry, going back to the roadshow again, but the technology innovation and the investment there, the expectation was the opportunity to save more than 500 basis points of cost once you get that benefit in 2024. Is that the right expectation as you've gone through the project? How's your confidence level on gaining that kind of cost savings over the next few years? Thanks.
spk12: Very high. We feel every bit as good today as we did a few months back when we talked about it. The progress that the team is making is substantial, and we're in a good place.
spk05: Thank you.
spk00: The next question comes from Andrew Nicholas with William Blair. Please go ahead.
spk06: Hi, good afternoon, and thanks for taking my questions. The first one I wanted to ask was just on the margin guidance and maybe the implied expense growth in there. Are there any puts and takes you can kind of add or qualitative factors that you could speak to that would push you to the high or low end of the range on margins, or am I Right to assume that that's primarily a function of revenue growth. Just curious if there are other kind of cost items that are driving the width of that range.
spk10: Yeah, I mean, I'd say generally we've taken a conservative view on how we're going to look at the guidance here. We think there's opportunity, and certainly we're going to drive towards the high end of the range. We're always going to be shooting for that. just as we would in any given year with a budget trying to exceed our plans. Part of it has to do with the timing of the savings from the project that we've been spending a lot of time talking about. As Guy alluded to, we are expecting to go live with the first module in the summertime frame, and how that module ramps and the savings associated with that We're certainly very comfortable with the end state and what we can achieve there. The ramp is an estimate at this point. So if that ramp turns out to be more accelerated than we planned for, that's an opportunity for us.
spk06: Makes sense. Thank you for that. And then for my follow-up, I just wanted to ask about M&A. I know it's still within your capital allocation priorities that you list in the slide deck. Just kind of wondering... what kind of assets are out there right now and maybe more broadly your openness to doing deals, realizing that you have a lot of organic opportunities in front of you and investment in your technology platform as well. So just kind of curious on appetite for M&A in the near term. Thank you.
spk12: Yeah, so that's a great question. I mean, we do have an active pipeline and targets. Obviously, for competitive reasons, we won't share specifically who they are, but I can tell you that You know, the traditional roll-up of the same types of businesses that we're currently taking share from doesn't really serve our shareholder interests, so we focus on targets that add to the value proposition, new products, or new geographies, and are a handful of deals that we're looking at, again, to enhance the portfolio, enhance our scale, and enhance our scope. But, you know, we'll continue to look at ways of investing capital, you know, to shareholder benefits. So, you know, long story short is I'm not keen on doing roll-ups when we're taking share at the rate we're taking share.
spk06: That's helpful. Thank you.
spk00: The next question comes from Shlomo Rosenbaum with Stifel. Please go ahead.
spk04: Hi. Thank you very much for taking my questions. I want to focus a little bit on the trajectory of the EBITDA expansion, the margin expansion versus the revenue. You guys really killed it on the revenue. But I'd say like the EBITDA on absolute came in kind of where we were expecting on lower revenue. And so we're seeing, you know, like an EBITDA margin, it's like 20 basis points lower than it was in 2Q21 where you had And despite the fact that you had so much more revenue, and I was wondering if there's certain things you could point us to, if they're public company costs or other things that we should be just thinking about as we look at this, you know, why there wasn't, I would say, like a little bit more leverage in that revenue.
spk10: Yeah, I mean, you hit the nail on the head on some of it, Shlomo. Part of it is a big chunk of it's driven by public company costs. I mean, our D&O insurance costs alone went up, you know, more than $5 million for the year, right? So Absorbing those public company costs that come in the range of, you know, $7 to $10 million is reflected in the guidance as well. And despite that, and despite the fact that we really won't see the full fruits of the automation initiatives until the end of 2023, we still are driving for margin expansion this year.
spk04: Okay. You guys are starting to separate and add back intangible amortization. Can you discuss how much you're expecting in 2022? What was the comp for intangible in 2021? And maybe give us the total DNA so that we can, you know, kind of put the whole picture together?
spk10: Yeah, sure. I can give you the approximate numbers and everything will be disclosed in the K. It's roughly $63-64 million. That's an ad back and you'll see the reconciliation. Actually, the reconciliation should be in the press release and it's in the K as well. So you should be able to see where that's added back specifically. And the number should be roughly the same for 2022 in the guidance.
spk04: Okay, so 63 to 64 in 21, same in 22. And what about depreciation in terms of thinking about where that's going, like for the full year, if we're going to take a total D&A?
spk10: I don't have that number off the top of my head. I'll have to get back to you on that one in our follow-up call. But, yeah, the amortization ad back specifically is, you know, $63-ish million and change.
spk04: Got it. And then how should that track? When I look at your EBITDA, how should I track it down to free cash flow for 22? Because one of the pitches, again, on your roadshow was the ability for this company to really generate cash.
spk10: Mm-hmm. Yeah, so when you look at it from a CapEx perspective, historically the company has trended in that kind of $12 to $15 million range, roughly split between capitalized software development and other fixed assets, split roughly 50-50. Obviously, with our investment in the technology transformation that we're going through right now, we've indicated that that's going to be roughly $10 you know, $40 to $50 million over a two-year time horizon split roughly equally between 2022 and 2023.
spk04: Okay, so think of that 12 to 15 kind of being double over the next years. And should I be – if I'm doing a walkdown from EBITDA, it should be EBITDA minus CapEx minus – you know, some kind of tax rate that you would expect? How should I think of that? I just wanted to kind of illustrate the free cash flow per share.
spk10: Yeah. So if you look at, you know, EBITDA minus CapEx is the easiest way to do it. And if you look at it from a CapEx perspective, we haven't given guidance on that. So I can't share that right now. But you can see the numbers that we just discussed are in the ballpark, right? Historical numbers of, you know, $12 to $15 million, you know, going to $20 to $25 million this year.
spk04: Okay. And that's something that was really interesting.
spk10: We're not a cash taxpayer, right, for anything of any note.
spk04: Okay. Again, one thing you mentioned was very interesting is the uptake on monitoring products, and that's one of the things that seems like there's a lot of – potential in the industry, but it hasn't really taken off a lot. And can you talk about where you're seeing that accelerating? Why? Who's adopting it? Why now? You know, maybe just talk about that.
spk12: Yes, it depends on the industry, Shlomo. You know, I mentioned in particular as it relates to the technology companies adopting, you know, things more at scale like social media monitoring. And then, you know, we've got that because of our emphasis on health care, You've got healthcare companies doing more employee monitoring, more annualized drug testing. There's also a need for sanctions, sanctions monitoring in particular for healthcare workers. It's coming across the board, and of course we're pitching it more often, which is why we're seeing some of that uptake.
spk04: Got it. Okay, I'm going to get out and get back in the queue.
spk00: The next question comes from Andrew Jeffrey with Truist Securities. Please go ahead.
spk02: Hey, it's Gus stepping on for Andrew. So our first question is just any call out in terms of like background checks per job opening? I mean, there were strengths in that last year. Is that carrying into this year? And how much of that is being baked into the guidance?
spk12: Yes, that's a great question. As we noted a few times during the roadshow and continually, we continue to see, because of the volume and demand and just the difficulty in getting people to fill jobs, that more screens per opening are indeed occurring. I can't give you the exact number, and I can also tell you that that trend has not slowed down.
spk02: Got it. And following up, So then just trying to understand the net revenue retention a little better, what would be like a normalized level? And on that 136%, what portion was price? And I guess attached to all that, how is attrition doing in terms of like the overall growth algo?
spk10: Yeah, I would say, you know, a normalized net revenue retention for us, you know, should be in that 100 to 110% range. is what we would target, really probably closer to 105%. That's from a normal period of time. From an overall attrition, that's why we track the gross retention. We use the inverse of that as an attrition factor, so roughly 5%.
spk02: Thanks for taking my questions.
spk00: The next question comes from Jason Salino with KeyBank Capital Markets. Please go ahead.
spk08: Hey, guys. Thanks for taking my question. Just one for me. You know, I think at one point you mentioned hospitality was one of the, or I think this quarter hospitality was one of the stronger industries you called out. But I think in prior periods, maybe it was one of the areas that had been slower to recover. As it relates to maybe a sub-segment of industries that may not have fully recovered yet? Where are we in terms of getting those back to normal, and how should we think about progression from here?
spk12: Thanks for the question, Jason. We don't mention hospitality as a target industry, but it's one we've been fairly successful with. What you see in that growth number is a combination of two things. One is some new logo wins in the hospitality market. The second is the general recovery of the hotel and tourism industries, and they've struggled like crazy just to find talent so they could fill rooms. That continues to be the watchword for them, so we've got some pretty large clients in that industry that are continuing to experience growth from just trying to find talent to fill the roles in their hotels, restaurants, things like that. So good performance from them. We emphasize them because we have a good chunk of revenue coming from them. So we've had some good new wins in that industry, but there's clearly some substantial recovery that's occurring.
spk08: Great. Thank you.
spk00: The next question comes once again from Shlomo Rosenbaum with Stiefel. Please go ahead.
spk04: Thanks. I just wanted to sneak one more in. We're really at the end of the first quarter, and I was just wondering if you don't give quarterly guidance, but maybe given the fact that we're pretty much at the end of the first quarter, if there's some way that we should be You know, maybe something more specific that you could share about the quarter, given, you know, you've been through the vast majority of it already.
spk12: Shalom, I'll just repeat what I said. I mean, you know, as we sit here, we've talked about the great momentum that we're seeing, you know, this year following COVID. last year, we're very comfortable with the guidance that we've been given. The guidance we've given here annually reflects what we see in Q1. And I also commented on the pipeline that we have is robust.
spk04: Great. Thank you very much.
spk00: The next question comes from Manav Patnik with Barclays. Please go ahead.
spk03: Hi, guys. How are you? This is Ron Kennedy. I'm from Manav. Thank you for taking my question. You spoke on this, I think, in response to a question from Andrew with regards to M&A and the pipeline, et cetera. And I know you said the traditional roll-ups don't necessarily serve the shareholders' best interest particularly well. Just wondering if you could comment on overall competitive dynamics within the industry from a consolidation standpoint, but also what you're seeing from disruption from the likes of, say, a checker and a good hire. Just high-level commentary in that regard.
spk12: Yeah, so just high-level, and I've said this before on the roadshow, you may call them disruptors. We've never lost a client to a so-called disruptor. I mean, what we do for background screening is far different than what the two companies you mentioned do for screening. And One of the things that has always sort of surprised me is the technology that we use to do what we would do as fairly instant screens is faster and no different than what they do. So there's no substantial difference between us other than the fact that we do way more than just the initial hit search. So we're not seeing any disruption from so-called disruptors. The business is competitive as it's been for the last 25 years we've been doing this. We continue to see the clients, especially large companies, continue to harbor quality. One of the things that we didn't talk about here, but our adherence to compliance, I mean, the fact that we're more comprehensive and we find things that people miss is evidenced by us going back and rescreening employees, the emphasis that we have with our compliance workbench product, where we're continuing to look for changes in laws and regulations to ensure that our clients can continue to maintain compliant background screening programs, that matters to large companies. And in fact, it matters to everybody, right? So that's why I think we're seeing success. I think you'll continue to see success because of those differentiating points.
spk03: Thank you. That's very helpful. And then a follow-up, if I may, please. Have you disclosed or are you disclosing the percentage that was, say, continuous monitoring? And then also, can you speak about the backgroundchecks.com and SMB opportunity, what the results were in the outlook?
spk12: Yeah, so we don't disclose the specifics at that level. But what I can tell you is that part of the success that we saw in the fourth quarter was some recovery from backgroundchecks.com. We talked openly about how small, medium businesses were negatively impacted by the pandemic. Backgroundchecks.com saw a pretty good fourth quarter.
spk03: Okay, thank you. And then may I just confirm on the tech transformation? So you're not at this time committing to actual time, timeframe commitments, et cetera?
spk12: It's exactly what we've said. What we've said it's been our, you know, what we've said is that we, from the tech transformation itself, we plan to deliver a 500 basis point improvement and margin that will be realized by the full year 2024. but that we'll start to see some of that improvement in the second half of this year and then subsequent quarters through 23, and then the full effect in 2024.
spk10: Yeah, to be very clear, it's not a big bang implementation, right? We're rolling out modules over the course of two years, and with each module, we'll start to see incremental benefit.
spk03: Thank you. I appreciate it. You bet.
spk00: This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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