HireRight Holdings Corporation

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.

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?

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.