Morning, everybody. We're going to go ahead and get started. My name is Mark Marcon. I follow human capital technology and solutions for Baird. Our next presenting company is First Advantage. First Advantage is the leading provider of pre-employment screening and, increasingly, a leader in digital identity and identification. With us today, we're very pleased to have Scott Staples, the CEO. Scott first joined First Advantage in 2017 as CEO and has led the company to be literally the largest by at least 2X in the space. And Steven Marks is also here with us. He's the CFO. Steven was named the CFO in 2024 and first joined First Advantage in 2016. I'm going to turn it over to Scott and Steven. They're going to go through a short presentation, and then we'll have time for some follow-up questions. Scott, thank you for joining us. Steven, thanks a lot.
Yeah, thanks very much.
Thanks for having me, guys.
Thanks for having us. Like Mark said, we're going to just go through some slides quickly just to give you a general background of the company and then have time for questions. I'm going to dive in, and I've got nine slides to cover here. I'll do it pretty quickly. I think we'll start with what we sell and how we sell. We see ourselves as a global software data and services company. We sell our technology, our platforms, and our software in the HR space. Our buyer is typically a head of talent acquisition, head of HR, head of security, head of compliance. We lead with a very technical sell. As you can see here, it's all about the platforms and the data.
We have spent literally the last eight, nine years building up our automation frameworks either through robotic process automation, APIs, and now using AI as well to provide the products that you see here on the slide on the platform to our buyers. At a glance, we were pretty happy with our positioning in the market. Mark did a great job of talking about our size and our scale. $1.5 billion in revenue, $457 million in EBITDA. Great numbers. We throw off a lot of free cash, and Steven will walk you through that. We are a big company with scale. We provide our services across multiple verticals and literally all geographies across the world. Our specialty, I feel, is the enterprise space. We like big customers that hire a lot with lots of turnover and global reach.
If you think about, let's talk about the market in terms of TAM. Basically, the background screening market itself is about a $14 billion TAM, about half of that being vended today and half of it being white space. A lot of that white space is actually in the international market, especially in places like Asia, which are way behind the U.S. and Europe in terms of big companies that screen there. Over 50% of our new logos that we win in the APAC region are companies that are first-time screeners. What basically is the HR departments from the large multinationals have left the large multinationals and now work for regional companies and say, "Wait, why are we not background screening?" It's a growing market. I think what's really driving the growth is that we live in a very complicated world.
Just turn on the news at night. Companies are looking at their risk portfolio now more than ever, and they're coming to us asking for more and more protection of their brand, of their workplace, of their workforce, and of their shareholders. What's been very nice about that $14 billion TAM is that it's got a recent addition of a $10 billion TAM that has emerged in sort of a newer space in the digital identity market. What digital identity is, is basically there is large-scale fraud, identity fraud that is entering the workforce. And our products can help companies combat that. That is anything from customers who are recruiting people over Zoom or Teams and that person on the other side is using a deepfake to do that interview.
A different person that interviews is not the same person that shows up for the job and maybe not even the same person that fills out the I-9. This is a huge risk for companies right now. This is a real risk. There was an article in The Wall Street Journal last week which says North Korean threat actors have penetrated over 300 U.S. companies by getting jobs fraudulently. Our products can help protect that. Also, Gartner says by 2028, one in four job candidates will be using fraud in some way, whether it's a deepfake, whether it's AI-enhanced documents, whether it's deep voice, which is also being used. It's incredible what's happening right now, and this is a very, very hot topic. Where do we sit in the market? The competitive landscape is us at the top as the category leader.
There are really two buckets. These dots are actually fairly accurate. There are about eight, nine, or ten mid-market players that are in the $100 million-$700 million revenue range, and then literally dozens and dozens of mom-and-pops that are in the $100 million and sub range. We like the fact that we are only sitting here with 25% market share. That is why when we look at that $14 billion TAM, we feel really good about our ability to do upsell, cross-sell, and our ability to land new logos. Basically, how we position ourselves for winning, there is a lot that goes into it, but I think the two key things are technology. Our technology demos really well. I am going to get to a slide here in a second which shows you the power of our tech team and our vertical story.
Vertical story is really important in our space. Our technology is customized for each vertical that we sell in. For example, when we're selling our platform into the transportation space, it's loaded with everything that a transportation company would need from a product standpoint, but also a compliance standpoint. It's got all the DOT compliance built into it, and that's a big differentiator for us. It's the combination of tech and vertical that really makes a difference. Talk quickly about our platforms. I think this slide's important because for those of you that know our story, we actually bought our largest competitor last fall, a company called Sterling. Sterling and First Advantage, we feel, were the two best companies in the space, and now we've merged into one.
The beauty of the story is that we're able to offer our clients the best of both worlds in that if there's a piece of functionality on the Sterling platform that was better than the First Advantage platform, we now make that available across the entire customer portfolio. One of the things that we also can benefit from is our ability to use our automation. We were by far the most automated company in the space. We can use our automation to the Sterling's install base, which can now help us improve margins on the Sterling legacy business and also improve the customer experience there. Data is important for us. We have our own data. We also go out and get data from third parties. We also go out and get data from publicly available data sources like federal databases, state databases, local databases.
This is a differentiator in the space for us. No other background screener has proprietary data. We can use this, one, to improve our margins because we already have data, and two, as a sales advantage to say, "Hey, this is faster. It can help us be more price competitive by leveraging our own data." I talk about our tech prowess. We are a tech company. We've got 850 product and tech experts around the world. We have 90 agile pods around the world. Eight of those pods are dedicated just to product innovation, and that's primarily AI. We're developing AI POCs, AI products. All of those eight pods actually sit in Poland, where we found great AI tech resources and at good price points. We spend $130 million on R&D every year.
If you think about that competitive landscape slide that I showed, all those mom-and-pops are not even that size in terms of revenue. We can really blow them away from a sales standpoint when we get in front of them with our tech and vertical story. Last slide before I turn it over to Steven is AI is important. We have AI throughout many of our services and products. We have been launching AI products for over four years. One example is where we have our call center capability of Click Chat Call. Instead of calling an 800 number, clients can now chat with us through AI bots. If the question is too hard, there is human in the loop where a human can jump in.
This chat has really improved our customer satisfaction, and it's enabled us to improve our margins because we've been able to reduce headcount there as well. I'll throw it over to Steven, who can quickly walk us through some financials.
Yeah. Thanks and good morning, everyone. We'll take a quick drive of where we've come from, where we're at, and where we're going from a financing or financial model. A couple of key things here. First Advantage IPO'd almost four years ago to the day in June of 2021. That journey has been obviously with a number of different macro backdrops. In 2021, exiting the pandemic, there was mass hiring expansion. A great metric that we look at internally is the ratio of job openings to those unemployed. A healthy, comfortable level for that's about one- to- one. Exiting the pandemic, that number exploded to two point two to one. That peaked in early 2022. What that means is for every unemployed person, there's two and a half jobs waiting for them. That created excess churn in the hiring market.
That reflects within our base revenues or same customer sales as employees are migrating from job to job for higher paychecks. Through a combination of this and our ability to expand revenues with new logo, upsell, cross-sell, and a very consistent retention level of 96%+ , we were able to grow revenue through that pandemic boom. As we have normalized back down through base revenues, continuing to drive offsetting growth. More importantly to us, all that going on and able to use the tech, the data, and the automation that Scott just talked about to drive consistent cost growth. You can see we have been able to outpace our revenue growth with expansion of EBITDA margins, which has been a core tenet of our past.
Obviously, a current focus of ours with the synergy program coming off of the heels of the Sterling acquisition and then well into the future. Speaking of the synergies, we closed on the Sterling deal about seven months ago. When we announced that deal, we were thinking synergies would be north of $50 million and have expanded and refined that range over time. Last week, we were here in New York with our investor day, and we're happy to announce that we've now expanded that again to a $65 million-$80 million number of total net cost synergies. In fact, we've been focused on accelerating that number and have already actioned $37 million by March 31st to the end of Q1 and continue to focus on that on a day-to-day basis as we run the business.
As I mentioned, our ability to scale our margins, a key component of our financial model is the scalability of our P&L and specifically our cost of sales. Right now, our gross margins run right around high 40% range, 47%-48%. When you break down that, we'll call it 50% of revenue that is cost of sales, you'll see on the screen about three quarters of that is third-party data costs. What Scott was talking about, public data, the private data. The good news about that from our P&L standpoint, that's virtually 100% volume variable. If we do not do the search, we do not incur the cost. We do not pay the expense. We are also able to leverage our proprietary data more and more over time to both offset our usage of that and use that in a better perspective.
That remaining quarter, that remaining 25% of our cost of sales is really our internal fulfillment costs. A key tenet of the historical First Advantage business is looking at that as almost entirely volume variable. The way we workforce manage, the way we staff to inbound volumes, the way we monitor inbound volumes, and then use things like overtime, shift differential, and weekends, we're able to actually dial that workforce to match that inbound volume. We've lived in a really volatile macro environment for the last five years. What you've seen quarter after quarter and year after year is First Advantage's ability to consistently deliver gross margins that remain in line. Those are key tenets of that. I'll flip to the balance sheet for a second.
A, because I'm proud of this because of the way my team owns this, but B, the outlook here is really strong. Obviously, with the Sterling acquisition, we financed that. We now have a combined facility that runs about $2.2 billion. We've already started to pay that down with a $15 million voluntary prepayment we made just about a month ago, and we'll continue to take excess free cash flow and turn it there. A couple of key things on this slide. One, our company and our management team have been here before, and we're prepared to do it again. When we were acquired about five years ago, as you can see, leverage jumped up to about six times.
Very, very quickly, we were able to get the cost in line, focus on networking capital management, limit our cost investment, and get leverage back into it to an ordinary place. We're at 4.4 times today and between the synergy production that we have, the focus on cost containment and free cash flow generation, and a very flexible financing model, we've got a great horizon to get that back into our target range of two to three times really by the end of next year. Let's talk about capital allocation for a quick second. Think of this as two phases. Phase one is what we're in right now, which is deleveraging. Our core focus today is completing our acquisition, going and getting that full $65 million-$80 million synergies, and really focusing on reducing the amount of one-time costs and net reinvestment back into the business.
While that's going on, bringing that leverage to that two to three-time mark. When we get to that future state, which again, you're looking out in the horizon about 2027, we'll open up the playbook a little farther. That includes some inorganic growth. That includes looking at opportunistic and strategic return of capital to investors. That's a journey that's not going to happen overnight. I would focus you on the left side of this page for now and note that we're really committed to, and obviously with our voluntary prepayments and mandatory prepayments, already started the journey. I have the joy of being here just a week after we had our investor day last Wednesday. These are our new long-term financial targets for 2028. You can see the scale that we plan to be operating at in about three and a half years' time.
Almost a $2 billion revenue business, call it $600 million of EBITDA, converting that to cash at an incredibly high rate. Long term, we think we convert adjusted net income to free cash flow at about a 90% metric. If you look at the most important metric here to me, it is $1.65-$2 of EPS adjusted. We were at $0.82 last year. That is more than a 2x expansion at all points of our range as we leverage our synergies, leverage the revenue growth, continue to focus on cost savings, but also more importantly to that number, deleverage and watch that flow to EPS. Real quick, as we kind of talked about, this is how we grow revenues top line.
Things that we can control that aren't influenced by macro is a very consistent growth, 4%-5% new logo, which is new customers, 4%-5% upsell, cross-sell. That is more penetration into our clients, more products, more risk management, more geographies. As I mentioned, being able to retain clients at a 96% plus rate. That gets us to a long-term target growth rate of 7%-9%, a healthy number that outpaces our vended market. I'm just rushing a little bit because I know I want to make sure we get time. When you pull this all together, as Scott mentioned, we're a market leader. In a few years' time, we'll be operating at a $2 billion scale with above 30% margins. As I added, $1.65- $2 of EPS generation.
Mark, I want to make sure we get it to you back. I believe this has the backdrop for questions.
I really appreciate that. One of the questions I'm asking every company that I've been hosting is a macro question. You obviously have a number of areas that are not particularly cyclically sensitive. You have some areas that are cyclically sensitive that you ended up doing a great job during COVID with. I mean, on the retail side, if you've got companies like Walmart and Amazon, those are constantly hiring. You do have some areas that are cyclically sensitive. One question I have is we had a lot of optimism post-election, then we had Liberation Day, a lot of pessimism following that. What are you currently seeing from your clients?
There are a couple of key tenets. Scott mentioned enterprise as our focus. Enterprise for us is $500,000 or more screening volume. First Advantage is 10,000 employees. We barely break the low end of mid-market. You have to think about the scale of these companies. When an event comes out or a Truth Social tweet or whatever they are called, post, I guess, our companies are so big that they are able to absorb those and act more strategically. I think small business is a lot more levered into those and has to react a lot faster. We are fortunate to operate in some really key verticals, like you mentioned. In fact, our number one vertical now has nothing to do with retail. It is healthcare, which is a really resilient place to be.
Where we operate in retail and transportation, we would have called essential retail in 2020. Toilet paper, toothbrush, things like that that are essentials to life. We feel really good not just about the verticals, but the size of customers that we have who are able to have a news come out on Monday and be able to wait and react to it and set strategy and it does not change their overnight and their business strategy. I think that is what has given us a little bit of insulation from the volatility of the news cycle. I think that it is the separation from the news cycle to Main Street to I would almost call it Big Street because the size of our clients are just so different from these mom-and-pop sized small business companies.
Great. I want to shift over to very specific questions. During the investor day, you discussed the evolution of First Advantage over time and specifically the FA5.0 strategy. For people who are not familiar or did not go through the full investor day, can you discuss some of the tenets of that?
Yeah. FA5.0 is a new strategy for us starting January 1st. We like to do three-year strategies. They make sense for us. Given the fact that we had just acquired Sterling, the timing was right for a new strategy. Being FA5.0 means that there was a 4.0, 3.0, 2.0, et cetera. We have done really well with those strategies. They have all triggered. When the new management team came on in 2017, we actually created FA3.0, and that is where we went forward. 2.0 and 1.0 are just historical. The strategy is really a combination of a bunch of things. One is the integration of Sterling. We have to nail that. We are way ahead of schedule. We raised our synergies. Things are going really well. We have an incredible culture fit between those two organizations, which has really helped us with the acceleration.
Two is doubling down on these verticals that we like so much. Take healthcare, for example. It's not just being in the space and attacking the hospital networks. It's getting down deeper into subverticals that we love, like home healthcare, which is high turnover, healthcare staffing, nursing schools, all that stuff, high volume, high turnover, lots of different types of products to be sold to them. It's all about sort of the penetration of the verticals, the tech story, which I talked about, bringing the best of both worlds together so that we feel we've got the best technology in the industry today. When you put these two together, I mean, it's incredible how great it is. The last thing is the financials. We're totally committed to paying down the debt, increasing the margins, growing the company.
That's great. One thing that you've done a tremendous job with is the integration of Sterling. I was pleasantly surprised to see the lack of turnover among the existing Sterling clients. Can you talk a little bit about what you did to manage that? Because sometimes when you've got these situations, you do see a number of clients leave. You've done a phenomenal job there.
This was our biggest fear when we did the deal. We have been so focused on that. If you look at the messaging and the communication we have done since we announced this deal, we have been very purposeful and repetitive in our communication about the technology story. What drives retention or attrition in a merger is forcing those acquired customers onto a platform that they are unfamiliar with, did not want to go on. We are not having to do that. Huge shout-out to our tech teams for coming up with this elegant architecture where we can take the best of both worlds. Everybody actually gets it is even better than just saying, "Hey, you do not have to migrate." It is, "Hey, you are going to get a number of upgrades." They were already happy on the platform.
Now they're like, "Wait, it's going to get better." That's really helped. The last thing is we went because it was two publicly traded companies that came together. We had to go through a lengthy DOJ process. This may sound weird, but the DOJ actually did us a favor by doing a second request. It gave us more time to plan. We have just planned well. We got a lot of help from Silver Lake, who's been through hundreds and hundreds of M&As. They gave us good advice, some templates. We even have Silver Lake consulting team helping us through the process. We've got dedicated teams. We've got program managers, project managers. We've got comms experts. We're just focused on this because we know that's the most important thing.
Mark, it was also important for us to start with a realistic synergy number that did not force us to go put pressure on any of those areas Scott just talked about. That is what has given us both the ability to raise that over time, because we started with a very conservative number that allowed us to be flexible with the strategy and make sure we could preserve that client experience throughout the process.
You've already achieved $37 million.
Correct.
You're targeting $ 65 million- $ 80 million. What was done for that first $ 37 million and what still needs to be done?
Yeah. The first chunk is a lot of it is bringing two big organizations together. It's like Scott talked about, two public companies. Getting that infrastructure unwound, getting a lot of the back office merged together, getting the functions brought together is a lot of the core focus. The journey to come is a lot more about the fulfillment side. That cost-to-sales pie chart, getting the data and providers and automation pulled together, getting the workforces pulled together. A lot of that's happening. Because it's such a broad structure, it's going to take a while to work its way through the full cost-to-sales structure. That's really kind of phase two, if you will. We accelerated whatever we could. We wanted to get as much 2025 uplift into the numbers and get that as early in the year as possible.
The management team did a phenomenal job getting to that $37 million, which far exceeded our expectations.
Will you still continue to run two platforms, or is that part of that remainder?
We'll run two front-end platforms. The back-end will be one consolidated platform on mostly the First Advantage automation that I talked about that we've built. That's where all the cost savings come. The client experience doesn't get disrupted. From what they visibly see, there's hardly any change. What's happening, kind of the plumbing underneath, that all rides on one platform.
Great. Unfortunately, we only have three minutes left, and I had way more questions. I want to ask about the digital identity market because that is really topical. First of all, how do you get to a $10 billion TAM? How do you break that down?
Yeah. So we got to it actually with the help of a lot of external sources. The $10 billion TAM was a number that actually came up with four independent sources came up with the exact same number. The footnotes are in our deck on our website as to what those sources are like IBISWorld and others. We actually came up with a very similar number on our own. We're pretty comfortable with it. Technically, what it means is that it brings the whole concept of identity, fraud, verification up the workflow, up the funnel to the recruiting part. This no longer becomes just embedded in a background screen. It now becomes part of recruitment and onboarding. That is why it's grown so big because companies recruit a lot more than they onboard. It's just a larger funnel, which has created that TAM.
Can you describe what you do in terms of that market?
I think we're in a unique position. That's why we love our space here because there's lots of point solutions in digital identity. A company can go out and partner with somebody for a single point solution. We're one of the only few companies out there that actually can bring all those things together under one user workflow, one user experience, and one single source of truth. If a company goes out and tries to get point solutions to help with all the different parts of digital identity, validating was it a deepfake, looking at Social Security number verifications, validating a driver's license, a passport, all that stuff, that's a lot of work on their end. They're the ones that have to connect all the dots.
We are going in and said, "We can do all that for you." Plus, we can also validate that the person who you interviewed is the same person that you onboarded, is the same person that filled out the I-9. And I-9s become very important in today's world to make sure that you're going to survive an audit from the federal government. That is all digital.
Who else could play and what are the unique advantages that you have?
Yeah. There are companies that can play in different parts. You can go out to a facial recognition digital ID company. That is the only piece they can do. We are partnering with them anyway. The price points are not that different. Why do it? It is embedded in our workflow and on our platform.
That's terrific. Unfortunately, we're out of time. Please join me in thanking Scott and Steven for a terrific discussion.
Thanks for having us.
We really appreciate it.
Yeah, no problem. This is great.
I look forward to it.