Q4 2023 First Advantage Corp Earnings Call
Participants
Stephanie Gorman; VP, IR; First Advantage Corp.
Scott Staples; CEO; First Advantage Corp.
David Gamsey; Analyst; First Advantage Corp.
Shlomo Rosenbaum; Analyst; Stifel Financial Corp.
Ashish Sabadra; Analyst; RBC Capital Markets Corp.
Andrew Steinerman; Analyst; JPMorgan Chase & Co.
Manav Patnaik; Analyst; Barclays PLC
Kyle Peterson; Senior Analyst; Needham & Company LLC
Heather Balsky; Analyst; Bank of America Corp.
Scott Wurtzel; Analyst; Wolfe Research LLC
Presentation
Operator
Good day, everyone. My name is Leo, and I will be your conference operator today. I would like to welcome you to the First Advantage Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations.
At this time, all participants have been placed in listen-only mode. To prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during this time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Lastly, if you should require operator assistance, please press star-zero. Please note, today's event is being recorded.
It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.
Stephanie Gorman
Thank you, Leanne, and good morning, everyone. I'm joined on our call today by Scott Staples, our Chief Executive Officer, and David Gamsey, our Chief Financial Officer.
As you may have seen today, we announced a definitive agreement to acquire Sterling Bancorp. We will first discuss the transaction then cover First Advantage's Fourth Quarter and Full Year 2023 results as well as our 2024 outlook. Then we will open the call for questions in the Investors section of our website. You'll find a press release on Sterling acquisition in addition to our earnings press release and slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on our Investor Relations website.
Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward looking statements. Such forward-looking looking statements are not guarantees of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements. Due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2022 Form 10 K and our 2023 form 10 K to be filed with the SEC. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements.
Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release and presentation, which are available on our Investor Relations website.
I will now hand the call over to Scott.
Scott Staples
Thank you, Stephanie, and good morning, everyone. This is an exciting day for First Advantage as we announced our agreement to acquire Stirling. This strategic and accretive acquisition will benefit customers and investors and drive long term value creation.
I'll start by walking through an overview of the rationale behind this acquisition against the backdrop of a highly fragmented, large and growing market for our services, adding Sterling to First Advantage will allow us to further strengthen our high-quality and cost-effective background screening, identity and verification solutions for the benefit of customers of all sizes across industry verticals and geographies.
Our product offerings are highly complementary, which should unlock upsell and cross-sell opportunities and enable improved customer experiences across our combined customer base. The transaction will enable us to increase investment and drive innovation in key development areas of our business like artificial intelligence and next-generation digital identification technology, all with the goal of helping our customers hire smarter and onboard faster. With this investment, we will be increasingly well positioned to meet the evolving needs of our customers, deliver an even better customer and African experience and to do so more efficiently by leveraging best practices and technologies from both companies with the addition of Sterling.
First Advantage, we'll have a more balanced revenue mix across customer verticals and geographies, which will reduce seasonality and improve resource planning, operational efficiency and resilience across macro cycles. This acquisition is also compelling from a financial perspective for First Advantage for Sterling and for investors of both companies. It's just the beginning of a new value creation journey. As David will cover in more detail shortly, we are acquiring Sterling for approximately $2.2 billion in cash and stock. The combination of our companies is expected to generate at least $50 million in run rate synergies in the first 18 to 24 months with potential material upside. This positions us well to both reduce costs for our customers and create long-term value for our shareholders.
We expect the transaction to deliver immediate double digit accretion to adjusted earnings per share on a run-rate synergy basis and to accelerate our objectives to drive long-term profitable growth. And importantly, we're excited about bringing together the world-class talent of First Advantage and Sterling. We have two high-performing cultures that share a dedication to delivering excellent customer experiences. We look forward to building on that together to deliver substantial value for our customers and shareholders through this acquisition as the CEO of the combined company. I personally look forward to welcoming the talented Sterling team to First Advantage. Overall, this combination is a transformative step for First Advantage in all our stakeholders.
Turning to slide 5, which highlights some key metrics of our combined company. This acquisition will create a combined company with approximately $1.5 billion in revenue that conducts over $200 million background screens annually and serves 80,000 customers across more than 200 countries and territories. From a geographic perspective, first, advantage and Sterling have complementary international footprint, deepening our local presence and advancing our growth in attractive geographies like Amea, A-Pac, LatAm and India.
If we look at the verticals where our customers operate, Sterling has strength in serving employers in health care, industrials and financial services, which make up over half its business today, while First Advantage particularly excels in the transportation, retail and e-commerce verticals. Together, we will have greater product and vertical diversification that generates cross-selling opportunities and reduces seasonality in our business, which will enable more accurate planning for greater operational efficiencies. And the combination is expected to greatly reduce customer concentration by diversifying our customer base. Together, we will be able to better support companies as they manage risk and hire them talent.
Turning to slide 6, the combination of First Advantage and Sterling's technology products, data and capabilities. We'll further enrich our offerings across background checks, digital identity and biometrics verification solutions, drug and health screening, continuous monitoring and beyond. We expect feature functionality that will reduce turnaround time and cost for customers.
We see exciting opportunities to use our complementary portfolio to sell incremental products and services to both companies' customers. For example, we expect to be able to bring First Advantage's i. nine and what's the offering to Sterling's customers and split and certain of Sterling's digital identity solutions to First Advantage customers. We'll also have an opportunity to bring First Advantage's leading automation expertise to sterling.
We expect that as we find new ways to utilize our technology and capabilities, the combined company will be able to leverage first advantages, AI driven intelligent routing and proprietary data assets to reduce our reliance on third-party data providers, advancing our commitment to delivering cost-effective solutions to our guests.
This transaction also creates the opportunity to accelerate innovation in ways that will meet the dynamic needs of customers and deliver an elevated Applica's experience while also improving operational efficiencies. For example, with greater capacity for investment. The combined company will accelerate innovation, focused on artificial intelligence, impacting both the front end application experience and the back-end fulfillment process and other technologies that will shape this industry over the long term.
Similarly, the transactional will enable greater combined investment in next-generation digital identification technologies, building on our existing services and the acquisition of Infinity ID digital identification has been a core part of First Advantage's strategy and bringing together our identity verification and identity fraud solutions will enable First Advantage to further innovate in delivering state-of-the-art digital identity solutions to our customers.
Overall, our acquisition of Sterling will accelerate our strategic objectives toward sustainable long-term value creation for customers and shareholders. Our enhanced growth opportunities and improved diversification set us up to deliver a stronger, more comprehensive value proposition to customers and a large, growing and highly fragmented $13 billion market for our services. And this combination enables accelerated investment in our products to fuel innovation and growth. I am confident that this acquisition is the right step to create meaningful value for First Advantage's current customers and shareholders. And those of the combined company.
I will now turn the call over to David to discuss the financial details of the transaction.
David Gamsey
Thank you, Scott. And turning to Slide 7, I'll take you through the financial aspects and structure of the transaction. Total purchase price consideration for this transaction is $2.2 billion. The consideration will include $1.2 billion in cash, 27.15 million shares of newly issued First Advantage common stock and the assumption of sterling debt, which will be retired at closing. This translates to a purchase price of $16.73 per share, which represents a premium of 35% to Sterling's closing price yesterday and 26% premium to the 30-day VWAP.
We will be acquiring sterling at a synergized adjusted EBITDA by a multiple that represents a discount to First Advantage's current trading multiple. We expect the transaction to deliver significant total shareholder return in the long run. This transaction essentially doubles First Advantage's revenues and adjusted EBITDA. And we expect the transaction to deliver immediate double digit accretion to adjusted earnings per share, assuming run rate synergies.
I'll discuss the pro forma profile in more depth shortly. It also provides greater trading liquidity for investors, creating an even more compelling opportunity for investors in this industry within 18 to 24 months after closing, First Advantage expects to achieve at least $50 million in synergies as identified by our team and supported by an adviser. These synergies would be driven by a reduction in third-party data costs and efficiencies across operations, product and technology and SG&A, including the elimination of duplicate of public company costs such as the combination of insurance programs and one audit one set of tax returns.
We see potential for upside on the expected synergies value over time. We have secured fully committed financing for this transaction with $1.8 billion of new seven year term debt. The new financing is in addition to the existing debt on our balance sheet. I'll talk through the balance sheet impacts of the transaction in more detail shortly.
Regarding timing. The transaction is expected to close approximately in the third quarter of 2024, subject to required regulatory approvals, clearance clearances and other customary closing conditions. We cannot control the exact timing, but we will be prepared to close as soon as all approvals have been received. First, Advantage shareholders will own approximately 84% of the combined company and Sterling shareholders will own approximately 16%. There will be approximately 173 million diluted shares outstanding.
As a result of the transaction, we have suspended purchases under our share buyback program. Our primary focus upon closing will be on integration synergies, de-leveraging and most importantly on our customers. The acquisition of Sterling is a significant step forward in our value creation playbook. It is just the beginning. We have the leadership team, industry expertise, technology and systems to successfully execute and integrate this transaction and deliver shareholder and customer value.
Now turning to slide 8, our proposed acquisition of Sterling generates a strong pro forma financial profile using the year-end figures that First Advantage and sterling reported today, we will have pro forma $1.5 billion in 2023 revenues and $473 million in combined EBITDA, including expected run rate synergies. This represents a 32% adjusted EBITDA margin which is approximately 100 basis points above First Advantage's current margin, we expect to generate double digit EPS accretion on a run rate basis with continued ability to compound EPS at 10s growth rate over time.
Now on Slide 9, I'll focus on how the transaction impacts our capital structure. First Advantage will assume and retire Sterling's outstanding debt at closing, as previously mentioned this along with the cash consideration, Porch's portion of the purchase price will be funded through a new $1.8 billion, seven-year term loan and cash on the balance sheet, we have already secured financing commitments for this new facility from a consortium of banks. Additionally, as part of this financing agreement, we will be upsizing our current $100 million revolver to $250 million and extending the maturity date to 2030.
Net leverage at closing will be in the range of four times depending on the exact timing of closing, the debt will be covenant light, consistent with our current agreement, further reducing risks and increasing flexibility. Our long term goal is to reduce and maintain net leverage between two and three times. Our expected liquidity at closing and our combined company's ability to generate cash flow will leave us with greater than 2.5 times interest coverage ample room to achieve our capital allocation priorities and deleverage organically over time for contacts, pro forma combined cash flow from operations was approximately $300 million based on actual 2023 results.
Our Welbilt financial foundation and resilient business model has supported our history of strong adjusted EBITDA margins and robust operating cash flows, creating a healthy balance sheet that has given us the flexibility to acquire Sterling looking ahead. And as previously mentioned, we expect first advantage to continue compounding EPS at a 10s growth rate over time through the combination of top line growth, ongoing synergy capture and significant deleveraging via strong organic free cash flow generation.
We will continue to selectively and strategically invest in the business to fuel long-term organic growth and to successfully integrate Stirling, particularly to drive the innovation that we know will most benefit our customers consistent with our historical capital allocation strategy. Going forward, we plan to focus our uses of capital on prudent deleveraging towards our long-term net leverage target range, which will help support earnings growth.
So let me take you through our full year and fourth quarter results as well as our standalone First Advantage 2024 outlook. Turning now to a recap of our four full year results on Slide 12. We are pleased with our overall annual performance coming in within 1% of our original 2023 guidance ranges for revenues and adjusted EBITDA and performing in line with what we communicated for adjusted net income and adjusted diluted EPS. This is further evidence that we continue to be diligent and successful at controlling what can be control within our business.
Despite the challenging macro environment, revenues grew sequentially throughout the year in every single quarter, including Q4 coming in at $764 million, a decrease of 5.7% from the prior year with constant currency revenues of $766 million. Separately here, an incident ID, which we acquired in September 2023, contributed approximately $3 million to our revenues as we have discussed throughout 2023. We have been pleased that our upsell, cross-sell, new logos and attrition rates have broadly aligned with their historical revenue growth rates.
Our base growth, which is more sensitive and correlated to changes in the macro environment declined on lower volumes. We believe that when the macro environment stabilizes, our base growth will normalize to our historical rate of 2% to 4%. In our Americas segment revenues of $673 million or 87% of consolidated revenues were down 3.1% from the prior year.
In our international segment, revenues of $97 million or 13% of consolidated revenues were down 21% from the prior year. On a constant currency basis, international revenues were $99 million or down 19% year over year. Adjusted EBITDA for the year was $238 million, and our adjusted EBITDA margin was a robust 31.1% representing year over year expansion. Our adjusted effective tax rate was 23.5%. Adjusted net income was $146 million and adjusted diluted EPS was $1.
Looking now at our fourth quarter results on Slide 13 before the quarter exemplifies the continued strength of our flexible business model. Disciplined cost management and investments in technology and automation, which were key drivers of achieving a record adjusted EBITDA margin of nearly 34% and strong cash flow from operations of $57 million. Our fourth quarter revenues were $203 million, a decrease of 4.7% from the prior year.
Given the mix of our domestic and international businesses. Currency had little impact on fourth quarter results with constant currency revenues of $202 million. For the quarter, incentive ID contributed approximately 2 million to our revenues, we continued to make great progress building our customer base. During the fourth quarter and the year.
We had 10 bookings in the fourth quarter of $500,000 or more of expected annual contract value and 46 for the year, of which approximately half were new logos and the other half were upsell cross-sell. That said, total base continued to be under pressure in the fourth quarter, declining $28 million or 13%, driven by peak season ending earlier than expected and continued macro-driven weak performance.
In our India and APAC markets, we are well positioned to take advantage of the upside from a market recovery when it materializes. The base still declined for the quarter was partially offset from upsell and cross-sell, which contributed $12.7 million or nearly 6% to our performance. Revenues from new customer logos contributed an additional $8.3 million or approximately 4%.
In our Americas segment, revenues of $182 million or 89% of consolidated revenues were down 3.1% from prior year. This quarter held up relatively well, which is primarily attributable to our broad base resilient customers. All of our fundamentals remain strong. As a reminder, jolts data is correlated to our Americas base growth looking at December 2023, jolts data openings and hires increased slightly month-over-month and remain relatively high by historical standards, but separations decline, employers are holding on to talent longer quit fell to the lowest monthly level in nearly three years.
These declining hiring trends continue to impact your Americas space, which for the quarter was down 12%. And our international segment revenues of $22 million or 11% of consolidated revenues were down 16% from the prior year. On a constant currency basis, international revenues were $21 million or down 18% year over year. The decrease was due primarily to base weakness in India and A-Pac, offset in part by relative strength in Amea.
As a reminder, our direct exposure to China is less than 1% of our total revenues and has little impact on our business in the fourth quarter. India was down approximately 36%, given our regional exposure to DPONIT. services related businesses and A-Pac was down 21%, driven by the financial services sector and other regional market dynamics. We achieved a record consolidated adjusted EBITDA margin of 33.7% on adjusted EBITDA of $68 billion, which represented an improvement of 140 basis points sequentially and 60 basis points on a year-over-year basis. This is another proof point that our business remains resilient in the face of top line headwinds.
Our adjusted effective tax rate was 21.2%, which reflects a one-time favorable adjustment. Adjusted net income was $43 million and adjusted diluted EPS was $0.29, which includes a $0.02 negative impact from our August 2023 special dividend.
Now turning to Slide 14. I'd also like to highlight that in 2023, we generated operating cash flows of $163 million ending the year with $214 million of cash on the balance sheet. We continue to return capital to shareholders through our $218 million, one-time special dividends and repurchasing $15.9 million of stock. As part of our buyback program, we spent $41 million on the acquisition of Infinity ID, growing our vertical capabilities and expanding our product suite. Additionally, we spent $28 million on capital related investments. In December, we entered into two new interest rate swap agreements that take the place of our existing interest rate collars that mature today.
Now moving to Slide 15 and a discussion of our outlook in developing our stand-alone guidance for 2024. We considered many factors. First was the current macroeconomic environment, including the softening in hiring trends and the reduction in employee churn. These dynamics were partially offset by discussions with our customers who are becoming more optimistic and see ready to start investing in new growth opportunities.
On top of this, the Sterling acquisition announced today will require significant amounts of management time and resources to complete and integrate. As such, the midpoint of our guidance reflects a conservative posture towards growth and profitability in 2024 for First Advantage on a stand-alone basis throughout 2024. We expect sequential quarter over quarter growth for revenues, adjusted EBITDA and adjusted EBITDA margins.
Similar to 2023, we expect customer retention to remain in line with our strong historical performance of around 97%. We also expect continued execution of upsell, cross-sell and new logo growth, consistent with historical trends and long term targets. The midpoint of our guidance range assumes that there will be further macro-driven base declines with days remaining negative in the first three quarters, so improving sequentially and then turning positive in Q4. However, assuming the economy begins to recover later in the year and into 2025. We are extremely well positioned to benefit for 2024.
We expect to generate full year revenues in the range of $750 million to 800 million based on the midpoint of 775 million. This results and positive year over year organic revenue growth. This includes revenues related to infinity ID, which is expected to contribute approximately $7 million in the first eight months of the year as we approach the anniversary of the acquisition at the beginning of September.
At our midpoint, we expect to maintain full year adjusted EBITDA margins of approximately 31% and adjusted EBITDA in the range of $228 million to 248 million. This is after considering approximately $10 million in increases in employee wages and benefits and normalization of management incentive plans as well as approximately $7 million in new investments in product technology and sales.
We are continuing to selectively invest in our business to strengthen our client relationships and to bring them the best possible offering in the industry. At the midpoint, we expect our 2024 adjusted net income to be approximately 135 million and adjusted diluted EPS of $0.93. We have provided an adjusted diluted EPS bridge on slide 16 that walks you through the puts and takes and comparing 2023 results to what we expect in 2024. This is very important to understand on a like-for-like basis after adjusting for impacts, including our 2023 one-time special dividend expiring interest rate swaps and the positive impact from our 2023 share buybacks.
Adjusted 2023 EPS would have been $0.92. We expect diluted EPS expansion at the midpoint of our guidance range in 2024 when taking into account these and other items. We have also provided a summary of selected 2020 for modeling assumptions in the appendix, including a range of $30 million to $33 million of capital expenditures, of which $3 million relates to a new U.S. criminal data AI. project and $4 million relates to a large-scale computer refresh project. The balance consistent with 2023 primarily relates to capitalized software development costs.
Looking now at the quarterly phasing of our 2024 guidance, we expect Q1 year-over-year consolidated revenues to decline by approximately 5%, and we expect sequential top line improvement as we move throughout 2024, with Q2 results coming in relatively flat year over year, we expect positive overall growth in the second half of the year, more heavily weighted toward Q4.
We expect our Q1 adjusted EBITDA margin to be between 27% and 28% which is consistent with the first quarter of the last three years. Starting with Q2, we expect adjusted EBITDA margins to be above 30% and to improve in the second half of the year following a similar pattern to 2023. Overall, we are extremely well positioned to benefit when the macro environment improves. Please note that we expect to provide guidance on the combined company after the Sterling acquisition closes.
But let me now turn the call back over to Scott before we open the line for questions.
Scott Staples
Thank you, David. I want to acknowledge the great progress our First Advantage team made throughout 2023. I'm especially proud that we did not take our foot off the gas pedal even as we continue to navigate an uncertain macro environment and evolving labor. We are well positioned to weather the current environment and benefit greatly once it stabilizes and starts to improve.
We are excited about today's definitive agreement to acquire Stirling, which will allow us to extend our high-quality and cost-effective background screening, identity and verification technology solutions for the benefit of customers of all sizes across industry verticals and geographies. Looking forward, we remain focused on long-term profitable growth and maximize value for all stakeholders.
With that, we will open the line for questions.
Question and Answer Session
Operator
Thank you. We will now begin the question and answer session. At this time. If you have a question, please press star one on your telephone keypad. If at any point your question has been answered you may remove yourself from the queue by pressing star two. If you are using a speakerphone, we request that you pick up your handset while asking your question to provide optimal sound quality. Thank you. Our first question is coming from Shlomo Rosenbaum of Stifel.
Shlomo Rosenbaum
Hi, thank you very much for taking my questions. Just to deal first of all, just when you're combining two of the top three companies in this space. I just wanted to get your take on your considerations around the DOJ on this and the work you've done over there. And then I just have a follow-up in terms of just the combination.
Scott Staples
Yes, one of So I mean, first of all, I'll tell you we've hired some great experts in this in this space who will guide us, yes, through the process. But let's keep coming back to the market on that because, yes, this is a large $13 billion market and we've yes, we've always told you how fragmented. I mean, there's there's lots of competitors of all sizes and shapes across the world. We think we've got a great case, but we'll we'll let the experts guide us through the process. And And yes, we'll see where it takes us. But I think like I said, this is a this is a very large but very fragmented market landscape.
Shlomo Rosenbaum
Okay, thank you. Just and then just in terms of the combination, you pointed out $50 million in synergies. Is that all cost synergies in? Can you talk a little bit more about just the underground, practically the combination of the two companies. How will you report accelerate organic revenue growth? Like what would the if you could just give some examples a fan of this customer. We could sell this to you of that customer. I could solve that to.
Can you just give us some on the ground examples of why this makes sense get David Ryan take the synergy part, and I'll take the second part of that.
David Gamsey
Okay. So Shlomo, from a synergy perspective, the $50 million, at least $50 million. That is from a cost perspective basis, we think there is upside relative to rental revenue synergies and from a cross-sell perspective. And Scott can give you some specific examples relative to that, we think we can get that $50 million in 18 to 24 months.
Scott Staples
Some of it is very low hanging and we're going to go get right away and then I think just to handle to answer your cross-sell, and it's actually probably I think, a broader question that you're asking. Yes, I think one of the one of the things that we really like is the complementary vertical exposure or overlap actually. So just think about it, as we said in the script, Sterling's largest verticals of health care and financial services and business, professional services, et cetera, maps really well to our large ones, which are transportation, retail, e-commerce.
And so we really love the fact that they're their vertical strengths match so well through our vertical strength. And now we've got potentially a much, obviously a much larger customer base with 80,000 customers. And we feel like our we have our nine product. Our WiFi product can be sold across the sterling base, and they're digital identity solutions across our base, et cetera. And but again, we're talking about early days here. We've got to sit down and map this all out. But we think there's yes, great opportunities for what I just want.
Shlomo Rosenbaum
Thank you.
Operator
We'll take our next question from Ashish Sabadra of RBC Capital Markets. Your line is open.
Ashish Sabadra
Thanks for taking my question. Just wanted to drill down further on the on the cost synergy front. I think there was a reference to reduction in third-party costs. I was wondering if you could provide any more clarity on that front. And then also during the Q&A last question, there was a reference to certain low hanging fruit. I was wondering, can you provide color on that front as well? Thanks.
Scott Staples
So, Ashish, from a third party data perspective, as you know, we have our verified database and we have our Smart Hub technology that's AI driven and that allows us to use our own database and other sources for employment and education verification and Sterling does not currently have access to that database or to that technology. And we believe that we can help drive down costs once we can integrate them into that Smart Hub technology.
Ashish Sabadra
As far as low hanging fruit. There are a lot of opportunities, right?
David Gamsey
We're only going to need one audit. We're only going to need one set of tax returns. We're going to consolidate our insurance programs you'll eliminate one complete public company cost scenario. So there are a lot of really easy costs we can go after really quickly.
Ashish Sabadra
That's very helpful color. And as we look out to 2024. Thanks for providing some good commentary on trends by quarter. I was just wondering if you could also provide some color by end market verticals where you're seeing better hiring strength versus the verticals which are still weak in 2014 as his historic really hasn't changed here too much.
Scott Staples
It's been kind of like or a repeat for us over literally maybe the last year where we still continue to see good strength in the transportation and home delivery verticals.
Yes, retail e-commerce actually kind of flattish for us, but keep in mind, as we've said many, many times, our retail e-commerce footprint is really more of the large discounters and the young and the online e-tailers. And those are both. There's still high, obviously, high demand for for those companies, products and services because of inflation and things like that. And all all year long know, verticals like staffing and financial services have been down and continue to be down.
The one vertical, which I missed when I talked about positive is health care. Our health care has done really well for us this year. And especially over the last quarter or two. And so yet in the end, it kind of all washes out with exactly what we've given you with results and guidance. We can expect is sort of more of the same from those verticals, at least for the first three quarters.
Ashish Sabadra
That's very helpful color.
Operator
We'll take our next question from Andrew Steinerman of JPMorgan. Your line is open.
Andrew Steinerman
I wanted to ask a little bit about the Smart Hub and the identification of third party costs being, I guess, just listed the top you've listed before operational our efficiencies is the reduction of third party costs, which I understand is usually passed along to the customer bigger savings for work. Will it be bigger savings for FA than you know, than the operational savings across your products, et cetera. And so my question is on Smart Hub, is that up to the customer base is less use of Smart Hub or not for you have verifications?
Scott Staples
Yeah, I mean, technically, it would be up to the customer, but I can't point to a customer doesn't it doesn't want to use it a home. So again, think of it think of it as really a router. It's really a fantastic piece of technology because it's got algorithms built into it. And we've been working on it for four plus years, maybe even five years now. So it's got some AI driven technology in it. It touches the algorithms, but all it really does, Andrew is it gives our customers choice. And so it gives their applicant, you know, based off their their criteria, it gives the customer choices as to where to go find that data and so I can't remember or think of a customer that doesn't use it.
And but at the end of the day, you know, what we're really offering is multiple data sources and of course, our own data, our data continues to grow. We add to it every quarter. We add to it every month and it's it's good, it's good data source and and with the Sterling acquisition, we'll be able to tap into their data as well, which they don't currently live. And so we aren't able to quantify that yet because we obviously haven't gotten into what exactly that those records look like and stuff. But we are pretty feeling pretty good about where we have, where and how we can leverage this going forward.
Well, Scott, the other part of my question was you listed the reduction of third-party costs before efficiencies and operations and products and technology and SG&A, like you say, the reduction of third-party costs in the $50 million target. Our savings is going to be bigger than the efficiencies that follow in that list. I think I don't think it would be bigger just it's just how it was written. I think I think we'll get way more out of efficiencies, as David mentioned, and there's there is duplicate tax and insurance and all that all that kind of stuff. So no, I don't I don't think it's a bigger number. It's just how it was right now.
Andrew Steinerman
That makes most sense to me. Thank you very much.
Operator
We'll take our next question from Manav Patnaik of Barclays. Your line is open.
Manav Patnaik
Thank you. Good morning. I was hoping just to touch on a base growth. I know you gave us some directional color for the year, but just was hoping you might be able to quantify what you're assuming for 24, just because it sounds like for both you guys and sterling, the base growth got worse than what you guys are guiding to. So I was just curious if that was in the changes in the large customers that renew it after it was at the tail end, that kind of it came short of what you what you expected.
Scott Staples
So base growth consolidated base growth was down 13% in Q4, which was greater than we anticipated. As a result of that, we're taking a pretty conservative posture to it. If you look at the midpoint of our guidance for 2024, we're projecting base to be down a little over 5% for the full year, but it's more in the 9% to 13% negative range in Q1 and then improving sequentially from there. But again, down about 5% for the full year.
Manav Patnaik
Okay. And then perhaps just e-mail address, can you just talk a little bit about pricing trends currently? I know it's not a big part of the algorithm, but in the double digits, can you help in that equation?
Scott Staples
As you know, pricing in this industry has been very consistent and very stable we've had no conversations with Sterling about pricing nor we'll wait till after closing.
Manav Patnaik
Okay. Thank you.
Operator
And once again to ask a question, please press star one now on your telephone keypad. We'll move next to Kyle Peterson of Needham & Company.
Kyle Peterson
Good morning, guys. Thanks for taking the questions. And just want to touch on the balance sheet and capital allocation obvious about the leverage from it's going to come up a bit and with this transaction. But I guess how quickly do you guys feel some you can delever the balance sheet more toward in that target range from maybe in whether it's kind of a status quo macro or if we get some improvement. But yes, I guess where can you get from a four to the two to three times.
Scott Staples
So Kyle, we're going to have two primary objectives, post-closing integration and deleveraging. So we throw off a lot of cash. You can see it in our numbers combined, we had over $300 million, about 300 million of cash flow from operations, and we will be utilizing that to delever as quickly as possible.
Kyle Peterson
Got it. That's helpful. And maybe just follow up in terms of some of the other and the competitive benefits after this deal, seems like you guys will be kind of a clear number one player in the screening space beyond. Just wanted to see if you guys had some thoughts on and whether it is kind of how you guys are going to go to market or the value prop of having more scale globally? And maybe just anything in terms of how you guys think will influence on your sales process or your ability to kind of push the snowball down the hill on new logos and and upsell cross-sell?
Scott Staples
I think, yes, there is a lot of customer benefits here. You know, Sterling does some things really well, we do some things really well. And when you combine them, it's good for the customer and how we was able to launch sort of best in breed products across the customer base on that dial. Again, we're still really early days on this, and we've got a lot of planning to do. And so it is clear, it's hard for me to sit here today and tell you exactly what that landscape will look like. But we just we just feel like I know that again, I'll go. I'll go back to it many, many, many times because this is a key component in us on it through this deal was just such a great vertical, the complementary of the verticals, again, what the verticals there's they're very strong in are not the same verticals that were very strong and it just it just makes a good story, I think, for the market.
Kyle Peterson
That makes sense. Thanks guys. Congrats on the transaction.
Operator
We'll take our next question from Heather Balsky of Bank of America.
Heather Balsky
I think you had another question on the acquisition and you talked about the diversification in your customer mix to sell. And I was hoping you could help us think about that from your wall in terms of your long-term strategy.
So I know you've talked a fair amount a lot about your your high-growth vertical strategy and that is driving outsized growth from a once your combined company, kind of how do you think about focusing on higher-growth verticals kind of where does Sterling have higher growth and how much of your business will be in that kind of higher growth area? And then are there other parts of your business or parts of their business you might want to prune or to get the right growth profile?
Scott Staples
Perfect. I think I'll go backwards on that. I don't again, we're still very early days on this. And obviously, over time, we'll give you more insights into into go-to-market strategies. But I don't I don't think there's going to be a need or a reason for pruning. If you think about what we've always message to you guys about.
Yes, our strategy of high-volume hiring. And I think if you look at it again across transportation, retail and health care and even staffing and hospitality, although very low numbers for us that that kind of strategy sort of math to about that 1% of our and if you look at Sterling and you look at their verticals and especially health, I'll point out healthcare because are there their healthcare verticals really strong.
If you think about think about our verticals so again, if you look at yes, transportation, that's 24%. If you look at retail e-commerce, that's 22% healthcare for us, 15%. But if you look at Sterling, you're looking at healthcare of 23% and know they're manufacturing and industrials that are at 18% and things like that. So I think when you when you combine the two organizations you're going to bring obviously some of those numbers down and some of those numbers up.
But I think in general, as far as we can tell from you know from our discussions or their strategy in healthcare is very similar to us where it's high volume hiring, stuff like that. So I think there's just a great sort of complementary vertical story here, but it's really more and more to come. You're going to have to be a little patience with us as we as we wait for closing and then can give you more information about go-to-market strategies and stuff like that.
Heather Balsky
That's real helpful. And then for your business on an international, can you just help us think about sort of line of sight you have in terms of stabilization there? And any any green shoots that you're seeing in A-Pac?
Scott Staples
India?
Heather Balsky
Yes.
Scott Staples
Great question. So as we've as we've again talked to you guys about for literally all of all of 2023 international has been a drag on the business. And again, let's separate it too, because Amir has actually done pretty well so when we talk about international, we're really talking about India and A-Pac and in India and A-Pac have been down, as David mentioned in his in his remarks.
But I would tell you that starting in Q4 of 2023, we actually started to see stabilization and in A-Pac and India. And obviously, we're hoping that that continues. It's still early days on stabilization, but we think we hit bottom sometime in 2023. And now we're starting to see see stabilized stabilization and maybe even slight improvement. And it's still bit early days to call it a trend. But yes, again, I think we're starting to see India and A-Pac come back a little bit.
Heather Balsky
Thank you.
Operator
We'll take our next question from Scott Wurtzel of Wolfe Research.
Scott Wurtzel
Your line is open and good morning, guys, and thank you for taking my questions here. I just wanted to go back to the synergy side and I appreciate the color on sort of what the low hanging fruit is on the cost side. So just want to maybe touch on what on the cost side is maybe go into require the most work.
And you also mentioned that revenue synergies aren't embedded in the $50 million. I'm just wondering also if there's anything on the cost side that isn't embedded in the $50 million of synergies? Thanks.
Scott Staples
Well, Scott, as we said, we think we can get at least $50 million, and we think we can do that over 18 to 24 months. Longer term, there's a lot of opportunity relative to combining fulfillment operations, looking at best practices, refining processes, utilizing AI. As we said, we're launching a $3 million AI. initiative relative to US criminal data. We hope the outcome of that will be something special that will also help drive productivity and reduce costs. So, you know, when you're putting two companies together like this.
There are a lot of opportunities. We're going to take best practices. We have a whole team of black belts on internally that we're going to be using utilizing to identify best practices and best processes. We'll be using some outside advisors to assist us with that as well. And we think there's just a lot of opportunity on a longer-term basis, but we're going to go really hard and fast at that first $50 million.
Scott Wurtzel
Got you. That's helpful. And then just wondering, I think you just mentioned it in your answer, but just wondering if you can expand on what some of these incremental investments in AI could look like as you sort of realized savings associated with the synergies?
Scott Staples
Yes, Scott, let me jump in there. I mean, I don't think we want to give you too much information for competitive reasons on what these projects are about.
But I will tell you in general, we are looking at all aspects of the business of where we can leverage AI and not only how it improves the candidate and customer experience and the offering, but where it potentially also can reduce head count.
And I think we've mentioned to you in the past or to others in the past of where we've already rolled out AINR. and our call centers and with our click chat call initiative that we announced a couple of quarters ago, which not only has improved our RC. SAT scores, but it has allowed us to reduce head count because people are clicking and chatting and with a payout chat bots that use a lot of AI, chat bots and things like that, but less less of the phone. And so we think there's a similar type of story across fulfillment on the US criminal side. But again, we're going to sort of keep the secret sauce on that, yes, to us, and we'll keep you posted as we actually roll out things.
Scott Wurtzel
Understood. Thanks, guys, and congrats on the deal again.
Operator
And once again, to ask a question, please press star one now on your telephone keypad. One moment while the queue, we have a follow-up from Shlomo Rosenbaum of Stifel. Your line is open.
Shlomo Rosenbaum
But I want to circle a couple of more in if you don't mind on Scan One of the critical areas in combining two companies that are background screeners is making sure you don't have a lot of client losses post the deal. And given the complexity of the integration of an acquisition that is close to your guys size and on all that's involved in that. How are you going to really minimize any client losses? And then I have a financial one for David and Shawn.
Scott Staples
A great question. And probably the most important question that we've been that we've been talking about. So I'll give you a couple of high-level things, but we are we are again, we're early days and we haven't yet mapped all this stuff out. So first of all, we are going to have a dedicated integration team. This is all they're going to do and we're going to staff it with some of our best people we're going to bring in third parties.
We're going to take and the advice of a lot of folks on this and probably as you know, from some of the history of this industry, some of the biggest challenges have been not in maybe the integration of operations or sales or any kind of the functions of the Company, but it's really been the technology integrations that have that have hit snags.
And I will tell you right now, we are we are going to take a very conservative approach on tech tech integration to minimize client loss. And we are not going to force scale, large customers onto platforms. They don't want to be on our technologies. They don't want it beyond. We've got we've got a what I would call a very theoretical and high level strategy at this point, which we will obviously start refining some.
Yes, literally starting tomorrow hum, but we have to obviously wait until close before we can actually get in and really do any of the heavy lifting and even some of the heavy planning and but in general, we're going to not going to work. We're not going to break a eggs on the on the customer side and because we're going to take a smarter approach to technology.
Shlomo Rosenbaum
Okay. And then just from a financial side, David, when I do the math using kind of end-of-year 23 numbers in the assumed $50 million of synergies, I'm getting closer to 4.5 times leverage. Is the difference on the assumption of free cash flow from both companies for another two plus quarters?
David Gamsey
That's right. So it all comes down to timing. If it closes June 30, it closes September 30. Both companies saw a significant amount of cash quarter over quarter, plus there'll be a minimum amount of cash on the balance sheet of at least $150 million, maybe up to $200 million at closing. So from a net leverage perspective, that will drive that down even further.
Shlomo Rosenbaum
Okay. Thank you.
Operator
I see no further questions in the queue. I will now turn the call over to Mr. Staples for closing comments. Please go ahead.
Scott Staples
Yes, thank you, operator, and thank everyone for your time this morning and for your ongoing support. Take care.
Operator
Thank you. This concludes the First Advantage Fourth Quarter and Full Year 2023 earnings conference call. And webcast. Thank you all for your participation. At this time, you may disconnect your lines and have a wonderful day.
