Sterling Check Corp. (STER) Q4 2021 Earnings Call Transcript

Sterling Check Corp. (STER 0.33%)
Q4 2021 Earnings Call
Mar 02, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Sterling fourth quarter 2021 earnings call. My name is Victoria, and I'll be coordinating your call today. [Operator instructions]. I will now pass over to your host, Judah Sokel, vice president of investor relations to begin.

Please go ahead.

Judah Sokel -- Vice President, Investor Relations

Thank you, operator. Welcome to Sterling's fourth quarter 2021 earnings call. Joining me today are Josh Peirez, chief executive officer of Sterling; and Peter Walker, chief financial officer of Sterling. The slides we will reference during this presentation can be accessed on Sterling's investor relations website under news and events.

The slides will be posted at the conclusion of this call, and a replay will be made available on the website. After prepared remarks, we will open this call to questions. Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our recently filed final prospectus for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements.

Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued this morning. I will now turn the call over to Josh Peirez.

Josh Peirez -- Chief Executive Officer and Director

Thank you, Judah. Good morning and thank you for joining us. Sterling's fourth quarter was exceptional and continued the momentum we saw through the first three quarters of 2021. We delivered record financial results including 39% organic constant currency revenue growth, 57% adjusted EBITDA growth, and 114% adjusted EPS growth.

We are also very excited about our performance thus far this year. For 2022 we expect to generate revenues of $740 million to $755 million representing year-over-year growth of 15% to 17.5%. Adjusted EBITDA of $205 million to $212 million representing year-over-year growth of 14.5% to 18.5%, and adjusted net income of $112 million to $118 million representing year-over-year growth of 21.5% to 28%. Peter will discuss our 2022 guidance in greater detail but first I'm going to discuss our macro environment, 2021 accomplishments, and specific areas of focus for Sterling in 2022.

Starting with Slide 4, Sterling is the world's most trusted provider of background and identity verification services. The slide provides some key stats on our business that we discussed on our third quarter earnings call. Rather than repeat them now, I will call out two stats. First, our gross client retention rate was 96% for a full year 2021 and second, we are now serving more than 50,000 clients which speaks to the immense success we have had in winning new clients of all sizes and retaining them.

This success has been driven by our company's strategic focus over the past few years on client service, technology, and product innovation. Turning to Slide 5, Sterling operates in a highly attractive global market with a total addressable market of 16 billion as of 2020, growing at a 12% CAGR to 29 billion by 2025. Importantly the industry remains highly fragmented and the majority of this opportunity is outside of the U.S. where we have a leading position and continue to grow share.

I want to take a few moments now to touch on the macro environment and its effect in our market. In the fourth quarter of 2021 and thus far in the first quarter of 2022 our macroeconomic environment has remained strong, with the great resignation continuing and broad employee turnover remaining a key theme in the employment market. The number of U.S. job openings is at near-record highs and the pace of labor separations remained high as well.

Additionally, the secular demand drivers most relevant to Sterling continued to be robust and create strong tailwinds for comprehensive background screening solutions. These include the fast growth of the Gig Economy, the increasing use of contingent workforces and freelancers, and the increasing prevalence of remote work. We believe these trends existed before the pandemic and have accelerated over the past couple of years. They have led to a structural shift in the workforce with greater velocity and employee turnover persisting for years to come.

While there is clearly a lot of uncertainty in the overall economy related to inflation, rising interest rates, and geopolitical tensions, these items have not impacted the demand for our services and our underlying fundamentals remain strong. As a result, we believe our growth algorithm is sustainable and we will continue to outpace overall job growth. I'll now take you through some highlights of 2021 which was by all accounts an exceptional year for Sterling. Slide 6 lists some of the many accomplishments which our team delivered.

Firstly, our organic constant currency revenue growth for the full year was 39% and we expanded our adjusted EBITDA margins by approximately 600 basis points. I am particularly proud that every one of our verticals and regions grew by double-digits during 2021. Peter will provide more details on our results but I want to start off by thanking the Sterling team for executing on our strategy and driving this tremendous success. A second highlight from 2021 was the traction we gained in identity.

Identity remains a crucial part of our overall growth strategy and we feel it significantly distinguishes us from our background screening competitors. During 2021 we embarked on two key exclusive partnerships, one with ID.me and one with FINRA which will be pillars of our strategy as we continue to expand our identity offerings. Another critical accomplishment in 2021 was the expansion of our global footprint as we grew our international revenues by 55%. International revenues comprised 19% of our revenues during 2021, up from 17% in 2020.

As I outlined earlier, over half of the global addressable market for our services sits outside the U.S. and we plan to further capitalize on this opportunity for years to come. The fourth item worth highlighting from 2021 was our successful IPO on the NASDAQ Global Select Market in September. Going public enabled us to enhance our capital structure while continuing to invest in the organic initiatives driving our strong growth.

Our IPO was a proud moment for Sterling and I would like to thank our team who supported that successful process as well as our clients and partners for the continued support of our business. The final highlight I'll mention is our acquisition of EBI, a U.S.-based background screening provider which we expect to contribute over 30 million in revenues during 2022 with robust synergies expected as we integrate over the next 12-18 months. We view synergistic tuck-in M&A as a strategic lever to complement our organic revenue growth ambitions and we are enthusiastic to make EBI our first acquisition since MCC in 2018. EBI is highly complementary to our core strategy and accretive to our financial results and we continue to explore additional similar deals with a healthy and building pipeline.

Turning now to 2022, we see a lot of opportunity for continued success. Slide 7 lists four such areas including expanding identity, accelerating growth in key U.S. verticals, continuing our international expansion, and complementing our strong organic growth with M&A. I'll start with identity on Slide 8.

Identity services represent a tremendous growth opportunity for us and create significant differentiation as we are far ahead of our competition due to our strategic focus and innovation-based approach. To execute on this large opportunity, we have built a dedicated business unit called Sterling Identity. Let me frame the opportunity. The vast majority of existing background checks around the globe do not have identity verification included.

This alone represents a significant opportunity for Sterling as we believe identity should be the first step of any background screening process and can thereby increase our package density. Beyond making identity verification the first step in every background check we have a large opportunity to sell identity services on a stand-alone basis. Identity verification and digital identity services are fast growing and in high demand as governments and organizations struggle to keep up with the rise in identity fraud, increasing data breaches, and the shift to remote work. In 2021 we took two important steps toward capturing this opportunity.

First, we're excited about our exclusive partnership with ID.me, a best-in-class identity verification and digital wallet provider with over 70 million verified users by far the largest such network. Through this partnership, candidates need only verify their identities one and they are then able to reuse it as part of the largest trusted digital identity network in the U.S. Sterling and ID.me have combined to offer robust and configurable identity services including video chat and in-person verification options. This powerful platform is central to our go-forward strategy and includes many innovative solutions currently in development.

Second, our partnership with the FINRA solidifies us as a leading provider of biometric-based identity solutions with a specialization in the financial services space. We run the nation's only single-source national fingerprinting network available in all 50 states. Our state-of-the-art technology is custom-built, in-house, and provides a fully touchscreen and modern fingerprinting experience. Through our relationship with FINRA we now service over 3,800 financial services firms and 12 background check and fingerprinting providers, processing hundreds of thousands of annual transactions.

Even more importantly, this deal is a testament to our leadership in the identity space and is serving as a strong lead generation tool within the financial services industry which brings us to our next strategic priority for 2022, growing in key U.S. verticals. In 2021 we had several verticals and geographies which saw particularly outstanding results and we are excited about the market opportunities in many of them going forward. One such vertical I would like to spotlight today is financial and business services shown on Slide 10.

In this vertical we saw greater than 50% organic revenue growth in 2021 driven by robust base growth, cross-sell, upsell, and new customer growth. We touched on the FINRA partnership earlier which in just a few months since going live is already driving increased penetration and pipeline in the financial services industry. Our Fin-Biz vertical has built a strong reputation for best-in-class regulatory expertise. Customers in industries such as financial services must navigate complex and evolving regulatory regime and our Fin-Biz team is highly proficient in the rules to serve clients and maintain compliance.

This is especially crucial during the ongoing war for talent when labor turnover often leads to gaps in client service and regulatory knowledge. Moreover, many multinational companies are looking to simplify processes and consolidate global spend with best-in-class service providers. Our ability to navigate cross-border regulatory challenges creates a distinct competitive advantage that is helping us win and retain business. The Fin-Biz team exemplifies the success of our verticalized model and has built new solutions tailored to their clients.

One such example is our lien judgments and bankruptcy solution. With the implementation of new standards for public records a few years ago, all civil judgments and most tax liens were removed from consumer credit reports providing a challenge for financial institutions to obtain compliance information for risk assessment and reporting to FINRA. Using our solution Sterling's clients can assess risk associated with new hires and existing employees, helping determine whether there is a need to disqualify them from performing securities-related functions or establish supervisory control for safety and security. The Fin-Biz team's relentless commitment to identifying and covering gaps in clients' workflows has driven significant success in winning and retaining customers.

Their customer retention rate is even higher than the 96% rate for Sterling as a whole and the pipeline for new wins remains robust. Our Fin-Biz vertical is only one example of the success of our verticalized model and we look forward to sharing spotlights on future call about other U.S. verticals displaying similarly great momentum. Our next 2022 strategic priority is expanding our global scale which we show on Slide 11.

I pointed out earlier that the majority of our large and growing TAM sits outside the U.S. The international market is even more fragmented and less penetrated than in the U.S. making international expansion a compelling opportunity for us to pursue. A key driver of this opportunity is increasing adoption of background screening outside the U.S.

Many international markets are only just beginning to view employment background checks as critical components of their hiring function which presents tremendous upside for our business. We believe we are already the leading global background screening provider. In 2021 we expanded to 19% of revenues outside the U.S. with 55% year-over-year revenue growth, including 44% organic constant currency revenue growth.

We see opportunity to continue growing our market share outside the U.S. The secret to our success internationally is that we empower local leaders and teams to make decisions that serve local customers. In this way we deliver the boutique feel of a local firm while also delivering the scale and capabilities of a leading global player. This duality underpins our ability to win both local deals overseas as well as large global deals serving multinational companies.

The final strategic focus I will discuss is M&A. Our priority remains organic revenue growth through share gains and market growth but we see a compelling opportunity to complement our strong growth with M&A. We have the appetite and capacity for deals of varying size and type, but we are most focused on tuck-in deals that complement our core strategy with upside from synergistic integration. EBI is a great example of this approach and is highlighted on Slide 13.

EBI is a high-quality background screening provider with a strong reputation for client service and a commitment to compliance and I can say that we are even more impressed with the team now that they have joined the Sterling family. The EBI deal grows our share in key U.S. verticals with a blue chip enterprise-focused client base. Moreover, EBI's client base is highly diversified with minimal single client or vertical concentration.

From a financial perspective, we expect the acquisition to be accretive to our results as we paid a reasonable price well within our M&A tuck-in framework and we see robust synergy potential for migrating clients to our platform and fulfillment. Integration will take 12 to18 months. Once that process is complete we expect EBI's revenues to flow through at 45% to 50% rate similar to our underlying incremental margins. Our pipeline for attractive tuck-ins is deep and growing and we hope to announce additional similar deals during 2022.

Additionally, we expect an accelerating pace of consolidation in our industry over the next couple of years as smaller competitors struggle to compete and are more macro sensitive compared to scale of providers. We plan to be a significant player in that consolidation. In conclusion, we enter 2022 with a lot of enthusiasm, confident in our ability to execute organically and to build for the future with great strategic opportunities regardless of the direction in which the economy goes. And now I will hand it over to Peter Walker our CFO to take you through our financial results and 2022 guidance.

Peter?

Peter Walker -- Executive Vice President and Chief Financial Officer

Thank you Josh and good morning everyone. Turning now to an overview of our most recent quarterly performance on Slide 16. We reported company record quarterly revenues of $174 million, this was a 35.1% increase, compared to the fourth quarter of 2020 including 32.3% organic constant currency revenue growth, 2.3% contribution from M&A, and 50 basis point benefit due to the foreign currency translation. The organic revenue increase included 23.1% of base revenue growth including cross-sell upsell net of attrition and 9.6% of new customer growth.

Revenue in our U.S. business grew 36% compared to the fourth quarter of 2020 we saw a double-digit revenue growth in all our industry verticals with particularly exceptional results in our industrials and Gig verticals. Revenue in our international business grew 17% on an organic constant currency basis during the fourth quarter. The quarter's strong results included some expected slowdown from earlier in 2021 due to lapping strong growth in 4Q '20.

Due to our strong topline results and attractive incremental margins, fourth quarter adjusted EBITDA was $44 million, representing a 58% year-over-year increase compared to the fourth quarter of 2020. Adjusted EBITDA margin for the fourth quarter of 2021 was 25.4%, a 370 basis point expansion from the fourth quarter of 2020. This was the company's fourth consecutive quarter with adjusted EBITDA margin expansion of greater than 300 basis points proving that our net profitability scale is revenue scale. 4Q incremental margins were tempered a bit by a full quarter of public company costs and EBIs lower margin in December.

The impact to margins from public company costs and EBI will continue during 2022 but should moderate over the course of the year as we lap our September IPO as well as integrate the EBI acquisition and realized cost synergies. We had adjusted net income of $22.6 million or $0.23 per diluted share in the fourth quarter of 2021, representing year-over-year growth and adjusted earnings per share of 130%. This growth is primarily driven by strong year-over-year growth in revenues and operating income. Our effective tax rate in the fourth quarter was 21% due to several discrete items which benefited us.

We expect the rate to return to our normalized 26% rate for 2022.Slide 17 shows our financial results for full year 2021. We had an excellent 2021 in all facets of our business with record levels of revenue and profitability and the strong results have continued thus far in 2022. For the full year 2021 we reported revenues of $642 million reflecting a 41.4% increase, compared to 2020 including 39% organic constant currency revenue growth, 1.7% benefit from foreign currency translation, and 70 basis point contribution from M&A. The organic revenue increase included 28.4% of base revenue growth including cross-sell upsell net of attrition and 12.3% of new customer growth.

Notably, our investments in technology and product coupled with our best-in-class turnaround times and customer-first focus drove a 200 basis point improvement during 2021, and our gross retention rate from 94% to 96%. Revenue in our U.S. business grew organically by 38% compared to 2020. We saw a broad-based strength across industry verticals with particularly exceptional results in our tech media and our Fin-Biz verticals as we executed our growth playbook and the U.S.

economy benefited from strong macroeconomic factors. In recent years we have been strategic in selecting high-growth verticals with significant opportunity for our business. We saw those efforts pay off during 2021 and expect this momentum to continue into 2022. Approximately 90% of revenue was generated outside of the U.S.

in 2021, compared to 17% of revenue generated outside the U.S. in 2020. International revenue grew 44% on an organic constant currency basis during 2021, demonstrating a growing international presence as Josh discussed. We saw double-digit organic constant currency revenue growth in all three of our international regions.

Adjusted EBITDA for the full year was $179 million, representing a 79% year-over-year increase compared to 2020. Adjusted EBITDA margin for the year was 27.9%, a 590 basis point expansion from 2020 with incremental adjusted EBITDA margins of 42%. 2021 was a great demonstration of an operating leverage in our business as we benefited from strong revenue growth as well as automation and cost optimization initiatives which have streamlined our cost base. For 2021 we had adjusted net income of $92 million or $0.97 per diluted share representing year-over-year growth in adjusted earnings per share of 223%.

This growth was driven by strong year-over-year revenue growth and improved operating leverage as well as improvements in D&A and interest expense. As seen on Slide 18, our average organic constant currency revenue growth has been 17% since the beginning of 2020. Looking at our profitability trends on Slide 19, our adjusted EBITDA growth has been 44% since the beginning of 2020, following a similar path to revenues. This data demonstrates that we have been organically growing on average at or above the 9% to 11% framework with robust margin expansion since we launched our new strategy three years ago.

Turning to Slide 20. We have generated free cash flow in 2021 of $84 million, normalized for one-time cash non-operating charges related to the IPO. This was an increase of $64 million or 328% over 2020 that was due to strong revenue growth as well as permanent expense reduction implemented during 2020. Our year-end 2021 net leverage was 2.6 times net debt to adjusted EBITDA, squarely inside our two to three times net leverage target.

We ended the year with total debt of $510 million and cash and cash equivalents of $48 million which reflects the use of $100 million most of which we received from the IPO to pay down our first lien credit facility as well as $67 million to acquire EBI. Let's now turn to Slide 21 to touch on our capital allocation priorities. First, we remain focused on internal investment opportunities, new product development, and other projects that would increase organic growth and continued improvement in operating leverage through robotics, process automation, and vendor network optimization. Second, we have a robust pipeline of acquisition opportunities.

We are primarily focused on targets that are U.S. tuck-in similar to EBI or provide us with increased scale in existing international markets or expanded into new geographies. And finally we are committed to maintaining a strong balance sheet with a targeted long-term leverage ratio of two to three times net debt to adjusted EBITDA absent any temporary variations as a result of potential future scale of acquisitions. On Slides 22 and 23 we provide our guidance for 2022.

For 2022 we expect to generate revenues of $740 million to $755 million, representing year-over-year growth of 15% to 17.5%. Adjusted EBITDA of $205 million to $212 million representing year-over-year growth of 14.5% to 18.5% and adjusted net income of $112 million to $118 million representing year-over-year growth of 21.5% to 28%. As shown on Slide 23, our guidance includes organic constant currency revenue growth of 10% to 12%. We're assuming 5% to 5.5% contribution from the acquisition of EBI and no material impact from the fluctuation in foreign currency.

2022 will continue the notable strength we displayed during 2021 albeit at a naturally more moderate pace given that we will be growing over a year a 41% growth. Our 2022 organic constant currency revenue guidance of 10% to 12% is above our long-term framework of 9% to 11% per year. We are confident in achieving these 2022 targets because of our encouraging client conversations, new wins coming online during 2022, and our deep pipeline of prospects. We expect strong year-over-year growth throughout the year but forecast 1Q 2022 to have our strongest growth rate as we are comping up our lowest revenue quarter in 2021.

Based on what we've seen to date we expect revenue growth for the first quarter of 2022 to end up solidly above the high end of our guidance range which is why we have listed our full year organic revenue growth guidance above the typical 9% to 11% range. Turning to margins our 2022 guidance implies an adjusted EBITDA margin of 28% at the midpoint which would be in line with 2021. 2022 underlying margin expansion of at least 100 basis points is needed by the absorption of three quarters of public company costs and acquisition of lower margin EBI business prior to full integration. The year-over-year impact of margins of public company costs in EBI will be felt most at the beginning of the year but should steadily alleviate as we go through 2022 and benefit from lapping the IPO plus EBI cost synergies.

We currently expect Q1 to be our lowest margin quarter of the year with approximately 25% margins. Finally turning to our adjusted net income growth guidance of 21.5% to 28%, we will benefit this year from reduced interest expense and D&A which should drive strong growth to the bottom line well in excess of our revenue and adjusted EBITDA growth. We are encouraged by the level of leverage in our financial model, driving strong adjusted net income growth during 2022 even as adjusted EBITDA margins remain similar to 2021. To further help with your modeling of 2022, we're assuming capex of approximately $18 million, stock compensation expense of approximately $23 million, tab transformation and EBI integration costs of approximately $16 million, interest expense of approximately $27 million, P&A net of intangible amortization of $26 million, and effective tax rate of 26% and diluted share count of $101 million.

I will close our prepared remarks with our long-term targets on Slide 24. As we mentioned during our 3Q 2021 earnings call, over the next three to five years we are targeting an annual organic revenue growth rate of 9% to 11% with adjusted EBITDA margin ultimately expanding to 29% to 32% or more over that period. We have also now added a long-term target for annual adjusted net income growth of 15% to 20% per year. We're thrilled with the trajectory of our company and look forward to sharing that success with you as we execute on our strategy for years to come.

That concludes our prepared remarks. At this time, operator, please open up the lines for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions]. And our first question comes from Toni Kaplan from Morgan Stanley. Please go ahead.

Toni Kaplan -- Morgan Stanley -- Analyst

Thank you so much. It sounds like the labor market conditions have been really strong, just wanted to understand what is sort of built in to the guidance, is it really a continuation of current trends or some sort of reversion to more normal levels, and just help us assess the conservatism there and what risks do you see to sort of that current strength continuing?

Josh Peirez -- Chief Executive Officer and Director

Hi. Good morning, Toni, and thanks for the question. It's Josh. So I think our assumption is that there's going to be a sustained level of job churn and there are near record levels as I mentioned in my prepared remarks of open jobs remaining, not just in the U.S.

but really in many, many markets around the globe. So even if that were to be muted a bit through the year, we think that our guidance is well in line with covering for that. But we do expect the levels of job churn to actually continue into the future at an elevated rate from before the pandemic and we don't see that returning to those lower levels. And we talked about that on some previous calls but just looking at the way Gen Z, millennials, others look at staying in jobs and think about their careers, looking at the opportunities around the remote work and people being able to more easily get new jobs, switch jobs, do multiple jobs with Gig work, those we think are demographic changes that will continue for years to come.

Probably not at the same level that we saw last year or that we're seeing right now but at levels that are certainly high enough to support our long-term guidance that we have provided.

Toni Kaplan -- Morgan Stanley -- Analyst

Great. I wanted to ask about international as well. Can you just talk about --are you seeing a little bit of different mix versus the U.S. in terms of where your growth comes from, whether it be taking share market growth or upselling and when you think about like Europe and APAC, for example, is competition there more regional or local focused, just sort of who are the main competitors that we should be paying attention to there? Thanks.

Josh Peirez -- Chief Executive Officer and Director

Great. Thanks, Toni. So I think as I mentioned in my prepared remarks in last call, we just really love our position in the international markets, where we have a skilled team and a skilled business in each of the three regions that we primarily operate in today; Canada, EMEA, and Asia Pacific. And we've been very thoughtful about how we're targeting and investing in those markets.

And we are growing share relative to competitors, and taking wins away from them both local and global competitors, frankly, in those markets. Generally, for the local businesses that are the majority of our business internationally, we're taking those from local competitors or they are just coming online and doing background screening for the first time. Because as we mentioned, these markets are much less mature in our industry than the U.S. market, which has been doing background screening for an extended period of time.

We also are seeing great success in the global Gig economy outside the U.S. where we think we are the market leader by far. And so we are seeing significant wins there where it is often not from competition, it's just replacing either in-house solutions or their first time going and doing the screening. We also see good base growth and good upsell cross-sell in these markets.

So we're very excited about the international opportunity and we do continue to expect to see it be a good growth driver for us going forward.

Toni Kaplan -- Morgan Stanley -- Analyst

That's great, and congrats on the really strong results.

Josh Peirez -- Chief Executive Officer and Director

Thank you so much, Toni.

Operator

Thank you Toni for your questions. Our next question comes from Shlomo Rosenbaum. Please go ahead. Your line is open.

Shlomo Rosenbaum -- Stifel Financial Corp. -- Analyst

Hi. Thank you very much for taking my questions. Hey Josh, I thought maybe I can ask you a little bit about the EBI acquisition. Can you talk about -- over the period of 12-18 months of integration how should we think about the EBITDA contributing to 2022? And then, just in general, how many acquisitions are there like this, is this kind of unique, or is this one where you could repeat it because it looks like if you look out like two years or something, you're -- on a synergized basis you're going to be getting this thing at like four times EBITDA or below?

Josh Peirez -- Chief Executive Officer and Director

Thanks very much for the question, Shlomo. It's good to talk to you. So I'm going to make a couple of comments on EBI and then I'll let Peter walk through some of the math for you to think about for this year in a little more detail. So first of all, we're extremely pleased with this acquisition, it was definitely one of the targets we had at the top of our list for the last couple of years.

And we were very pleased when Rick did reach out, the former owner, and said he was finally ready to sell the asset. I think our perspective is that there are actually a lot of companies that look like this today, both in terms of this size, slightly bigger, slightly larger. And also, we believe that there are a number of small players that we're starting to see consolidate and roll up themselves to get to this size. So we actually think there will be a strong pipeline for the next few years of these deals and as I mentioned in my remarks, we do think that the consolidation we're seeing that accelerate and we plan to be at the front end of helping that happen, and taking advantage of that, to complement our strong organic growth.

And I think that our view is these do ultimately drops through at our long-term rate of 45% to 50% based on what we're seeing, and we expect to get to that, as we fully synergize. The synergies are largely accomplished, not entirely, but largely accomplished by us taking these clients and putting them onto the Sterling platform. The moment we do that our fulfillment engine goes through when we get our better gross margin and we stop paying the technology costs to run the platform that we acquired, which in this case is a third-party platform. So it's just literally dollars out the door to a third party that go away as soon as we finished migrating those clients.

In terms of the 12 to18 month timeline, that is probably longer than what we would normally think of for an acquisition of this size. And the reason for that is a lot of the work is similar to the transport work that we're already doing in our last phase of project Ignite. So we have to work the EBI transports in a long whip, our Project Ignite work. And so we'll come back and talk more about that in our first quarter call and give you more specificity of exactly when we think we'll finish the EBI work and if that has any impact on Project Ignite, but right now, we think it's safe to say that we'll get to that full synergy rate in 12 to 18 months.

In terms of how to think about what might or might not be flowing through and the guidance we've provided for this year, let me turn it to Peter to give you some of those details Shlomo.

Peter Walker -- Executive Vice President and Chief Financial Officer

So hey, good morning Shlomo. As we shared with you adjusted EBITDA margin guidance for 2022 is going to be 28% this year. We expect that would be 100 bps or more if it wasn't for the EBI acquisition and public company costs. And that's because the EBI acquisition from an adjusted EBITDA margin will be operating lower than the $0.45 to $0.50 that it will operate at when it's ultimately integrated.

Shlomo Rosenbaum -- Stifel Financial Corp. -- Analyst

OK. And then can you give an update just to where you stand with Project Ignite and are you on pace to finish it in the timeline you wanted and when do you expect to finish it?

Josh Peirez -- Chief Executive Officer and Director

Yeah. Thanks, Shlomo. So at this point, we remain on target with Project Ignite. Peter shared sort of a combined technology costs related to the project as well as some of the EBI work in his prepared remarks.

I think the only thing we'll say and I'll come back on this in the next quarter call is, given that we can have some really good synergies potentially faster from EBI, it's possible we'll choose to restack some of the work to front end the EBI work, which could lead for the transport project piece of Project Ignite to go a quarter or two longer. But we're not in a position to tell you that yet. We haven't factored that into our numbers yet and we'll come back, I think by the first quarter call, we should have some good visibility into how we've chosen to layout that work.

Peter Walker -- Executive Vice President and Chief Financial Officer

And the cost of Project Ignite, still within add-backs, because they are non-recurring, closing down platform costs. But the other benefit to think about that you're not seeing is that we do end the project, we do expect capex to go down by about 30% as will just be spending less capitalized dollars on that.

Shlomo Rosenbaum -- Stifel Financial Corp. -- Analyst

Thank you.

Operator

Thanks, Shlomo for your question. Our next question comes from Andrew Nicholas from William Blair. Please go ahead. Your line is open.

Trevor Romeo -- William Blair and Company-- Analyst

Hi. Good morning. Thanks. This is actually Trevor Romeo in for Andrew.

Appreciate you taking the questions. First one was just kind of thinking about your 2022 revenue guidance. I think you mentioned a deep line of prospects for new logos, just kind of wondering if there any particular areas where that pipeline for new logos is particularly strong, whether that's kind of by vertical, geography, client size, any characteristics where you're seeing particular strong influx of potential new clients?

Josh Peirez -- Chief Executive Officer and Director

Thanks, Trevor. Good to talk to you. So we don't usually break down our pipeline, specifically, just because again, we like to focus on the business, we know when we have it. But our pipeline is strong across all of our verticals and all of our regions right now.

And I think it speaks to the fact that we made deliberate choices, in terms of what markets to focus on and what verticals to focus on because we believe that they are all the markets and verticals where we have solutions that are competitively advantaged and give us a right to win the business. So, we're very encouraged with our pipeline really across the board.

Trevor Romeo -- William Blair and Company-- Analyst

OK. Great. Thanks. That's helpful.

And then just kind of wondering how the inflationary environment is impacting Sterling, kind of both from a cost perspective and a pricing perspective, are you seeing any increasing I guess, accelerating cost increases right now and if so, how confident are you in the ability to pass those along in the form of higher prices? Thank you.

Peter Walker -- Executive Vice President and Chief Financial Officer

Yes. So I'd say in terms of delivering our products and services, we've been able to manage quite a few of the price increases. So we're not seeing a significant increase in costs related to it because I would say that we are seeing some marginal wage inflation in our labor costs. It sits in our cost of revenues and in our opex.

Trevor Romeo -- William Blair and Company-- Analyst

Great. Thanks again.

Josh Peirez -- Chief Executive Officer and Director

Yeah. Thanks so much, Trevor.

Operator

Perfect. Thank you so much for your question. And our next question comes from George Tong from Goldman Sachs. Please go ahead.

George Tong -- Goldman Sachs -- Analyst

Hi. Thanks. Good morning. Your midpoint of guidance assumes minimal EBITDA margin expansion in 2022.

Acknowledging EBI has about a 100 basis point drag to the margins this year, can you discuss overall puts and takes that may impact margin performance for 2022?

Peter Walker -- Executive Vice President and Chief Financial Officer

Yeah. Hey. Good morning, George. Nice to hear from you.

So if you think about let's take the midpoint of the organic growth range of 11%, if we think about that call it $71 million of revenue that we'll put on in 2022, that's going to have a flow-through rate of call it 40% to 45%, a little bit muted off the 45% to 50%, because of the wage inflation components we just covered. And so based on that, we would have seen EBITDA margin expansion of 100 basis points or more. So call it 29 plus in 2022. But what we're seeing is a drag really from two things, one is EBI is not operating yet at the 45% to 50% drop through which they will at full integration which will occur, call it 12-18 months, and then also the one-time lift from three-quarters of public company costs.

George Tong -- Goldman Sachs -- Analyst

Got it. You've known, owned EBI now for several months, can you discuss how EBI's growth compares with Sterling and talk about progress with synergy realization?

Josh Peirez -- Chief Executive Officer and Director

Yeah. Thanks, George. This is Josh. Thank you for the question.

Good to talk to you. So I think that the main comment, I would say is that EBI growth is strong. I think that it's something that we weighed in looking at the business. One thing I will note is that when we model acquisitions, we don't model new business growth as part of that acquisition, because of course, that's pipeline that we also could have, and that we can count on.

So just looking at their kind of base growth, cross-sell upsell, it was a little bit slower than what we would have seen on the Sterling side. However, we think that we have a great opportunity to improve the cross-sell upsell within the EBI base, because we have a lot more products that we can add on, and the ability to support incremental divisions of some of their clients that they were not able to support, given the characteristics of those. So we're very excited and believe that it is going to be consistent with our growth algorithm and not a drag on that over time, which is what we really like about these synergistic U.S. tuck-ins.

In terms of progress with integration, we feel really good that the team is kind of integrated with us, and we're working well. We've got a good team now working on moving the clients over and as the clients move, individual team members are able to move into our verticals as well with their clients. So that's part of the work that will go on through the year and we'll be able to use some of the great talent that we found at EBI to fill open positions at Sterling, that like everyone else, we've been out there recruiting and trying to bring in people. So, that is part and parcel of our synergy case and we think that the progress thus far is exactly where we would have wanted it to be.

George Tong -- Goldman Sachs -- Analyst

Very helpful. Thank you.

Josh Peirez -- Chief Executive Officer and Director

Sure. Thanks, George.

Operator

Thank you so much, George, for your question. And our next question comes from Andrew Steinerman from J.P. Morgan. Please go ahead.

Andrew Steinerman -- J.P. Morgan -- Analyst

Hi, Josh. Two questions. The first one is on recruiting. In general, when I look at open positions in the background check industry, there's just a lot of open positions right now, particularly maybe at the $50,000 level area.

My question is, how contingent is it for you to achieve your guidance to hit your recruiting goals internally? And how has the recruiting and retention been at the beginning of the year relative to plant? And I have one more question.

Josh Peirez -- Chief Executive Officer and Director

OK. So first of all, thanks, Andrew, and good to talk to you, and appreciate the question. So a couple of comments. First, I think that long-term for us, it is critical that we're able to fill these roles, because many of those positions that you're seeing at those levels are ultimately for client support, and to be able to manage the clients to the level of service that they've grown accustomed to with Sterling.

For us, we believe the EBI team helps us to fill some of those gaps immediately, but we do need to go and fill those. That will not impact our guidance for this year, but long-term health of the business, maintaining those retention rates, we've given the kind of long-term buildup to that in the kind of 95% to 96%. Keeping that requires that level of service. For us to keep hiring is actually in our captive entities in Asia, both in India and the Philippines and other places where most of our fulfillment resources sit.

And there, we've actually been able to fill our open roles successfully, and bring people in and also when necessary to use vendors, in order to augment given the very large volumes that we've been seeing. And we in our guidance and otherwise, we are planning and expecting to be staffing for the peak earlier than we normally do because we keep seeing such strong volumes. We do have very, very high employee engagement and employee net promoter scores, which we think will help us with retention. But we do see a lot of the trends that many people see in terms of job churn and being able to recruit.

So I think, Andrew, we're not worried about it from hitting our guidance for this year, but longer term in order to maintain our growth numbers, which really is around the retention rate, we do need to make sure we fill those roles as we have them posted.

Andrew Steinerman -- J.P. Morgan -- Analyst

OK. Great. My other question is about package density. It's such a tight labor market here for employers and I just feel like perhaps employers might be hesitant to increase their package density meaning to make more factors in their background check because that will weed out more candidates.

And so my question is, as you look at 2022, do you feel like package density will go up from 2021 and it is -- just a suggestion, a sensitivity to employers that you're seeing that they might be hesitant to increase package density because it decreases their pool of candidates?

Josh Peirez -- Chief Executive Officer and Director

So Andrew, thank you very much for the question. And I'm going to answer it in a few parts. Let me just start with what we saw last year, which we've given the best metric we've given for package density, and it's not an exact apples to apples, is our cross-sell upsell metric with a 4% to 5% annual growth whereas last year we saw 8% so, almost double the low end of that and substantially above. So we're very, very pleased with that.

So we did see package density increase, in addition, to cross-selling increase last year. In our guidance this year, and again, we've raised our range from our long-term targets to start the year, we do expect to continue to see each of our elements potentially overperform and that's part of why we're so optimistic about our ability to hit our guidance this year so that we raised it. So that's sort of just want to start with a general answer to say, we have built-in at a minimum, our four to five long-term target, with some upside to that in the cross-sell upsell, which speaks to our expectations on package density as a whole. In terms of what we're likely to see going forward and your hypothesis, two things; one, I have not seen a single client shrink the density of their package and take more risk in order to hire.

The main thing for them is speed, right. So as long as the background screen is occurring within the timeframes they need, so they don't lose the candidate along the way, they are continuing to really, at least at the minimum, do the same background screening that they were going to do. So that is a trend. That is a trend where we're seeing and expect to keep seeing.

The thing that's the long tail on a background screen is often the drug screening. The people who are doing the drug and health screening are required to do so and they're not getting rid of it so that would be the thing you'd look at first. We're not seeing that trend and don't expect to see it. The last point I would make, we think on the package density side, identity in particular, and as I said in my remarks, adding identity at the front end of a background check that actually speeds up the background check and makes it more accurate and will allow them to more quickly weed out candidates that they don't want.

So we actually think that provides a tremendous opportunity for us to increase package density, while actually helping our clients to bring in their candidates more quickly and effectively. So hopefully that helps give you some color on what we're thinking.

Andrew Steinerman -- J.P. Morgan -- Analyst

That's well said, Josh. Thank you.

Operator

Thank you so much for your question. Our next question comes from Jason Celino from KeyBanc Capital. Please go ahead.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Great. Thanks for fitting me in. First, with the FINRA partnership, I think you initially outlined the potential for this partnership to drive demand for incremental wins for the Sterling platform. I think in your prepared comments you said that it was already driving some pipeline, maybe can you just talk about some of the trends you're seeing there?

Josh Peirez -- Chief Executive Officer and Director

Yeah. First good to talk to you, Jason. Thanks for the question. So we have seen a significant increase in our pipeline in the financial services sector, in particular coming out of the FINRA partnership.

They know that we're processing their fingerprints for them, even if they were currently giving them through a competitive background check provider or other fingerprint channel and I mentioned, we're serving a number of those now through this partnership, where we are basically sitting behind the scenes and processing for them, like a toll booth, which is a wonderful business to be in from my MasterCard days, I just love those kinds of businesses. So that's very attractive to us. But then the clients are saying, gee, if I'm already processing with you on the fingerprint side, let's see what else you have to offer. And so we've seen a really robust pipeline there.

Some certainly in the large enterprise banks, where they realize the importance of that relationship. But we're actually really seeing it enable us to penetrate mid and smaller-sized banks, where we typically have not had a significant amount of business, and they're now seeing a reason to do business with us, which is great. So we see a robust pipeline building. We'll provide more color on that as we close those deals and bring them online in future calls.

Jason Celino -- KeyBanc Capital Markets -- Analyst

OK. Excellent. And then maybe a quick clarification question for Peter. I think, in the guidance commentary, you said that Q1 growth would be at the high end of the full year guide.

If we kind of think about the rest of the year, should we think of the deceleration beginning in 2Q is maybe just a function of the growth comps?

Peter Walker -- Executive Vice President and Chief Financial Officer

That's correct. So, we're comping over a low 1Q 2021 so that's why we're seeing such a large growth rate thus far and 1Q 2022 we do expect the rest of the quarters to be within the range of guidance that we gave you of 10 to 12.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Perfect, thanks.

Josh Peirez -- Chief Executive Officer and Director

Thanks, Jason.

Operator

Perfect. Thanks, Jason for the question. And our next question comes from Andre Childress from Baird. Please go ahead.

Andre Childress -- Robert W. Baird and Company -- Analyst

This is Andre Childress on for Mark Marcon. Congratulations on a strong quarter and thank you for taking our questions. So I just wanted to follow up on a question earlier about employment trends. What did you see in Q4 and what are you seeing in Q1 regarding the speed of hiring, I know, Q4 has some seasonality but how did the speed of hiring compare to what you were internally expecting regarding the seasonality, and is there a pace of acceleration as it kind of stayed the same or maybe slowed down a bit it, just some color there'll be very helpful?

Josh Peirez -- Chief Executive Officer and Director

Yeah. So thanks, Andre for the question. It's Josh. Let me try to unpack your question in two different ways and then we can see if that answers it.

So first, in terms of speed of hiring, in terms of like clients, like how much hiring they're doing. We don't think anything has been kind of pulled forward if that's the question. We think that our clients are hiring within their plans. They are trying to bring people onboard faster, simply because they have so many open roles and they really need to sell those seats.

And we are seeing that trend continue in Q1. However, what we're seeing, which we think is a benefit is that they have to -- they have to go through the process often with more than one candidate in order to fill it because candidates do have multiple choices of jobs that they can choose, in many cases on these lower-end jobs, which drive the majority of our volume. And so, they have to move fast but they also are not going to get 100% of the people who even get through their background screening and are offered the opportunity to come and work. So, I think that in some ways, that does mean that the roles get filled slower, simply because they don't get their first choice in many cases, but they do run multiple background screens then when that's the case.

So I think that hopefully answers your question, but it's both in terms of there is a need to fill roles faster, because there are so many open, and people are trying to do that. But in the end, because they are losing candidates. If you asked me what's the average time to hire from somebody posting a role to getting them to start working? I don't know that that has moved materially over time. What we're seeing is just that it's harder for them to actually fill it but when they find people they are moving them through the funnel faster, but as an average, it's probably averaging out to where it was before.

Peter Walker -- Executive Vice President and Chief Financial Officer

And I would just add with 4Q being our record revenue quarter for the year, we really have seen a change in the business around seasonality where we don't expect to see that dip n 4Q that we used to see. And again, it's just because of a better spread of clients we have today and diversification. And then your other question on pull through. As we said, we're expecting first quarter of 2022, thus far, to be at the high end of the guidance, really demonstrating that we're continuing to see that performance.

Andre Childress -- Robert W. Baird and Company -- Analyst

Great. And Josh, on that first point you made, is there any sort of metrics you can provide in terms of like before the pandemic you kind of -- might have seen 1.1 background checks per successful hire because of kind of like that employee reneging? Or -- and maybe that's now 1.4, 1.5. Or do you have any metrics to provide? Because I would imagine it would make sense that there's going to be a lot more employees getting multiple offers and taking one of the four or five offers they may have and that could provide a lot more screens per hire for you guys.

Josh Peirez -- Chief Executive Officer and Director

Yeah. It's a great question. I don't have hard data that I can give you. We'll look to see what we can find either publicly or from our clients and see if we can give you some metrics around that to help in the future.

Andre Childress -- Robert W. Baird and Company -- Analyst

Awesome. Well, thanks so much, and congratulations on the strong quarter.

Josh Peirez -- Chief Executive Officer and Director

Thank you so much.

Operator

Thank you so much, Andre, for your question. And our final question comes from Manav Patnaik from Barclays. Please go ahead.

Ronan Kennedy -- Barclays -- Analyst

Good morning. This is Ronan Kennedy for Manav. Thank you for taking my question. Just wanted to if I may unpack with regards to the tremendous opportunity ID identification verification, you have the differentiator in the ID.me offering.

I think we have previously talked about ID verification and post-hire monitoring being approximately 10% of the mix. Is that what it's still is and also I'm assuming but want to confirm that your guidance, even with the 10 to 12 above the typical 9 to 11 doesn't contemplate the ID.me contribution?

Josh Peirez -- Chief Executive Officer and Director

OK. Thanks, Ronan. It's Josh. So I think, first of all, your assumption is correct that our numbers do currently still reflect roughly 10% from the pre-hire identity and post-hire monitoring and onboarding type solutions.

And our guidance for 2022 does not reflect a change in that mix. But as we've said on previous calls, we do ultimately expect that mix to shift, particularly from what we're seeing with identity to become a higher than 10%. But that is not baked into our current assumptions and as soon as we see that trajectory shift in a meaningful way, we will share that with you.

Ronan Kennedy -- Barclays -- Analyst

OK. Thank you. And then just one last quick one, if I may please, in the competitive dynamic. Obviously, some insight into it based on what you've talked about, what you're seeing from new business wins, from a vertical international standpoint, and also the acceleration of consolidation in the industry.

Anything else you're seeing with regards to differentiation between yourself and the big three and then kind of the competitive dynamic with the more medium players like decisive and accurate, and then what you're seeing from check or hire and good hire if you're seeing, true disruption there or anything of that nature?

Josh Peirez -- Chief Executive Officer and Director

Sure. So I think you listed a lot of competitors, rather than going kind of one by one. I think what I'll say is that we like our chances versus everyone. And it's very much because of our vertical and regional strategy.

So typically, when we're talking to a client, we are able to talk their language in terms of the industry they're in not just our sales team, not just our service team, but our product team, our implementation teams, our technology teams. And that's why we've organized the way we have. And being able to do that locally around the world and in the various verticals that we serve, and I gave some detail on how that works with the financial and business services sector today, we think that allows us to unearth pain points that our clients are having because we're seeing it across so many. And to bring solutions to the clients in a way where we compete very effectively with the big players who are more generalized providers than we are because we're very verticalized in that way.

But it also allows us to compete with the boutique firms who may specialize in one industry or one vertical, like when you mentioned check or hire and so we like our chances there as well. And we have good win rates against all of them. I think my commentary more on the consolidation is I think it just gets harder and harder for some of the smaller and specialty players to compete over time, which will lead to the consolidation because of the scale that a business like ours is able to have and therefore, what we're able to do in terms of servicing the clients. But I will tell you our true secret sauce, we've got market-leading turnaround times, market-leading quality metrics.

We think our technology tools are the best. But in the end, we win because of our people. It is about that ability to speak to and work with the client at a very detailed level and that's why I highlighted the great work of the financial and business services team today but that's true in all our verticals and all our geographies and we look forward to sharing more about some of those on future calls. So hopefully that helps with your question Ronan.

Ronan Kennedy -- Barclays -- Analyst

Yes. Thank you.

Operator

[Operator signoff]

Duration: 67 minutes

Call participants:

Judah Sokel -- Vice President, Investor Relations

Josh Peirez -- Chief Executive Officer and Director

Peter Walker -- Executive Vice President and Chief Financial Officer

Toni Kaplan -- Morgan Stanley -- Analyst

Shlomo Rosenbaum -- Stifel Financial Corp. -- Analyst

Trevor Romeo -- William Blair and Company-- Analyst

George Tong -- Goldman Sachs -- Analyst

Andrew Steinerman -- J.P. Morgan -- Analyst

Jason Celino -- KeyBanc Capital Markets -- Analyst

Andre Childress -- Robert W. Baird and Company -- Analyst

Ronan Kennedy -- Barclays -- Analyst

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