HireRight Holdings Corp (HRT) 2022 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the HireRight Fourth Quarter 2022 Conference Call. Joining today's call is the company's President and Chief Executive Officer, Guy Abramo; and Chief Financial Officer, Tom Spaeth; and Andrew Hay, Vice President of Treasury and Investor Relations. (Operator Instructions)

I remind everyone that management will refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures is included in the press release issued today, which is available in the Investor Relations section of HireRight's website.

Also during this call, management's remarks will include forward-looking statements, including related to macroeconomic conditions, demand for the company's services and the company's technology improvement and cost reduction initiatives. 

It's now my pleasure to turn the call over to Guy Abramo. Mr. Abramo, please go ahead.

Thank you, operator, and good afternoon, everyone. I appreciate everyone taking the time with us today as we share our fourth quarter and full year 2022 results. To begin, I am very pleased that despite continued macroeconomic headwinds, we achieved strong results in 2022 and exceeded the guidance we provided on our third quarter earnings call. As we noted during that call, we observed a slowing trend in hiring volumes, which continued throughout the fourth quarter with many companies announcing staffing reductions or the delay in hiring driven primarily by a general nervousness on the economic outlook. Since that third quarter call, that apprehension has been confirmed with additional announced workforce reductions as well as national data, which showed an 11% reduction in hires in the fourth quarter versus the prior year. 

With that said, our revenue for fourth quarter was $175 million, down 12% versus the prior year period. It is important to note that the significant majority of the decline came from just 2 verticals, technology and government, both of which saw a 30% decline. Technology sector layoffs and slowing of replacement hiring is not surprising given the press we've all read for the last 6 months. In the case of the government sector, the slowdown appears to have more to do with difficulty in finding qualified applicants than an elimination of positions. Excluding these 2 verticals, Q4 showed a much more modest decline of 4% relative to the prior year. It's also key that despite the clear slowing of hiring in this macro environment, there continues to be relatively healthy activity, just not at the pace we experienced in the first half of 2022. 

As you have heard me say many times, quality and thoroughness in our investigations remain key selling points for us, particularly in our core markets that tend to be more demanding and our single global platform and automation initiatives continue to be differentiators. To leverage these strengths, our account management and go-to-market teams continue to focus on developing and expanding new global client relationships. During the quarter, we added 42 new enterprise customers, 2/3 of which are distributed across our 4 core verticals. 

Turning to profitability. Our adjusted EBITDA margin improved 70 basis points over the prior year period on adjusted EBITDA of $38.9 million. Despite the challenging demand environment, we were able to increase our gross margin over 300 basis points to 47.3%. This improvement was driven by increased automation, overall greater workforce productivity, rebalancing our labor mix by increasing our offshore presence and increased cost management of data providers. All these initiatives are focused on reducing the cost of delivering our services.

Turning to our annual results. We generated revenue of $807 million, a 10.5% increase from fiscal year '21. Our gross margin increased 169 basis points to 46%. Adjusted EBITDA grew 18% to $188 million and adjusted net income, including the effects of the reversal of our deferred tax asset valuation allowance increased 148% to $194 million from $78 million. These results reflect our ability to upsell, expand packages to existing customers and onboard domestic and international new logos won in previous quarters as well as our ability to continue to expand margins. Our industry leadership continues to be evidenced by the performance of our top-tier customer base in our core verticals of health care, technology, financial services and transportation. Annually, despite the lower Q4 hiring trends, our core verticals collectively grew 14% versus 2021, led by health care, which grew 23%. Transportation continued its rebound from pandemic lows, growing 17%, while financial services and technology grew 11% and 7%, respectively.

I would also like to highlight our recent announcement that we have entered into a partnership with Griffin HR, a Form I-9 and E-Verify compliance solutions provider that will allow higher edge customers to benefit from access to their interactive I-9 program dashboards, self-service reporting, customized workflows, auditing capabilities and real-time platform updates to help meet regulatory compliance requirements. As we previously stated, we are always looking for ways to bolster our services to offer our customers innovative background screening solutions. 

Lastly, I would like to provide an update on our platform and fulfillment technology initiatives. As the improving margin results validate, we are already benefiting from automation of our back-office fulfillment processes, a project that began in the fall of 2021. We have completed the build-out of the core platform and several key pieces of functionality. We are continuing to scale that new platform with our U.S. customers and will soon be extending it internationally. We will continue to enhance our overall delivery platform in a measured manner while keeping an eye on the broader macro environment. This will enable us to further control costs while making incremental improvements to automation, quality and profitability. We continue to expect modest financial benefits in 2023 from these initiatives and remain committed to overall margin expansion this year and in the foreseeable future. 

In closing, we're pleased with our results given the backdrop of the broader macro environment. And as is always the case, the macro cycle will run its course, and we will be well positioned as a leaner and more efficient organization as the hiring market picks up yet again whether this year or next. The underlying demand for talent remains strong and the underlying drivers of increased hiring of velocity, we believe, are here for the long term. In the meantime, we will continue to focus on expanding margins, upselling to existing customers, adding new logos and growing our core verticals through new global client relationships while continuing to manage costs. Our talented and dedicated teams focused on these principles gives us confidence in the long-term outlook and our ability to create significant shareholder value over time. 

With that, I'll turn the call over to Tom for a closer look at our fourth quarter financial performance and our outlook for 2023. Tom?

Thank you, Guy. Good afternoon, everyone, and thank you for joining our call today. As Guy mentioned, our fourth quarter revenue was $175 million, down 12% versus the prior year. This includes a 1% negative impact from foreign currency as well as a 30% decline from technology and government verticals. Excluding these 2 verticals and the foreign currency impact, revenue would have been down 3% versus the prior year. Revenue from new customers and upsells exceeded $13 million in the quarter, partially offsetting existing customer declines. 

Diving deeper into Q4 revenue, a few of the more resilient verticals were manufacturing and transportation, each of which posted modest gains in the quarter over the prior year. Additionally, health care and retail and hospitality showed only modest reductions compared to the prior year. Healthcare with its strong growth over the prior year is now our largest vertical. Our core 4 verticals of health care, technology, transportation and financial services continue to represent approximately 56% of total revenue. Looking at our geographic split, international revenue based on applicant location remained steady at approximately 15% of total revenue. International markets reported a similar decline to the U.S. and North America, India, which is largely driven by our multinational technology clients declined 22% in the quarter. Our customer retention and upsell and cross-sell continue to be strong. Gross retention finished the year at 95%, while net retention was 108% and our 2022 revenue was 100% organic. 

One of the clear highlights of the quarter was our continued margin improvement. For the quarter, we reported a 308 basis point improvement in gross margin to 47.3%, up from Q4 2021's 44.2%, demonstrating our ability to manage variable costs despite the revenue decline. Fourth quarter adjusted EBITDA margin improved to 22.2%, a 70 basis point improvement over Q4 2021, driven by our focus on managing data costs, optimizing our onshore and offshore labor mix and multiple ongoing operating efficiency projects. We continue to flex and rebalance our labor in response to the slower market demand. 

Total SG&A expenses in the quarter, excluding stock-based compensation and the prior year facility cease use charge of $9 million improved by approximately $1 million versus Q4 2021, driven largely by lower third-party fees and expenses. Adjusted net income for the quarter, including the tax valuation allowance reversal, increased 15% to $26.8 million, largely driven by our gross margin improvements. And lastly, adjusted diluted EPS for the quarter was $0.34, up from $0.33 in the prior year. 

Turning to a review of full year results. Revenue was $807 million, up 10.5% from the prior year led by our health care vertical, which was up 23% for the year and quickly followed by transportation, which was up 17%. As mentioned earlier, health care is now our largest vertical at approximately 16% of revenue. Gross margin showed a 169 basis point improvement for the year to 46%, primarily driven by operational labor efficiencies. For the full year, SG&A increased by $12.6 million. This annual increase is primarily due to higher personnel costs of $19 million and higher public company costs of $5.1 million. Employee costs were driven by investments in technology and go-to-market as well as higher stock comp and employee benefits. 

Public company costs consist of insurance, accounting, audit and legal fees. The increases were partially offset by a decrease in facility-related expenses of $14.9 million as we rightsized our real estate footprint in the prior year due to the increased remote work environment. We reported adjusted net income of $194 million, including our tax valuation allowance reversal, the tax valuation allowance reversal has no impact on our TRA calculations or the timing of payments. We expect to make our first payment in Q1 2024 following the filing of our federal tax returns. We do not anticipate paying any U.S. federal taxes in 2023 as we utilize the tax allowance. And our tax rate is based primarily on our international revenues and subject to change based on revenue mix. Even though market interest rates are significantly higher than Q4 2021, we benefited from a reduction in interest expense of $43 million, largely driven by our improved capital structure compared to a year ago.

I would also like to provide some color on our cash flow generation, liquidity, capital allocation and balance sheet. This is another area where we have delivered exceptional results with full year operating cash flow of nearly $108 million, up from $47 million in 2021. Excluding our technology initiative, operating cash flow from operations was $138 million. Free cash flow increased 172% to $91 million, an increase of $57 million versus 2021. At quarter end, we had no draws against the revolver and had approximately $700 million outstanding on our first lien loan. Our leverage ratio ended the year at 2.85x, an improvement versus the 3.7x at the end of 2021. We also ended the year with $162 million of unrestricted cash on the balance sheet, up from $111 million. This increase in cash was driven by our team's attention to driving working capital improvement. When combined with our revolver availability, we ended the year with over $300 million of liquidity. 

As announced in November, the company's Board of Directors approved a share repurchase program authorizing the repurchase of up to $100 million over a 2-year period. Through December 31, 2022, the company repurchased over 1.5 million shares of common stock for $16.8 million. We believe currently as we continue to evaluate cash allocation options, the repurchase program is the right use of our excess capital and reflects our confidence in our business prospects and our ability to generate ongoing positive cash flow. Looking ahead, we continue to see steady volume across almost every vertical, however, lower than the same period a year ago. In the near term, we anticipate some of our customers may continue to defer some hiring decisions primarily driven by uncertainty regarding the sustained direction of the macro environment. 

As we've noted on previous calls, Q4 and Q1 have historically been our seasonally lower quarters, with Q2 and Q3 being stronger and in line with each other. With this in mind, we are providing the following guidance for full year 2023. Revenue in a range of $720 million to $745 million, adjusted EBITDA in a range of $165 million to $175 million, adjusted net income in the range of $100 million to $110 million and adjusted diluted earnings per share in a range of $1.30 to $1.43 based on a fully diluted share count of $77 million. We will continue to monitor the macro environment, actions by the Federal Reserve, hires, quits and job openings and actively engaged with our customers to monitor demand, manage vendor relationships and costs and adjust our operating practices to reflect market conditions, maximize margins and create long-term shareholder value. 

With that, operator, we can open the call for questions.

Now be conducting a question-and-answer session. (Operator Instructions) Our first question today is coming from Andrew Nicholas from William Blair.

This is Daniel Maxwell on for Andrew today. Just to start off, you mentioned the cost savings coming from the automation project is having a modest impact in 2023. Is there any way to quantify that as far as the cost savings that you expect to realize that next year or this year?

We haven't given specific guidance relating to how much we're going to drive out of cost savings, but it's obviously reflected in the guidance.

And Andrew, I think it's been a big part of our story. You saw pretty substantial margin improvement this year, and we will continue to drive margin improvement going into next year despite the potentially declining revenue environment. So it will be effective.

Understood. And then maybe on a vertical basis across the core verticals, any assumptions that are baked in across those 4 main verticals? And any qualitative details you can give at that level?

Yes. I think just what we quoted in just a few minutes ago in terms of what we're seeing overall is technology as a sector has had the biggest decline. If you remember in the last call, I talked about the volume that we were seeing is sort of an inch deep and a mile wide. And I would tell you that that's not the case anymore. It just seems that it's impacted technology and government for 2 different reasons. Technology is just laying off people, not hiring, government having a difficult time getting qualified applicants for sure. The other core verticals way more modest decline with some of them showing -- continuing to show some growth. So obviously, we don't split out our targets for next year vertical by vertical, but we expect some continued softness in technology. Hopefully, government recovers by finding better qualified candidates and the other verticals sort of in this relatively modest position that we saw them coming out of the end -- last half of this year.

Okay. That's helpful. And if I can squeeze one more in on backgroundchecks.com and how the performance there has been over the past several quarters. Just curious as to the resiliency of that business given the broader strength in SMB over that time frame?

Yes. It's really been a mixed story, I would say, in the SMB. And actually, the macro numbers we've actually seen very recently have been softer for the SMB market. I think in the latest gilts – is reflected. So it's been slightly improving, but nothing noticeable, to be honest with you. It's been pretty steady state.

Next question today is coming from Kyle Peterson from Needham & Company.

This is actually Sam Salvas on for Kyle today and nice results here. I wanted to start off just getting your thoughts about how you guys are thinking about growth in '23, balancing that between new client additions, existing client growth, cross-sell, upsell and then churn in the year.

Yes, sure. I mean the pattern largely follows what we've seen historically with the exception of the base growth. So we haven't seen anything change in the outlook from a buying pattern from our clients that would indicate that we wouldn't have similar lines of growth by new customers, new logos and upsells like as we've seen even in the second half of 2022 when the market softened a bit, we were able to successfully execute on new logos and upsells. So we expect to continue to see those be meaningful contributors to the overall growth profile. Obviously, the biggest driver of the guidance and the decline, though, is kind of what we call the same-store sales or the base level, right? That base level and our long-term growth algorithm, we've said, is kind of a 3% to 5% growth number, and that's clearly a negative number this year rather than a growth number. But all the other numbers in terms of churn, we ended up the year at 95% gross retention. We generally model in that 95% to 96% range. So that will be consistent. 

There's always going to be some natural level of attrition with client base. but grow upsells and new business, we're pretty optimistic about. It's a strong pipeline that we have and that we've seen even building in the last half of this year. So all aspects of the business, including, by the way, our progression are in pretty strong shape. The one unknown that we always face is, as Tom mentioned, same-store sales, just we can't control what our clients are going to do in terms of their -- what they see in the hiring outlook.

Got it. That's helpful. And then just a quick follow-up, good to see the leverage ratio coming down a bit. And I know you guys talked about the buyback as well. But just wanted to get your thoughts on M&A and how you guys are thinking about M&A? Is this a priority that's kind of top of mind for you guys? Or is the buyback and debt paydown still the priority here?

Yes. The buyback has certainly been a priority. I mean, our M&A strategy hasn't changed. Part of it, you could sort of take an investment that we did. We did -- I-9 is one of those solutions that we felt very, very good (inaudible) in the space rather than acquire the company, we did an investment in them to ensure that we could also drive product development. The other M&A pipeline that we show tends to be either geographic based, but nothing substantial in terms of size. We don't see that as the high and best use of capital right now.

Next question is coming from Kevin McVeigh from Credit Suisse.

Great and congratulations on the results. (inaudible), is there any way to frame the potential revenue associated with those new enterprise wins?

Yes. I mean you can generally think of... I didn't quote a number, though, we just quoted the number of customers. But historically, when we think about that new logo contribution to our growth year-over-year, that is in the neighborhood of $35 million to $45 million a year. That's kind of an average year for us.

That's helpful. And then it's kind of interesting like technology is laying off, government can find people. Is that a broader observation across more verticals too? I mean it seems like it's more pronounced in tech and government, but are you seeing any timing in terms of playing off workers getting kind of redeployed to other verticals? Or is that -- is there a skills mismatch. So I guess my question is, is it skills mismatch from us kind of having those folks get hired elsewhere? Or is it just kind of timing you expect those folks to get absorbed?

Yes, Kevin, we really don't have that kind of insight into who our clients are hiring, whether or not folks are moving around like that. The reason why we highlighted and government is because absent those 2 verticals, we saw a modest decline, not anything precipitous -- in fact, if you sort of look at the other verticals that we have, it's much more moderate, including some growth in a couple of other areas. The government one is a little bit of a strange one. I mean we've seen this pattern before, where they will advertise heavily for workers and sometimes they'll get a good response and sometimes not. And they've been having a hard time picking up people.

Next question is coming from George Tong from Goldman Sachs.

You talked about seeing a slowdown in base hiring in 4Q. Can you discuss how volume trends have performed in January and February relative to December?

George, good to hear from you. Basically, you just have to sort of look at the guidance we gave to draw your own conclusion. So as you know, from what we said before, typically, Q1 and Q4 are slower quarters due in Q3 or larger quarters, and they also tend to be fairly close in demand historically. So Q4 and Q1 will tend to be close. Q2, Q3 will tend to be close, so be at a higher level. That's about the most we can tell you.

Okay. Got it. And then as you think about organic revenue growth on a year-over-year basis, what are your thoughts around the cadence of how the growth performs moving through the year? And how would margins perform by quarter as well moving through the year?

Yes, sure. I tried to give you a little bit of insight into the seasonal patterns that we expected, as Guy just mentioned, we would expect to see, as we always do, improve starting in the second quarter and lasting kind of through the middle 2 quarters of the year. And then a seasonal slowdown in the summer, we typically get a little bit of a spike coming after the summer, kind of in that September, October time frame, then again slow in the holiday season because we don't have a lot of retail exposure driving Q4 sales. Obviously, when you look at a year-over-year comparison, our first half of the year is going to be a very tough comparison because we had such a strong first half of 2022. We do expect that comparison to get slightly favorable by the end of the year. But certainly, the first half of the year will be a bit of a challenge from a comp perspective.

Great. In margins?

Yes. Margins, there's 2 things. Demand is driving that, but we're not sitting back, as evidenced by what we did in Q4, not sitting back and waiting for operating leverage to drive margins. We're really attacking it at the gross profit and gross margin level. We'll continue to expect to see improvement in cross gross margin across the year.

Next question is coming from Stephanie Moore from Jefferies.

This is Hans Hoffman on for Stephanie. Congrats on the results. Just wanted to touch on guidance and sort of the underlying assumptions there. Just kind of curious, are you guys assuming any sort of recovery at any point in 2023 just from a broader hiring environment?

No, I would say just what I said to George there, we really assume kind of steady state from a macro environment, and then we've layered in our typical seasonality, which we expect to see regardless of the macro environment. And then the last thing I would say, just as I reiterated a minute ago is we expect to see some favorability from a growth perspective early because of (inaudible) but because of the comparable comparison to the prior year when we start to get into September, October, November of next year. So what I would -- again, I would -- it's assuming kind of steady state from an overall max, not really baking in any (inaudible) real change to the macro environment in the second (inaudible).

Okay. Understood. And then just for my follow-up, I was just kind of wondering what kind of levers you guys have to pull to sort of drive margin expansion and cost cuts at the top line, the period is worse than you guys expect? And if you could just briefly touch on kind of where you guys are in your overall tech and automation journey in terms of what's behind you and kind of what's still to come?

Yes. So we're -- I mean, we sort of break that down into a few areas, Hans. So first and foremost, the automation work that we've done that we started in the fall of 2021 is well underway and yielding benefits, as you can see, in particular, from the improvements in growth -- with our efforts to drive both employee productivity through new systems, so the automation from 2 standpoints. One is the elimination of labor. Second is through the productivity of the existing employees. That work is yielding results as we also continue to increase the pace of offshoring labor, always sort of looking for the labor arbitrage to ensure that we can take advantage of that. 

And then we've made some good headway as well and just looking at the overall cost structure on SG&A, and we'll continue to make some efforts there to improve margins that way. So that's why we're -- we feel comfortable in committing to continued margin even if it's a down year in terms of revenue.

Next question is coming from Manav Patnaik from Barclays.

This is Ronan Kennedy on for Manav. May I ask on the 42 new enterprise clients that you added, you indicated that were distributed across the 4 core verticals. Could you provide some color on the distribution from a size of the competitor and possibly by region? And then also your comments on what you're seeing from a competitive dynamic standpoint within the industry?

Yes. So I'll take a couple of those. One is we don't comment at that level of detail. An enterprise client is by definition, a large client, right? So someone at scale, it does acquiring, but we don't really break it out by region or industry. One of the things that we did say was 2/3 of those clients came from our core 4 verticals, which is not unusual given our expertise in those 4 sectors and our ability to be very competitive and ability to take share as well. And from a competitive dynamic standpoint, I would tell you, we're continuing to take share. I think a lot of it comes from some of the regional players, smaller players who just can't keep up with the pace of technology investments that are required to satisfy the needs of an enterprise. Anything else...

Yes, please. And then can you confirm the trend and the outlook, reconfirm the trend and the outlook for third-party data costs, your pricing and screen economics? And also on the back of that, any update on the large U.S. customer who stopped doing verifications in the third quarter? I think it was an impact of $6 million for the third quarter and was anticipated to be for the fourth?

I'll take the latter part of that question first. So that customer (inaudible) so that's one of the reasons why we quoted that as being down. But again, that had as much that sector, not just that client having difficulty finding people to employ. And the first part of the question. As part of the question.

The trends and outlook for third-party data costs, your pricing and kind of screen economics.

Yes. So I mean, again, it's a big focus for us. It's the big line item on the P&L for us. We're looking to continue to drive that number down as an overall percentage of revenue, and we think we can over the course of the year. I mean, a modest improvement there, 50 basis point improvement has a pretty meaningful impact on the P&L. We'll continue to focus on that. We made improvement in it in 2022, and

we expect to do the same in '23.

Next question is coming from Mark Marcon from Baird.

Just with regards to the seasonality discussion that you had and just to help us lay out reasonable expectations. Would you basically suggest that Q1 is going to be similar to the Q4 that we just ended up seeing? Just broadly speaking, basically in the third month here of the quarter. So you've got pretty good visibility and this is an open conference call. So…

Yes. Yes, that's right, Mark. And that's what we do with that comment about Q4 and Q1 tend to be in line with each other unless something drastically changes. And then we would expect the seasonal peak in Q2 and Q3.

Okay. Great. And then in terms of the hiring trends outside of the 2 verticals that you cited, were you seeing moderation in terms of the hiring turns in the other sectors as well? Or were those just basically staying steady state in this chugging right along.

No, it is moderating. It's one of the things that we said is we -- if you backed out transportation -- or sorry, technology and government, the rest of the business would still have been down just about 4 points. So there's definitely (inaudible) hiring trends across the board. It's just some industries, not nearly as miners. And there are a couple of transportation happen to be one that fill up year-over-year, and there are others as well that tended to be in the markets sectors that were the slowest from the pen. We're showing more growth to some extent because of a weaker comp from prior rather than an overall robust hiring environment (inaudible) if you take out those 2 verticals I talked about, I would characterize the rest of it as still moderately down.

Got it. And then with regards to technology, was your retention rate in the tech vertical as consistent with the overall retention stats that you gave us?

Higher actually. The tension in technology is almost -- it's close to 100%, as you can get (inaudible) just I mean the big names are all of our big global clients and watching what happened in the quarter was a little bit of a surprise. If you go back to -- if you remember, when we the third quarter last year, the one segments down year-over-year was technology, and they were down like 1% in the third quarter. So you take down 1% in the third quarter to down 30% in the fourth quarter. That's a pretty big drop in hiring that we witnessed, but retention is extremely solid.

Okay. And on the government side, is it just that one big client that we all know about that's having issues, why on earth would the rest of the government be having issues in terms of this finding qualified candidates?

For government is a major sector, as you know. So you can sort of conclude from that, how much of that sector might be a large client. But we did from daily interaction that the job openings are there. It's just they're having a difficult time getting people to fill the jobs. It's the (inaudible). I mean we've seen this before. I mean this is a long-standing client. We've seen this before. So that, I think, is just an anomaly, but we'll see how it goes this next few months.

Yes. I would -- just another tidbit of information regarding sector. Our government sector also includes education, primarily higher education, where we have a pretty good footprint. And that actually segment of that segment performed okay. So you're hitting the nail on the head, Mark, kind of where the softness is coming from.

Okay. Great. And then with regards to just -- you indicated that your overall assumption for revenue is based on the environment staying roughly the same. Can you talk a little bit about the levers, let's say, the environment deteriorates, like you did a great job in terms of expanding the margins here? How should we think about margins if, let's say, the economic environment worsens as obviously, the Fed is trying to slow things down?

They're doing their best. So what I would say is that, as I said before, we were going to focus on that gross margin line. We talk a lot about how variable our cost model is at the cost of sales line. We'll focus on that. We'll continue to drive margin kind of regardless of the demand environment, where it becomes trickier when you get into the overhead or the SG&A expenses, right? And that's when we have to make decisions about whether or not we have to take out some of that overhead. But at the gross profit and gross margin level, we feel very confident even if the demand is softer than what we're currently looking at now that we're able to generate better margins regardless -- at the gross margin level.

Yes. I think just to make sure everybody remembers, we have the labor that we use to fulfill our services is in that line, right? So the automation efforts that we have to both eliminate labor, offshore labor and then improve productivity of the systems that are used Regardless and environment, that work will continue, and we'll continue to deliver improvement in margin. And then of course, as Tom pointed out, we'll get and have been aggressive and take G&A cost out as quickly as well. So there's not too much risk.

And me, with regards to just capital allocation, I mean, M&A is off the table. But any thoughts with regards to like thinking about debt repayment relative to buybacks if the environment worsens.

Of course. I mean, it's something we discuss with our Board on a monthly basis, to be honest with you, of between M&A, debt repurchase and share repurchase. So it's top of mind. We think about all the time. Right now, we feel confident about the long-term outlook business. Certainly, there's certainty over the next handful of quarters. But we think long term, we lost in the industry where this company can go margins that will ultimately deliver shareholder value. And we think that investment in our shares today is an attractive return.

Next question today is coming from Shlomo Rosenbaum from Stifel.

I want to follow up a little bit about that large customer that was deciding not to do the employment history reports. After we talked, you said you were going to be looking for like alternatives for employment history reports because of the skyrocketing costs from the main provider in that industry. Is there any progress over there in terms of alternatives that you can offer your customers?

Yes, absolutely. Good to hear from you, Shlomo. So that supplier is one supplier, right? They happen to be a fairly high-volume supplier, but there are a lot of alternatives for us, including using our own data and manually verifying employment, previous employment and current employment in a number of ways and implemented that and rolled that out for a lot of clients as well. So the (inaudible) understands their options and are evaluating their options. I think as I had mentioned previously, they were pretty upset since they were a major data supplier to this vendor.

So this is not a fast-moving client, but we have -- we've presented alternatives to them and they're considering them. And we do the same with all of our clients. I don't want to overstate that vendors influence. They're not the only -- they're certainly not the only game in town, and there are lots of options, some that are already -- that we're already taking into account availing ourselves of services as well as doing manual verifications through the that we've built. We just built and deployed a new -- entirely new var module just for education and employment and we're finding.

Okay. And then is it fair to assume you said that that $6 million is really basically a pass-through -- so should I assume that the lack of that pass-through provided about 120 basis points of gross margin improvement and then you had like $185 million or so from the company's own efforts in terms of everything that you're doing internally together with the new cost initiatives and new technology program. Is that the right way to think about it?

That's a bit of an oversimplification. The $6 million is not $100 million pass-through. This vendor in question is only a portion of that because any large customer of ours, who does an employment verification, I don't know if I should quote the stat, but it is certainly less than half the time that this vendor can fulfill that. So -- and I think we talked about on the call last quarter was this customer, in particular, decided to stop doing the verification, employment verification work. That means impacted this vendor, and it also impacted the other sources that we use for -- and some of those carry margin with them, obviously.

Next question is coming from Andrew Jeffrey from Truist.

It's Gus stepping on for Andrew. The first question I have is, can you talk a little bit about the competitive environment amongst the big 3? And have we seen any kind of a shift to clients, maybe or customers single sourcing, the screening or that's the first one.

Gus, good to chat again. I would say unchanged it's sort of the same as it's been. We do see, in particular, one of the things our business is with the platforms. These -- a lot of the new enterprise wins that we take are for multi-country clients taking advantage of that platform. I wouldn't say that the performance in the fourth quarter or our outlook for next year reflects any change in the competitive environment, other than we'll continue to be aggressive in the market with our proven technology and our emphasis quality and thoroughness is playing well with clients and prospects. We'll continue to message and continue to do our best to take share in the market.

Got it. Perfect. And my last question is, can you talk a little bit about what you're seeing in terms of applicants for opening, check for opening employment velocity in general? Do we think that this is still going to remain elevated, kind of what we saw in 2020, '21?

Yes. I think that is clearly normalized over the last 3 to 5 months. That phenomenon that we saw and perhaps that is what contributed to the strength we saw in the first half of the year. That -- although we don't have hard data on it, we get it from our clients and we clients. And we definitely think that has normal demand and the competitive nature is just not as strong as it was 9 months ago.

Next question is coming from Ashish Sabadra from RBC Capital Markets.

Just a quick question on package density and pricing. I was wondering, have you seen any changes on that front? Is there more adoption of services at existing customers increasing package density?

Yes. I mean that's a big piece of what we focus on, right, is upselling our clients and upsells can upsell -- we call it upsell and package expansion. Some people say those are the same thing. We have a nuance: upsell mines could be selling a new region, selling a completely new program where package expansion is more along the line what you're talking about in terms of package density. We kind of combine those when we quote the $13 million number in our script that includes both of those. We continue to do a really good job. I can tell you the team that is responsible for that exceeded all their goals for 2022. In fact, we were very with the despite kind of the softening macro environment. We'll continue to focus on that. We continue to focus on driving kind of a higher package order value. And I'm not going to give specific numbers, but it was high in '22 over '21, and we try to drive it higher in '23 as well.

That's very helpful color. And then maybe just a quick follow-up on better managing the data costs. Does that also gives you a competitive edge in the sense that is that a pitch that a part of the pitch to new customers in lowering their total cost of employment screening or baron screening?

Yes, definitely. I mean our customers do want to understand kind of what the total cost of their program is going to be. And they know that we're out there trying to lower data cost. I'm not going to give specific examples, but there are certain products in certain geographies in the U.S. that drive higher data costs, state of New York being one of them and certain products drive other incremental surcharge or data or our clients. And I think our clients are (inaudible) offer them less expensive solution. That's very helpful color.

Next question is coming from Jason Celino from KeyBanc.

As we think about new business activity in a tougher macro environment, is a typical customer more willing or less willing to change our background check vendor? I guess my question is, does the business environment impact the customer's decision to switch?

Jason, it's a great interesting question. So what I can tell you is we have a pipeline of business opportunities that we're negotiating and closing. I don't know that the environment changed it. We also did great during the pandemic. I mean when companies were really, really focused on just basic liquidity and staying in business, we were still seeing a healthy activity -- now sometimes, there could be procurement or wanting to just put a program out to RFP because they're cost conscious, and it gives us an opportunity to go win a new piece of business.

But I'll -- generally, if a company is frustrated with their current providers, the mistakes, missing hits, not servicing them well, we find times in these down environments' companies use as an opportunity to switch out because it's such an important part of their compliance program. I mean you can't have an existing provider who keeps missing convictions and missing hits, which we find provides us an opportunity as well. So I don't know that -- we haven't done the direct correlation, but I can just tell you, we have a strong pipeline. We had a strong pipeline during the pandemic and closed a lot of new business in, and we have a strong pipeline sitting in front of us now despite the macro environment.

We have reached the end of our question-and-answer session. I'll turn the floor back over to management for any further or closing comments.

Thanks, operator. Appreciate everybody joining us. And I think as you've gathered from the call, we had a very solid year. Underlying demand drivers apparent. And with new logos attracted by our quality approach and our ability to take share, we're making great progress on our automation initiatives and margin expansion initiatives, and we're very excited about what's ahead '23 despite what we think is the macro environment. Look forward to be posted as we move through the year, and please don't hesitate to reach out to us with any questions. Thanks again, and good evening, everybody.

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