Sterling Check Corp.

Hello everyone and welcome to the Stirling third quarter 2022 earnings call. My name is Seb and I'll be the operator for your call today. There will be an opportunity to ask a question on the call today and you can submit your question by pressing star 1 on your telephone keypad or press star 2 if you wish to withdraw your question. I will now hand the floor over to Judah Sokol to begin.

Thank you operator. Welcome to Stirling's third quarter 2022 earnings call. Joining me today are Josh Perez, 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 have been posted to our website 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 which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our Form 10-K filed with the Securities and Exchange Commission 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, reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued this morning. I'll now turn the call over to Josh Perez.

Thank you, Judah. Good morning, and thank you for joining us. Sterling's third quarter of 2022 was another great quarter and continued the strong results we saw throughout our record 2021 and the first half of 2022. As you can see on slide four, this represents our seventh straight quarter of double-digit organic constant currency revenue growth. Our sustained excellence in new business growth, client service, and innovation drove year-over-year revenue growth of 18%, including 12% organic constant currency revenue growth, even as we lapped last year's third quarter growth of 44%. We also saw approximately 7% growth from EBI, which has consistently outperformed our initial expectations and gives us great confidence for future M&As. We are very encouraged that the quarter's strong results were driven by all four of our revenue drivers performing at or above our long-term targets. Our product innovation and technology excellence continue to resonate with prospective clients, helping drive third quarter growth from new business of 9%, the eighth consecutive quarter of growth from new business above our long-term target of 7% to 8%. We continue to win new logos from competitors of all sizes and in all regions due to our competitive differentiators, such as innovative product offerings, client service excellence, and cloud-based technology. Our pipeline of recent wins and new prospects remains very strong, giving us confidence in our ability to continue to deliver best-in-class new business revenues. Clients are also deepening their spend with us through our upsell cross-sell strategy as we expand package density and sell innovative and unique new products. One such unique product is identity verification, where we are a global market leader with highly differentiated and proprietary solutions. In the third quarter, we signed an exclusive workflow partnership with UK-based Yodi, expanding our digital identity solutions to international markets by building on the same vision and best-in-class identity verification offerings we have in place in the US with ID.me. I'll discuss this partnership and our identity solutions shortly. Our other two revenue drivers, revenue retention and base growth, also performed in line with our long-term targets. Our revenue retention rate of 96% is fueled by our ongoing commitment to customer service excellence. which includes customer tools that have been completely redesigned in recent years and a cloud-based platform providing best-in-class innovation and network availability. Turning to slide five, the third quarter of 2022 marks our seventh consecutive quarter of double-digit year-over-year organic revenue growth, and we have now delivered an average sequential quarter-over-quarter revenue growth of 10% since the second quarter of 2020. We are very proud of our consistency in new business generation, as Q3 was the eighth consecutive quarter, delivering above our seven to eight percent target range, and we expect to continue outperforming the market over the long term. We are particularly proud that we accomplished double digit organic revenue growth in the third quarter, which we believe is best in class. Slide six illustrates this point further. showing that we have been delivering strong results in the growth drivers we control. From the combination of new business, cross-sell, upsell, and gross retention, our organic revenue growth has averaged 15% since the first quarter of 2021, double our combined 7% to 8% target for those items. Even during the 2020 COVID downturn, we still achieved our upsell, cross-sell, and new business targets, and our retention improved by 300 basis points over this period. This demonstrates that our solid strategy and execution have enabled us to perform well in the areas most within our control, even during challenging economic times. As we discussed on our last earnings call, we saw our base growth moderating in the back half of the year to our long-term 2% to 3% target. This moderation happened a bit earlier than we expected, as many clients tempered their hiring due to macroeconomic uncertainty and are now operating in a holding pattern as they assess the macro environment and establish their plans for next year. Despite this, we still grew 18% in the quarter, including 12% on an organic constant currency basis, while lapping our stellar 44% growth from the third quarter of 2021. We expect fourth quarter revenues to grow year over year on both a total and organic constant currency basis. While we continue to see strong performance on the growth drivers within our control, given the uncertain macro environment, we have acted quickly to execute on our low growth playbook, taking steps to right size our business from the extremely high growth environment we've been operating in for nearly two years. As we shared on our Q1 call, we have been hiring ahead of our revenue needs and running a roughly 10% surplus in our fulfillment labor this year to support our 40% average growth since the beginning of 2021. This strategy served us well, enabling us to maintain very high service levels during a time of explosive growth. As we now transition into a lower growth or recessionary environment, We are acting quickly to right-size the company, a strategy that will drive cost of revenue and OPEC savings starting in the fourth quarter and increasing in 2023. We have been planning a number of initiatives for the last few quarters while we managed our tremendous growth. We are now accelerating these initiatives as part of our low-growth playbook, including four key parts summarized on slide seven. expanding our margins through additional automation and cost reduction measures. These actions will be aimed at streamlining the business in connection with the refreshed strategy we launched earlier this year. Second, executing on the revenue drivers in our control with an even greater focus on new business and cross-sell upsell initiatives. Third, driving our market leading identity solutions to gain scale in the market And fourth, accretive M&A as multiples for tuck-ins and geographic expansion opportunities become more attractive. We believe these actions will position the company to invest for growth and market share gains regardless of the macro environment and will allow us to expand adjusted EBITDA margins year over year in Q4 by over 250 basis points. We also expect to realize significant run rate cost savings by the end of this year which will fuel our ability to expand margin substantially in the future while also gaining market share. One of the key reasons we win in Excel and the drivers within our control is our product innovation. Turning to slide eight, identity continues to be a great example of our innovation-led approach and first-to-market solution. So I thought I would share some updates on how things are developing. As we have discussed in previous earnings calls, we view Sterling Identity as a strategic pillar on equal footing to background screening, and we are very excited about our early traction. We believe that the future is not built on transactional identity verification, but instead on trusted digital identity networks. To the best of our knowledge, Sterling is the only provider that offers a solution built upon this principle. Our exclusive partnership with FINRA and ID.me are significant competitive differentiators and it puts Sterling in a leadership position to deliver identity services for employers in the US. We are excited to now expand our exclusive trusted digital identity offerings to international markets in partnership with Yodi, a market leader in the portable identity space. Sterling and Yodi have created a new fully integrated exclusive workflow that we believe provides us a significant competitive advantage outside the US, just as our ID.me partnership does in the US. The exclusive workflow will allow candidates to seamlessly create a reusable digital identity where they can verify their identity once and share their details with other businesses in seconds. Individuals will be able to use their digital identity for future job opportunities, age verification, and any process requiring identity verification. In Q1 2023, we expect to start deploying our new solution with Yodi in the UK and have planned rollouts in various international markets throughout 2023. In terms of our ID.me partnership, the identity rollout has continued to be successful with client adoption across all of our verticals. Clients and prospects are responding positively to our identity-first messaging and focus on product innovation. The themes that have resonated the most with clients are reducing fraud, ensuring data integrity, and streamlining the candidate experience. When ID.me is used, we are now seeing more than one-third of all candidates come in pre-verified, a testament to ID.me's network and the power of reusable identity. We are also starting to see the impact to screening outcomes when identity is in place. One of our largest financial services customers experienced a 22% increase in records found during the six months following ID&E implementation as compared to the six months prior due to enhanced data integrity. Better screening, better candidate experience, and reduced fraud all contribute to our vision to start every screen with identity. This is just the beginning of our identity journey. We look forward to continuing to provide updates as we innovate and change the way background screening works. Turning to slide nine, our achievements in automated fulfillment are another key competitive differentiator helping us drive strong organic revenue growth. Time to hire is a critical measure for our clients, and we are committed to accelerating that time while not compromising on compliance or accuracy. Automation across our global businesses for all our product areas has been a critical investment area at Sterling for many years. Investment into machine learning, artificial intelligence, APIs, and robotic process automation combined with owning our captive offshore fulfillment centers have given us greater control over collecting data with faster speed and increased accuracy. These benefits extend to all parts of our workflow, including data collection, data analysis, and report generation. Today, we have well over 3,000 automations leveraging APIs and RPA, representing 90% of our US criminal searches. These automations enable us to easily access data through seamless integrations and perform the most cost-efficient searches that allow for deeper analysis while searching more jurisdictions in less time. But it's not simply the number of automations that matters, it's the results it drives for our clients. Over 60% of our U.S. criminal screens are now completed within the first 15 minutes, over 70% within the first hour, and over 90% within the first day. To our knowledge, these turnaround time figures are best in class in our industry and are key characteristics that differentiate us from competitors. Automation also drives cost reductions throughout our business. We have realized millions of dollars of net savings thus far by reducing our manual footprint and vendor costs. And we expect significant future savings as we continue to implement and optimize our strategy with continued investments yielding additional gross margin expansion and cash flow. As part of the low growth playbook I discussed earlier, we have launched Project Nucleus to drive meaningful cost savings and efficiency gains by first, reengineering processes, second, driving fulfillment labor cost reduction, and third, identifying and executing on additional automation opportunities with a focus on international screens as well as U.S. incremental opportunities. Automation is one of several exciting investments and cost savings initiatives we slowed or paused while our revenue growth was so robust during 2021 and this year. We are excited to ramp up our work on this front, improving further on our already best-in-class capabilities while also enhancing our financial results. In conclusion, I am really proud of the Sterling team for delivering a great third quarter and for continuing to deliver through uncertain times. We navigated successfully through COVID and the subsequent recovery while building for the future, and I strongly believe we will deliver on share gains and margin improvements in the current macro environment as well. With that, I will hand it over to Peter Walker, our CFO, to take you through our financial results and updated 2022 guidance. Peter?