Sterling Check Corp.

Good morning or good afternoon all and welcome to the Sterling fourth quarter 2022 earnings call. My name is Adam and I'll be your operator for today. If you'd like to ask a question at the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand the floor over to Julia Circle, Head of Treasury and Investor Relations to begin. So Julia, please go ahead when you're ready.

Thank you, Operator. Welcome to Sterling's fourth quarter and full year 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 most recent 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 2022 was a great year, and I am very proud of the accomplishments and results the team delivered. Reflecting on the year, there is a lot to highlight. Slide four shows some of the key 2022 accomplishments I'll talk about today. I'll be discussing our strategy refresh, innovation, M&A, and financial success before ending with our 2023 priorities. I'll then hand it over to Peter for a more detailed analysis of our full year and fourth quarter results and to provide our 2023 guidance. Starting with slide five, this year we completed a strategy refresh and organizational realignment, which we expect to lay the groundwork for the company's continued long-term success. Our strategy includes doubling down on our competitive strengths and increasing our revenues with existing clients, acquiring new clients, growing market share internationally, and utilizing M&A to supplement our organic revenue growth. We also remain at the forefront of industry innovation and are bending our trajectory with newer solutions such as identity verification, concierge services, and post-hire services like monitoring and I-9. Turning to slide six, the next area I'd like to highlight is our innovation. Throughout our history, we have pioneered many industry-leading solutions, such as criminal fulfillment technology, arrest record and incarceration alert products, and AI-enhanced record review and validation processes. In the past few years, we have only increased our focus on innovation, and Project Ignite has enabled us to launch products more rapidly to meet immediate client needs. In 2022, we had over 300 product releases, nearly 20% more than what we released in 2021. Examples of recent developments include our enhanced global language support capabilities and proprietary Core i9 offering, and we released our comprehensive global identity verification solution through our partnership with ID.me in the US and with Yodi internationally. We have been very pleased to see that our identity offerings consistently grew through 2022 with full year transactions up approximately 250% over 2021. Our fingerprinting business also experienced similar growth, with 2022 fingerprint transactions being up by nearly 300% over 2021. Another recent product innovation is the continued enhancement of post-hire monitoring solutions, which track, among other things, healthcare sanctions, medical licenses, recent arrests, and motor vehicle registration monitoring. In 2022, we released our new enhanced industry-leading monitoring solution, providing a fully integrated criminal monitoring experience, including arrests and convictions for our clients. Historically, this industry has delivered monitoring in the form of transactional rescreening orders. Our new solution is subscription-based and enables multilayered monitoring that will scale globally for our clients around the world. We also made significant progress towards unifying the client experience by moving approximately $140 million in client revenue from legacy platforms onto our single unified platform. We now have over 85% of our global revenues on our core platform. Finally, we increased our automation integrations with well over 3,000 APIs and RPA bots powering our fulfillment platform to deliver high accuracy, low hiring costs, and faster time to hire rates. Over 90% of our US criminal searches are automated, and we now complete 50% of US criminal searches within the first five minutes, 65% within the first 15 minutes, over 70% within the first hour, and 90% within the first day. Turning to slide seven, the next accomplishment I'd like to highlight is M&A. 2022 was also a year of great success on that front, starting with the EBI acquisition at the end of 2021. We completed our integration of EBI ahead of schedule and are pleased that the results exceeded our initial estimates. we realized meaningful cost and revenue synergies from the deal as clients were enthusiastic about switching to the Sterling platform and gaining access to our additional solutions. We employed this strategy in 2018 with the acquisition of National Crime Check to expand in the APAC region And the Socrates deal now expands our global presence into Latin America to serve the rapidly growing hiring needs of multinational and local clients. With operations centers in Brazil, Colombia, and Mexico, the Socrates team has built a highly reliable operational model and suite of screening services guided by their people-first, client-centric values that are a perfect fit with the Sterling culture. We are excited to work with the Socrates team to build on Sterling's proven model of bringing deep regional expertise and localized innovative solutions to deliver growth in the Latin America region. Our other acquisition was of Acheck, a highly complimentary deal we just announced yesterday. The purchase of Acheck builds on our successful M&A strategy of growing market share in the U.S. through accretive tuck-in deals. The company possesses a high-quality, enterprise-focused client base diversified across attractive verticals, including healthcare, industrials, and tech media. As with EBI, we expect this deal to yield significant synergies from platform migration, SG&A rationalization, and cross-sell of Sterling products. In particular, we expect an integration period of 12 to 15 months, with Acheck's adjusted EBITDA flow through reaching 45 to 50% once clients are integrated onto our platform and technology consistent with our playbook for US-based tuck-in deals. We messaged similar ambitions when we bought EBI and can say now that we achieved those targets ahead of schedule. We aim to do the same with Acheck. Our business and strategic accomplishments throughout 2022 resulted in strong financial results. As shown on slide eight, we set new company records this year for annual revenues, adjusted EBITDA, and adjusted net income as we continue to execute against the strategy we implemented in 2019. Our 2022 revenues grew by 19%, including 14% on an organic constant currency basis, even while lapping 2021's exceptional 41% revenue growth. Our long-term target for organic revenue growth is 9% to 11% per year, and 2022 was the second consecutive year above that range. To our knowledge, our organic revenue growth in 2022 was industry-leading and reflects the investments we have made since 2018 to prioritize profitable organic revenue growth. Our growth in 2022 was driven by all four of our organic revenue drivers, which were each at or above their long-term targets. In particular, our continued focus on new client wins resulted in $57 million, or 9% revenue growth in 2022, marking the fourth consecutive year at or above our long-term 7% to 8% targets. To our knowledge, our growth from new clients is industry-leading. We also increased our wallet share with existing clients through upsell and cross-sell and prioritized exceptional client service to ensure optimal client satisfaction and revenue retention rates. And I'm proud to say that the efforts certainly paid off. Slide 9 shows that our strong results in 2022 are a continuation of our strong performance. From the time we launched our strategy in 2019 through 2022, our revenue has grown at a 14% CAGR, including 11% on an organic constant currency basis. We saw a pullback in 2020 due to COVID-19, but otherwise our results have increased each year as we gain market share, increase spend amongst existing clients, and benefit from multiple secular trends driving increased background screening adoption. We believe our trajectory is particularly compelling when viewed over multiple years. 2021 and 2022 were not simply recovery from 2020's trough, but rather a natural continuation of the trends we started in 2018 and 2019. As shown on slide 10, our success over the past four years has been notably consistent in the revenue drivers we can control. new client wins, cross-sell, up-sell, and retention. We have deployed strategies and tactics focused on these drivers, including setting targets for our vertical and regional teams around these metrics. And our Project Ignite tech transformation has yielded countless benefits across the company. As a result of this sustained focus, we have grown organically at a 10% CAGR since 2018 from the combination of these three drivers, solidly ahead of their seven to eight percent combined target. Even during the 2020 COVID downturn, we still hit our long-term target and grew by seven percent on this basis as we achieved our new business and upsell cross-sell targets and our retention improved by 300 basis points year over year. Moreover, as you can see on the slide, we have improved our gross retention rate through the period increasing from 88% in 2018 to 91% in 2019 and 94% in 2020, followed by two consecutive years at 96%. 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. Turning now to our strategic focus areas in 2023 on slide 11. Despite an uncertain macro environment, 2023 presents a lot of promise, and we expect to continue the journey we started when I joined in 2018. In particular, we expect, at the midpoint of our guidance, to set new company records again this year with revenues of $760 to $800 million, adjusted EBITDA of $198 to $218 million, and adjusted net income of $106 to $121 million. We plan to deliver these results by remaining focused on the long-term strategic elements which have driven our compelling success in recent years. These include organic revenue growth with new and existing clients, expanding our industry-leading identity verification products built around our exclusive ID.me and Yodi workflows, and M&A. Our 2023 priorities also include a laser focus on margin expansion through increased automation, process improvements, and cost reduction measures. Last quarter, we discussed the playbook we implemented when we saw our base growth begin moderating. We removed the surplus in our fulfillment labor that we had been carrying to support our 40% average growth since the beginning of 2021. We also completed a realignment of our senior leadership and functions to elevate our go-to-market strategy and accelerate our technology and product innovation. And we launched Project Nucleus, an initiative that we expect to drive long-term meaningful cost savings and efficiency gains by reengineering processes, driving fulfillment labor cost reductions, and identifying and executing on additional automation opportunities. Some of these initiatives are complete, some are underway, and still others remain on the near-term horizon. The common denominator is that all these actions will position the company in the future for growth and market share gains regardless of the macro environment, and they will enable us to expand adjusted EBITDA margins for full year 2023 and over the long term. In conclusion, I'm really proud of the Sterling team 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 2023's uncertain macro environment as well. With that, I will hand it over to Peter Walker, our CFO, to take you through our financial results and 2023 guidance. Peter?