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spk21: good morning thank you for attending today's sterling first quarter 2023 earnings call my name is megan and i'll be your moderator for today's call online will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you would like to ask a question please press star 1 on your telephone keypad i would now like to pass the conference over to judah sokol head of treasury and investor relations judah please go ahead
spk02: Thank you, Operator. Welcome to Sterling's first quarter 2023 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 slide 2, 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.
spk04: Thank you, Judah. Good morning, and thank you for joining us. Sterling's first quarter of 2023 was a successful period of execution, and I am very proud of the accomplishments and results the team delivered. The year is unfolding as we expected, and as a result, we are reiterating our 2023 guidance. Slide four shows highlights of the quarter. First and foremost, this was a quarter where we took steps towards achieving our long-term strategy and ambitious 2023 goals. Our financial results were encouraging. Our revenues were slightly favorable to our prior expectations, even against the uncertain macro environment. and our progress in executing our cost savings programs in the first quarter helped us to deliver on adjusted EBITDA, adjusted net income, and free cash flow that were solidly above our expectations. These positive results and outperformance were driven by the Sterling team's continuous hard work to enhance our value proposition, customer service, and technology through an unyielding commitment to innovation and operational excellence. In the first quarter, we made great strides on several key initiatives that we set at the beginning of the year and which I will further explore in the following slides. Identity verification, cost optimization, and M&A. Turning now to slide five, which summarizes our long-term strategy and 2023 goals. On our fourth quarter earnings call, we mentioned a strategic refresh we completed in 2022, which set the foundation for our company's long-term aspirations. We aspire to be the world's most trusted background and identity services company differentiated by our deep market expertise, unrivaled client service, best-in-class data, and seamless workflows. To achieve these goals, we have several specific growth strategies, including development of innovative new products to upsell, geographic expansion, and M&A. The strategic framework directly fueled our focus areas for 2023 with concrete near-term goals that we believe will drive our company closer to that long-term vision. Specifically, we are focused this year on doubling down on the organic revenue drivers we can control scaling our identity verification business, optimizing our cost profile, and M&A. In the first quarter, we saw positive results on each of these four areas. Starting with organic revenue growth on slide six, in the first quarter, we continued to execute on the organic revenue drivers in our control. We won new logos in all our geographic regions, increased our clients' spend, and maintained strong gross client retention rates. To do this, we enhanced our core offerings with continued investment into exceptional client service and cloud-based technology capabilities. When combined with our innovative culture, those characteristics enabled us to perform slightly ahead of the expectations we provided in March. In the first quarter, growth from new clients remained solid at 5%. This was slightly better than our expectations, albeit a bit lower than our long-term target and the levels we have previously delivered. As discussed on our fourth quarter call, we saw some signed new client implementations pushed till later in the first quarter and to the second quarter. As those implementations come online, we expect our new client growth to return to the long-term target of 7% to 8% over the course of 2023. we continue to see our new business pipeline remain robust and supportive of our long-term targets. In the first quarter of 2023, we delivered growth from upsell and cross-sell in line with our long-term target, an accomplishment we are very proud of given the uncertain macro environment. Our innovative culture combined with the past work we did to complete Project Ignite continues to drive the release of new products and new functionality at a swift pace. During the first quarter, we saw traction in our newer solutions, such as identity verification, clinical concierge services, and post-hire services like monitoring and I-9. We also increased our automation, powering faster time to hire and delivering high accuracy at low hiring cost. Last quarter we shared our milestone achievements in the improvement of U.S. criminal fulfillment turnaround time. And now we can say the same about motor vehicle records and civil searches with the recent release of improved automation capabilities. Moreover, we made progress on fulfillment automation outside of the U.S. where background screening and digital integrations into courthouse data are less mature. Moving to the right half of the slide, we made great progress during the first quarter in identity verification. We believe our investments into identity create true market differentiation, which significantly amplify our addressable market and our right to win, and we are pleased to see positive outcomes of our identity verification investments paying off. Identity adoption has been consistently growing at a robust pace since we first released our exclusive ID.me Identity Verifications workflow to the market in early 2022. In the first quarter of 2023, our global suite of identity solutions saw continued strong growth on both a quarter-over-quarter and year-over-year basis. While we are seeing traction with all types of clients, enterprise clients are leading the adoption of identity and in the first quarter we added identity verification to several large client programs. Regardless of size, all clients who adopt identity can benefit from stronger screening programs and an increase in criminal records identified. Candidates are no longer able to submit inaccurate information either intentionally or accidentally into the background screening process. We have also been pleased that the U.S. candidate experience is fast and efficient and takes just 30 to 90 seconds to complete. Finally, we continue to invest in fortifying our competitive advantages within identity. In partnership with ID.me, our exclusive ID verification partner in the U.S., we have built an in-person verification pathway, enabling individuals to verify their identity at a physical location. We were pleased to recently announce a major milestone by achieving IAL2 certification. This certification recognizes our pathway as conforming to the federal digital identity guidelines set by the National Institute of Standards and Technology and opens the path for other government agencies to utilize our verification services. Those conversations have already begun and we are excited about the large growth potential that can arise from this milestone. Turning now to cost optimization on slide seven, we've shared in recent earnings calls that we launched a series of initiatives aimed at building a more scalable and profitable company. We expect these initiatives to drive long-term meaningful cost savings and efficiency gains, and we are targeting $25 million of run rate savings including $10 million of in-year savings during 2023. We have a history of driving productivity and cost savings through financial discipline and by leveraging technology. For example, our proprietary and cloud-based technology platform is supported by our powerful artificial intelligence-driven fulfillment platform, leveraging more than 3,300 automation integrations, including APIs and RPA bots. In 2023, we aim to continue our rich history and achieve our cost savings targets through a three-pillar approach. First, through Project Nucleus, we aim to reduce labor and data costs in our cost of goods sold through reengineering fulfillment processes and increased automation. Second, we are reducing our facilities costs by leaning even more into our virtual-first approach and reducing our real estate and facilities footprint. This strategy has served us well since its adoption in 2020 with the closure of multiple offices around the world, and we are now closing additional offices. Third, we are enhancing functional alignment by streamlining our organization to align with the go-to-market structure we established in 2022, an initiative we believe will result in meaningful OPEX savings. Q1 was a strong first step in executing against our goals. In particular, we made progress towards closing eight offices and facilities globally, streamlining our functional teams, and we made strong early steps towards process reengineering and automation of our fulfillment engine. Our progress in the quarter gives us increased confidence in our goal of margin expansion during 2023 and beyond. The final 2023 goal I will discuss is M&A, shown here on slide eight. As a result of the large and fragmented addressable markets which we serve and the cash flow we generate, we have a great opportunity to increase our scale through both organic and inorganic growth. As we shared on our March earnings call during the first quarter, we executed on two acquisitions, Socrates and Acheck. Our January acquisition of Socrates achieves our goal of using M&A to expand geographically into attractive new regions. Outside the U.S., we are already a leader in several key regions, and with our newfound presence in Latin America, we can now serve the rapidly growing hiring needs of multinational and local clients in another region. Our other acquisition was of Acheck, a highly complementary deal which 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 upsell of Sterling products. In the early months of integrating both deals, we are pleased with the revenue trends inclusive of a healthy new business pipeline. We are also pleased early on by the deal integration with the expertise and skills we built from the EBI deal and other initiatives yielding clear dividends. An acquirer's ability to integrate cultures, operations, and performance goals effectively and efficiently is a key determining factor of a deal's success, and we are laser-focused on executing this important goal during 2023. We plan to complete the integration of Socrates by the end of 2023 and for ACHEC by the second quarter of 2024, with the expectation to realize increasing synergy gains throughout that period. Thus far, during the first quarter of 2023, the team's execution has been highly encouraging. I'll conclude with slide nine. The market for background screening and identity verification services is attractive with a large and growing total addressable market driven by multiple secular tailwinds. These include remote work, millennial churn, and continued growth of the contingent and gig economy. Overseas, the opportunity for geographic expansion is particularly attractive with background screening adoption still nascent. We're excited about the growth of the global market and believe that our strong competitive advantages, innovation-led culture, and financial discipline will enable us to execute on our 2023 goals and take another step forward towards achieving our long-term strategy. We look forward to continuing to update you on our progress as the year unfolds. With that, I will hand it over to Peter Walker, our CFO, to take you through our financial results. Peter?
spk18: Thank you, Josh, and good morning, everyone. Turning now to an overview of our financial performance starting with revenues on slide 11. During the first quarter of 2023, we reported revenue of approximately $179 million a 7% decline compared to the first quarter of 2022 on both the reported and organic constant currency basis. The quarter included 150 bps contribution from M&A, partially offset by 100 bps drag due to foreign currency translation. These results were slightly favorable to the expectations we provided on our March earnings call, as our team is executing on our 2023 goals. We continue to see success in the areas of our business most within our control, including growth from new clients and cross-sell upsell alongside strong revenue retention rates. We are focused most on these areas, and we feel that our momentum in winning market share and expanding wallet share with clients can help offset the unpredictability of base growth over time. Following nine consecutive quarters of new client growth at or above our 7% to 8% long-term target, this quarter's new client growth was 5%. This result was slightly above our expectation. As we discussed in March, this was caused by some signed new business implementations pushed out to late Q1 and Q2 2023. With those implementations now ramping as planned and our new business pipeline remaining robust, we expect our new client growth to return to 7% to 8% over the course of the year. In the first quarter, our revenue from existing clients was down approximately 13% year-over-year. Within those existing client declines, we saw upsell, cross-sell, and gross retention performing within our long-term target ranges, which were outweighed by expected base business declines. As we mentioned in March, our clients' base hiring volumes have been down year-over-year primarily due to macroeconomic uncertainty. It's worth noting the current industry hiring volumes remain strong relative to history and are down year over year only when measured against 2022's record levels, including our robust 38% revenue growth in the first quarter of 2022. Looking further back, our revenues have grown at a 15% CAGR over the past three years, demonstrating the strong secular growth we've been able to deliver through this past cycle. These base business trends tempered our positive results in other revenue drivers, including upsell-cross-sell, where we've seen robust traction in our newer, fast-growing areas, such as identity verification. As Josh described, client adoption has been very strong for services we provide through our exclusive identity partnerships. As we've discussed, we view identity verification as a significant opportunity to expand our addressable market and revenue growth, along with accretive margins. It's exciting to see our investment coming to fruition now. Looking at revenues by region, our U.S. business was down 6% year-over-year in the first quarter. Within the U.S., we have a diversified and attractive vertical mix, which has been instrumental in supporting our compelling revenue growth in recent years. In the first quarter, our U.S. performance was led by our healthcare and industrial verticals, which continued to grow year-over-year. We saw softness in some other verticals, including tech media and FinBiz. Turning to international, revenue in our international business was down 10% in the quarter. Similar to the U.S., base volume declines offset good trends in the revenue drivers we can control. International revenues were led by the EMEA region, which saw good growth in our core screening markets, tempered by softer gig vertical trends. We are seeing increased opportunities in digital identity and right to work fueled by our newest partnership with Yodi, as well as new client wins in the UK and EU. In the first quarter, we delivered 1.5% of inorganic revenue growth from Socrates and ACHEC, the two acquisitions we closed in January and March of this year. In these first months, we've been pleased with both companies' performances with results matching or exceeding our initial expectations. As Josh described, the integration work is well underway to deliver on the upside potential from these deals, including the attractive geographic expansion capabilities presented by Socrates and the robust synergy potential at HX. Turning to slide 12, our first quarter adjusted EBITDA was $46 million, a 4% year-over-year decline compared to last year, primarily due to the base revenue decline. Despite the softer top line trends, we were pleased to expand our adjusted EBITDA margins this quarter by 60 basis points to 25.4%. This exceeded our prior expectations and was driven by early progress in our cost savings initiatives and financial discipline. As we introduced last quarter and Josh described in greater detail today, we have several cost initiatives underway which are aimed at driving meaningful cost savings and efficiency gains. These programs will be executed over 2023 and 2024. When complete, we are targeting a run rate cost savings of $25 million and expect to see in-year savings of $10 million during 2023. We plan for these initiatives to drive permanent reductions in our cost profile and position the company to scale efficiently and profitably over the long term. So far, we are quite pleased with the progress and will keep laser focused on execution going forward. In the first quarter of 2023, we had adjusted net income of $23 million or $0.24 per diluted share, representing year-over-year decline in adjusted EPS of 4%. This year-over-year decline was similar to the decline in adjusted EBITDA, with a lower tax rate partially offset by higher interest expense. Turning to slide 13, free cash flow in the first quarter was $7 million, a substantial increase from the prior year period. Q1's free cash flow is our seasonal low point, and the results in 1Q2023 exceeded our expectations. The drivers of the quarter's improvement included increased collections, lower cash tax payments, and a decrease in purchases of property, plant, and equipment. We remain very focused on free cash flow and are forecasting a full year free cash flow conversion of adjusted EBITDA in our target range of 40 to 50 percent. Our net leverage at quarter end was 2.3 times net debt to adjusted EBITDA at the lower end of our 2 to 3 times net leverage target. In the quarter, we spent approximately $49 million of net cash on our two acquisitions and $8 million on share repurchases. Despite these outlays, our net leverage remains at an attractive level and is poised to continue declining absent any future M&A or buybacks. We ended the quarter with total debt of $504 million, cash and cash equivalents of $51 million, and $193 million available under our credit facility, providing us with ample capacity to execute our growth strategy of reinvesting in organic revenue growth and pursuing M&A. During the quarter, we also enhanced our capital structure through the implementation of an interest rate hedging program, which fixed approximately 60% of our floating rate debt. Our capital allocation priorities remain investing in organic revenue growth, pursuing M&A, and maintaining a healthy balance sheet. This includes opportunistic share buybacks under our previously announced share repurchase program. These priorities hold true in a lower growth environment as we see macro uncertainty as opportune times to build a foundation for future success. As we discussed last quarter, our rising cash position allowed us to use cash on hand for our two M&A deals in the quarter. Following these two deals, we remain well positioned to continue pursuing M&A to supplement our organic revenue growth and make further compelling investments. That said, we are focused in the near term on the integration of these two assets and executing our core strategy. On slide 14, we reaffirm our guidance for 2023, which is unchanged since we provided it in March. For 2023, we expect to generate revenues of $760 to $800 million, representing year-over-year growth of minus one to positive 4%. Adjusted EBITDA of $198 million to $218 million, representing year-over-year growth of 0% to 10%, and adjusted net income of $106 million to $121 million, representing year-over-year growth of 0% to 14%. Our guidance includes full-year organic constant currency revenue growth of minus 3% to positive 1%. As we discussed earlier, we continue to see solid growth in items within our control, including new client wins and upsell cross-sell. These are being offset by base revenue declines. We are not assuming a material change in the macro environment over the course of the year. If there is a material shift for better or worse, we would reflect those changes in updates to our guidance. We continue to expect year-over-year declines during the first half of the year. Based on what we've seen so far in April and part of May, Q2 will likely see year-over-year revenue declines comparable to Q1. We are seeing positive signs in multiple parts of our business and are encouraged by the new client and upsell cross-sell trends. At the same time, we are cycling over our strongest quarter of 2022 and in our company's history, both in terms of revenue dollars and growth rate when measured on a multi-year basis. This tougher comp will temper 2Q's year-over-year growth. As we move into the second half of this year, we expect to see show year-over-year growth due to several key items. First, new client onboarding throughout the year. Second, ramping client hiring plans. Third, upsell and cross-sell based on our pipeline. And fourth, easing year-over-year comps, especially in Q4. From the combination of our two M&A deals, we expect two and a half to three points of inorganic revenue growth in 2023. We are now assuming no impact from foreign currency, slightly less favorable than our previous assumption. Turning to profitability, our 2023 guidance includes adjusted EBITDA growth of 0% to 10%. The midpoint of this range implies a full-year adjusted EBITDA margin of 26.7%, reflecting a notable margin expansion of over 100 basis points versus 2022, muted by approximately 30 basis points drag from our two M&A deals. We expect margin expansion for the full year even in the absence of robust organic revenue growth due to the cost measures we put in place as well as the variability of our cost structure. The first quarter's margins were stronger than we previously expected due to some early success against our cost savings targets as well as strong financial discipline. These results give us increased confidence in our ability to hit our targets for cost savings and margin expansion. To give you some more color on our thoughts by quarter, we expect two Q adjusted EBITDA margins to be in line with first quarter. As Josh mentioned, we are doubling down on our virtual first strategy by closing additional facilities. In the second quarter, we expect these closures to result in impairment charges and accelerated rent expense of $8 to $10 million, which will be added back for the purposes of adjusted EBITDA. We expect margins over the back half of 2023 to improve from the first half and for the year-over-year margin expansion to increase as our revenue trends improve, the benefits of our cost actions ramp and year-over-year comps ease. Finally, turning to our adjusted net income growth guidance of 0% to 14%, we will benefit this year from reduced DNA, which should drive growth to the bottom line in excess of our adjusted EBITDA growth. We remain encouraged by the leverage in our financial model, driving adjusted EBITDA growth during 2023 ahead of our revenue growth and driving adjusted net income growth ahead of adjusted EBITDA growth. To further help with your modeling, we've included a page in the appendix with our updated assumptions for 2023 and a detailed breakdown of our revenue guidance. In closing, we are reaffirming our long-term targets on slide 15. Over the long term, we are targeting 9 to 11 percent organic revenue growth levels, with margin expanding towards 29 to 32 percent plus, and adjusted net income growth of 15 to 20 percent per year. Even in the absence of robust revenue growth this year, we expect 2023 to be a healthy step towards achieving our profitability targets. That concludes our prepared remarks. At this time, operator, please open up the line for questions.
spk21: Absolutely. If you would like to ask a question, please press the star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press the star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of George Tong with Goldman Sachs. Your line is now open.
spk06: Hi, thanks. Good morning. You mentioned new client growth of 5% reflected this fine new business that was pushed to late 1Q and into 2Q, and that new client growth should return to 7% to 8% over the course of the year. Can you elaborate on how much new business was pushed into 2Q and when we should see a return to 7% to 8% growth in new clients?
spk04: Hey, George. Good morning. It's Josh. Thanks for the question. So let me just start again by reminding you that last year we put up record new business growth from a revenue perspective of $57 million. And that was notwithstanding the Q4 piece that we shared on the last call where it was a little bit lighter than our expectations based on these deals pushing out. So as we look at this year, we would expect the number to come in a little bit lower than that, but by the end of the year, so figure sometime in Q3 or Q4, we would expect to be back at the 7% to 8%. And that's both the new business that we know is coming on as well as the pipeline of deals that we believe we're going to win from our existing win rates and things that we see in the timelines we expect there. So we would expect sort of sequentially to see some improvement, but getting back to the seven to eight in the back half of the year.
spk06: Got it. That's helpful. You mentioned you're seeing continued market share gains and increased client spend that's helping to mitigate base business declines. Can you talk about where you're seeing share gains and where client spend is increasing, and then also discuss how base trends have evolved over the course of 1Q, whether it was steady or whether you saw a deterioration or improvement? Thank you.
spk04: Yeah, thanks, George. I'll go first, and if Peter wants to add any additional color. So first, I would say that we're winning share in all of our key regions and markets and in all of our key verticals. It's not in one place or another. And so, again, you know, a pickup in the quarter of 5%, the deals that we know that we've closed, the deals we believe we're going to win, we're seeing those share gains really from competitors of all sizes as well as in all geographies. You know, I would emphasize again, I think one of the dynamics in our market that we really like is the fact that there's this long tail of, you know, smaller competitors. There's also the reality that we face of sort of nascent markets around the world give us great opportunity to grow as well. So there's a lot of room for this industry to grow as a whole and for us to gain share within that. So that's important. I think on the upsell-cross-sell, we were very pleased to be within our long-term target, notwithstanding the slowdown in base growth because it's those same clients and they're still buying more and newer things from us. in particular around the identity and the post-hire monitoring and other services for post-hire. And we're very pleased with the trends that we're seeing there. We're actually, for the first time in Q1, we saw the mix from post-hire and identity move north of the 10% figure that we've been saying in terms of our revenues in the quarter. So we think that that was a really good point for us in the first quarter. And then finally, the base business trends, we continue to believe that December was the trough of what we've seen, and we saw the trend throughout Q1 and thus far into Q2 as being steady.
spk06: Very helpful. Thank you.
spk21: Thank you. Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.
spk09: Hi, good morning, guys. This is Daniel Maxwell on for Andrew today. Just curious, starting off, anything on the second quarter performance through five weeks? You mentioned some trends there, but any specific vertical or geographic callouts on that?
spk18: So as I mentioned in the prepared remarks, our expectation for Q2 is that we'll be down year over year, similar to Q1 from a percentage basis. And then I also highlighted on the call that healthcare and our industrial verticals, which are our largest verticals in the US, continue to perform really well and growing year over year. And then I highlighted some other spots that were a little bit soft. We've seen a continuation of that trend through May.
spk07: Okay, that's helpful.
spk09: And then given the strength that you're calling out in new products and moving above 10% there on identity, just wondering what's changed there or if there's been any specific things to call out in terms of the level of interest in those and just general cyclicality of package upgrades and upsell more broadly.
spk04: Hey, Daniel, it's Josh. I think there's like eight or nine questions in there. I'll try to cover it, and then if you have further questions, we can follow up. But I think, first of all, what's changed, if anything, with identity and monitoring, honestly, is we've been successful in starting to gain traction in the market through educating clients, through building and refining the products based on client feedback, and getting to the point where we have largely driven by our big enterprise clients interest in these products because in the case of identity, it saves them money and makes sure that they're actually doing the proper work to get the right people on board. And we have a very differentiated solution, particularly in the U.S., relative to what anyone else has. On the monitoring side, I think there's been a real demand that's been pent up, but it's been difficult to match that with the capabilities in the products. As we shared on the last call, we moved to more of a subscription model and less of a full kind of rechecking and redoing all the packages in our releases last quarter. So we're very excited about the fact that we're seeing early traction there again with some of our largest accounts who have had that pent up demand. So honestly, I think the biggest shift has been that we've been able to find the products that the market wants and to position them well and to be differentiated versus our competitors who don't have similar products. And that's been a part of that success and why we thought it was noteworthy to call out on this call.
spk08: Got it. Appreciate the detail. Thanks.
spk20: Thank you.
spk21: Our next question comes from the line of Tony Kaplan with Morgan Stanley. Your line is now open.
spk16: Hey, good morning. This is Greg Parish. I'm for Tony. Thanks for taking our question. Um, I just want to kind of circle back and talk about the ramp. So you're checking new business to get back to seven to eight. And then I think Peter called out second half improvement, partially driven by ramping hiring plans. I think there's some other items in there I missed, but could you just maybe help parse out like why you're confident in the second half improvement, you know, sort of ignoring the easier comps.
spk03: Yeah, it's Josh, let me start, and then Peter, if you want to jump in.
spk04: So first, I think the biggest factor is the comps. So we're not expecting a macro change. We're expecting to have continued uncertainty, continued choppiness in the macro. But we do have the plans from our clients of what they're going to hire in the year. We know where those are slated. We also have the new clients who we know are coming on board. And we also have cross-sell, up-sell deals that we know are signed and clients are currently in the testing phase. And so we know all those things are coming online in addition to the lower comps, particularly in Q4. So those things have given us confidence since, you know, when we set the guidance and everything we've seen in Q1 was slightly better than our expectations, but, you know, very much, you know, gives us confidence that the year's unfolding as we thought. I don't know, Peter, if you wanted to add.
spk18: Yeah, I was just going to add, I mean, this is, for us, it's always been a first half, back half story where we're seeing the acceleration in Q2, albeit against a very difficult comp in terms of, you know, a record revenue growth rate and dollar perspective in the company's history, and then the easing comps in the back half of the year, along with the pipeline that Josh spoke to in terms of new clients upsell, cross-sell.
spk16: Okay, great. Thank you for the call there. I just wanted to ask about the cost optimization plan. In terms of timing, The 25 million run rate, is that expected to be achieved by the end of this year? So the full 25 should be realized in 2024. And then the 10 million of in-year savings, was that sort of already baked in the guidance last quarter? I wasn't sure if there's sort of upside there.
spk04: Sure. So first, in terms of the 10 million, it is reflected in our guidance expectations, and it's a part of the north of 100 basis points of margin improvement that's somewhat muted by the 30 basis point drag from the M&A we did. And so that is baked into the assumptions. In terms of the 25 million run rate, I think we'll have to come back to you on the next call to give you the exact timeline. I would say that we would get to the point of having most of those initiatives actioned between by the end of this year or sometime in Q1, early Q2 of next year. So we should get most of the savings into next year. There could be a couple million that maybe spills out of Q1 into the following Q1, but we should get almost all the way there for next year.
spk15: Great. Thank you.
spk20: Thank you.
spk21: Our next question comes from the line of Andrew Steinerman with JP Morgan. Your line is now open.
spk17: Yes, hi. This is Alex Hesson for Andrew Steinerman. I just want to walk through some of the volume and base volume math that you guys pointed to. So if new logos were up 5% and organic... was down slightly. Wouldn't that point to something like a low teens base volume trend for the quarter? Is that about right? Something like 13%?
spk18: I got you slightly lower than that, but you're in the ballpark. And that's similar to the base volume declines we saw in Q4. Got it.
spk17: And then maybe can you give us any sort of dimensionalization around identity? I know last quarter you guys called out a 250% increase in sort of transaction volume or screening volume using the identity solution. Can you maybe dimensionalize any of what you saw in one queue and help us understand a bit more how much of a tailwind that could be as the year progresses? Thank you.
spk04: Yeah, thanks, Alex. I think we're very excited about what we saw with identity in Q4 and in Q1. I think what I shared in my remarks was we saw quarter-over-quarter growth that was strong as well as year-over-year growth for Q1 that was strong. We didn't give specific numbers. We're not going to get in the habit of breaking out identity or other products every single quarter, but we did want to give the color, which I think starts to give you the most important dimensionalization that is part of our overall mix, identity and post-hire monitoring, you know, for the first time have moved north of the 10% that we've had them at since the time we went public. So, you know, we're excited about that trend. We think that that is really, you know, great green shoots that we're seeing on products that are still less than a year old, and we're excited about the traction that we're getting.
spk18: And Alex, just a reminder on that, right, what we've shared previously is 90% of our revenue comes from pre-hire, 10% of our revenue comes from identity and post-hire. And as Josh mentioned, we're seeing that 10% start to grow as a percentage of total revenue. Got it.
spk17: Thank you all.
spk21: Thank you. Our next question comes from the line of Kyle Peterson with Needham. Your line is now open.
spk10: Great, thanks. Hey guys, Sam on for Kyle today. Thanks for taking the questions. Just wanted to touch on the market share gains you guys have been talking about. Are you guys seeing any changes in win rates across any of the key verticals or geographies?
spk04: Hey Sam, it's Josh. No, we're not. We're continuing to see good win rates overall, particularly against the smaller and less sophisticated providers and domestic-only providers in other markets. But we also continue to take share from some of our larger competitors.
spk10: Got it. Okay. That's helpful. Thanks. And then I know you guys talked a little bit about it on the call, but I just wanted to get a sense – for the M&A appetite, get a sense for what kind of valuations you guys are seeing out there and what some of the key priorities there are on the M&A front.
spk18: So as we shared on the last call, we were thrilled with the acquisition of Socrates and really the price of that acquisition, you know, coming in line with our expectations. And then we also talked about the acquisition of Acheck. And what we shared is that we paid, you know, 4x synergized EBITDA for Acheck. You know, Socrates gives us the geographic expansion in LATAM that's so important for us with new business and existing clients. And Acheck really brought a great book of business to us. It's very complementary to our current verticals. Our view is, you know, we have capacity for additional M&A, but for the rest of this year, we're most likely focused on integrating both of those acquisitions, realizing the synergies from Acheck and, you know, growing the business of Socrates.
spk04: And, Sam, I would just add to Peter's points. I think that, you know, as Peter highlighted in his prepared remarks, We haven't changed our capital allocation strategy. Our focus is still on the investments to drive organic growth and profitability. And I think that in a time like this, we're happy to be towards the low end of our leverage target. We'd like to stay there. We don't think it's a time that makes a lot of sense to spend a lot of money on things that are questionable. So we were happy to get these two M&A deals in Q1 that really fit our model perfectly. But right now, we're just in hardcore execution mode for this year on everything. Execution against our cost targets. execution against the revenue drivers in our control, execution against integrating and getting the synergies from our M&A deals, and just continuing to innovate in these key product areas that we mentioned where we're starting to now see that traction grow as a percentage of our overall mix. So I think the theme you're going to hear from us throughout this year is, it's a great time to execute well, deliver on this year, but it's set up the future to be larger, more profitable, and have even more competitive advantages in these key product areas that we're already a market leader in.
spk10: Yeah. Okay. Got it. Yeah, that's helpful. All right. Thanks, guys.
spk21: Thank you. Our next question comes from the line of Scott Wurzel with Wolf Research. Your line is now open.
spk25: Great. Good morning, guys, and thanks for taking my questions. I wanted to just go back to the integrations of Socrates and Ajak. Just sort of wondering if you can give a little bit more color on some of the performance there. brought up the low end of your inorganic contributions assumptions from 2% to 2.5%, just any more color that you're seeing there, and also maybe what you've sort of learned about the LATAM market with Socrates relative to some of the other international geographies that you're in. Thanks.
spk04: Thanks, Scott. It's Josh. I guess two comments. First, just on ACHEC, what I'll say is anytime you do these acquisitions, you always want to make sure that you don't get out over your skis in terms of understanding what risks may exist in terms of the revenue-based clients that you do the diligence you can, but As soon as you own it and you have those client calls, you get more of a sense of some things. So I think for us, you know, it was a little bit better than we thought in Q1. But again, we had one month of performance in Q1. I think what we've seen just says that some of the conservatism that we put into the low end we felt comfortable taking out versus any change in performance expectations. It was more that we didn't have negative surprises as we took the asset on. In terms of Socrates in Latin America, I think that what we're seeing is the number of U.S. clients in particular who really want to be able to do screening programs in Latin America that align with what they're doing in the U.S. as much as possible is a very, very large demand for us. And that's driven by offshoring that can be done in the same time zones, the Spanish language in particular being really important for some of our clients. And people are setting up more and more operation centers throughout Latin America among our clients as they're seeing that to be beneficial from a cost perspective as well as easier to manage than being halfway around the world in some cases. So we're excited about that dynamic. We also believe that there is a lot of domestic demand in some of the key markets in Latin America, which has really not been tapped at all, and we're excited to have a chance to go after that. That's not reflected as something we see growing this year, but it is something that over time we expect to be able to grow and contribute meaningfully to the company, similar to the way we've had success with that when we've acquired assets in Canada, Europe, Australia, and Asia.
spk25: Got it. That's very helpful. Then just a quick follow-up here, and apologies if I missed this earlier, but just on the sort of sales cycles and implementations, I know you said you would called out some sort of pushed out implementations into 2Q. Have we seen that trend sort of renormalized with some of the newer business that you're signing right now?
spk04: Yeah, we're seeing pretty normal trends with everything except for this group that we talked about in Q4, which are some blue chip, you know, name brands. You would know them and If you look at what they're reporting publicly, they've been very focused on their own internal initiatives for the last quarter or two and are now returning into their more normal operational modes. And we don't share those names, but it's quite reasonable and obvious that these clients would be in the mode of waiting a quarter or two longer than they normally would have given what else they've had going on. But in terms of new business we're signing now, we're seeing more normalized implementation data.
spk24: Got it. Thanks, guys.
spk21: Thank you. Our next question comes from the line of Mark Markin with Baird. Your line is now open.
spk05: Good morning, and thanks for taking my questions. One question, you know, when we take a look at the base volumes, you know, you mentioned, you know, we're basically comparing against last year where it was absolute record levels. How would these levels from a base perspective compare to more normalized levels, say, back in 21 or even pre-COVID? How are you thinking about that and how that gives you confidence that, hey, we're basically seeing a normalization and a steadiness?
spk04: Thanks, Mark. I guess a couple of comments. One, which is not directly on base growth, but it is a very, very big driver of the trend. We've shared in the prepared remarks that we have seen a 15% CAGR even on the Q1 number over the last three years. We think that's obviously in excess of our long-term target. And so we are pleased overall. And a big part of that has been you know, base growth obviously exceeding our long-term targets by a pretty good amount over the last few years. I think as we look at base growth, you know, we have in the long-term targets two to three percent for base growth given all the trends that we see in our industry, which we highlight in our presentation slides today. You know, we continue to see the churn. albeit at, you know, more muted rates than we saw last year, but still, you know, far above what we would have seen pre-COVID. We continue to see, you know, particularly millennials and Gen Zers, you know, churn faster than normal. We believe that that trend will continue. The use of contingent and gig workers, obviously there are times like you would see right now where maybe the contingent workforce doesn't grow as rapidly. But overall, that's a trend that we think supports our industry. And so as we look at what we saw from last year, where Peter and I shared in our Q3 and then our Q4 call, that we saw this base growth kind of turn negative earlier. So we saw it muted earlier in the year and then turn negative, particularly in Q4 work. And we shared that the trough of what we've seen for that was December. And then we've seen, you know, a pickup that's been stable so far from January through, you know, May 8th, I guess, so far this year. So, you know, we think that that sort of falling and then hitting a plateau happened. And we would expect that to then normalize to the 2% to 3% as we look into next year and beyond.
spk05: Great. And then you've done a great job in terms of expenses. Rationalization, obviously the margins have been holding in really well and improving. And part of that has been through your RPA efforts. I'm wondering, just from a longer term perspective, what your initial thoughts might be in terms of the application of generative AI and these large language models in terms of being able to further increase the efficiencies of the operations.
spk04: Thanks, Mark. You know, we're optimistic and cautious at the same time in the short term. You know, we've been at the forefront of using various technological capabilities, including what I'll call kind of 1.0 AI capabilities that we do use in the normalization of our data in the fulfillment engine. But I think we now believe that there's a chance to really rethink a lot of what we're doing. Some of it will utilize, I'm sure, the AI capabilities, not just that exist today, but we're seeing the speed with which those capabilities grow, obviously, to be exponential at this point. I think for our view, we want to make sure that we're doing it in a secure way that complies with all law and that also protects the data and the integrity of the information that we provide to our clients because in the end, people's jobs and livelihoods are on the hook if we get something wrong. We think it's important that we're using these tools in a way that delivers low cost, delivers speed, and allows for our clients to get the benefit of that as they're hiring, but also to do so in a way that meets our obligations under the FCRA, the various state and city laws, laws around the world for the work we do, as well as for general protection of data and otherwise. So we're very excited for the opportunities that exist and some of the tools that are being provided that are not public facing and that you can use without risking your data being exposed publicly. And, you know, we plan to utilize those and we believe those can drive down costs and increase our overall effectiveness over time.
spk18: And Mark, maybe just two things to add on cost optimization. Yes, we're excited about the cost optimization, but also we expect to improve the candidate and the client experience out of that and improve turnaround time. So it's not just focused on cost, but It's really setting up the business for continued success with clients and customers. And then the other thing just to highlight is the $10 million of in-year savings in 23. That is baked into the guidance that we provided in Q4 and reaffirmed as part of this call.
spk05: That's great. And then last question for this call is... Can you talk a little bit more about international and, you know, how you're thinking about that from a long-term perspective? Obviously, macro factors impacting international markets as well, short-term, but just in terms of the potential for, you know, new business ads and more countries becoming, you know, bigger parts of the Sterling platform.
spk04: Yeah, thanks, Mark. I think, again, we believe we're the most global of any of the providers in terms of having more revenue and a higher percentage of our revenues outside of the U.S. versus our competitors. And we believe that that sets us up for great share gains. We continue to see new business wins. We're seeing more and more consolidation of regions by clients, which is exciting for us and the opportunity to serve them on our single core platform. You know, we shared some statistics around how our migrations have gone there. And so we're very excited about that future outside of the U.S., really, in all the markets we operate. And we think that we've got a position that's a winning position. We've got products that are winning products. We've got a team that's the best in the business. And over time, we expect to continue to grow international and ultimately for it to grow faster than the U.S., you know, as we look down the road a few years. Thank you.
spk20: Thank you.
spk21: Our next question comes from the line of Jason Salino with KeyBank Capital Markets. Your line is now open.
spk13: Great. This is Devin on for Jason this morning. Thanks for taking our question. Maybe just one from us. I know you've called out softness in your financial business services vertical. Just given the recent crisis in the banking sector, any color you can provide on how much exposure do you have with banks? And just based on your conversations, with customers in that vertical, how are you thinking about hiring plans for the rest of the year versus maybe like a quarter ago?
spk04: Yeah, thanks, Devin. So again, I think we have financial and business services together. So I think your question is specifically more applicable in financial services and banks in particular. So again, our financial services vertical is broader than banks. So it is not something that has a significant impact. Our exposure to the sort of you know, mid-tier and smaller banks is low relative to more of the, you know, sort of too big to fail banks, let's say, and banks in other countries that are also similarly, you know, too big to be let fail. The hiring plans, again, that's all baked into our guidance for the year. Those are industries where, in particular, the largest parts of our revenues in any given year would be through their summer intern program and their new hire programs. We're not hearing about any pullbacks in that It's much more at the higher levels of the organization where we've seen that pullback.
spk11: Great. Appreciate the call there, Josh.
spk21: Thank you.
spk11: Thanks, Stephanie.
spk21: Our next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open.
spk14: Hi. Thanks for sending me in. This is James Holmes on for Shlomo Rosenbaum. Maybe a quick one. Can you talk about attrition? Are you seeing the current environment starting to have any impact on retention rates? And has there been any change in the pricing environment?
spk03: Thanks, James. It's Josh.
spk04: So first I would say, you know, we're pleased to still be at our long-term target on retention. We continue to think that that, you know, bodes well for the future. We really haven't seen major changes in trends. I think one of the things we are seeing on the offensive side as well as on the, you know, existing client side is there are a lot more RFPs out there. We believe that we win more than our fair share, so we're excited about that, and that gives us the chance to really, you know, earn more new business. But a lot of that is clients just taking the time when they have a little bit of a slowdown to – make sure they're getting the right services, and as you say, on pricing. And I think there we haven't seen a material change in the pricing dynamics at all. We do expect to be able to implement price increases mid-year as we've done for the last few years. And again, at the high end of the market, the largest clients, they always have some amount of pricing impact on us, but we're not seeing anything materially change over the last few years on price.
spk19: Great, thank you.
spk21: Thank you. There are no additional questions waiting at this time, so that will now conclude the Sterling first quarter 2023 earnings call. Thank you for your participation. I hope you have a wonderful rest of your day. you you Thank you.
spk01: Thank you. We'll be right back. you
spk21: Good morning. Thank you for attending today's Sterling first quarter 2023 earnings call. My name is Megan and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to Judah Sokol, Head of Treasury and Investor Relations. Judah, please go ahead.
spk02: Thank you, Operator. Welcome to Sterling's first quarter 2023 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 slide two, which explains the risks of forward-looking statements on 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.
spk04: Thank you, Judah. Good morning, and thank you for joining us. Sterling's first quarter of 2023 was a successful period of execution, and I am very proud of the accomplishments and results the team delivered. The year is unfolding as we expected, and as a result, we are reiterating our 2023 guidance. Slide four shows highlights of the quarter. First and foremost, this was a quarter where we took steps towards achieving our long-term strategy and ambitious 2023 goals. Our financial results were encouraging. Our revenues were slightly favorable to our prior expectations, even against the uncertain macro environment. And our progress in executing our cost savings programs in the first quarter helped us to deliver on adjusted EBITDA, adjusted net income, and free cash flow that were solidly above our expectations. These positive results and outperformance were driven by the Sterling team's continuous hard work to enhance our value proposition, customer service, and technology through an unyielding commitment to innovation and operational excellence. In the first quarter, we made great strides on several key initiatives that we set at the beginning of the year and which I will further explore in the following slides. identity verification, cost optimization, and M&A. Turning now to slide five, which summarizes our long-term strategy and 2023 goals. On our fourth quarter earnings call, we mentioned a strategic refresh we completed in 2022, which set the foundation for our company's long-term aspirations. We aspire to be the world's most trusted background and identity services company differentiated by our deep market expertise, unrivaled client service, best in class data, and seamless workflows. To achieve these goals, we have several specific growth strategies, including development of innovative new products to upsell, geographic expansion, and M&A. The strategic framework directly fueled our focus areas for 2023 with concrete near-term goals that we believe will drive our company closer to that long-term vision. Specifically, we are focused this year on doubling down on the organic revenue drivers we can control, scaling our identity verification business, optimizing our cost profile, and M&A. In the first quarter, we saw positive results on each of these four areas. Starting with organic revenue growth on slide six, in the first quarter, we continued to execute on the organic revenue drivers in our control. We won new logos in all our geographic regions, increased our clients' spend, and maintained strong gross client retention rates. To do this, we enhanced our core offerings with continued investment into exceptional client service and cloud-based technology capabilities. When combined with our innovative culture, those characteristics enabled us to perform slightly ahead of the expectations we provided in March. In the first quarter, growth from new clients remained solid at 5%. This was slightly better than our expectations, albeit a bit lower than our long-term target and the levels we have previously delivered. As discussed on our fourth quarter call, we saw some signed new client implementations pushed till later in the first quarter and to the second quarter. As those implementations come online, we expect our new client growth to return to the long-term target of 7% to 8% over the course of 2023. we continue to see our new business pipeline remain robust and supportive of our long-term targets. In the first quarter of 2023, we delivered growth from upsell and cross-sell in line with our long-term target, an accomplishment we are very proud of given the uncertain macro environment. Our innovative culture combined with the past work we did to complete Project Ignite continues to drive the release of new products and new functionality at a swift pace. During the first quarter, we saw traction in our newer solutions, such as identity verification, clinical concierge services, and post-hire services like monitoring and I-9. We also increased our automation, powering faster time to hire and delivering high accuracy at low hiring cost. Last quarter we shared our milestone achievements in the improvement of U.S. criminal fulfillment turnaround time. And now we can say the same about motor vehicle records and civil searches with the recent release of improved automation capabilities. Moreover, we made progress on fulfillment automation outside of the U.S. where background screening and digital integrations into courthouse data are less mature. Moving to the right half of the slide, we made great progress during the first quarter in identity verification. We believe our investments into identity create true market differentiation, which significantly amplify our addressable market and our right to win, and we are pleased to see positive outcomes of our identity verification investments paying off. Identity adoption has been consistently growing at a robust pace since we first released our exclusive ID.me identity verifications workflow to the market in early 2022. In the first quarter of 2023, our global suite of identity solutions saw continued strong growth on both a quarter-over-quarter and year-over-year basis. While we are seeing traction with all types of clients, enterprise clients are leading the adoption of identity and in the first quarter we added identity verification to several large client programs. Regardless of size, all clients who adopt identity can benefit from stronger screening programs and an increase in criminal records identified. Candidates are no longer able to submit inaccurate information either intentionally or accidentally into the background screening process. We have also been pleased that the U.S. candidate experience is fast and efficient and takes just 30 to 90 seconds to complete. Finally, we continue to invest in fortifying our competitive advantages within identity. In partnership with ID.me, our exclusive ID verification partner in the U.S., we have built an in-person verification pathway, enabling individuals to verify their identity at a physical location. We were pleased to recently announce a major milestone by achieving IAL2 certification. This certification recognizes our pathway as conforming to the federal digital identity guidelines set by the National Institute of Standards and Technology and opens the path for other government agencies to utilize our verification services. Those conversations have already begun and we are excited about the large growth potential that can arise from this milestone. Turning now to cost optimization on slide seven, we've shared in recent earnings calls that we launched a series of initiatives aimed at building a more scalable and profitable company. We expect these initiatives to drive long-term meaningful cost savings and efficiency gains, and we are targeting $25 million of run rate savings including $10 million of in-year savings during 2023. We have a history of driving productivity and cost savings through financial discipline and by leveraging technology. For example, our proprietary and cloud-based technology platform is supported by our powerful artificial intelligence-driven fulfillment platform, leveraging more than 3,300 automation integrations, including APIs and RPA bots. In 2023, we aim to continue our rich history and achieve our cost savings targets through a three-pillar approach. First, through Project Nucleus, we aim to reduce labor and data costs in our cost of goods sold through reengineering fulfillment processes and increased automation. Second, we are reducing our facilities costs by leaning even more into our virtual-first approach and reducing our real estate and facilities footprint. This strategy has served us well since its adoption in 2020 with the closure of multiple offices around the world, and we are now closing additional offices. Third, we are enhancing functional alignment by streamlining our organization to align with the go-to-market structure we established in 2022, an initiative we believe will result in meaningful OPEX savings. Q1 was a strong first step in executing against our goals. In particular, we made progress towards closing eight offices and facilities globally, streamlining our functional teams, and we made strong early steps towards process reengineering and automation of our fulfillment engine. Our progress in the quarter gives us increased confidence in our goal of margin expansion during 2023 and beyond. The final 2023 goal I will discuss is M&A, shown here on slide eight. As a result of the large and fragmented addressable markets which we serve and the cash flow we generate, we have a great opportunity to increase our scale through both organic and inorganic growth. As we shared on our March earnings call during the first quarter, we executed on two acquisitions, Socrates and HHF. Our January acquisition of Socrates achieves our goal of using M&A to expand geographically into attractive new regions. Outside the U.S., we are already a leader in several key regions, and with our newfound presence in Latin America, we can now serve the rapidly growing hiring needs of multinational and local clients in another region. Our other acquisition was of Acheck, a highly complementary deal which 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 upsell of Sterling products. In the early months of integrating both deals, we are pleased with the revenue trends inclusive of a healthy new business pipeline. We are also pleased early on by the deal integration with the expertise and skills we built from the EBI deal and other initiatives including yielding clear dividends. An acquirer's ability to integrate cultures, operations, and performance goals effectively and efficiently is a key determining factor of a deal's success, and we are laser-focused on executing this important goal during 2023. We plan to complete the integration of Socrates by the end of 2023 and for ACHEC by the second quarter of 2024. with the expectation to realize increasing synergy gains throughout that period. Thus far, during the first quarter of 2023, the team's execution has been highly encouraging. I'll conclude with slide nine. The market for background screening and identity verification services is attractive, with a large and growing total addressable market driven by multiple secular tailwinds. These include remote work, millennial churn, and continued growth of the contingent and gig economy. Overseas, the opportunity for geographic expansion is particularly attractive with background screening adoption still nascent. We're excited about the growth of the global market and believe that our strong competitive advantages, innovation-led culture, and financial discipline will enable us to execute on our 2023 goals and take another step forward towards achieving our long-term strategy. We look forward to continuing to update you on our progress as the year unfolds. With that, I will hand it over to Peter Walker, our CFO, to take you through our financial results. Peter?
spk18: Thank you, Josh, and good morning, everyone. Turning now to an overview of our financial performance starting with revenues on slide 11. During the first quarter of 2023, we reported revenue of approximately $179 million, a 7% decline compared to the first quarter of 2022 on both the reported and organic constant currency basis. The quarter included 150 BIPs contribution from M&A, partially offset by 100 BIPs dragged due to foreign currency translation. These results were slightly favorable to the expectations we provided on our March earnings call. as our team is executing on our 2023 goals. We continue to see success in the areas of our business most within our control, including growth from new clients and cross-sell upsell alongside strong revenue retention rates. We are focused most on these areas and we feel that our momentum in winning market share and expanding wallet share with clients can help offset the unpredictability of base growth over time. Following nine consecutive quarters of new client growth at or above our 7% to 8% long-term target, this quarter's new client growth was 5%. This result was slightly above our expectation. As we discussed in March, this was caused by some signed new business implementations pushed out to late Q1 and Q2 2023. With those implementations now ramping as planned and our new business pipeline remaining robust, we expect our new client growth to return to 7% to 8% over the course of the year. In the first quarter, our revenue from existing clients was down approximately 13% year over year. Within those existing client declines, we saw upsell, cross-sell, and gross retention performing within our long-term target ranges, which were outweighed by expected base business declines. As we mentioned in March, our clients' base hiring volumes have been down year over year, primarily due to macroeconomic uncertainty. It's worth noting the current industry hiring volumes remain strong relative to history and are down year over year only when measured against 2022's record levels, including our robust 38% revenue growth in the first quarter of 2022. Looking further back, our revenues have grown at a 15% CAGR over the past three years, demonstrating the strong secular growth we've been able to deliver through this past cycle. These base business trends tempered our positive results in other revenue drivers, including upsell-cross-sell, where we've seen robust traction in our newer, fast-growing areas, such as identity verification. As Josh described, client adoption has been very strong for services we provide through our exclusive identity partnerships. As we've discussed, we view identity verification as a significant opportunity to expand our addressable market and revenue growth along with accretive margins. It's exciting to see our investment coming to fruition now. Looking at revenues by region, our U.S. business was down 6% year over year in the first quarter. Within the U.S., we have a diversified and attractive vertical mix, which has been instrumental in supporting our compelling revenue growth in recent years. In the first quarter, our U.S. performance was led by our healthcare and industrials verticals, which continued to grow year over year. We saw softness in some other verticals, including tech media and FinBiz. Turning to international, revenue in our international business was down 10% in the quarter. Similar to the US, base volume declines offset good trends in the revenue drivers we can control. International revenues were led by the EMEA region, which saw good growth in our core screening markets, tempered by softer gig vertical trends. We are seeing increased opportunities in digital identity and right to work fueled by our newest partnership with Yodi, as well as new client wins in the UK and EU. In the first quarter, we delivered 1.5% of inorganic revenue growth from Socrates and ACHEC, the two acquisitions we closed in January and March of this year. In these first months, we've been pleased with both companies' performances with results matching or exceeding our initial expectations. As Josh described, the integration work is well underway to deliver on the upside potential from these deals. including the attractive geographic expansion capabilities presented by Socrates and the robust synergy potential at HX. Turning to slide 12, our first quarter adjusted EBITDA was $46 million, a 4% year-over-year decline compared to last year, primarily due to the base revenue decline. Despite the softer top-line trends, we were pleased to expand our adjusted EBITDA margins this quarter by 60 basis points, to 25.4%. This exceeded our prior expectations and was driven by early progress in our cost savings initiatives and financial discipline. As we introduced last quarter and Josh described in greater detail today, we have several cost initiatives underway which are aimed at driving meaningful cost savings and efficiency gains. These programs will be executed over 2023 and 2024. When complete, we are targeting a run rate cost savings of $25 million and expect to see in-year savings of $10 million during 2023. We plan for these initiatives to drive permanent reductions in our cost profile and position the company to scale efficiently and profitably over the long term. So far, we are quite pleased with the progress and will keep laser focused on execution going forward. In the first quarter of 2023, we had adjusted net income of $23 million or $0.24 per diluted share, representing year-over-year decline in adjusted EPS of 4%. This year-over-year decline was similar to the decline in adjusted EBITDA, with a lower tax rate partially offset by higher interest expense. Turning to slide 13, free cash flow in the first quarter was $7 million, a substantial increase from the prior year period. Q1's free cash flow is our seasonal low point, and the results in 1Q 2023 exceeded our expectations. The drivers of the quarter's improvement included increased collections, lower cash tax payments, and a decrease in purchases of property, plant, and equipment. We remain very focused on free cash flow and are forecasting a full-year free cash flow conversion of adjusted EBITDA in our target range of 40% to 50%. Our net leverage at quarter end was 2.3 times net debt to adjusted EBITDA at the lower end of our 2 to 3 times net leverage target. In the quarter, we spent approximately $49 million of net cash on our two acquisitions and $8 million on share repurchases. Despite these outlays, our net leverage remains at an attractive level and is poised to continue declining absent any future M&A or buybacks. We ended the quarter with total debt of $504 million, cash and cash equivalents of $51 million, and $193 million available under our credit facility, providing us with ample capacity to execute our growth strategy of reinvesting in organic revenue growth and pursuing M&A. During the quarter, we also enhanced our capital structure through the implementation of an interest rate hedging program, which fixed approximately 60% of our floating rate debt. Our capital allocation priorities remain investing in organic revenue growth, pursuing M&A, and maintaining a healthy balance sheet. This includes opportunistic share buybacks under our previously announced share repurchase program. These priorities hold true in a lower growth environment as we see macro uncertainty as opportune times to build the foundation for future success. As we discussed last quarter, our rising cash position allowed us to use cash on hand for our two M&A deals in the quarter. Following these two deals, we remain well positioned to continue pursuing M&A to supplement our organic revenue growth and make further compelling investments. That said, we are focused in the near term on the integration of these two assets and executing our core strategy. On slide 14, we reaffirm our guidance for 2023, which is unchanged since we provided it in March. For 2023, we expect to generate revenues of $760 to $800 million, representing year-over-year growth of minus 1 to positive 4%. adjusted EBITDA of $198 million to $218 million, representing year-over-year growth of 0% to 10%, and adjusted net income of $106 to $121 million, representing year-over-year growth of 0% to 14%. Our guidance includes full-year organic constant currency revenue growth of minus 3% to positive 1%. As we discussed earlier, we continue to see solid growth in items within our control, including new client wins and upsell cross-sell. These are being offset by base revenue declines. We are not assuming a material change in the macro environment over the course of the year. If there is a material shift for better or worse, we would reflect those changes in updates to our guidance. We continue to expect year-over-year declines during the first half of the year. Based on what we've seen so far in April and part of May, Q2 will likely see year-over-year revenue declines comparable to Q1. We are seeing positive signs in multiple parts of our business and are encouraged by the new client and upsell cross-sell trends. At the same time, we are cycling over our strongest quarter of 2022 and in our company's history, both in terms of revenue dollars and growth rate when measured on a multi-year basis. This tougher comp will temper two cues year-over-year growth. As we move into the second half of this year, we expect to show year-over-year growth due to several key items. First, new client onboarding throughout the year. Second, ramping client hiring plans. Third, upsell and cross-sell based on our pipeline. And fourth, easing year-over-year comps, especially in Q4. From the combination of our two M&A deals, we expect 2.5 to 3 points of inorganic revenue growth in 2023. We are now assuming no impact from foreign currency, slightly less favorable than our previous assumption. Turning to profitability, our 2023 guidance includes adjusted EBITDA growth of 0% to 10%, The midpoint of this range implies a full year adjusted EBITDA margin of 26.7%, reflecting a notable margin expansion of over 100 basis points versus 2022, muted by approximately 30 basis points drag from our two M&A deals. We expect margin expansion for the full year, even in the absence of robust organic revenue growth due to the cost measures we've put in place, as well as the variability of our cost structure. The first quarter's margins were stronger than we previously expected due to some early success against our cost savings targets, as well as strong financial discipline. These results give us increased confidence in our ability to hit our targets for cost savings and margin expansion. To give you some more color on our thoughts by quarter, we expect 2Q adjusted EBITDA margins to be in line with first quarter. As Josh mentioned, we are doubling down on our virtual first strategy by closing additional facilities. In the second quarter, we expect these closures to result in impairment charges and accelerated rent expense of $8 to $10 million, which will be added back for the purposes of adjusted EBITDA. We expect margins over the back half of 2023 to improve from the first half and for the year-over-year margin expansion to increase as our revenue trends improve, the benefits of our cost actions ramp and year-over-year comps ease. Finally, turning to our adjusted net income growth guidance of 0% to 14%, we will benefit this year from reduced DNA, which should drive growth to the bottom line in excess for our adjusted EBITDA growth. We remain encouraged by the leverage in our financial model, driving adjusted EBITDA growth during 2023 ahead of our revenue growth and driving adjusted net income growth ahead of adjusted EBITDA growth. For further help with your modeling, we've included a page in the appendix with our updated assumptions for 2023 and a detailed breakdown of our revenue guidance. In closing, we are reaffirming our long-term targets on slide 15. Over the long term, we are targeting 9 to 11 percent organic revenue growth levels with margin expanding towards 29 to 32 percent plus and adjusted net income growth of 15 to 20 percent per year. Even in the absence of robust revenue growth this year, we expect 2023 to be a healthy step towards achieving our profitability targets. That concludes our prepared remarks. At this time, operator, please open up the line for questions.
spk21: Absolutely. If you would like to ask a question, please press the star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press the star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of George Tong with Goldman Sachs. Your line is now open.
spk06: Hi, thanks. Good morning. You mentioned new client growth of 5% reflected signed new business that was pushed to late 1Q and into 2Q, and that new client growth should return to 7% to 8% over the course of the year. Can you elaborate on how much new business was pushed into 2Q and when we should see a return to 7% to 8% growth in new clients?
spk04: Hey, George. Good morning. It's Josh. Thanks for the question. So let me just start again by reminding you that, you know, last year we put up record new business growth from a revenue perspective of $57 million. And that was, you know, that was notwithstanding the Q4 piece that we shared on the last call where it was a little bit lighter than our expectations based on these deals pushing out. So as we look at this year, you know, we would expect the number to come in a little bit lower than that, but by the end of the year, so figure sometime in Q3 or Q4, we would expect to be back at the 7% to 8%. And that's both the new business that we know is coming on as well as the pipeline of deals that we believe we're going to win from our existing win rates and things that we see and the timelines we expect there. So we would expect sort of sequentially to see some improvement, but getting back to the seven to eight in the back half of the year.
spk06: Got it. That's helpful. You mentioned you're seeing continued market share gains and increased client spend that's helping to mitigate base business declines. Can you talk about where you're seeing share gains and where client spend is increasing, and then also discuss how base trends have evolved over the course of 1Q, whether it was steady or whether you saw deterioration or improvement? Thank you.
spk04: Yeah, thanks, George. I'll go first, and if Peter wants to add any additional color. So first, I would say that we're winning share in all of our key regions and markets and in all of our key verticals. It's not in one place or another. And so again, a pickup in the quarter of 5%, the deals that we know that we've closed, the deals we believe we're going to win, we're seeing those share gains really from competitors of all sizes as well as in all geographies. I would emphasize, again, I think one of the dynamics in our market that we really like is the fact that there's this long tail of smaller competitors. There's also the reality that we face of sort of nascent markets around the world that give us great opportunity to grow as well. So there's a lot of room for this industry to grow as a whole and for us to gain share within that. So that's important. I think on the upsell, cross-sell, we were very pleased to be within our long-term target, notwithstanding the slowdown in base growth because it's those same clients and they're still buying more and newer things from us, in particular around the identity and the post-hire monitoring and other services for post-hire. And we're very pleased with the trends that we're seeing there. We're actually, for the first time in Q1, we saw the mix from post-hire and identity move north of the 10% figure that we've been saying in terms of our revenues in the quarter. So we think that that was a really good you know, point for us in the first quarter. And then finally, the base business trends, we continue to believe that December was the trough of what we've seen, and we saw the trend throughout Q1 and thus far into Q2 as being steady.
spk06: Very helpful. Thank you.
spk21: Thank you. Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.
spk09: Hi, good morning, guys. This is Daniel Maxwell on for Andrew today. Just curious, starting off, anything on the second quarter performance through five weeks? You mentioned some trends there, but any specific vertical or geographic call-outs on that?
spk18: So as I mentioned in the prepared remarks, our expectation for Q2 is that we'll be down year over year, similar to Q1 from a percentage basis. And then I also highlighted on the call that, you know, healthcare and our industrial verticals, which are our largest verticals in the U.S., continue to perform really well and growing year over year. And then I highlighted, you know, some other spots that were a little bit soft. We've seen a continuation of that trend through May.
spk07: Okay, that's helpful.
spk09: And then given the strength that you're calling out in new products and moving above 10% there on identity, just wondering what's changed there or if there's been any specific things to call out in terms of the level of interest in those and just general cyclicality of package upgrades and upsell more broadly.
spk04: Hey, Daniel, it's Josh. I think there's like eight or nine questions in there. I'll try to cover it and then, you know, if you have further questions, we can... But I think first of all, you know, what's changed, if anything, with identity and monitoring, honestly, is we've been... successful in starting to, you know, gain traction in the market through educating clients, through building and refining the products based on client feedback and, you know, getting to the point where we have, you know, largely driven by our, you know, our big enterprise clients' interest in these products because in the case of identity, it saves them money and makes sure that they're actually doing the proper work to get the right people on board. And we have a very differentiated solution, particularly in the U.S., relative to what anyone else has. On the monitoring side, I think there's been, you know, a real demand that's been pent up, but it's been difficult to match that with the capabilities in the product. As we shared on the last call, we moved to more of a subscription model and less of a full kind of rechecking and redoing all the packages, you know, in our releases last quarter. So we're very excited about the fact that we're seeing early traction there again. with some of our largest accounts who have had that pent-up demand. So honestly, I think the biggest shift has been that we've been able to find the products that the market wants and to position them well and to be differentiated versus our competitors who don't have similar products. And that's been a part of that success and why we thought it was noteworthy to call out on this call.
spk08: Got it. Appreciate the detail. Thanks.
spk20: Thank you.
spk21: Our next question comes from the line of Tony Kaplan with Morgan Stanley. Your line is now open.
spk16: Hey, good morning. This is Greg Parish. I'm for Tony. Thanks for taking our question. I just want to kind of circle back and talk about the ramp. So expecting new business to get back to seven to eight and then I think Peter called out second half improvement partially driven by ramping hiring plans. I think there's some other items in there I missed. But could you just maybe help parse out why you're confident in the second half improvement, sort of ignoring the easier comps?
spk03: Yeah, it's Josh. Let me start, and then Peter, if you want to jump in.
spk04: So first, I think the biggest factor is the comps. Right, so we're not expecting a macro change. We're expecting to have continued uncertainty, continued choppiness in the macro. But we do have the plans from our clients of what they're going to hire in the year. We know where those are slated. We also have the new clients who we know are coming on board. And we also have cross-sell, up-sell deals that we know are signed and clients are currently in the testing phase. And so we know all those things are coming online in addition to the lower comps, particularly in Q4. So those things have given us confidence since, you know, when we set the guidance and everything we've seen in Q1 was slightly better than our expectations, but, you know, very much, you know, gives us confidence that the year's unfolding as we thought. I don't know, Peter, if you wanted to add.
spk18: Yeah, I was just going to add, I mean, this is, for us, it's always been a first half, back half story where we're seeing the acceleration in Q2, albeit against a very difficult comp in terms of, you know, a record revenue growth rate and dollar perspective in the company's history, and then the easing comps in the back half of the year, along with the pipeline that Josh spoke to in terms of new clients upsell, cross-sell.
spk16: Okay, great. Thank you for the call there. I just wanted to ask about the cost optimization plan. In terms of timing, The 25 million run rate, is that expected to be achieved by the end of this year? So the full 25 should be realized in 2024. And then the 10 million of in-year savings, was that sort of already baked in the guidance last quarter? I wasn't sure if there's sort of upside there.
spk04: Sure. So first, in terms of the 10 million, it is reflected in our guidance expectations, and it's a part of the north of 100 basis points of margin improvement that's somewhat muted by the 30 basis point drag from the M&A we did. And so that is baked into the assumptions. In terms of the 25 million run rate, I think we'll have to come back to you on the next call to give you the exact timeline. I would say that we would get to the point of having most of those initiatives actioned between by the end of this year or sometime in Q1, early Q2 of next year. So we should get most of the savings into next year. There could be a couple million that maybe spills out of Q1 into the following Q1, but we should get almost all the way there for next year.
spk15: Great. Thank you.
spk20: Thank you.
spk21: Our next question comes from the line of Andrew Steinerman with JP Morgan. Your line is now open.
spk17: Yes, hi. This is Alex Hesson for Andrew Steinerman. I just want to walk through some of the volume and base volume math that you guys pointed to. So if new logos were up 5% and organic... was down slightly. Wouldn't that point to something like a low teens base volume trend for the quarter? Is that about right, something like 13%?
spk18: I got you slightly lower than that, but you're in the ballpark, and that's similar to the base volume declines we saw in Q4. Got it.
spk17: And then maybe can you give us any sort of dimensionalization around identity? I know last quarter you guys called out a 250% increase in sort of transaction volume or screening volume using the identity solution. Can you maybe dimensionalize any of what you saw in one queue and help us understand a bit more how much of a tailwind that could be as the year progresses? Thank you.
spk04: Yeah, thanks, Alex. I think we're very excited about what we saw with identity in Q4 and in Q1. I think what I shared in my remarks was we saw quarter-over-quarter growth that was strong as well as year-over-year growth for Q1 that was strong. We didn't give specific numbers. You know, we're not going to get in the habit of breaking out identity or other products every single quarter, but we did want to give the color, which I think starts to give you the most important dimensionalization that is part of our overall mix, identity and post-hire monitoring, you know, for the first time have moved north of the 10% that we've had them at since the time we went public. So, you know, we're excited about that trend. We think that that is really, you know, great green shoots that we're seeing on products that are still less than a year old, and we're excited about the traction that we're getting.
spk18: And Alex, just a reminder on that, right, what we've shared previously is 90% of our revenue comes from pre-hire, 10% of our revenue comes from identity and post-hire. And as Josh mentioned, we're seeing that 10% start to grow as a percentage of total revenue. Got it. Thank you all.
spk21: Thank you. Our next question comes from the line of Kyle Peterson with Needham. Your line is now open.
spk10: Great, thanks. Hey, guys, this is Sam on for Kyle today. Thanks for taking the questions. Just wanted to touch on the market share gains you guys have been talking about. Are you guys seeing any changes in win rates across any of the key verticals or geographies?
spk04: Hey, Sam, it's Josh. No, we're not. We're continuing to see good gains. win rates overall, particularly against the smaller and less sophisticated providers and domestic-only providers in other markets, but we also continue to take share from some of our larger competitors.
spk10: Got it. Okay, that's helpful. Thanks. And then I know you guys talked a little bit about it on the call, but I just wanted to get a sense of for the M&A appetite, get a sense for what kind of valuations you guys are seeing out there and what some of the key priorities there are on the M&A front.
spk18: So as we shared on the last call, we were thrilled with the acquisition of Socrates and really the price of that acquisition, you know, coming in line with our expectations. And then we also talked about the acquisition of Acheck. And what we shared is that we paid, you know, 4x synergized EBITDA for Acheck. You know, Socrates gives us the geographic expansion in LATAM that's so important for us with new business and existing clients. and Acheck really brought a great book of business to us. It's very complimentary to our current verticals. Our view is we have capacity for additional M&A, but for the rest of this year, we're most likely focused on integrating both of those acquisitions, realizing the synergies from Acheck and growing the business of Socrates.
spk04: Sam, I would just add to Peter's points. I think that as Peter highlighted in his prepared remarks, We haven't changed our capital allocation strategy. Our focus is still on the investments to drive organic growth and profitability. And I think that in a time like this, we're happy to be towards the low end of our leverage target. We'd like to stay there. We don't think it's a time that makes a lot of sense to spend a lot of money on things that are questionable. So we were happy to get these two M&A deals in Q1 that really fit our model perfectly. But right now, we're just in hardcore execution mode for this year on everything. execution against our cost targets, execution against the revenue drivers in our control, execution against integrating and getting the synergies from our M&A deals, and just continuing to innovate in these key product areas that we mentioned where we're starting to now see that traction grow as a percentage of our overall mix. So I think the theme you're going to hear from us throughout this year is, it's a great time to execute well, deliver on this year, but it's set up the future to be larger, more profitable, and have even more competitive advantages in these key product areas that we're already a market leader in.
spk10: Yeah. Okay. Got it. Yeah, that's helpful. All right. Thanks, guys.
spk21: Thank you. Our next question comes from the line of Scott Wurzel with Wolf Research. Your line is now open.
spk25: Great. Good morning, guys, and thanks for taking my questions. I wanted to just go back to the integrations of Socrates and Acek. Just sort of wondering if you can give a little bit more color on some of the performance there. brought up the low end of your inorganic contributions assumptions from 2% to 2.5%, just any more color that you're seeing there, and also maybe what you've sort of learned about the LATAM market with Socrates relative to some of the other international geographies that you're in. Thanks.
spk04: Thanks, Scott. It's Josh. I guess two comments. First, just on ACHEC, what I'll say is anytime you do these acquisitions, you always want to make sure that you don't get out over your skis in terms of understanding what risks may exist in terms of the revenue-based clients that you do the diligence you can. As soon as you own it and you have those client calls, you get more of a sense of some things. So I think for us, you know, it was a little bit better than we thought in Q1. But again, we had one month of performance in Q1. I think what we've seen just says that some of the conservatism that we put into the low end we felt comfortable taking out versus any change in performance expectations. It was more that we didn't have negative surprises as we took the asset on. In terms of Socrates in Latin America, I think that what we're seeing is the number of U.S. clients in particular who really want to be able to do screening programs in Latin America that align with what they're doing in the U.S. as much as possible is a very, very large demand for us. And that's driven by offshoring that can be done in the same time zones, the Spanish language in particular being really important for some of our clients. And people are setting up more and more operation centers throughout Latin America among our clients as they're seeing that to be beneficial from a cost perspective as well as easier to manage than being halfway around the world in some cases. So we're excited about that dynamic. We also believe that there is a lot of domestic demand in some of the key markets in Latin America, which has really not been tapped at all, and we're excited to have a chance to go after that. That's not reflected as something we see growing this year, but it is something that over time we expect to be able to grow and contribute meaningfully to the company, similar to the way we've had success with that when we've acquired assets in Canada, Europe, Australia, and Asia.
spk25: Got it. That's very helpful. Then just a quick follow-up here, and apologies if I missed this earlier, but just on the sort of sales cycles and implementations, I know you said you had called out some sort of pushed out implementations into 2Q. Have we seen that trend sort of renormalize with some of the newer business that you're signing right now?
spk04: Yeah, we're seeing pretty normal trends with everything except for this group that we talked about in Q4, which are some blue chip, you know, name brands. You would know them and If you look at what they're reporting publicly, they've been very focused on their own internal initiatives for the last quarter or two and are now returning into their more normal operational modes. And we don't share those names, but it's quite reasonable and obvious that these clients would be in the mode of waiting a quarter or two longer than they normally would have given what else they've had going on. But in terms of new business we're signing now, we're seeing more normalized implementation data.
spk24: Got it. Thanks, guys.
spk21: Thank you. Our next question comes from the line of Mark Markin with Baird. Your line is now open.
spk05: Good morning, and thanks for taking my questions. One question, you know, when we take a look at the base volumes, you know, you mentioned, you know, we're basically comparing against last year where it was absolute record levels. How would these levels from a base perspective compare to more normalized levels, say, back in 21 or even pre-COVID? How are you thinking about that and how that gives you confidence that, hey, we're basically seeing a normalization and a steadiness?
spk04: Thanks, Mark. I guess a couple of comments. One, which is not directly on base growth, but it is a very, very big driver of the trend. We've shared in the prepared remarks that we have seen a 15% CAGR even on the Q1 number over the last three years. We think that's obviously in excess of our long-term target. And so we are pleased overall. And a big part of that has been you know, base growth obviously exceeding our long-term targets by a pretty good amount over the last few years. I think as we look at base growth, you know, we have in the long-term targets 2 to 3% for base growth given all the trends that we see in our industry, which we highlight in our presentation slides today. You know, we continue to see the churn. albeit at, you know, more muted rates than we saw last year, but still, you know, far above what we would have seen pre-COVID. We continue to see, you know, particularly millennials and Gen Zers, you know, churn faster than normal. We believe that that trend will continue. The use of contingent and gig workers, obviously there are times like you would see right now where maybe the contingent workforce doesn't grow as rapidly, but overall that's a trend that we think supports our industry. And so as we look at what we saw from last year, where Peter and I shared in our Q3 and then our Q4 call, that we saw this base growth kind of turn negative, you know, earlier. So we saw it muted earlier in the year and then turned negative, particularly in Q4. And we shared that the trough of what we've seen for that was December. And then we've seen, you know, a pickup that's been stable so far from January through, you know, May 9th, May 8th, I guess, so far this year. So, you know, we think that that's sort of falling and then hitting a plateau happened, and we would expect that to then normalize to the 2 to 3 percent as we look into next year and beyond.
spk05: Great. And then, you've done a great job in terms of expense rationalization. Obviously, the margins have been holding in really well and improving. And part of that has been, you know, through your RPA efforts. I'm wondering this from a longer term perspective, what your initial thoughts might be in terms of the application of generative AI and these large language modules models in terms of being able to, you know, further increase the efficiencies of the operations.
spk04: Thanks, Mark. You know, we're optimistic and cautious at the same time in the short term. I think that, you know, we've been at the forefront of using various technological capabilities, including what I'll call kind of 1.0 AI capabilities that we do use in the normalization of our data in the fulfillment engine. But I think we now believe that there's a chance to really rethink a lot of what we're doing. Some of it will utilize, I'm sure, the AI capabilities, not just that exist today, but we're seeing the speed with which those capabilities grow, obviously, to be exponential at this point. I think for our view, you know, we want to make sure that we're doing it in a secure way that complies with all law and that also protects the data and the integrity of the information that we provide to our clients because in the end, people's jobs and livelihoods are on the hook if we get something wrong. We think it's important that we're using these tools in a way that, you know, delivers low cost, delivers speed, and allows for our clients to get the benefit of that as they're hiring, but also to do so in a way that meets our obligations under the FCRA, the various state and city laws, laws around the world for the work we do, as well as for general protection of data and otherwise. So we're very excited for the opportunities that exist and some of the tools that are being provided that are not public facing and that you can use without risking your data being exposed publicly. And, you know, we plan to utilize those and we believe those can drive down costs and increase our overall effectiveness over time.
spk18: And Mark, maybe just two things to add on cost optimization. Yes, we're excited about the cost optimization, but also we expect to improve the candidate and the client experience out of that and improve turnaround time. So it's not just focused on cost, but It's really setting up the business for continued success with clients and customers. And then the other thing just to highlight is the $10 million of in-year savings in 23. That is baked into the guidance that we provided in Q4 and reaffirmed as part of this call.
spk05: That's great. And then last question for this call is... Can you talk a little bit more about international and how you're thinking about that from a long-term perspective? Obviously, macro factors impacting international markets as well, short-term, but just in terms of the potential for new business ads and more countries becoming bigger parts of the Sterling platform.
spk04: Yeah, thanks, Mark. I think, again, we believe we're the most global of any of the providers in terms of having more revenue and a higher percentage of our revenues outside of the U.S. versus our competitors. And we believe that that sets us up for great share gains. We continue to see new business wins. We're seeing more and more consolidation of regions by clients, which is exciting for us and the opportunity to serve them on our single core platform. You know, we shared some statistics around how our migrations have gone there. And so we're very excited about that future outside of the U.S., really, in all the markets we operate. And we think that we've got a position that's a winning position. We've got products that are winning products. We've got a team that's the best in the business. And over time, we expect to continue to grow international and ultimately for it to grow faster than the U.S., you know, as we look down the road a few years. Thank you.
spk20: Thank you.
spk21: Our next question comes from the line of Jason Salino with KeyBank Capital Markets. Your line is now open.
spk13: Great. This is Devin on for Jason this morning. Thanks for taking our question. Maybe just one from us. I know you've called out softness in your financial business services vertical. Just given the recent crisis in the banking sector, any color you can provide on how much exposure do you have with banks? And just based on your conversations, with customers in that vertical, how are you thinking about hiring plans for the rest of the year versus maybe like a quarter ago?
spk04: Yeah, thanks, Devin. So again, I think we have financial and business services together. So I think your question is specifically more applicable in financial services and banks in particular. So again, our financial services vertical is broader than banks. So it is not something that has a significant impact. Our exposure to the sort of you know, mid-tier and smaller banks is low relative to more of the, you know, sort of too big to fail banks, let's say, and banks in other countries that are also similarly, you know, too big to be let fail. The hiring plans, again, that's all baked into our guidance for the year. Those are industries where, in particular, the largest parts of our revenues in any given year would be through their summer intern program and their new hire programs. We're not hearing about any pullbacks in that. It's much more at the higher levels of the organization where we've seen that pullback.
spk11: Great. Appreciate the call there, Josh.
spk21: Thank you.
spk11: Thanks, Stephanie.
spk21: Our next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open.
spk14: Hi. Thanks for sending me in. This is James Holmes on for Shlomo Rosenbaum. Maybe a quick one. Can you talk about attrition? Are you seeing the current environment starting to have any impact on retention rates? And has there been any change in the pricing environment?
spk03: Thanks, James.
spk04: It's Josh. So first, I would say we're pleased to still be at our long-term target on retention. We continue to think that that bodes well for the future. We really haven't seen major changes in trends. I think one of the things we are seeing on the offensive side as well as on the, you know, existing client side is there are a lot more RFPs out there. We believe that we win more than our fair share, so we're excited about that, and that gives us the chance to really, you know, earn more new business. But a lot of that is clients just taking the time when they have a little bit of a slowdown to make sure they're getting the right services. And as you say on pricing, and I think there we haven't seen a material change in the pricing dynamics at all. We do expect to be able to implement price increases mid-year as we've done for the last few years. And again, at the high end of the market, the largest clients, they always have some amount of pricing impact on us. But we're not seeing anything materially change over the last few years on price.
spk19: Great, thank you.
spk21: Thank you. There are no additional questions waiting at this time, so that will now conclude the Sterling first quarter 2023 earnings call. Thank you for your participation. I hope you have a wonderful rest of your day.
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