Sterling Check Corp.

Good morning and welcome to the Stirling second quarter 2023 earnings call. My name is Carla and I will be the operator of today's call. If you would like to register a question for the Q&A portion of the call, please press star followed by one on your telephone keypad. When asking your question, please ensure your telephone is unmuted locally. To revoke a question, you can press star followed by two. I would now like to pass the conference over to our host, Judah Sokol, Senior Vice President of Finance, to begin. Please go ahead when you're ready.

Thank you, operator. Welcome to Sterling's second 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 and the use of non-GAAP financial measures. Additionally, please refer to our most recent Form 10-K and 10-Q filed with the Securities and Exchange Commission for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued this morning. I'll now turn the call over to Josh Perez.

Thank you, Judah. Good morning, and thank you for joining us. Sterling's second quarter of 2023 was another quarter of successful execution towards our long-term strategy and 2023 focus areas. Results were at or above our prior expectations, and I am very proud of the team's accomplishments. The macro environment recently slowed during the second half of June and July, and we have narrowed our full year expectations to reflect that slowdown. Even in the face of this macro softness, our clients continue to hire at a rapid pace and are increasingly relying on us to help them keep their employees safe while hiring faster and smarter. Our unique focus on product innovation, technological excellence, and client service differentiate us. Moreover, our global scale and capabilities are attracting more new clients who seek a global player capable of handling complex screening programs with compliance and quality worldwide. As a result, we are succeeding in the areas we can control while also building a stronger foundation for the future. Turning to our highlights of the quarter on slide four, in Q2, we delivered revenues of approximately $190 million in line with our expectations as we continue to see success in the organic revenue drivers in our control. This quarter, our results included growth of 10% year-over-year from the combination of new clients and increased client spend through upsell and cross-sell. Our Q2 adjusted EBITDA margin exceeded our expectations and was fueled by the progress we have made on our cost optimization efforts. We expect these strategic initiatives centered around focused automation, efficiency, and process reengineering to result in a stronger, more scalable, and more profitable company for the long term. We are well on track to achieve our cost savings targets of $10 million in 2023 and $25 million of annualized savings. We also saw continued momentum this quarter with global adoption of our newer and differentiated solutions, identity verification, and post-hire monitoring, which I will touch on shortly. Overall, our passion for client service, innovation, and operational excellence is evident, and I could not be prouder of the Sterling team as we took significant steps forward in Q2 toward achieving our goals. Turning now to slide five, which summarizes our long-term strategy and 2023 goals. In recent earnings calls, we shared our company's long-term goal of becoming 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. This strategic framework directly fueled our 2023 focus areas, with concrete near-term goals. Specifically, we are focused this year on doubling down on the organic revenue drivers we can control, scaling our identity verification and post-hire monitoring solutions, optimizing our cost profile, and M&A. In the second quarter, we saw positive results on each of these four areas. Starting with organic revenue on slide six, We continue to be a global leader in background screening and identity services due to our deep market expertise, robust cloud platforms, and exceptional client service. In Q2, we again delivered on our commitment to drive high-impact innovation and elevated client experiences within our core offering. We have many milestones to highlight from the past few months. These include the significant enhancements we've made to our recently released fully integrated Sterling monitoring solution and the upcoming release of our Sterling i9 virtual inspection capabilities enabled by our partnership with ID.me. We've also launched several new enhanced features that provide strong improvements to client experiences, including our new sub-report functionality and new drug and health capabilities. Both of these allow clients more flexibility and convenient methods to manage their programs. Our continued focus on innovation has enabled us to enhance our revenue regardless of the macro environment. During the second quarter, we continued to gain market share through new client wins and increased client spend on newer and higher margin solutions such as identity verification, and post-hire. We have also seen an increase in the number of new and expanded client RFPs. Prospects and existing clients are attracted to our differentiated solutions and are using the current environment to evaluate consolidation with scaled providers possessing an increased scope of services. Our success is spanning all regions of the world as well. as we have seen continued success winning new clients and growing through upsell cross-sell in our international regions. This includes our new Latin America region, where our improved capabilities following the acquisition of Socrates are better positioning us to win more multinational deals. Looking ahead to the back half of 2023, we expect to see improved year-over-year performance, particularly in the fourth quarter, from the combination of several factors. First, we expect new business to improve through the second half based on deals coming online. Second, in the first half of this year, we've seen better win rates and have closed more business in new logo and upsell cross-sell opportunities than a year ago. Third, we have a very strong opportunity pipeline, including larger and more advanced stage deals when compared to last year. These factors help underpin our belief that results will strengthen in coming quarters, notwithstanding the uncertain macro. Turning now to slide seven, our continued investment into identity and post-hire products are bending our trajectory with fast-growing and higher-margin solutions. These products cement our culture of innovation, our clear competitive differentiators, and significantly increase our addressable markets. We are thrilled to see our continued investments paying off, demonstrated by the identity and post-hire solutions representing more than 10% of our revenue for the second quarter in a row and increasingly being included in client packages. In fact, during the first half of 2023, nearly half of all new deals we won in the U.S. included identity as part of the package. Even with this recent success, the penetration rate of digital identity within our existing client base remains very low, suggesting that the runway for additional growth is very robust. In Q2, we also extended our industry-leading identity position through the release of our new exclusive verification workflow with Yodi. The Sterling-Yodi partnership expands Sterling's digital identity capabilities into the EMEA and Asia Pacific regions. By exclusively enabling the verification process at the beginning of a background check, the new solution decreases turnaround time by approximately 80 percent, improves completion rates, and delivers more accurate screening results. In the U.S., we were thrilled to recently extend our exclusive partnership with ID.me through 2028. Building on our proven success, this extension will allow us to continue to drive innovation and adoption of identity verification solutions. In that spirit, we were very pleased to recently unveil the upcoming launch of a new virtual I-9 document review service. For more than 35 years, the Form I-9 process has remained largely unchanged and burdensome with in-person verification requirements. Now, in partnership with ID.me, Sterling can offer a secure, compliant, and convenient alternative virtual inspection option via ID.me's trusted referee video chat. Shifting to post-hire on the right side of the slide, demand continues to grow for our subscription-based monitoring solution, which tracks, among other things, criminal arrest and conviction records, motor vehicle registry records, licensing and credentials, and social media. We continue to reimagine monitoring, and in Q2, we announced new capabilities that help clients to effortlessly manage and scale their post-hire monitoring in our client hub. We're optimistic about our consistent progress to streamline and simplify the post-hire experience, which has traditionally involved a more limited, fragmented experience with multiple providers. Moving on to slide eight, we shared in our first quarter earnings call that we are focused on driving long-term meaningful cost savings and efficiency gains. Over the course of 2023 and 2024, we are executing on a comprehensive cost optimization program aimed at building a more scalable, effective, and profitable company now and into the future. Our cost initiatives fall into three key pillars. reducing our cost of revenue through a focus on labor and data costs, two, decreasing our facility costs by leaning even more into our virtual first strategy, and three, reducing SG&A costs by streamlining our organization and enhancing functional alignment. I am happy to share that Q2 was another quarter of strong execution against that goal. We implemented several new initiatives driving efficiency and automation, the closure or downsizing of several facilities, and the continuation of actions to streamline functional alignment with go-to-market strategy. We expect that initiatives already implemented will drive the vast majority of the projected $10 million of savings during 2023. On a run rate basis, this equates to over two-thirds of our $25 million annualized target, giving us confidence we will achieve our goals. We are very excited about the opportunities we are unearthing to drive further process improvements, including increased automation and the use of generative AI. We believe generative AI can be leveraged to improve the client and candidate experience, internal productivity in client and candidate care teams, engineering, and other internal areas. we have identified exciting opportunities to leverage AI in various parts of our fulfillment business already, some of which include enhancing our criminal reporting processes and creating intelligent data extraction capabilities. Once complete, all of these initiatives are expected to bring our total annualized savings to our $25 million goal. The final 2023 goal I will discuss is M&A, shown here on slide nine. During the first quarter, we made two strategic acquisitions, Socrates and Acheck, and started on deal integration to drive cost synergies and geographic expansion benefits. In the second quarter of 2023, we continued that journey with strong execution against our integration timelines, including on-track migration of client-facing and fulfillment platforms. We expect to complete deal integrations by the end of 2023 for Socrates and the end of second quarter 2024 for ACHEC. As part of these integrations, we are leveraging and refining the M&A playbook we developed for our 2021 EBI acquisition, giving us increased confidence in potential future deals due to our ability to integrate cultures, operations, and performance goals effectively and efficiently. Our integration efforts are driving meaningful financial benefits. As of Q2, our year-to-date inorganic revenue from the two acquisitions has been performing ahead of pre-deal expectations, and we remain on track to realize our cost synergies as planned. In particular, the Socrates integration is offering substantial benefits to multinational and local Latin American clients. In conclusion, I am proud of what we accomplished this quarter and excited for the opportunities in front of us. While cyclical hiring trends will come and go, the longterm health of this industry and our business is exciting. Moreover, we believe we are well on track to achieving our 2023 goals and realizing the vision of our longterm strategy. We look forward to continuing to update you on our progress in the second half of the year. With that, I will hand it over to Peter Walker, our CFO, to take you through our financial results. Peter?