Q3 2022 Sterling Check Corp Earnings Call

Hello, everyone and welcome to the Sterling third quarter of 2022 earnings call.

Name is SAP and I'll be the operator for your cold today.

There will be an opportunity to ask a question on the call today and you can submit your question by pressing star one on your telephone keypad, well press star two if you wish to withdraw your question.

I will now hand, the floor over to Judah cycle to begin.

Thank you operator, welcome to Sterling third quarter 2022 earnings call.

Joining me today are John <unk>, Chief Executive Officer of Sterling, and Peter Walker, Chief Financial Officer of Sterling.

The slides referenced during this presentation can be accessed on Sterling <unk> Investor Relations website under news and events.

As 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 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.

In our earnings release issued this morning.

I'll now turn the call over to Jos Peres.

Thank you Judah good morning, and thank you for joining us Sterling third quarter of 2022 was another great quarter and continued the strong results. We saw throughout our record 2021, and the first half of 2022.

As you can see on slide four this represents our seventh straight quarter of double digit organic constant currency revenue growth our sustained excellence in new business growth client service and innovation drove year over year revenue growth of 18%, including 12% organic constant currency.

<unk> growth, even as we lapped last year's third quarter growth of 44%.

We also saw approximately 7% growth from Epi, which has consistently outperformed our initial expectations and gives us great confidence for future M&A.

We are very encouraged that the quarter's strong results were driven by all four of our revenue drivers performing at or above our long term targets.

Our product innovation and technology excellence continue to resonate with prospective clients, helping drive third quarter growth from new business of 9% the eighth consecutive quarter of growth from new business above our long term target of 7% to 8%.

We continue to win new logos from competitors of all sizes and in all regions due to our competitive differentiators such as innovative product offerings client service excellence and cloud based technology, our pipeline of recent wins and new prospects remains very strong, giving us confidence in our ability.

<unk> to continue to deliver best in class New business revenues.

Clients are also deepening their spend with us through our up sell cross sell strategy as we expand package density and sell innovative and unique new products. One such unique product is identity verification, where we are a global market leader with highly differentiated and proprietary solutions in the third.

Third quarter, we signed an exclusive workflow partnership with UK based EOD, expanding our digital identity solutions to international markets by building on the same vision and best in class identity verification offerings, we have in place in the U S with IDB.

I'll discuss this partnership in our identity solutions shortly.

Our other two revenue drivers revenue retention and base growth also performed in line with our long term targets. Our revenue retention rate of 96% is fueled by our ongoing commitment to customer service excellence, which includes customer tools that have been completely redesigned in recent years.

And a cloud based platform, providing best in class innovation and network availability.

Turning to slide five the third quarter of 2022 marks our seventh consecutive quarter of double digit year over year organic revenue growth.

And we have now delivered an average sequential quarter over quarter revenue growth of 10% since the second quarter of 2020.

We are very proud of our consistency in new business generation as Q3 was the eighth consecutive quarter delivering above our 7% to 8% target range and we expect to continue outperforming the market over the long term.

We are particularly proud that we accomplished double digit organic revenue growth in the third quarter, which we believe is best in class.

Slide six illustrates this point further showing that we have been delivering strong results and the growth drivers we control.

From the combination of new business cross sell upsell and gross retention our organic revenue growth has averaged 15% since the first quarter of 2021 double our combined 7% to 8% target for those items.

Even during the 2020 COVID-19 downturn, we still achieved our upsell cross sell and new business targets and our retention improved by 300 basis points over this period.

This demonstrates that our solid strategy and execution have enabled us to perform well in the areas most within our control even during challenging economic times.

As we discussed on our last earnings call, we saw our base growth moderating in the back half of the year to our long term, 2% to 3% target.

This moderation happened a bit earlier than we expected as many clients tempered their hiring due to macroeconomic uncertainty and are now operating in a holding pattern as they assess the macro environment and establish their plans for next year.

Despite this we still grew 18% in the quarter, including 12% on an organic constant currency basis, while lapping our stellar 44% growth from the third quarter of 2021.

We expect fourth quarter revenues to grow year over year on both a total and organic constant currency basis, while we continue to see strong performance on the growth drivers within our control given the uncertain macro environment. We have acted quickly to execute on our load growth playbook take.

<unk> steps to rightsize, our business from the extremely high growth environment, we've been operating in for nearly two years.

As we shared on our Q1 call. We have been hiring ahead of our revenue needs and running a roughly 10% surplus in our fulfillment labor this year to support our 40% average growth since the beginning of 2021.

This strategy served us well, enabling us to maintain very high service levels during a time of explosive growth.

As we now transition into a lower growth or recessionary environment. We are acting quickly to rightsize. The company a strategy that will drive cost of revenue and Opex savings starting in the fourth quarter and increasing in 2023.

We had been planning a number of initiatives for the last few quarters, while we managed our tremendous growth. We are now accelerating these initiatives as part of our load growth playbook, including four key parts summarized on slide seven.

First expanding our margins through additional automation and cost reduction measures. These actions will be aimed at streamlining the business in connection with the refresh strategy, we launched earlier this year.

Second executing on the revenue drivers in our control with an even greater focus on new business and cross sell upsell initiatives.

Third driving our market, leading identity solutions to gain scale in the market and fourth accretive M&A as multiples for tuck ins and geographic expansion opportunities become more attractive.

We believe these actions will position the company to invest for growth and market share gains regardless of the macro environment and will allow us to expand adjusted EBITDA margins year over year in Q4 by over 250 basis points.

We also expect to realize significant run rate cost savings by the end of this year, which will fuel our ability to expand margins substantially in the future while also gaining market share.

One of the key reasons, we win and excel and the drivers within our control is our product innovation turning to slide eight identity continues to be a great example of our innovation led approach and first to market solution.

So I thought I would share some updates on how things are developing.

As we have discussed in previous earnings calls, we view Sterling identity as a strategic pillar on equal footing to background screening and we are very excited about our early traction.

We believe that the future is not built on transactional identity verification, but instead on trusted digital identity networks to.

To the best of our knowledge Sterling is the only provider that offers a solution built upon this principle.

Our exclusive partnership with FINRA Niv me are significant competitive differentiators and it put sterling and our leadership position to deliver identity services for employers in the U S. We are excited to now expand our exclusive trusted digital identity offerings to international markets in partnership with you.

Already a market leader in the portable identity space.

Sterling and Euro have created a new fully integrated exclusive workflow that we believe provides us a significant competitive advantage outside the U S. Just as our <unk> partnership does in the U S.

The exclusive workflow will allow candidates to seamlessly create a reusable digital identity, where they can verify their identity, one and share their details with other businesses in seconds.

Individuals will be able to use their digital identity for future job opportunities age verification and any process requiring identity verification.

In Q1, 2023, we expect to start deploying our new solution with Yoda and the U K and a planned rollouts in various international markets throughout 2023.

In terms of our IBM partnership the identity rollout has continued to be successful with client adoption across all of our verticals clients and prospects are responding positively to our identity first messaging and focus on product innovation. The themes that have resonated the most with clients are reducing fraud ensuring.

Data integrity and streamlining the candidate experience.

When <unk> is used we are now seeing more than one third of all candidates come in pre verified a testament to <unk> network and the power of reusable identity.

We are also starting to see the impact of screening outcomes when identity is in place.

One of our largest financial services customers experienced a 22% increase in records found during the six months following <unk> implementation as compared to the six months prior due to enhanced data integrity.

Better screening better candidate experience and reduced fraud, all contribute to our vision to start every screen with identity.

This is just the beginning of our identity journey, we look forward to continuing to provide updates as we innovate and change the way background screening works.

Turning to slide nine our achievements and automated fulfillment are another key competitive differentiator, helping us drive strong organic revenue growth.

To hire is a critical measure for our clients and we are committed to accelerating that time, while not compromising on compliance or accuracy automation across our global businesses for all our product areas has been a critical investment area at Sterling for many years.

Investments into machine learning artificial intelligence, API and robotic process automation combined with owning our captive offshore fulfillment centers have given us greater control over collecting data with faster speed and increased accuracy.

These benefits extend to all parts of our workflow, including data collection data analysis and report generation.

Today, we have well over 3000 automation, leveraging Apis and RPI, representing 90% of our U S criminal searches.

These automation to enable us to easily access data through seamless integrations and perform the most cost efficient searches that allow for deeper analysis, while searching more jurisdictions and less time.

But it is not simply the number of automation that matters. It's the results that drives for our clients over 60% of our U S. Criminal screens are now completed within the first 15 minutes over 70% within the first hour and over 90% within the first day to our knowledge. These turnarounds.

<unk> figures are best in class in our industry and our key characteristics that differentiate us from competitors.

Automation also drives cost reductions throughout our business, we have realized millions of dollars of net savings, thus far by reducing our manual footprint and vendor costs and we expect significant future savings as we continue to implement and optimize our strategy with continued investments yielding additional gross.

Arjun expansion and cash flow.

As part of the low growth playbook I discussed earlier, we have launched project nucleus to drive meaningful cost savings and efficiency gains by first reengineering processes.

Driving fulfillment labor cost reduction and third identifying and executing on additional automation opportunities with a focus on international screens as well as U S incremental opportunities.

Automation is one of several exciting investments and cost savings initiatives, we slowed or paused, while our revenue growth was so robust during 2021 and this year. We are excited to ramp up our work on this front improving further on our already best in class capabilities, while also enhancing our financial.

<unk> results.

In conclusion, I am really proud of the Sterling team for delivering a great third quarter and for continuing to deliver through uncertain times, we navigated successfully through Covid and the subsequent recovery while building for the future and I strongly believe we will deliver on share gains and margin improvement in the current macro environment as well.

With that I will hand, it over to Peter Walker, our CFO to take you through our financial results and updated 2022 guidance Peter.

Thank you, Josh and good morning, everyone.

Turning now turn overview of our most recent quarterly performance on slide 12.

During the third quarter of 2022, we reported revenue of approximately $199 million, an 18% increase compared to the third quarter of 2021 with 12% organic constant currency revenue growth as Josh mentioned this was sterling seventh consecutive quarter of double digit year over year.

Organic revenue growth an accomplishment we are very proud of and believe is unique in this industry.

Third quarter also included a 7% contribution from M&A, partially offset by a 160 basis point drag due to foreign currency translation.

The organic revenue increase include a new client growth of approximately 9% and existing client growth of approximately 2%, including base growth cross sell upsell and net of attrition our investments in technology and products, coupled with our best in class turnaround times and customer first focus enable our.

Gross retention rate to remain strong at approximately 96% for the last 12 months. Additionally, pricing was relatively stable across the period and not meaningful to the change in revenues.

We are encouraged that our quarter strong results were driven by all four of our revenue drivers performing at or above the target range. We are seeing significant success in the areas of our business most within our control, including strong growth from new clients and cross sell upsell as well as maintaining industry leading revenue rich.

Pension rates, we are most focused on these areas and we feel that our momentum in winning market share and expanding wallet share with clients can help offset any unpredictability base growth.

As Josh described our base growth moderated a bit earlier than expected in Q3, which drove approximately $6 million less in revenue and approximately 100 basis points flat and adjusted EBIT margin versus our expectations.

Looking at revenues by region revenue in our U S business grew 21% compared to the third quarter of 2021, including 7% from the <unk> acquisition.

We saw broad based strength across our industry verticals with particularly exceptional results in our health care industrials and <unk> verticals as we executed our growth playbook.

Revenue in our international business grew 11% on an organic constant currency basis International growth was led by the APAC region, which continues to exhibit broad based strength, including Australia, and Singapore due to new client wins and strong underlying performance.

In the third quarter, we delivered 7% of inorganic revenue growth from Evi. Our November 2021 acquisition. We were very pleased with this performance as it was a third consecutive quarter above our expectations. The deal integration is almost complete ahead of schedule and our epi client retention has solidly.

<unk> outperformed our initial expectations. The success of this deal and integration provides us with confidence that we are well prepared to pursue additional synergistic M&A.

Turning to slide 13, our third quarter, adjusted EBITDA was $53 million or 4% year over year increase compared to the third quarter of 2021, and adjusted EBIT margin for the third quarter of 2022 was 26, 6%.

Last quarter, we indicated that margin should increase in the third and fourth quarters as I mentioned, the faster moderation in base growth impacted our third quarter margin by around 100 basis points.

While we are growing the macro environment is unclear and as such we are implementing our low growth playbook. As a result, we expect more than 250 basis points of year over year expansion of margin in Q4 or.

Our focus on cost discipline healthy growth and innovation will drive long term margin expansion, even as we continue investing in organic revenue growth as a reminder, our cost structure is highly variable with 80% of our cost of revenues tied directly to third party data costs, we only incur as revenue is.

Recognize.

An additional 16% of our cost of revenues are tied to labor costs, we can quickly scale up and down as required.

In the third quarter of 2022, we had adjusted net income of 29 million or <unk> 29 per diluted share representing a year over year decline in adjusted earnings per share of 12%.

This year over year decline was primarily driven by a much lower tax rate in the third quarter of 2021, when our provision adjustment brought our adjusted effective tax rate to 13% compared to this quarter's adjusted effective tax rate of 26, 5%.

For the fourth quarter, we expect an adjusted effective tax rate in the range of 26% to 27%.

Turning to slide 14 free cash flow in the third quarter was $35 million, an increase of 65% from the prior year period Q3's free cash flow was in line with our internal expectations and driven by the growth in operating income and an acceleration in collections, we expect the fourth.

Quarters free cash flow conversion of adjusted EBIT to be similar to the third quarter's conversion rate.

Our net leverage at quarter end was two times net debt to adjusted EBITDA at the low end of our two to three times net leverage target. Our net leverage continues to decline due to our growing cash balance and adjusted EBIT growth and is poised to continue declining absent any future M&A that's fair.

Third our M&A pipeline remains robust and we expect multiples to start to moderate we ended the quarter with total debt of 505 million cash and cash equivalents of $99 million and approximately $140 million available under our revolver, providing us with ample capacity to execute our growth strategy.

<unk> of reinvesting in organic revenue growth and pursuing M&A.

Our capital allocation priorities have not changed since the time of our IPO investing in organic revenue growth pursuing M&A and maintaining a healthy balance sheet. This remains true in a low growth playbook as well as we see macro instability is opportune times to build the foundation for future success.

Yes.

On slides 15, and 16, we provide our updated guidance for 2022 for 2022, we now expect to generate revenues of 769 to 779 million representing a year over year growth of 20 to 21, 5%.

Adjusted EBITDA of $204 million to $210 million, representing year over year growth of 14% to 17% and adjusted net income of $109 million to $113 million representing year over year growth of 18 to 22, 5%.

As shown on slide 16, our guidance includes full year organic constant currency revenue growth of 15% to 16, 5%, implying low single digit organic constant currency growth in the fourth quarter. We continued to see good performance from the revenue drivers in our control, including new business.

Sell cross sell and retention.

Our industry diversification is providing us some protection against the verticals most impacted by the current environment in particular, our healthcare industrials and APAC region are all showing growth so far in Q4, helping offset declines in UK gig retail contingent and technology.

So the contribution from the acquisition of Evi, we now expect the deal to contribute six five points of inorganic revenue in 2022 ahead of our previous 6% estimate.

The fourth quarter, we expect the inorganic contribution to be approximately 4% as epi revenues will flip to organic in December .

For the impact of foreign currency fluctuation, our full year 2022 guidance assumes 170 basis points drag compared to a 100 basis points and our previous guidance. This includes a headwind during the fourth quarter of approximately 300 basis points.

Turning now to profitability. Our updated 2022 guidance includes adjusted EBITDA growth of 14% to 17% and implies a full year adjusted EBIT margin of 26, 7% at the midpoint.

Our margins are lower for the year from previous expectations, driven by lower revenue guidance fulfillment labor surplus to support extraordinary growth higher inflationary costs and higher third party verification costs in the U S. We.

We expect fourth quarter, adjusted EBITDA margins to expand substantially both year over year and on a sequential basis as we execute on our low growth playbook that Josh mentioned earlier, the midpoint of our guidance implies a fourth quarter margin of approximately 28% of our 250 basis points higher year over year.

Year, reflecting the speed at which we are shifting our organization for the unclear macro environment.

Looking ahead the moves we're making should yield continued margin expansion.

Finally, turning to adjusted net income growth guidance of 18% to 22, 5%, 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 strong adjusted net income growth during 2022.

Even in the absence of adjusted EBITDA margin expansion.

To further help with your modeling we've included a page in the appendix with our assumptions for 2022.

In closing we are reaffirming our long term targets on slide 16, we are encouraged by our continued ability to execute on the revenue drivers in our control and are confident in our plans to improve the profitability of our business as we move forward in the year.

That concludes our prepared remarks at this time operator, please open the line for questions.

Thank you as a reminder to ask a question. Please press star one on your telephone keypad oil prices start to withdraw your question.

Question comes from Shlomo Rosenbaum from Stifel. Please go ahead.

Hi, Thank you very much for taking my questions.

I just wanted to ask you. If you can just digging a little bit more into the environment that youre seeing right now and kind of.

Are you expecting gross organic growth in the fourth quarter.

From what Youre seeing with your clients discussions.

Do you think it's fair to assume that you could still generate organic growth going into 2023, I know that no one wants to get too far ahead of themselves.

Generally the company has said that they think that the.

Gross drivers in terms of new clients and upsell and things like that should be able to give them growth even in tough environments and I'm wondering if you still expect it to happen in 2023.

Hey, Shlomo good morning, it's Josh Thanks for the question. So in terms of what we're seeing now and again, we don't like to comment on any given month, but you should assume that our Q4 guidance is reflective of what we're seeing in our expectation to grow both on a total and.

Organic constant currency revenue basis, obviously, the headwinds from foreign currency exchange are higher than our expectations.

Peter laid that out in terms of our expectations of a 300 basis point headwind in the quarter as we think about next year I think we're not in a position to give guidance. Obviously as you reflected in your in your question Shlomo and it is a cloudy macro out there, but our expectation is that if the macro remains as we're seeing it now we are.

Spect to grow next year on both the total and obviously at this point, we don't have any inorganic that was accounting next year. So on a organic constant currency basis, we would be expecting.

Next year, obviously, the first half as we lap our stellar 38, and 29% growth rates in the first and second quarter, which were in turn lapping, 80% and 44% growth rates last year will be a little bit more challenging, but we would expect to be able to grow as long as the macro does hold and more importantly, I think.

We expect to expand our margins next year. We believe this is a great time for us to actually take the action that we could not take over the last call. It three to four quarters, while we were growing at such an exponential rate for our business. It was very hard to actually do some of the work that we wanted to do to expand margin. So we're going to use.

This low growth period to do that work be more profitable while also planning to grow.

Great and if you don't mind give me one follow up over here you called out APAC is international area of strength one of your competitors called it out as an area of weakness and I was wondering if you can kind of talk about the verticals that you're in the APAC region, and maybe a little bit more generally internationally.

You kind of give us a contrast as to why you're stronger in one region versus another in terms of the growth.

Yes, so we don't really break down our international business into verticals, but you should think of our Asia Pacific business as being heavy in financial services and also in dig in Australia in particular and those are areas that.

We're continuing to see good performance.

And then I think in Europe .

We also have heavy financial services and other general broad based industries, but we do have a very heavy gig business in the UK, which is which has actually had a pretty tough year. After stellar growth last year and the headwinds from currency on the pound Peter shared the 11%.

Organic constant currency growth rate for our international businesses, but the impact of currency actually wipes out almost all of that growth in the quarter.

Hey, good morning, Shlomo, It's Peter I, just wanted to add to and when we think about APAC rate well countries or are we in is going to be kind of a differentiator probably between us.

And the other calls you've heard recently, Australia, and Singapore, Singapore are where we're continuing to see strong performance.

Great. Thank you.

Thanks. Our next question is from Manav Patnaik from Barclays. Please go ahead.

Hi, Good morning. This is actually running Kennedy on for Manav May I. Please ask with regards to what you've seen in today's moderation come in quicker than expected how does that can you assess your visibility.

In terms of your line of sight into that from what Youre seeing from your leading indicators conversations with clients et cetera.

And your visibility for the next 10 ensured it worsen from a slowing environment to potentially recessionary.

Thanks, Ron and it's Josh I'll jump in and if Peter I wanted to follow up I think first what I'll say is what we're seeing and hearing from clients is reflected in our revised guidance for Q4, it's why we brought it down but we do still expect to see.

Growth, both organic constant currency and total in the quarter. So that is reflective of what we're seeing and hearing in terms of our visibility.

While we won't share the specifics at any given time with you we do see our revenues on an hourly basis and our platform on a daily basis in.

In terms of our buildings and have very good visibility into changes in trends and what we're seeing.

And what we wanted to share was more of that in Q3, we saw that reversion to our long term two to three.

Percent target on base growth happen, a little bit earlier than we had expected it impacted the quarter by about $6 million in revenue, which we would've expected to have a flow through that would have impacted margin by 100 basis points. So we thought it was important to share that in terms of visibility in terms of why the margin was where it was and why the guidance. So when you think.

About our revised guidance at the midpoint, which is lowered by $16 six of that already happened in Q3 and the rest is what we're reflecting based on what we're seeing and.

Hey, good morning, Brennan I would just add to that we have not seen an additional any kind of step down from what we saw kind of in that moderation of base growth at the end of Q3. The businesses continue to perform based on that run rate and that's what gives us confidence in sharing Q4 guidance that we will grow revenue in totality.

And then we will grow organic constant currency revenue in Q4 and also the 2023.

High level comments, Josh has provided.

That's very helpful. Thank you and then May I, just confirm what the other drivers for the year over year decline in adjusted EBITDA margins were outside of the 100 basis points from.

The moderation in base group.

Yes, so I think very consistent with what we've been talking about all year. The first three quarters of 'twenty, two and public company costs. So we needed to absorb those costs. We also have evi operating not at its fully synergize EBIT margin in Q3, even though we're ahead of schedule and.

We will be there.

Call. It a 2023, so those would be the two drivers to think about along with the fact that there was about $6 million of revenue that we didn't see in Q3, because the base growth moderating sooner than we expected and that would have had 100 basis points flow through which would have expanded margins quarter over quarter, which was our commitment in our last earnings call.

Okay. Thank you I appreciate it.

Our next.

Western is from Toni Kaplan from Morgan Stanley . Please go ahead.

Thanks, so much.

Wanted to ask.

I know you mentioned the base growth being a little bit later than expected.

How about new business.

I know you mentioned a little bit on this earlier, but maybe just a little bit more color on on the pipeline and what you saw in new business this quarter.

Sure. Thanks, Toni it's Josh So again it was our.

It was our eighth consecutive quarter of year over year growth from new business above our long term target range, which we're very proud of of course are our explosive growth last year means that the denominator in that equation keeps going up so actually just to give a little more color. Our raw dollars of new business in Q3 of 2022 were higher than our raw.

Of new business in Q3 of 2021, and we continue to see a strong pipeline both of deals that have already closed and just not started to onboard yet and in deals that are in our pipeline that we would expect to win our ordinary percentage of that gives us confidence to continue to perform at.

At least at our long term targets if not higher.

Terrific.

I wanted to ask.

Peter I know you mentioned that M&A pipeline is robust and youre expecting valuations have come down I guess.

Youre sort of thinking of a challenging environment.

<unk> like I guess.

Do you still just because since on a long term youre still solid within your targets et cetera, like I guess is it tough to pull the trigger on M&A in a challenging environment or do you feel like this one I really need to do it because valuations are argon. So just anything on on that and capital.

Priorities.

That'd be helpful. Thanks.

Yes, so when we think about our low growth playbook, focusing on M&A is a key part of that and we are seeing multiples moderating in the market. We are also seeing sellers kind of being more flexible about how to structure.

Payments for.

Acquiring those M&A deals so I would say our pipeline is very robust and full.

And we do take this as an opportunity for us to pick up some great quality assets during a lower growth environment.

Terrific. Thank you.

Our next question is from Andrew Nicholas from William Blair. Please go ahead.

Hi, good morning, Thanks for taking my question.

I wanted to follow up on one of Tony's questions actually just in terms of the <unk>.

Non base growth items.

Like momentum has obviously been very good despite tougher and tougher comps, but but generally speaking and I am not.

Speaking to the fourth quarter or even the first half of next year, but would you expect that piece of the growth algorithm to have some cyclical risk would you expect over a cycle for a more challenging time to.

To include that that piece of the growth algorithm operating below your long term targets or how should we think about the.

The willingness of clients to switch vendors or or partner up with Sterling win when the economic environment is not as supportive.

Thanks, Andrew It's John I'll start and if Peter wants to jump in I guess I'll just make two key points first of all during 2020.

In the Covid period, when you would think that if anyone was going to freeze that's when they would have frozen in terms of switching providers et cetera. We still grew our new we grew off new business within our long term targets. So we think that's sort of the best example, kind of over a period and I. Appreciate your comments on in any given quarter, it's hard to it's hard to say.

Because your new clients could pull back a little I guess as well, but our view on the long term is that in a low growth environment. We actually think it's the perfect time for us to take more business, which actually is what happened during 202020. During COVID-19. So you saw us perform at our long term target in terms of the actual Andrew.

Annual client value that we took it was much higher and it's something that that benefited us going through last year. So we think actually a lot of clients will want to shop in the market and we're seeing a lot more rfps coming our way from competitors, giving us confidence that we'll be able to continue to gain market share, which is why I may.

Those comments in my prepared remarks and <unk>.

Hey, Andrew its Peter I would just add that our cross sell upsell also performed within the 4% to 5% long term target during COVID-19, so really proof in the putting that new business cross sell upsell will perform within the target in a recessionary environment.

That makes sense. That's helpful. Thank you and then for my follow ups I was hoping you could maybe frame or size. The cost savings you expect from from project nucleus, whether it's in the fourth quarter of the run rate exiting the year, just trying to understand what kind of incremental impact that can have on 23. Thank you.

Yes, so maybe what I can do is just give you frame up a little bit more of what we're focused on without giving explicit numbers, we will share more detail on our year end earnings call, but if we first look at cost of revenue.

Two levers that we pulled there is first we have been running at a buffer capacity and our fulfillment carrying about 10% surplus of the number of people that we need and we've been doing that obviously, because we've grown over 40% from the period of 'twenty, one halfway through 'twenty, two and we needed to make sure that we delivered on our <unk>.

Hi client level services, then number two in terms of cost of revenue is project nucleus that Josh mentioned.

The current automation, we have is a significant investment for us that being said the business has grown exponentially since 2019, so the opportunity to hover up.

And really look at what's the next kind of version of automation for our business.

It is really important here. So we've actually engaged an outside firm to assist us with this kind of showing the proof that we're really committed to this and then when we go into Opex.

Various initiatives that are in process right now.

Talk to you on the first quarter earnings call about our strategy refresh and organizing around the Americas and the international and so we've already completed.

Layers of management layers work in terms of getting more efficient in terms of our go to market organization, there, which will produce savings and then we've looked at other things like our global commissions plan. We've harmonized that we've eliminated places where we had annuity type Commission plans in place for our sales force.

And really mark to market those plants to make sure they were competitive but remove things that.

Financially we're in aligning with the market. So hopefully that's enough color to kind of give you. The places we've been focusing on and as we come back with a year end call, we'll be able to give you more detail in terms of run rate, but I think you should take back to the comment Josh opened with that assuming the macro environment holds as it is today, we believe we can grow.

So in 2023 on a from a revenue perspective, and we believe we can expand margins over 2022.

That's very helpful. Thanks again.

Our next question comes from Kyle Peterson at Needham. Please go ahead.

Hey.

Good morning, guys. Thanks for taking the questions.

Wanted to.

Follow up, particularly in the U K business.

I know you guys called out some softness particularly in gig.

How is the rest of that business holding up I know some of the macro data has been a little.

Choppy over there. So I guess is the rest of that business holding up and that's purely a gig issue or are you guys seeing a broader slowdown over there.

It is purely a gig issue we did mention earlier in the year that in the first quarter of 'twenty. One we had some onetime work related for a government agency related to Covid. So you take that piece out of the equation and you take <unk> out of the equation and you look at the rest of the business doing.

Doing performing well.

Obviously, when you translate it into the U S dollar.

We're.

The results don't show up as strong just because of the foreign currency headwinds that we're facing as an overall business.

Got it that makes sense and that's helpful.

Just wanted to follow up and see are you guys seeing any clients.

Whether it's kind of downsizing or trading down on any.

Of your screens and whether it's running shorter screens or are less anything less comprehensive given some of the macro uncertainty or is some of this purely as hiring pauses and suffer in place.

The base growth is a little lower.

Yes. This is purely.

Hiring has slowed and I wouldn't even say pausing people say pausing there still hiring for a central roles. We don't really have any clients, we're not hiring any one.

That's material, it's just that the hiring that they were doing they have slowdown that happened faster than we expected as Peter shared.

But we are not seeing anybody trading down.

Not seeing anyone stopping doing verifications doing lesser criminal checks stopping health screenings, if they were doing it we haven't seen any of those behaviors occur.

Got it that's really helpful and good to hear thanks, guys.

Our next question is from Andrew <unk> from Jpmorgan. Please go ahead.

Hi, Peter I, just wanted to start by just confirming something that you said earlier and then I have a question so.

Heard you say, we got to the base growth of 2% to 3% in the quarter was that for the whole quarter. So third quarter was 2% to 3% base growth and did you also say that fourth quarter has started with a similar pace.

Base growth, that's sort of my confirmation. So now my question when.

When you say low single digit organic constant currency revenue growth for the fourth quarter could you help us break that down between existing clients and new business.

Sure So happy to follow up on those questions.

So first starting with Q3, we did say the base growth was in that 2% to 3% long term target range. So confirming that you did hear that accurately.

And what we shared is that it did moderate to that range sooner than we expected too because the original guidance. We gave Andrew is it over the back half of the year. It would moderate to the two to three so hopefully that closes that question and then when we look at Q4.

We do not give guidance around our specific revenue growth drivers, but I think the way you should think about the low single digit growth rate on organic constant currency revenue in Q4.

We've got high confidence that we can deliver within the target ranges for new business cross sell upsell and attrition.

That strong performance, there will offset the declines in base growth. Okay. Thank you.

Our next question comes from George Tong from Goldman Sachs. Please go ahead.

Hi, Thanks, Good morning, I also wanted to dive into the components and drivers of growth.

This growth moderated to the 2% to 3% range long term range sooner than expected and you mentioned that new business and cross sell should comfortably operate within the long term ranges are you are you seeing a second derivative slowdown in new business and cross sell between where you are seeing a slowdown in <unk> growth just trying to see how the new.

New business and cross sell upsell are changing.

And beyond whether or not they're operating within the range.

Hey, George it's Josh So I think what we.

We've said and hopefully this helps as we expect to be able to perform at those targets.

We have been performing over those targets. So hopefully that sort of answers. The question part of that is just lapping the really strong growth that we've seen for the last two years. So as we think about.

Q4, we are lapping a 35% growth.

From last year, and as Peter shared kind of 40 ish percent for the last six quarters prior to Q3, and so we continue to have to do even more.

New business to stay at our targets and we are continuing to do more as I shared for Q3, we had more dollars of new business than we had in Q3 of 'twenty. One so we have to keep doing that but the denominator changes and of course, the new clients could be billing at slightly lower levels than they would in <unk>.

Normal environment as well so that's all factored into our revised guidance.

As elements of what we're thinking about it is also factored in.

Two the.

So the view David going into next year of the fact that we would expect to be able to grow.

As long as the macro holds and that is something that we consider in terms of the factors in our control versus what might happen with base growth and.

The moderation that might occur within those so we don't breakout or guide on our growth drivers. We just tell you about them on these calls from the previous quarter, but I think hopefully that gives you a little bit of color of how we're thinking about it.

Got it.

Helpful. And then with respect to the base growth moderation that you saw was a slowdown broad based or was it concentrated in the areas that you mentioned like UK gig in retail in other words was this a mile wide inch deep sort of phenomenon where very.

Very targeted.

And the slowdown.

Yes, George So we don't breakout individual performance by vertical or by Geo, but what I would point you to is what I shared.

<unk> remarks in terms of when we look at October .

We're seeing the diversification of our business playing out to a positive in this environment, where health care industrials and APAC are continuing to perform strong and then we are seeing some softness in the UK gig and then in the U S and contingent technology in retail.

Great. Thank you.

Our next question is from Alan <unk> from Wolfe Research. Please go ahead.

Hey, guys on for Darrin Peller here, Thanks for having me.

I know you guys lately touching on is but can you guys kind of further unpack the expected resiliency of your growth algorithm. Specifically are there any levers that you are willing to pull to further accelerate new logo wins to offset a faster than anticipated base growth deceleration.

And are there are you willing to sacrifice some of that expected margin expansion in 'twenty three to invest in your go to market.

To offset that top line.

Challenge from the macro.

It's Josh So first just to remind you that we believe that even in our long term algorithm. If we're performing at the 7% to 8%, we believe that would be market, leading relative to what you see from our competitors and we've been outperforming that consistently for the last seven quarters. So I just wanted to start there.

In terms of how we think about it going forward, we're not looking at it as a sacrificing of margin question again, we've said.

We expect to expand margins next year, we expect to expand margins in Q4 by over 250 basis points at the midpoint of our guidance. So our view, though is there are tactics that we can take to really further accelerate.

New business growth.

Don't necessarily want to give a roadmap to those to the competitors who might be listening, who I plan to take that share from but it worked for us in 2020, we're planning to bring some of those things back in and of course, there are things clients are going to want it.

Low growth environment that they that they may be more willing to give other things on so that's true on the new business growth that is also true on cross sell up sell where we think things like identity could actually play very well in terms of helping them to not waste.

<unk> doing background checks they shouldnt be doing if there's fraud or wrong information being anchored and we also think that applies to the retention playbook where are things. There are things. We can do with current clients. So I don't want to give those tactics here publicly.

Tell our competitors, what we do but we think the proofs in the pudding of how we've performed before on this where we think that we're best in class on those drivers and that's why we highlighted the fact that we've been performing at double those long term targets since the beginning of 2021 with that 15% that I pointed to on slide six of the <unk>.

Presentation.

Okay, Great color guys I appreciate it.

Our next question is from Mark <unk> from Baird. Please go ahead.

Hey, good morning, and thanks for taking my questions.

Just wanted to understand philosophically.

You're clearly anticipating increasing margins for next year.

Assuming that things hold up but.

Philosophically how would you if we do go into a recession.

How should we think about.

No.

Trying to maintain margins versus.

Maintaining the bustle in the business.

So how quickly how are you thinking about that how could a mild recession.

The difference in terms of what we ended up seeing.

Relative to what we ended up seeing during the Covid period.

In terms of your actions.

Nathan Thanks for the question, it's Josh rather than philosophical maybe I'll just tell you my personal beliefs relative to my job as CEO of a public company right. I think my job is to make sure that I'm doing what's right for shareholders, whatever the macro and in a macro the slow growth or if it turns recessionary where.

Where it goes.

Instituted our playbook and these are things that we've been planning for some time there actions, we wanted to take but could not take while we were growing 40%.

On an average basis over the six quarters prior to Q3, but as soon as we saw that base growth start to moderate we pulled the lever to start moving quickly on those so the first thing is the margin expansion. Some of those are very quick actions that we can take again as Peter shared when you're growing at a rate like 40%.

Very hard to stay ahead of that revenue and support the clients to the levels that they expect from us when we promised them best in class client service as that growth moderates, even through our long term targets of 9% to 11 or lower than we are in a position, where we don't actually have to be running at that kind of a surplus and we can run at the support rates we.

We need so that's like a quick easy action that we can take and that's a big part of what you see in the 250 basis point improvement that we expect in Q4. There are there are more strategic things that we can do where I can actually spend the time and the effort to really dig in and look at process reengineering and how do we do things that were designed over.

A decade ago, rather than just automating parts of that existing process and Thats, where Peter mentioned, we've brought in outside help with experts who are really experienced that at that to help us look at it. So those things. We think are really really important we think it's actually our obligation to shareholders. It's the right thing to do it's the right thing for our team as well so that people are.

To work on the things that will be meaningful for us going forward and our view is any step backs, whether thats the low growth environment that we're anticipating and experiencing now and that if it holds going into next year, where we expect to grow or if it turns to be a more recessionary environment in either of those cases, we think that our view with the <unk>.

Take care of the clients make sure they're served really well make sure we use the time to expand our margins and do a lot of the work that was just hard to do with the explosive growth rates. We had so that we can see that significant margin expansion. We did that in 2020, we exited with more new business higher client retention more upsell cross sell and <unk>.

Higher margins are planned in any downturn, whether it be through a low growth environment or turn recessionary is to make sure. We focus on the exit velocity coming out of that while also performing during that downturn.

The only additional point that I would add right is that we have a highly variable cost structure. So if you think about our cost of revenues, 80% of those are third party costs, which we do not incur unless we fulfill the order about 16% of that is labor costs, which is highly flexible based on the environment. So that's kind of the cost of revenues piece.

And then if we look at the Opex piece.

I covered earlier some significant initiatives, we have there in terms of.

Managing that down and improving the margins in <unk> as we spoke about and in 'twenty three.

That's really helpful. Thank you.

Can you talk a little bit about just the uptake with regards to the identity solutions and particularly.

Do you think that that may end up.

Going through over the course of the year, particularly in the.

Industries would be the ones that would be the most interested in taking advantage of these.

The solution and the expansion internationally.

Hi, it's Josh so happy to provide a little bit of color, we don't give specific numbers of clients or our revenues overall, 90% of our revenue sit in the pre hire screening 10% are in the post hire monitoring and identity space. Our long term targets assume that that mix stays the same but we are very opt.

Domestic on the identity space that Thats, something that can help us actually accelerate upselling and actually expand us into new categories. We're excited about that we're seeing a good number of new clients, who are already on board and using.

Using the product I shared a couple of data points in my prepared remarks that I'll refer you to.

Terms of that uptake, but roughly over a third of the candidates are actually already in the IV database, we would hope to see similar experience with the Ot over time and really this is this is R&R view relevant to anywhere Thats got high velocity hiring which is really important and places where any risk of fraud or getting the wrong people.

And there is a very high risk to the business in terms of the international expansion as I mentioned, we're going to be starting in the UK. We're really excited about the exclusive workflows that we've built with the Ot, we think it differentiates us versus other players in the market.

By providing this portable identity solution, where we're a candidate can actually reuse. It multiple times, that's something we think will actually really help us in that gig space in particular in the UK places where people actually worked for more than one entity at a time, we think that will be a big differentiator and then also in other industries because you do have the right to work.

Requirements in the U K, we have been providing a solution on that for a long time, but this is an even better solution for that and we think that that will increase the uptake.

Great. Thank you.

Okay.

This concludes the Q&A session and the Sterling third quarter 2022 earnings call. Thank you all for dialing in today you may now disconnect your lines.

Okay.

Yes.

Sure.

[music].

[music].

Hello, everyone and welcome to the Sterling third quarter of 2022 earnings call My.

My name is Sam and I'll be the operator for your call today.

An opportunity to ask a question on the call today and you can submit your question by pressing star one on your telephone keypad, well press star two if you wish to withdraw your question.

I will now hand, the floor over to Judah cycles to begin.

Thank you operator, welcome to Sterling third quarter 2022 earnings call. Joining me today are Josh <unk>, Chief Executive Officer of Sterling, and Peter Walker, Chief Financial Officer of Sterling.

The five new of reference during this presentation can be accessed on Sterling its investor relations website under news and events.

Slides have been posted to our website and a replay will be made available on the website.

After prepared remarks, we will open the 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 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.

Now I'll turn the call over to Jos Peres.

Thank you Judah good morning, and thank you for joining us Sterling third quarter of 2022 was another great quarter and continued the strong results. We saw throughout our record 2021, and the first half of 2022.

As you can see on slide four this represents our seventh straight quarter of double digit organic constant currency revenue growth.

Our sustained excellence and new business growth client service and innovation drove year over year revenue growth of 18%, including 12% organic constant currency revenue growth, even as we lapped last year's third quarter growth of 44%.

We also saw approximately 7% growth from Abi, which has consistently outperformed our initial expectations and gives us great confidence for future M&A.

We are very encouraged that the quarter's strong results were driven by all four of our revenue drivers performing at or above our long term targets.

Our product innovation and technology excellence continue to resonate with prospective clients, helping drive third quarter growth from new business of 9% the eighth consecutive quarter of growth from new business above our long term target of 7% to 8%.

We continue to win new logos from competitors of all sizes and in all regions due to our competitive differentiators such as innovative product offerings client service excellence and cloud based technology, our pipeline of recent wins and new prospects remains very strong, giving us confidence in our.

Ability to continue to deliver best in class new business revenues.

Clients are also deepening their spend with us through our up sell cross sell strategy as we expand package density and sell innovative and unique new products. One such unique product is identity verification, where we are a global market leader with highly differentiated and proprietary solutions in the third.

Third quarter, we signed an exclusive workflow partnership with UK based EOD, expanding our digital identity solutions to international markets by building on the same vision and best in class identity verification offerings, we have in place in the U S with IDB.

I'll discuss this partnership in our identity solutions shortly.

Our other two revenue drivers revenue retention and base growth also performed in line with our long term targets. Our revenue retention rate of 96% is fueled by our ongoing commitment to customer service excellence, which includes customer tools that have been completely redesigned in recent years.

And a cloud based platform, providing best in class innovation and network availability.

Turning to slide five the third quarter of 2022 marks our seventh consecutive quarter of double digit year over year organic revenue growth and we have now delivered an average sequential quarter over quarter revenue growth of 10% since the second quarter of 2020.

We are very proud of our consistency in new business generation as Q3 was the eighth consecutive quarter delivering above our 7% to 8% target range and we expect to continue outperforming the market over the long term we.

We are particularly proud that we accomplished double digit organic revenue growth in the third quarter, which we believe is best in class.

Slide six illustrates this point further showing that we have been delivering strong results and the growth drivers we control.

From a combination of new business cross sell upsell and gross retention our organic revenue growth has averaged 15% since the first quarter of 2021 double our combined 7% to 8% target for those items.

Even during the 2020 COVID-19 downturn, we still achieved our up sell cross sell and new business targets and our retention improved by 300 basis points over this period.

This demonstrates that our solid strategy and execution have enabled us to perform well in the areas most within our control even during challenging economic times.

As we discussed on our last earnings call, we saw our base growth moderating in the back half of the year to our long term, 2% to 3% target.

This moderation happened a bit earlier than we expected as many clients tempered their hiring due to macroeconomic uncertainty and are now operating in a holding pattern as they assess the macro environment and establish their plans for next year.

Despite this we still grew 18% in the quarter, including 12% on an organic constant currency basis, while lapping our stellar 44% growth from the third quarter of 2021.

We expect fourth quarter revenues to grow year over year on both a total and organic constant currency basis, while we continue to see strong performance on the growth drivers within our control given the uncertain macro environment. We have acted quickly to execute on our load growth playbook taking step.

<unk> to right size, our business from the extremely high growth environment, we've been operating in for nearly two years.

As we shared on our Q1 call. We have been hiring ahead of our revenue needs and running a roughly 10% surplus in our fulfillment labor this year to support our 40% average growth since the beginning of 2021.

This strategy served us well, enabling us to maintain very high service levels during a time of explosive growth.

As we now transition into a lower growth or recessionary environment. We are acting quickly to rightsize. The company a strategy that will drive cost of revenue and Opex savings starting in the fourth quarter and increasing in 2023.

We have been planning a number of initiatives for the last few quarters, while we managed our tremendous growth. We are now accelerating these initiatives as part of our load growth playbook, including four key parts summarized on slide seven.

First expanding our margins through additional automation and cost reduction measures. These actions will be aimed at streamlining the business in connection with the refresh strategy, we launched earlier this year.

Second executing on the revenue drivers in our control with an even greater focus on new business and cross sell upsell initiatives.

Third driving our market, leading identity solutions to gain scale in the market and fourth accretive M&A as multiples for tuck ins and geographic expansion opportunities become more attractive.

We believe these actions will position the company to invest for growth and market share gains regardless of the macro environment and will allow us to expand adjusted EBITDA margins year over year in Q4 by over 250 basis points.

We also expect to realize significant run rate cost savings by the end of this year, which will fuel our ability to expand margins substantially in the future while also gaining market share.

One of the key reasons, we win and excel and the drivers within our control is our product innovation turning to slide eight identity continues to be a great example of our innovation led approach and first to market solution. So I thought I would share some updates on how things are developing.

As we have discussed in previous earnings calls, we view Sterling identity as a strategic pillar on equal footing to background screening and we are very excited about our early traction.

We believe that the future is not built on transactional identity verification, but instead on trusted digital identity networks.

The best of our knowledge Sterling is the only provider that offers a solution built upon this principle.

Our exclusive partnership with FINRA Niv me are.

<unk> competitive differentiators and it put sterling and our leadership position to deliver identity services for employers in the U S. We are excited to now expand our exclusive trusted digital identity offerings to international markets in partnership with <unk>, a market leader in the portable identity space.

Sterling and have created a new fully integrated exclusive workflow that we believe provides us a significant competitive advantage outside the U S. Just as our <unk> partnership does in the U S.

The exclusive workflow will allow candidates to seamlessly create a reusable digital identity, where they can verify their identity, one and share their details with other businesses in seconds.

Individuals will be able to use their digital identity for future job opportunities age verification and any process requiring identity verification.

In Q1, 2023, we expect to start deploying our new solution with the <unk> in the U K and a planned rollouts in various international markets throughout 2023.

In terms of our IBM partnership the identity rollout has continued to be successful with client adoption across all of our verticals clients and prospects are responding positively to our identity first messaging and focus on product innovation. The themes that have resonated the most with clients are reducing fraud insuring.

Data integrity and streamlining the candidate experience when.

When <unk> is used we are now seeing more than one third of all candidates come in pre verified.

Testament to <unk> network and the power of reusable identity.

We are also starting to see the impact of screening outcomes when identity is in place.

One of our largest financial services customers experienced a 22% increase in records found during the six months following <unk> implementation as compared to the six months prior due to enhanced data integrity.

Better screening better candidate experience and reduced fraud, all contribute to our vision to start every screen with identity.

This is just the beginning of our identity journey, we look forward to continuing to provide updates as we innovate and change the way background screening works.

Turning to slide nine our achievements and automated fulfillment are another key competitive differentiator, helping us drive strong organic revenue growth.

Time to hire is a critical measure for our clients and we are committed to accelerating that time, while not compromising on compliance or accuracy.

Automation across our global businesses for all of our product areas has been a critical investment area at Sterling for many years.

Investments into machine learning artificial intelligence, API and robotic process automation combined with owning our captive offshore fulfillment centers have given us greater control over collecting data with faster speed and increased accuracy. These benefits extend to all parts of our <unk>.

Flow, including data collection data analysis and report generation.

Today, we have well over 3000 automation, leveraging Apis and RPI, representing 90% of our U S. Criminal searches these automation enable us to easily access data through seamless integrations and perform the most cost efficient searches that allow for deeper analysis while searched.

More jurisdictions and less time.

But it is not simply the number of automation that matters. It's the results that drives for our clients over 60% of our U S. Criminal screens are now completed within the first 15 minutes over 70% within the first hour and over 90% within the first day to our knowledge these turnaround time.

<unk>, our best in class in our industry and our key characteristics that differentiate us from competitors.

Automation also drives cost reductions throughout our business, we have realized millions of dollars of net savings, thus far by reducing our manual footprint and vendor costs and we expect significant future savings as we continue to implement and optimize our strategy with continued investments yielding additional gross margin.

Expansion and cash flow.

As part of the low growth playbook I discussed earlier, we have launched project nucleus to drive meaningful cost savings and efficiency gains by first reengineering processes second driving fulfillment labor cost reduction and third identifying and executing on additional automation.

<unk> with a focus on international screens as well as U S incremental opportunities.

Automation is one of several exciting investments and cost savings initiatives, we slowed or paused, while our revenue growth was so robust during 2021 and this year. We are excited to ramp up our work on this front improving further on our already best in class capabilities, while also enhancing our <unk>.

Financial results.

In conclusion, I am really proud of the Sterling team for delivering a great third quarter and for continuing to deliver through uncertain times, we navigated successfully through Covid and the subsequent recovery while building for the future and I strongly believe we will deliver on share gains and margin improvement in the current macro environment as well.

With that I will hand, it over to Peter Walker, our CFO to take you through our financial results and updated 2022 guidance Peter.

Thank you, Josh and good morning, everyone.

Turning now I'll turn it overview of our most recent quarterly performance on slide 12.

The third quarter of 2022, we reported revenue of approximately $199 million, an 18% increase compared to the third quarter of 2021 with 12% organic constant currency revenue growth as Josh mentioned this was sterling seventh consecutive quarter of double digit year over year.

<unk> revenue growth an accomplishment we are very proud of and believe is unique in this industry. The third quarter also included a 7% contribution from M&A, partially offset by 160 basis point drag due to foreign currency translation.

The organic revenue increase include a new client growth of approximately 9% and existing client growth of approximately 2%, including base growth cross selling upsell and net of attrition.

Our investments in technology and products, coupled with our best in class turnaround times and customer first focus enable our gross retention rate to remain strong at approximately 96% for the last 12 months. Additionally, pricing was relatively stable across the period and not meaningful to the change in revenues.

We're encouraged that our quarter strong results were driven by all four of our revenue drivers performing at or above the target range. We are seeing significant success in the areas of our business most within our control, including strong growth from new clients and cross sell upsell as well as maintaining industry leading revenue retention.

When rates were most focused on these areas and we feel that our momentum in winning market share and expanding wallet share with clients can help offset any unpredictability base growth.

As Josh described our base growth moderated a bit earlier than expected in Q3, which drove approximately $6 million less in revenue and approximately 100 basis points flat and adjusted EBITDA margin versus our expectations.

Looking at revenues by region revenue in our U S business grew 21% compared to the third quarter of 2021, including 7% from the <unk> acquisition.

We saw broad based strength across our industry verticals with particularly exceptional results in our health care industrials and <unk> verticals as we executed our growth playbook.

Revenue in our international business grew 11% on an organic constant currency basis International growth was led by the APAC region, which continues to exhibit broad based strength, including Australia, and Singapore due to new client wins and strong underlying performance.

In the third quarter, we delivered 7% of inorganic revenue growth from Evi. Our November 2021 acquisition. We were very pleased with this performance as it was a third consecutive quarter above our expectations. The deal integration is almost complete ahead of schedule and our epi client retention has solidly.

Outperformed our initial expectations. The success of this deal and integration provides us with confidence that we are well prepared to pursue additional synergistic M&A.

Turning to slide 13, our third quarter, adjusted EBITDA was $53 million or 4% year over year increase compared to the third quarter of 2021, and adjusted EBIT margin for the third quarter of 2022 was 26, 6%.

Last quarter, we indicated that margins should increase in the third and fourth quarters as I mentioned, the faster moderation in base growth impacted our third quarter margin by around 100 basis points.

While we are growing the macro environment is unclear and as such we are implementing our low growth playbook. As a result, we expect more than 250 basis points of year over year expansion of margin in Q4 or.

Our focus on cost discipline healthy growth and innovation will drive long term margin expansion, even as we continue investing in organic revenue growth as a reminder, our cost structure is highly variable with 80% of our cost of revenues tied directly to third party data costs, we only incur as revenue is.

Recognize.

An additional 16% of our cost of revenues are tied to labor costs, we can quickly scale up and down as required.

In the third quarter of 2022, we had adjusted net income of 29 million or <unk> 29 per diluted share representing a year over year decline in adjusted earnings per share of 12%.

This year over year decline was primarily driven by a much lower tax rate in the third quarter of 2021, when our provision adjustment brought our adjusted effective tax rate to 13% compared to this quarter's adjusted effective tax rate of 26, 5%.

For the fourth quarter, we expect an adjusted effective tax rate in the range of 26% to 27%.

Turning to slide 14 free cash flow in the third quarter was $35 million, an increase of 65% from the prior year period Q3's free cash flow was in line with our internal expectations and driven by the growth in operating income and an acceleration in collections, we expect the fourth.

Quarters free cash flow conversion of adjusted EBIT to be similar to the third quarter's conversion rate.

Our net leverage at quarter end was two times net debt to adjusted EBITDA at the low end of our two to three times net leverage target. Our net leverage continues to decline due to our growing cash balance and adjusted EBIT growth and is poised to continue declining absent any future M&A that.

Third our M&A pipeline remains robust and we expect multiples to start to moderate we ended the quarter with total debt of 505 million cash and cash equivalents of $99 million and approximately $140 million available under our revolver, providing us with ample capacity to execute our growth strategy.

<unk> of reinvesting in organic revenue growth and pursuing M&A.

Our capital allocation priorities have not changed since the time of our IPO investing in organic revenue growth pursuing M&A and maintaining a healthy balance sheet. This remains true in a low growth playbook as well as we see macro instability is opportune times to build the foundation for future success.

Yes.

On slides 15, and 16, we provide our updated guidance for 2022 for 2022, we now expect to generate revenues of $769 million to $779 million, representing a year over year growth of 20 to 21, 5%.

Adjusted EBITDA of $204 million to $210 million, representing year over year growth of 14% to 17% and adjusted net income of $109 million to $113 million representing year over year growth of 18 to 22, 5%.

As shown on slide 16, our guidance includes full year organic constant currency revenue growth of 15 to 16, 5%, implying low single digit organic constant currency growth in the fourth quarter. We continued to see good performance from the revenue drivers in our control, including new business.

Sell cross sell and retention our industry diversification is providing us some protection against the verticals most impacted by the current environment in particular, our healthcare industrials and APAC region are all showing growth so far in Q4, helping offset declines in UK gig.

Retail contingent and technology.

So the contribution from the acquisition of Evi, we now expect the deal to contribute six five points of inorganic revenue in 2022 ahead of our previous 6% estimate sharing.

During the fourth quarter, we expect the inorganic contribution to be approximately 4% as epi revenues will flip to organic in December .

For the impact of foreign currency fluctuation, our full year 2022 guidance assumes a 170 basis points drag compared to 100 basis points and our previous guidance.

This includes a headwind during the fourth quarter of approximately 300 basis points.

Turning now to profitability. Our updated 2022 guidance includes adjusted EBITDA growth of 14% to 17% and implies a full year adjusted EBITDA margin of 26, 7% at the midpoint.

Our margins are lower for the year from previous expectations, driven by lower revenue guidance fulfillment labor surplus to support extraordinary growth higher inflationary costs and higher third party verification cost in the U S. We expect fourth quarter adjusted EBITDA margins to expand substantially.

Both year over year and on a sequential basis as we execute on our low growth playbook that Josh mentioned earlier, the midpoint of our guidance implies a fourth quarter margin of approximately 28% of our 250 basis points higher year over year, reflecting the speed at which we are shifting our organization for the.

Unclear macro environment.

Looking ahead the moves we are making should yield continued margin expansion.

Finally, turning to adjusted net income growth guidance of 18% to 22, 5%, 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 strong adjusted net income growth during 2022.

Even in the absence of adjusted EBITDA margin expansion.

To further help with your modeling we have included a page in the appendix with our assumptions for 2022.

In closing we are reaffirming our long term targets on slide 16, we are encouraged by our continued ability to execute on the revenue drivers in our control and are confident in our plans to improve the profitability of our business as we move forward in the year.

That concludes our prepared remarks at this time operator, please open the line for questions.

Thank you as a reminder to ask a question. Please press star one on your telephone keypad oil prices start to withdraw your question.

Last question comes from Shlomo Rosenbaum from Stifel. Please go ahead.

Hi, Thank you very much for taking my questions.

I just wanted to ask you. If you can just dig in a little bit more into the environment that youre seeing right now and kind of.

Youre expecting growth organic growth in the fourth quarter.

From what Youre seeing with your clients discussions.

Do you think it's fair to assume that you could still generate organic growth going into 2023, I know that no one wants to get too far ahead of themselves.

Got it.

Generally the company has said that they think that the.

Gross drivers in terms of new clients and upsell and things like that should be able to give them growth even in tough environments and I'm wondering if you still expect it to happen in 2023.

Hey, Shlomo good morning, it's Josh Thanks for the question. So in terms of what we're seeing now and again, we don't like to comment on any given month, but you should assume that our Q4 guidance is reflective of what we're seeing in our expectation to grow both on a total and organic constant currency revenue basis, obviously.

The headwinds from foreign currency exchange are higher than our expectations.

Peter laid that out in terms of our expectations of a 300 basis point headwind in the quarter as we think about next year I think we're not in a position to give guidance. Obviously as you reflected in your in your question Shlomo and it is a cloudy macro out there, but our expectation is that if the macro remains as we're seeing it now we.

To grow next year on both the total and obviously at this point, we don't have any inorganic that was accounting next year. So on a organic constant currency basis, we would be expecting.

Next year, obviously, the first half as we lap our stellar 38, and 29% growth rates in the first and second quarter, which were in term lapping, 80% and 44% growth rates last year will be a little bit more challenging, but we would expect to be able to grow as long as the macro does hold and more importantly, I think.

We expect to expand our margins next year. We believe this is a great time for us to actually take the accident that we could not take over the last call. It 3% to four quarters, while we were growing at such an exponential rate for our business. It was very hard to actually do some of the work that we wanted to do to expand margins. So we're going to use.

This low growth period to do that work be more profitable while also planning for growth.

Great and if you don't mind give me one follow up over here you called out APAC is international area of strength one of your competitors called it out as an area of weakness and I was wondering if you can kind of talk about the verticals that you're in the APAC region, and maybe a little bit more generally internationally.

You kind of give us a contrast as to why you're stronger in one region versus another in terms of the growth.

Yes, so we don't really break down our international business into verticals, but you should think of our Asia Pacific business as being heavy in financial services and also in dig in Australia in particular and those are areas that.

We're continuing to see good performance.

And then I think in Europe .

We also have heavy financial services and other general broad based industries, but we do have a very heavy gig business in the UK, which is which has actually had a pretty tough year. After stellar growth last year and the headwinds from currency on the pound Peter shared the 11%.

Organic constant currency growth rate for our international businesses, but the impact of currency actually wipes out almost all of that growth in the quarter.

Hey, good morning, Shlomo, It's Peter I, just wanted to add to and when we think about APAC rate well countries or are we in it's going to be kind of a differentiator probably between us.

And the other calls we've heard recently, Australia, and Singapore, Singapore are where we're continuing to see strong performance.

Great. Thank you.

Our next question is from Manav Patnaik from Barclays. Please go ahead.

Hi, Good morning. This is actually running Kennedy on for Manav May I. Please ask with regards to what you've seen in today's moderation coming quicker than expected how does that can you assess your visibility.

In terms of your line of sight into that from what Youre seeing from your leading indicators conversations with clients et cetera.

And your visibility for the next 10 ensured it worsen from a slowing environment to potentially recessionary.

Yeah, Thanks, Ron it's Josh.

Peter I want to follow up I think first what I'll say is what we're seeing and hearing from clients is reflected in our revised guidance for Q4, it's why we brought it down but we do still expect to see.

Growth both organic constant currency in total in the quarter. So that is reflective of what we're seeing and hearing in terms of our visibility.

While we won't share the specifics at any given time with you we do see.

Our revenues on an hourly basis and our platform on a daily basis in.

In terms of our buildings and have very good visibility into changes in trends and what we're seeing.

And what we wanted to share was more of that in Q3, we saw that reversion to our long term two to three.

Percent target on base growth happen, a little bit earlier than we had expected it impacted the quarter by about $6 million in revenue, which we would have expected to have a flow through that would have impacted margin by 100 basis points. So we thought it was important to share that in terms of visibility in terms of why the margin was where it was and why the guide is so when you think.

About our revised guidance at the midpoint, which is lowered by $16 million six of that already happened in Q3 and the rest is what we're reflecting based on what we're seeing.

And good morning, Ron and I would just add to that we've not seen an additional any kind of step down from what we saw kind of in that moderation of base growth at the end of Q3. The businesses continue to perform based on that run rate and that's what gives us confidence in sharing Q4 guidance that we will grow revenue in totality.

And then we will grow organic constant currency revenue in Q4 and also the 2023.

High level comments, Josh just provided.

That's very helpful. Thank you and then May I, just confirm what the other drivers for the year over year decline in adjusted EBITDA margins were outside of the 100 basis points from.

The moderation in base group.

Yes, so I think very consistent with what we've been talking about all year. The first three quarters of 'twenty, two and public company costs. So we needed to absorb those costs. We also have evi operating not at its fully synergize EBIT margin in Q3, even though we're ahead of schedule on.

We will be their call.

At 2023, so those would be the two drivers to think about along with the fact that there was about $6 million of revenue that we didn't see in Q3, because the base growth.

Moderating sooner than we expected and that would have had 100 basis points flow through which would have expanded margins quarter over quarter, which was our commitment in our last earnings call.

Okay. Thank you I appreciate it.

Our next question is from Toni Kaplan from Morgan Stanley . Please go ahead.

Thanks, so much.

I wanted to ask.

I know you mentioned the base growth being a little bit later than expected.

How about new business.

I know you mentioned a little bit on this earlier, but maybe just a little bit more color on the pipeline and what you saw in new business this quarter.

Sure. Thanks, Toni it's Josh So again it was our.

It was our eighth consecutive quarter of year over year growth from new business above our long term target range, which we're very proud of of course are our explosive growth last year means that the denominator in that equation keeps going up so actually just to give a little more color. Our raw dollars of new business in Q3 of 2022 were higher than our raw.

<unk> of new business in Q3 of 2021, and we continue to see a strong pipeline both of deals that have already closed and just not started to onboard yet and in deals that are in our pipeline that we would expect to win our ordinary percentage of that gives us confidence to continue to perform.

At least at our long term targets if not higher.

Terrific.

Wanted to ask Peter I know you mentioned that M&A pipeline is robust and youre expecting valuations to come down I guess.

When you sort of thinking of a challenging environment.

Potentially.

I guess.

Do you still just because since on a long term.

Solid within your targets et cetera, like I guess is it tough to pull the trigger on M&A in a challenging environment or do you feel like this one I really need to do it because valuations are argon. So just anything on on that and capital priorities and stuff that would be helpful. Thanks.

Yes, so when we think about our low growth playbook, focusing on M&A is a key part of that and we are seeing multiples moderating in the market. We are also seeing sellers kind of being more flexible about how to structure.

Payments for <unk>.

Acquiring those M&A deals so I would say our pipeline is very robust and full.

And we do take this as an opportunity for us to pick up some great quality assets during a lower growth environment.

Perfect. Thank you.

Our next question is from Andrew Nicholas from William Blair. Please go ahead.

Hi, Good morning, Thanks for taking my question I wanted to follow up on one of Tony's questions actually just in terms of the.

Non base growth items.

Seems like momentum is obviously been very good despite tougher and tougher comps, but but generally speaking and I am not speaking to the fourth quarter or even the first half of next year, but would you expect that piece of the growth algorithm to have some cyclical risk would you expect over a cycle.

For a more challenging time.

To include.

That piece of the growth algorithm operating below your long term targets or how should we think about.

The willingness of clients to switch vendors or or partner up with Sterling win when the economic environment is not as supportive.

Thanks, Andrew its Jeff ill start and if Peter wants to jump in I guess I'll just make two key points first of all during 2020 in the Covid period. When you would think that if anyone was going to freeze that's when they would have frozen in terms of switching providers et cetera, we still grew our new.

Grew up new business within our long term target. So we think that's sort of the best example, kind of over a period and I. Appreciate your comments on in any given quarter. It's hard to it's hard to say because youre new clients could pull back a little I guess as well, but our view on the long term is that in a low growth environment. We actually think it's the perfect time for us to take.

More business, which actually is what happened during 202020 during Covid. So you saw us perform at our long term target in terms of the actual.

Annual annual client value that we took it was much higher and it's something that that benefited us going through last year. So we think actually a lot of clients will want to shop in the market and we're seeing a lot more rfps coming our way from competitors, giving us confidence that we'll be able to continue to gain market share which is why.

I made those comments in my prepared remarks, and Hey, Andrew It's Peter I would just add that our cross sell upsell also performed within the 4% to 5% long term target during COVID-19. So.

Really proof in the putting that new business cross sell upsell will perform within the target in a recessionary environment.

That makes sense. That's helpful. Thank you and then for my follow up I was hoping you could maybe frame or size. The cost savings you expect from from project nucleus, whether it's in the fourth quarter of the run rate exiting the year, just trying to understand what kind of incremental impact that can have on 23. Thank you.

Yes, so maybe what I can do is just give you frame up a little bit more of what we're focused on without giving explicit numbers, we will share more detail on our year end earnings call, but if we start first look at cost of revenue.

Two levers that we pulled there is first we have been running at a buffer capacity and our fulfillment carrying about 10% surplus of the number of people that we need and we've been doing that obviously, because we've grown over 40% from the period of 'twenty, one halfway through 'twenty, two and we needed to make sure that we delivered on our <unk>.

Hi client level services then.

Two in terms of cost of revenue is project nucleus that Josh mentioned.

The current automation, we have is a significant investment for us that being said the business has grown exponentially since 2019, so the opportunity to hover up.

And really look at what's the next to kind of version of automation for our business.

<unk> is really important here, so we've actually engaged outside firm to assist us with this kind of showing the proof that we're really committed to this and then when we go into Opex. There's various initiatives that are in process right now.

Talk to you on the first quarter earnings call about our strategy refresh and organizing around the Americas and international and so we've already completed.

Layers of management layers work in terms of getting more efficient in terms of our go to market organization, there, which will produce savings and then we've looked at other things like our global commissions plan. We've harmonized that we've eliminated places where we had annuity type Commission plans in place for our sales force.

And really mark to market those plants to make sure they were competitive but remove things that.

Financially we're in aligning with the market. So hopefully that's enough color to kind of give you. The places we've been focusing on and as we come back with a year end call, we'll be able to give you more detail in terms of run rate, but I think you should take it back to the comment Josh opened with that assuming the macro environment holds as it is today, we believe we can grow.

So in 2023 on a from a revenue perspective, and we believe we can expand margins over 2022.

That's very helpful. Thanks again.

Our next question comes from Kyle Peterson at Needham. Please go ahead.

Hey.

Good morning, guys. Thanks for taking the questions.

I wanted to.

Follow up, particularly in the U K business.

I know you guys called out some softness particularly in gig.

How is the rest of that business holding up I know some of the macro data has been a little.

Choppy over there. So I guess is the rest of that business holding up and that's purely a gig issue or are you guys seeing a broader slowdown over there.

It is purely a gig issue we did mention earlier in the year that in the first quarter of 'twenty. One we had some onetime work related for a government agency related to Covid. So you take that piece out of the equation and you take dig out of the equation and you look at the rest of the business doing.

Doing performing well.

Obviously, when you translate it into the U S dollar.

We're.

If the results don't show up as strong just because of the foreign currency headwinds that we're facing as an overall business.

Got it that makes sense and that's helpful. And then just wanted to follow up and see are you guys seeing any clients.

Whether it's kind of downsizing or trading down on any.

Of your screens and whether it's running shorter screens or anything less comprehensive given some of the macro uncertainty or is some of this purely as hiring pauses and suffer in place.

Just the base growth is a little lower.

Yeah.

Yes. This is purely.

Hiring has slowed and I wouldn't even say pausing people say pausing there still hiring for essential roles. We don't really have any clients, we're not hiring any one.

The material, it's just that the hiring that they were doing they have slowdown that happened faster than we expected as Peter shared but we are not seeing anybody trading down we're not seeing anyone stopping doing verifications doing lesser criminal checks stopping health screenings, if they were doing it we haven't seen any of those.

Behaviors occur.

Got it.

Good to hear thanks, guys.

Our next question is from Andrew <unk> from Jpmorgan. Please go ahead.

Hi, Peter I, just wanted to start by just confirming something that you said earlier and then I have a question. So I heard you say, we got to the base growth of 2% to 3% in the quarter was that for the whole quarter. So third quarter was 2% to 3% base growth and did you also say that fourth quarter has started with a similar.

Our base growth that's sort of my confirmation. So now my question.

When you say low single digit organic constant currency revenue growth for the fourth quarter could you help us break that down between existing clients and new business.

Sure So happy to follow up on those questions.

So first starting with Q3, we did say the base growth was in the 2% to 3% long term target range. So confirming that you did hear that accurately.

And what we shared is that it did moderate to that range sooner than we expected too because the original guidance. We gave Andrew is that over the back half of the year. It would moderate to the two to three so hopefully that closes that question and then when we look at Q4.

We do not give guidance around our specific revenue growth drivers, but I think the way you should think about the low single digit growth rate on organic constant currency revenue in Q4 is that we have.

Got high confidence that we can deliver within the target ranges for new business cross sell upsell and attrition.

And that that strong performance, there will offset the declines in base growth.

Okay. Thank you.

Our next question comes from George Tong from Goldman Sachs. Please go ahead.

Hi, Thanks, Good morning, I also wanted to dive into the components and drivers of growth.

Base growth moderated to the 2% to 3% range long term range sooner than expected and you mentioned that new business and cross sell should comfortably operate within the long term ranges are you are you seeing a second derivative slowdown in new business and cross sell between where you are seeing a slowdown in <unk> growth just trying to see how the.

New business and cross sell upsell are changing.

Above and beyond whether or not they're operating within the range.

Hey, George it's Josh So I think what we've said and hopefully this helps as we expect to be able to perform at those targets.

We have been performing over those targets. So hopefully that sort of answers. The question part of that is just lapping the really strong growth that we've seen for the last two years. So as we think about.

Q4, we are lapping a 35% growth.

From last year, and as Peter shared kind of 40 ish percent for the last six quarters prior to Q3, and so we continue to have to do even more.

Our new business to stay at our targets and we are continuing to do more as I shared for Q3, we had more dollars of new business than we had in Q3 of 'twenty. One so we have to keep doing that but the denominator changes and of course, the new clients could be billing at slightly lower levels than they would.

Normal environment as well so that's all factored into our revised guidance.

Elements of what we're thinking about it is also factored in.

To the to.

So the view David going into next year of the fact that we would expect to be able to grow.

As long as the macro holds and that is something that we consider in terms of the factors in our control versus what might happen with base growth.

The moderation that might occur within those so we don't breakout or guide on our growth drivers. We just tell you about them on these calls from the previous quarter, but I think hopefully that gives you a little bit of color of how we're thinking about it.

Got it that's helpful and then with respect to the.

Base growth moderation that you saw was a slowdown broad based or was it concentrated in the areas that you mentioned like UK gig in retail in other words was this a mile wide inch deep sort of phenomenon where very.

Very targeted.

And the slowdown.

Yes, George So we don't breakout individual performance by vertical or by Geo, but what I would point you to is what I shared.

In opening remarks in terms of when we look at October .

We are seeing.

Well diversification of our business playing out to a positive in this environment, where health care industrials and APAC are continuing to perform strong and then we are seeing some softness in UK gig and then in the U S and contingent technology in retail.

Great. Thank you.

Our next question is from Alan My Cowboys from Wolfe Research. Please go ahead.

Hey, guys on for Darrin Peller here, Thanks for having me.

I know you guys lightly touched on this but can you guys kind of further unpack the expected resiliency of your growth algorithm, specifically are there any levers that you are willing to pull to further accelerate new logo wins to offset a faster than anticipated base growth deceleration.

And are there are you willing to sacrifice some of that expected margin expansion in 'twenty three to invest in your go to market.

To offset that top line.

Challenge from the macro.

Hi, it's Josh So first just to remind you that we believe that even in our long term algorithm. If we're performing at the 7% to 8%, we believe that would be market, leading relative to what you see from our competitors and we've been outperforming that consistently for the last seven quarters. So I just wanted to start there.

In terms of how we think about it going forward, we're not looking at it as a sacrificing of margin question again, we've said.

We expect to expand margins next year, we expect to expand margins in Q4 by over 250 basis points at the midpoint of our guidance. So our view, though is there are tactics that we can take to really further accelerate new business growth I don't necessarily want to give a roadmap to.

Are those two the competitors who might be listening, who I plan to take that share from but it worked for us in 2020, we're planning to bring some of those things back in and of course, there are things clients are going to want in a low growth environment that they that they may be more willing to give other things. So that's true on the new business grew.

That is also true on cross sell upsell, where we think things like identity could actually play very well in terms of helping them to not waste money.

Money on doing background checks, they shouldnt be doing if there's fraud or wrong information being anchored and we also think that applies to the retention playbook where are things. There are things. We can do with current clients. So I don't want to give those tactics here publicly and tell our competitors, what we do but we think the proofs in the pudding of how we've performed before.

That's where we think that we're best in class on those drivers and Thats why we highlighted the fact that we've been performing at double those long term targets since the beginning of 2021 with that 15% that I pointed to on slide six of the presentation.

Okay, Great color guys I appreciate it.

Our next question is from Mark <unk> from Baird. Please go ahead.

Hey, good morning, and thanks for taking my questions.

Just wanted to understand philosophically.

You're clearly anticipating increasing margins for next year.

Assuming that things hold up but.

Philosophically how would you if we do go into a recession.

How should we think about.

No.

Trying to maintain margins versus.

Maintaining the bustle in the business.

<unk> quickly how are you thinking about that how could a mild recession.

Be different in terms of what we ended up seeing.

Relative to what we ended up seeing during the Covid period.

In terms of your actions.

Nathan Thanks for the question, it's Josh rather than philosophical maybe I'll just tell you my personal beliefs relative to my job as CEO of a public company right. I think my job is to make sure that I'm doing what's right for shareholders, whatever the macro and in a macro the slow growth or if it turns recessionary, whereas.

Where it goes.

Instituted our playbook and these are things that we've been planning for some time there actions, we wanted to take but could not take while we were growing 40%.

On an average basis over the six quarters prior to Q3, but as soon as we saw that base growth start to moderate we pulled the lever to start moving quickly on those so the first thing is the margin expansion. Some of those are very quick actions that we can take again as Peter shared when you're growing at a rate like 40%.

Very hard to stay ahead of that revenue and support the clients to the levels that they expect from us when we promised them best in class client service as that growth moderates, even through our long term targets of 9% to 11 or lower than we are in a position, where we don't actually have to be running at that kind of a surplus and we can run at the support rates.

Think we need so that's like a quick easy action that we can take and that's a big part of what you see in the 250 basis point improvement that we expect in Q4. There are there are more strategic things that we can do where I can actually spend the time and the effort to really dig in and look at process reengineering and how do we do things that were designed over.

A decade ago, rather than just automating parts of that existing process and Thats, where Peter mentioned, we've brought in the outside help with experts who are really experienced that at that to help us look at it. So those things. We think are really really important we think it's actually our obligation to shareholders. If the right thing to do it's the right thing for our team as well so that people are.

To work on the things that will be meaningful for us going forward and our view is any step backs, whether thats the low growth environment that we're anticipating and experiencing now and then if it holds going into next year, where we expect to grow or if it turns to be a more recessionary environment in either of those cases, we think that our view is to <unk>.

The care of the clients make sure they're served really well make sure we use the time to expand our margins and do a lot of the work that was just hard to do with the explosive growth rates. We had so that we can see that significant margin expansion. We did that in 2020, we exited with more new business higher client retention more upsell cross sell and much.

Higher margins are planned in any downturn, whether it be through a low growth environment or turn recessionary is to make sure. We focus on the exit velocity coming out of that while also performing during that downturn.

The only additional point that I would add right is that we have a highly variable cost structure. So if you think about our cost of revenues, 80% of those are third party costs, which we do not incur unless we fulfill the order about 16% of that is labor costs, which is highly flexible based on the environment. So that's kind of the cost of revenues piece and.

If we look at the Opex piece.

I covered earlier some significant initiatives, we have there in terms of.

Managing that down and improving the margins in <unk> as we spoke about and in 'twenty three.

That's really helpful. Thank you.

Can you talk a little bit about just the uptake with regards to the identity solutions and particularly.

Do you think that that may end up.

Going through over the course of the year, particularly in the.

Industries would be the ones that would be the most interested in taking advantage of these.

The solution and the expansion internationally.

Hi, it's Josh so happy to provide a little bit of color, we don't give specific numbers of clients or our revenues overall, 90% of our revenue sit in the pre hire screening 10% are in the post hire monitoring and identity space. Our long term targets assume that that mix stays the same but we are very odd.

Domestic on the identity space that Thats, something that can help us actually accelerate upselling and actually expand us into new categories. We're excited about that we're seeing a good number of new clients, who are already on board and using.

Using the product I shared a couple of data points in my prepared remarks that I'll refer you to in terms of that uptake, but roughly over a third of the candidates are actually already in the IV database, we would hope to see similar experience with the Ot over time and really this is this is our view relevant to anywhere Thats got high.

Velocity hiring which is really important and places where any risk or fraud or getting the wrong people in there.

A very high risk to the business in terms of the international expansion as I mentioned, we're going to be starting in the UK. We're really excited about the exclusive workflows that we've built with the Ot, we think it differentiates us versus other players in the market.

By providing this portable identity solution, where we're a candidate can actually reuse. It multiple times, that's something we think will actually really help us in that space in particular in the UK places where people actually worked for more than one entity at a time, we think that'll be a big differentiator and then also in other industries because you do have the right to work.

Requirements in the U K, we've been providing a solution on that for a long time, but this is an even better solution for that and we think that that will increase the uptake.

Great. Thank you.

Okay.

This concludes the Q&A session and the Sterling third quarter 2022 earnings call. Thank you all for dialing in today you may now disconnect your lines.