Q4 2022 Sterling Check Corp Earnings Call

Good morning, or good afternoon, and welcome to the Sterling fourth quarter 2022 earnings call. My name is Adam and I'll be your all principal today, if you'd like to ask the question in the Q&A portion of today's call you may do so progressing stock rose by one on your telephone keypad.

I will hand, the floor over to Judy who head of Treasury and Investor Relations to begin the <unk>. Please go ahead when you're ready.

Thank you operator, and welcome to Sterling is fourth quarter and full year 2022 earnings call.

Joining me today are Jos Peres, Chief Executive Officer of Sterling.

Peter Walker, our Chief financial Officer of Sterling.

The slides we will reference during this presentation can be accessed on Sterling its investor relations website under news and events the.

The slides that are 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 additional.

Additionally, please refer to our most recent Form 10-K filed with the Securities and Exchange Commission for a discussion of risk factors that could cause actual results to differ materially from these forward looking statements.

Our slide presentation and discussions on this call will include certain non-GAAP financial measures for such measures reconciliations to the most directly comparable GAAP measures in the appendix to the presentation and 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 <unk>.

22 was a great year and I am very proud of the accomplishments and results the team delivered.

Reflecting on the year there is a lot to highlight.

Slide four shows some of the key 2022 accomplishments I'll talk about today.

I'll be discussing our strategy refresh innovation M&A and financial success before ending with our 2023 priorities I'll then hand, it over to Peter for a more detailed analysis of our full year and fourth quarter results and to provide our 2023 guidance.

Starting with slide five this year, we completed a strategy refresh an organizational realignment, which we expect to lay the groundwork for the company's continued long term success.

Our strategy includes doubling down on our competitive strengths and increasing our revenues with existing clients acquiring new clients growing market share internationally and utilizing M&A to supplement our organic revenue growth. We also remain at the forefront of industry innovation and are bending our trajectory.

Murray with newer solutions, such as identity verification concierge services and post hire services like monitoring and nine.

Turning to slide six the next area I'd like to highlight is our innovation.

Throughout our history, we have pioneered many industry, leading solutions such as criminal fulfillment technology.

Thats record and incarceration alert products and AI enhanced record review and validation processes.

In the past few years, we have only increased our focus on innovation and project ignite has enabled us to launch products more rapidly to meet immediate client needs.

In 2022, we had over 300 product releases nearly 20% more than what we released in 2021.

Examples of recent developments include our enhanced global language support capabilities and proprietary core <unk> offering and we released our comprehensive global identity verification solution through our partnership with <unk> in the U S and with Yoda internationally.

We have been very pleased to see that our identity offerings consistently grew through 2022 with full year transactions up approximately 250% over 2021.

Our fingerprint business also experienced similar growth with 2022 fingerprint transactions being up by nearly 300% over 2021.

Another recent product innovation is the continued enhancement of post hire monitoring solutions, which track among other things healthcare sanctioned medical licenses recent Iraq and motor vehicle registration monitoring in.

In 2022, we released our new enhanced industry, leading monitoring solution, providing a fully integrated criminal monitoring experience, including arrest and conviction for our clients.

Historically this industry has delivered monitoring in the form of transactional re screening orders.

Our new solution is subscription based and enabled multilayered monitoring that will scale globally for our clients around the world.

We also made significant progress towards unifying the client experience by moving approximately $140 million in client revenue from legacy platforms onto our single unified platform. We now have over 85% of our global revenues on our core platform.

Finally, we increased our automation integrations with well over 3000, API as an RPI bots powering our fulfillment platform to deliver high accuracy lo hiring costs and faster time to higher rates.

Over 90% of our U S. Criminal searches are automated and we now complete 50% of U S. Criminal searches within the first five minutes, 65% within the first 15 minutes over 70% within the first hour and 90% within the first day.

Turning to slide seven the next accomplishment I would like to highlight is M&A 2022 was also a year of great success on that front, starting with the <unk> acquisition at the end of 2021.

We completed our integration of UBI ahead of schedule and are pleased that the results exceeded our initial estimates we realized meaningful cost and revenue synergies from the deal as clients were enthusiastic about switching to the sterling platform and gaining access to our additional solutions.

We employ this strategy in 2018 with the acquisition of National crime check to expand in the APAC region and the Socrates deal now expands our global presence into Latin America to serve the rapidly growing hiring needs of multinational and local clients.

With operations centers in Brazil, Colombia, and Mexico. The Socrates team has built a highly reliable operational model and suite of screening services guided by their people first client centric values that are a perfect fit with the Sterling culture.

We are excited to work with the Socrates team to build on the Sterling has proven model of bringing deep regional expertise and localized innovative solutions to deliver growth in the Latin America region.

Our other acquisition was of a check a highly complementary deal, we just announced yesterday the.

The purchase of a check builds on our successful M&A strategy of growing market share in the U S through accretive tuck in deals.

Company possesses a high quality enterprise focused client base diversified across attractive verticals, including health care Industrials and Tech media.

As with Epi, we expect this deal to yield significant synergies from platform migration, SG&A rationalization and cross sell of Sterling products.

In particular, we expect an integration period of 12 to 15 months with <unk> adjusted EBITDA flow through reaching 45% to 50% once clients are integrated onto our platform and technology consistent with our playbook for U S based tuck in deals we messaged similar ambitions.

When we bought UBI and can say now that we achieve those targets ahead of schedule. We aim to do the same with a check.

Our business and strategic accomplishments throughout 2022 resulted in strong financial results as shown on slide eight we set new company Records. This year for annual revenues adjusted EBITDA and adjusted net income as we continued to execute against the strategy we implemented.

In 2019.

Our 2022 revenues grew by 19%, including 14% on an organic constant currency basis, even while lapping 2021 exceptional 41% revenue growth.

Our long term target for organic revenue growth is 9% to 11% per year and 2022 was the second consecutive year above that range.

To our knowledge, our organic revenue growth in 2022 with industry, leading and reflects the investments we have made since 2018 to prioritize profitable organic revenue growth.

Our growth in 2022 was driven by all four of our organic revenue drivers, which were each at or above their long term targets. In particular, our continued focus on new client wins resulted in $57 million or 9% revenue growth in 2022.

Marking the fourth consecutive year at or above our long term, 7% to 8% target.

To our knowledge our growth from new clients is industry leading.

We also increased our wallet share with existing clients through upsell and cross sell and prioritize exceptional client service to ensure optimal client satisfaction and revenue retention rates and I'm proud to say that the efforts certainly paid off.

Slide nine shows that our strong results in 2022 are a continuation of our strong performance.

From the time, we launched our strategy in 2019 through 2022, our revenue has grown at a 14% CAGR, including 11% on an organic constant currency basis.

We saw a pullback in 2020 due to COVID-19, but otherwise our results have increased each year as we gained market share increased spend amongst existing clients and benefit from multiple secular trends driving increased background screening adoption.

We believe our trajectory is particularly compelling when viewed over multiple years 'twenty to 'twenty, one and 2022 were not simply recovery from 2000, Twenty's trough, but rather a natural continuation of the trends we started in 2018 in 2019.

As shown on slide 10, our success over the past four years has been notably consistent in the revenue drivers, we can control new client wins cross sell upsell and retention, we have deployed strategies and tactics focused on these drivers including setting targets for our.

Our vertical and regional teams around these metrics.

Our project Ignite Tech transformation has yielded countless benefits across the company.

As a result of the sustained focus we have grown organically at a 10% CAGR since 2018 from the combination of these three drivers solidly ahead of their 7% to 8% combined target.

Even during the 2020 COVID-19 downturn, we still hit our long term target and grew by 7% on this basis as we achieved our new business and upsell cross sell target and our retention improved by 300 basis points year over year.

Rover as you can see on the slide we have improved our gross retention rate through the period, increasing from 88% in 2018% to 91% in 2019 and 94% in 2020, followed by two consecutive years at 96%.

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

Turning now to our strategic focus areas in 2023 on slide 11.

Despite an uncertain macro environment 2023 presents a lot of promise and we expect to continue the journey, we started when I joined in 2018.

In particular, we expect at the midpoint of our guidance to set New Company Records again, this year with revenues of $760 to $800 million adjusted EBITDA of $198 million to $218 million and adjusted net income of 106 to 121.

<unk> million dollars.

We plan to deliver these results by remaining focused on the long term strategic elements, which have driven our compelling success in recent years. These.

These include organic revenue growth with new and existing clients expanding our industry, leading identity verification products built around our exclusive IDB annuity workflows.

And M&A.

Our 2023 priorities also include a laser focus on margin expansion through increased automation and process improvements and cost reduction measures.

Last quarter, we discussed the playbook, we implemented when we saw our base growth again moderating we remove this surplus in our fulfillment labor that we had been carrying to support our 40% average growth since the beginning of 2021.

We also completed a realignment of our senior leadership and functions to elevate our go to market strategy and accelerate our technology and product innovation.

And we launched project nucleus and initiative that we expect to drive long term meaningful cost savings.

And efficiency gains by reengineering processes, driving fulfillment labor cost reductions and identifying and executing on additional automation opportunities.

Some of these initiatives are complete some are underway and still others remain on the near term horizon the.

The common denominator is that all of these actions will position the company in the future for growth and market share gains regardless of the macro environment.

And they will enable us to expand adjusted EBITDA margins for full year 2023 and over the long term.

In conclusion, I am really proud of the Sterling team for continuing to deliver through uncertain times, we navigated successfully through Covid and the subsequent recovery while building for the future and I strongly believe we will deliver on share gains and margin improvements in 2020, three's uncertain macro environment as well.

<unk>.

With that I will hand, it over to Peter Walker, our CFO to take you through our financial results and 2023 guidance Peter Thanks.

Thank you Josh and good morning, everyone, turning now to an overview of our financial performance starting with revenues on slide 13. During 2022, we set new company record for annual revenues with approximately $767 million. This was a 19, 5% increase over 2021 and included 14.

4% organic constant currency revenue growth, we're very proud of these results, which we delivered even while lapping 2021 explosive 41% revenue growth. The year also included a six 5% contribution from M&A, partially offset by a 140 basis points drag due to foreign currency.

<unk>.

The organic revenue increase included growth from new clients, and approximately $57 million or 9% and growth from existing clients or approximately 4%, including base growth cross sell upsell and net of attrition to our knowledge our growth from new clients as industry, leading our investments in technology.

Products, coupled with our best in class turnaround times and customer first focus enabled our gross revenue retention rates remained strong at approximately 96% for the year, our second consecutive year at that level. Additionally, pricing was relatively stable across the periods and not meaningful to the <unk>.

And revenues we are encouraged that 2022 strong results were driven by all four of our revenue drivers performing at or above the target range. We are seeing success in the areas of our business most within our control, including strong growth from new clients cross sell up sell and revenue retention rates. These are.

Areas, our greatest focus and we feel that that our momentum in winning market share and wallet share can help offset the unpredictability of base growth overtime.

Turning to Q4 overall revenue was down 2% year over year, driven by a 4% decline on an organic constant currency basis, a 140 basis point drag due to foreign currency, partially offset by 4% of inorganic growth.

Q4 continued the positive trends and the drivers within our control, including growth from new clients of approximately $12 million or 7%, our ninth consecutive quarter at or above our 7% to 8% long term target.

At the same time revenue from existing clients was down 11%. The revenue shortfall in Q4 was driven by two main items. The first was slower hiring by clients, who are cautious to bring on additional head count before the new year and some return to seasonality importantly, we've seen some uptake thus far in <unk>.

'twenty three based on these factors the second item was signed new business implementations pushed out to late Q1 2023.

Overtime, we expect the current normalization and growth rates and modest pullback in hiring to be followed by a return to the historical 2% to 3% base rate and for our total organic revenue growth to return to a 9% to 11% target.

Looking at 2022 revenues by region, our U S business grew 23% compared to 2021, we saw broad based strength in our industry verticals with particularly strong results in our industrials healthcare and <unk> verticals.

Shown on slide 14, we have a diversified in attractive vertical mix. This mix has been instrumental in supporting our compelling revenue growth in recent years, including our industry, leading growth from new clients, our deep market expertise into these industries and geographies. We serve has allowed us to develop a client base. It is diversified across.

<unk> size industry, and geography with minimal concentration in particular, we have intentionally increased our exposure to health care, industrials and financial and business services, which together comprise over 60% of our U S revenues and had seen solid demand trends despite the uncertain macro.

The environment too.

Turning to international revenue in our international business grew 10% in 2022 on an organic constant currency basis International growth was led by the APAC region, which exhibited broad based strength, primarily in Australia, and Singapore due to new client wins and strong underlying performance.

International also showed resilience during the fourth quarter growing by 3% on an organic constant currency basis and demonstrated the benefit of our global scale with 17% of our revenues generated outside of the U S. During the quarter.

In 2022, we delivered six 5% of inorganic revenue growth from Epi. Our November 2021 acquisition. We were very pleased with <unk> performance in 2022 with results solidly above our expectations both on the top and bottom line. We deliberate this outperformance by completing the deal.

Integration ahead of schedule and delivering client retention above our initial expectations through proactive strategies. The resounding success of the UBI deal has increased our confidence to pursue additional synergistic M&A.

And we were excited to close on two more deals so far in 2023, I will touch on the impact of those deal shortly.

Turning to slide 16 in 2022, we set a company record for adjusted EBITDA with $199 million and 11% year over year increase compared to 2021, reflecting an adjusted EBIT margin of approximately 26%. We continue to invest in organic revenue growth, while also focusing on cost.

Discipline automation and process improvements to drive long term margin expansion 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 recognized.

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

2020, twos margins were below the expectations, we shared on our Q3 call primarily because of the greater than expected moderation in December revenues.

We were able to achieve a significant amount of our cost savings in the quarter. This was partially offset by higher fulfillment head count costs in the quarter due to lower revenue and higher non class settlement costs.

Like with our revenue and adjusted EBITDA. Our 2022, adjusted net income set a new company record of $29 million or $1 <unk> per diluted share representing a year over year increase in adjusted earnings per share of 11%.

This year over year increase was slightly higher than our adjusted EBIT growth due to lower DNA.

For the fourth quarter, our adjusted net income was $20 million or <unk> 20 per diluted share Q4's year over year decline in adjusted EPS was primarily driven by the base revenue moderation discussed earlier.

Turning to slide 18, our cash flow from operations in 2022 was $104 million, an increase of 52% over 2021 higher operating income and positive trends in cash collections was partially offset by higher cash interest and tax payments as well as significant cash out.

Close to complete project, ignite and M&A diligence and integration.

On November 30, our board authorized a $100 million share repurchase program as we continuously seek to increase shareholder return, while taking advantage of attractive equity valuations as of February 28, 2023, we've used approximately $22 million to repurchase Sterling share.

<unk>, leaving us with approximately $78 million of capacity to continue executing the program.

We ended the year with total debt of $505 million in cash and cash equivalents of $103 million. 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 strong cash flow generation and adjusted EBITDA growth.

As a result of a rising cash position, we were well positioned to use cash on hand for our two M&A deals in 2023 at a combined net purchase price of approximately $50 million.

Socrates is an asset that we've been working with and looking at acquiring for a long time and we were pleased to see the price return to attractive levels. We expect this acquisition to drive growth for us with both global and local clients in the case of HSE, we paid approximately four times adjusted EBITDA on a pro forma synergize basis.

Is solidly within our M&A pricing framework, and even lower than the multiple we pay per Abi.

Following these two deals we are well positioned to continue pursuing M&A to supplement our organic revenue growth and make further compelling investments. In addition to our ongoing cash generation, we have ample capacity under our new credit facility, including approximately $195 million available under our revolver at year.

And.

During the fourth quarter, we completed a successful debt refinancing with a new term loan and revolver, which extended our maturity profile to 2027 increased our credit capacity to $700 million and reduced our interest expense spread the new five year credit facility was oversubscribed, despite a challenging environment for me.

Many borrowers.

Point, which we believe reflects the credit market's recognition of our successful growth strategy and maturation as a public company. We also recently implemented an interest rate hedging instrument to thanks, approximately 60% of our floating rate debt.

Our capital allocation priorities remain investing in organic revenue growth pursuing M&A and maintaining a healthy balance sheet. This includes opportunistic share buybacks under our previously announced share repurchase program. We see macro instability is an opportune time to build the foundation for success.

On slide 19, we provide our guidance for 2023 for 2023, we expect to generate revenues of $760 to $800 million representing year over year growth minus one to positive, 4% adjusted EBITDA of 198% to $218 million representing year over year growth.

Zero to 10% and adjusted net income of $106 million to $121 million representing year over year growth of zero to 14%.

Our guidance includes full year organic constant currency revenue growth of minus three to positive 1% as we discussed earlier, we continued to see solid growth in items within our control, including new client wins. These are being offset by base revenue declines.

Based on what we've seen in the first two months of 2023 December 2022 appears to be the low point for negative base growth with an uptick so far in January and February .

We are not assuming a material change in the macro environment over the course of the year. If there is a material shift for the better or worse, we would reflect those changes and updates to our guidance.

For total organic revenue growth, we expect year over year declines during the first half of the year. This will likely include 8% to 10% organic constant currency revenue declines in Q1, marking the low point for 2023, followed by narrow declines in Q2, we expect the second half to show you.

Year over year growth with improvement each quarter, our guidance is based on several items, one new clients onboarding through the year.

Two ramping client hiring plans three upsell and cross sell based on our pipeline and for easing year over year comps.

Our industry and regional diversification is providing us some protection against the verticals most impacted by the current environment.

For example, our health care vertical in the APAC region are showing resilience so far in Q1, helping offset declines in some other verticals and regions.

From the combination of our two M&A deals we expect two to three points of inorganic revenue growth in 2023 note that the <unk> acquisition anniversary during Q4 2022, and the revenues became fully organic starting in December for the impact of foreign currency fluctuation, our full year 2023 guidance assumes.

40 basis points of benefit to us.

Turning to profitability, our 2023 guidance implies adjusted EBIT growth of zero to 10% the midpoint of this range implies a full year adjusted EBITDA margin of 26, 7%, reflecting a notable margin expansion over 100 basis points versus 2022 muted by approximately 30 base.

This points drag from our two M&A deals, we expect margin expansion for the full year, even in the absence of robust organic revenue growth through the cost measures, we put in place as well as the variability of our cost structure.

We expect margins to contract in the first quarter of 2023, followed by improvement through the year with healthy margin expansion in the second half as our revenue trends improved and the benefit from our cost actions ramp as I mentioned earlier, we have several initiatives both completed and underway does.

Signed to automate our workflow improve processes and optimize our cost structure. These are expected to drive margin expansion during 2023 and setup sterling to scale more profitably over the long term.

Finally, turning to our adjusted net income growth guidance zero to 14%, we will benefit this year from reduced DNA, which should drive growth to the bottom line in excess of our adjusted EBITDA growth. We remain encouraged by the leverage in our financial model driving adjusted EBIT growth. During 2023 ahead of.

Our revenue growth and driving adjusted net income growth ahead of our adjusted EBIT growth.

To further help with your modeling we have included a page in the appendix with our assumptions for 2023, and a detailed breakdown of our revenue guidance.

In closing we are reaffirming our long term targets on slide 20, we have significantly outperformed our topline targets during the past two years and are reaffirming our long term target of 911% organic revenue growth levels with margins expanding towards 29% to 32% and adjusted <unk>.

Net income growth of 15% to 20% per year that.

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

Thank you.

Wonder if you'd like to ask a question today. Please press star followed by one on your telephone keypad now from Pet parents asked you. A question. Please ensure your headsets fully plugged in on muted Luckily star one to ask a question.

On the first question today <unk> Mark <unk> from Baird. Your line is open. Please go ahead.

Good morning.

Wondering if you can give us a little bit more color with regards to what you're hearing from some of your key clients with regards to.

Their plans for the year given the.

Certain team in terms of the macro and any sort of additional color that you might provide with regards to just the differences.

Youre seeing in terms of the vertical.

Thank you.

Thanks, Mark it's Josh So let me go first Peter if you want to add to it. So first let me just start with we continue to hear from our clients and our strategic growth verticals like healthcare and industrials.

We're continuing to hire as they have been they've been growing throughout last year, including in the fourth quarter. So these are verticals, where we expect to continue to see our clients on the trajectories they've been on and maybe even improve.

In terms of.

Some of the other verticals, where we saw.

The slowdown in Q4, what we heard from them at the time and now we're hearing this year is that they sort of put things on pause as I mentioned in our last call for Q4 as they waited to get through the year get their budgets set and now even with the macro as it is they have their hiring plans for the year in place and they are starting to post those.

Jobs ramp those.

Amp those hiring physicians and expect to hire those so we have today baked into our plan and our guidance the view from clients on what Theyre hiring is going to be in the current macro with its current uncertainty and again Thats why Peter share that we expect Q1 to be the lowest point in the year as they are starting to get those positions rolling now.

And ramp that up through the year. We also expect them to continue to buy new products and our cross sell and up sell efforts and to see that continue to grow through the year and also for our new client onboarding to ramp up through the year as we would typically see but we saw that pause a little bit in Q4 as well notwithstanding.

We did hit our long term target in the quarter for new growth.

Great and then can you give us a little bit more color with regards to the specifics with regards to Socrates in HVAC with regards to Robyn.

Margin profiles that they currently have.

And then the.

Plans for integrating.

You, obviously did a great job with UBI.

Thinking through right.

Over the 15 month integration period.

On the margin.

But could come.

Two acquisitions thanks.

Sure. Thanks, Mark I'll go first and then Peter maybe it will give you some more specific on the numbers, but let's just start with a check I think that you should think about this as being very similar to epi and.

And we've incorporated what they've been seeing in the macro into the price, we paid and into our expectations for the year. That's part of why we were able to make this acquisition at four times pro forma adjusted Synergize, adjusted EBITDA, which is cheaper than what we paid for <unk>.

And we expect the cadence to be somewhat similar in terms of how we're able to improve the profitability for those clients as we migrate them over to our platform and our systems and our fulfillment. So again, you should think about that happening sort of starting to happen around the middle of the year and then the.

Fit from that ramping through the end of the year. Our goal is by the end of Q1 really to have.

Fully synergize the asset in terms of a check and you should think of it as current profitability and buying it and I think this is where Peter shared a little bit about this as having a 30 basis point margin drag combined with what we see in soccer to you. So we're not breaking them out separately, they're obviously at a lower margin than what we are.

Expecting in our core business until we synergize them at which point, we would expect them to actually be margin accretive given the drop through rates that Peter discussed in terms of Socrates. This was very important for us. It's something we've had our eyes on for a long time, we've worked with them as a provider overtime and we think the Latin America region provides us.

With significant growth opportunities really both from U S clients in particular, but some other global clients, who have business in Latin America and want to have.

Consistent screening experience and we think that that provides us with significant opportunities to win business and grow with existing clients by expanding into the region and Additionally, we think that it provides us with a real opportunity over time to win global clients, who want one provider everywhere.

There because we think we're really the only player now who is a leader in all of the key regions with this acquisition and it really helps us to stand apart. So that was much more of a strategic purchase and Mark I would just add as we shared on the last earnings call our M&A pipeline.

This fall we were really excited that we were able to get these two very high quality assets at what we view as very affordable prices. There were several other deals we walked away from.

Either because of price or either because of the client base and how that's being impacted in the current economic environment. If we think about <unk> specifically.

They are leading verticals, our healthcare industrials that leads really well right with where we're focused in growing overall. So we think this is just a terrific win win for us to pick up.

<unk> business and then soccer teams as Josh mentioned, we believe it's got leading capabilities in Latam, which will help us grow locally and with our global clients.

Great and then the last one just you.

Done a great job in terms of adding new clients.

How are you thinking about the pipeline.

In terms of the new pipe.

New client additions and then also what are you thinking about what are you most excited about with regards to.

All of your multiple cross selling opportunities when I think about identity and post her monitoring it seems like you've got really good traction. There. So just wondering what are some of the ones that you're most excited about as it relates to this year.

Sure, but why don't I start with the second one and then we can see if Peter one answer your first question. So I think.

I continue to be most excited about identity, because I really do think that it changes the changes the game for us in terms of something that we believe we can up sell to almost every background screen over time, we're seeing the growth rate we put in place those products throughout the year, we had the chance to really enhance the offerings later in the year and we.

Our <unk> offering for international which we think is also going to be a game changer for us as.

As we look to the.

As we look to rolling that out through the year. So that's probably the one I'm most excited about because it is a very straightforward upsell that increase was a package density and we have some stand alone identity opportunities that we continue to pursue and I think the growth rates that we shared on the call and in the slides show that that traction is really starting so we tried to give you.

Some color on that in terms of post hire monitoring we continue to see some of these specialized areas.

We've talked about before and I discussed in the script.

The sanctions monitoring the.

The MTR monitoring as being really attractive and now we're really excited that we do have a true monitoring solution on the criminal side that we have clients, who actually are on and excited about versus just doing these package re screens that can be unpredictable and can be.

Something that clients easily can choose to walk away from or move in a given year. This is a much more stable consistent stream as we're successful in getting clients on there. So I think we expect to see more from identity. This year and more for monitoring kind of later in the year as we really get those clients going and then your other question, which was on sort of the new business, which I'll let.

Peter give real color on what I would say is we continue to see very consistent trends in our advanced pipeline in our closed deals in our revenue expectations from from new clients. Peter I don't if you want to give a little color on it through the year. Yes. So we're really proud that we believe we've got industry leading.

New client growth.

And I think the numbers speak to that right. So for full year $57 million of revenue from new clients, which is 9% growth for the quarter that was $12 million, which is 7% growth if it hadn't been for some of the clients kind of pushing their onboarding of new business from the <unk>.

End of Q4 to Q1, you would have seen that higher when we think about 2023, we believe we're going to hit our new growth target of 7% to 8%. We don't believe thats going to be uniform over the year as we mentioned we expect to see.

Contraction in Q1 of organic constant currency currency revenue of 8% to 10% with that improving over the year, but we do believe for full year 'twenty three we're going to be in that 7% to 8% range for new client growth.

The next question comes from Andrew Steinman from Jpmorgan. Please go ahead. Your line is open.

Yes, Hi. This is Alex has on for Andrew Steinman Hope, you're all well a quick question just just for.

The record it seems that.

Revenue from existing clients, so base growth up sell cross sell minus churn was something like negative 13% in <unk>.

Any color there and then I want to follow up with a question on base growth. It seems like you're implying for the full year 2023 that that will be somewhat better than in the <unk> 22 in.

That seems to be somewhat at odds with what.

What we're hearing from some of your peers and laterals. If you could maybe elaborate on that as well would be great. Thank you.

Yes, sure good morning, Joe.

Reflecting back on Q4, what we shared with new client growth of 7% existing client was a decline of 11%. The way you should think about that 11% is cross sell up sell of approximately four offset attrition of approximately four so you kind of get to a net zero. So that negative 11 is all attributable to base growth we.

Also shared in our prepared remarks at December we believe is a trough of base growth and that we're seeing improvement in January and February and when you think about kind of our full year 2023 drivers as I just shared we believe new business will be 7% to 8%, we believe that cross sell ups.

Sell in nutrition will both be around a positive four and a negative four netting each other and the base growth will be eight to nine there will be seasonality in 2023, so and im providing those 2023 revenue drivers and speaking to the full year, where we're going to see negative organic constant currency revenue growth in Q.

One improving in Q2 moving into positive organic constant currency revenue growth <unk> and <unk>. So hopefully that's helpful.

Gary.

And then as a follow up on pricing.

Have you had any success pushing through price beyond the pass through of rising third party data costs like for like are you, taking more pricing and how should we think about your ability to maybe take price in 2023.

Sure so as we've shared on previous calls.

Do you have the ability to take pricing increases through on our contracts. We typically take an annual price increase every year, which we did this year.

Mid year think of that price increase as.

CPI type levels, albeit we muted it this year given CPI.

So out of control so.

A little bit more reasonable and call that adding.

$3 million to $5 million in terms of revenue for the current year, we will look to do a similar type of price increase in 2023.

Okay.

The next question is from Manav Patnaik from Barclays Manav. Your line is open. Please go ahead.

Hi, Good morning. This is running Kennedy on for Manav. Thank you for taking the question, maybe just confirm could you or sorry, rather could you unpack for Q margins in terms of the benefit from the low growth playbook articulated on the <unk> call project nucleus and also the hit from the moderation of base growth that you saw.

And then kind of the puts and takes to margins for 'twenty three.

Sure. So we'll focus first on Q4, so at the low end of our guide.

Although on margin dollars by about $4 million and you can think about the main driver of that being the revenue moderation that we saw hit around Thanksgiving that we didn't expect and I covered the reasons for that in the prepared remarks, what we were thrilled about is that we were able to get out the majority of the savings that we had planned.

For Q4, we were carrying higher fulfillment head count because we expected obviously higher revenue in call. It December so it does take US call. It 30 days to remove that head count we were carrying slightly more costs related to that that are now out of the system and we did have higher non.

Class settlement during the Q4 than we expected.

Okay, and sorry for 'twenty three the puts and takes for margins.

Please.

Yes, so for 'twenty three our overall view is that margin expansion.

North of 100 basis points less about 30% for the acquisitions that we're bringing on board right. So youre looking at call. It 26, 7% margin for the full year.

Also indicating that we expect margins to be down year over year in Q1, following revenue being down call. It 8% to 10% in Q1, and we expect margin improvement throughout the year, we do expect that to be more pronounced in the back half of the year as we see revenue acceleration.

In Q3, and Q4, and we expect significant savings from our project nucleus to come online in Q3 and Q4.

Okay. Thank you and as a follow up if I may please.

With regards to the macro and just just interested in your assessment of your visibility.

In terms of what you had said mid into.

Into November on the <unk> call, how you expect the fourth quarter to play out the assumption of stable macro.

Just what kind of what that had entailed and what ultimately develop versus your expectation and what the outlook is for 23 also in consideration of the data, we're seeing from jolts et cetera. So.

So just some further thoughts on macro and.

Macro it specifically relates to hiring and trends.

Sure. Thanks, Ronny, it's Josh I'll start off and Peter can chime in.

I think first of all in Q4, we had messaged that we did see.

Slowdown in a number of verticals, where our clients had.

Really slow down their hiring taken a pause waiting for their budgets to get set to finish their years to really understand what their plans look like for this year.

And then what we saw after our call really around Thanksgiving through the end of the year was two things that happened one we saw that expand into other vertical or two that we had not seen.

Before that and that was something that.

It was not expected at the time that we gave that guidance those verticals have again restarted their hiring programs and that is reflected in Peter's remarks about the improvement we've seen already through January and February in Q1 on that base growth hiring from what we saw in December . The second thing we saw in December which Peter mentioned was a written.

Turn to seasonality in our business that we had not seen in the previous two years, where we had firms like in the staffing and retail space, who in an international gig who would typically not do much hiring in the last few weeks of the year, but in 2021 and 2022. They did do a lot of hiring.

They returned to that seasonality.

And then again picked right back up in January so that was something we saw really isolated.

In the month of December and in the back half, especially for those for those verticals and that seasonality in terms of 2023, we're assuming that it remains a rocky somewhat uncertain macro environment like we're seeing but we're at a point now where people have their plans for the year they've given their guidance for the year.

Our clients are moving forward with their revenue plans hiring plans et cetera for the year. So at this point. Unlike what we saw in Q4, where they sort of froze a little bit while they were waiting to get their plan set here, we're seeing them now start to ramp exactly as they are saying and move forward. So what we're assuming is the macro remains uncertain we're not.

Expecting an improvement to it but we are expecting that at least our clients are able to continue operating against the plans they've put in place with the full knowledge of the uncertain macro that theyre dealing with.

Thanks for the questions.

The next question is from Kyle Peterson from Needham. Your line is open. Please go ahead.

Yeah.

Great.

Thanks. Good morning, guys. Appreciate you taking the questions.

Just wanted to touch on the competitive dynamics here I mean, it seems like were in kind of a more challenging macro environment, probably for a lot of especially smaller players becoming tougher funding more difficult labor market.

Competitive dynamics changed for you guys at all in the last.

Whether it's three to six months or kind of what are you guys kind of seeing when when youre going to market and bidding on new deals.

Thanks, Kyle So first let me just start with I think and as we shared in our prepared remarks and as we shared in particular in.

In our slides on slide 10, we believe that we are industry best in winning new business. So we think that whether times are good bad or otherwise we win more business than others do as reflected in the 50 plus million dollars of new business that we put on <unk>.

Last year, even while lapping really great.

As in prior years, so we start with the assumption that we're positioned to win business based on our based.

Based on our client support model based on our technology based on our quality of fulfillment based on the turnaround times, we provide all of the things that we've been working on since I came here in 2018, and if we use 2020 as an example, we put on a ton of new deals that didn't show up until 21 in 2020 when people.

Had to pull back and retrench and we're starting to see a lot of those same dynamics. So we are seeing more rfps for us to go out there and win from those smaller and mid sized players because they are having their service levels drop and thats, causing anxiety for clients. So we would expect to be able to use any downturn in any.

Any difficulties this year to win a lot more new business from those small and midsized players, but also from our larger competitors, who we think we compete very well with as well.

Okay.

That makes sense and that's helpful. And then I guess, just a quick follow up kind of on the M&A pipeline I know one of your competitors. So just kind of recently, saying that the M&A market is seems pretty challenging in the valuations haven't really come down, but then I guess with <unk>.

Forex EBITDA post synergy multiple I guess that seems to.

Be a little contradictory of that so I guess, what are you guys seeing in the M&A pipeline and do you guys think you need to take a pause here to integrate these two deals or do you think there is potential for more M&A.

Later in 'twenty three.

Okay.

Sure. Thanks, Kyle So I think the our view on M&A is always that we're going to pay a fair price that fits in our model, we're not going to overpay for deals we're going to be patient. It's actually the reason we were not able to close deals in Q3 last year Q4 last year as the macro shifted in the targets that we were looking at their expert.

Patients Hasnt changed so we were unable to move forward. Some of those we were able to keep warm like Socrates in <unk> some of them we were not.

We had a few others that we moved along with.

Pretty far down the Pike, but we didn't like what we saw in the end in terms of how their client base was performing in this macro or we didn't like the fact that they werent resetting their expectations.

On price given the changes that they were seeing in their client based on their macro because they were still being unrealistic. So our view is the deals are there you have to build strong relationships with these targets and in many cases. This is their life's work. This is meaningful to them they care deeply about the clients and the people and we are very good at.

That and we are very good at making sure people know that when they handover. These treasured assets to us we're going to take care of those clients really really well in terms of your question.

The future I would just emphasize that what we find is we get inbounds from target to our not even running processes. They want us they want sterling, they're not generally out there looking for anyone who will buy it because they know that they can find that good home for folks in terms of our plans for the year at this point we can.

To see a lot of potential opportunities that are out there.

I would not expect us to do.

Tuck in M&A for at least the next two quarters would be my expectation not so much because we need to take a pause to integrate these couple of assets, but just because I think in our minds, we want to make sure that.

Some of the companies that we were talking to before for example, if they change their expectations on price, we'd be happy to get back engaged with them. We like their business is generally and so we think it may just take a quarter or two for that to happen and then otherwise for US I think we do need to spend one to two quarters, making sure that we do have.

Job of retaining and migrating these clients on the HFF platform.

Really putting in place the things we need to need to do to expand effectively with Socrates in Latin America, but I wouldn't expect that pause to be more than two quarters in terms of those integration efforts and so.

No with M&A, because you have to have two to tango, but it is something that we continue to see as attractive as accretive and as a really good use of our capital after our first priority, which is the organic revenue growth.

The next question comes from Andrew Nicholas from William Blair. Your line is open. Please go ahead.

Hi, good morning, Thanks for taking my questions.

You talked quite a bit about your expectations for 'twenty three.

And then also how fourth.

Played out relative to your expectations I'm just curious.

Are there any major distinctions underlying guide.

Guidance for next year between how you would expect U S business and international business to perform whether it's in terms of base growth or retention or any of the different metrics that you track or are those two.

Kind of buckets behaving relatively similarly at this point.

Hey, Andrew Good morning, So obviously FX has been a major headwind for us.

In 2022, we do expect that to be less of a headwind next year, just because of the currencies. We currently operate.

I would say going into 2023, our plans for the U S business and the international business.

In terms of base growth in cadence are pretty similar.

Understood. Thank you and then switching gears for my follow up.

Talk quite a bit about identity as an opportunity for growth I know you cited on the slide 250% increase.

Entity transactions this year between <unk> and <unk> I'm, just curious as we think about the cross and upsell.

Growth target over the medium term if continued acceleration there would mean upside to those numbers. It certainly seems like at the growth rate.

That you're targeting there and as that becomes a bigger and bigger piece of the business that would be a possibility just kind of wondering if that's baked into your long term target. Thank you.

Yes. Thanks, So it's Josh So let me just start with again I think that if you look at our 14% CAGR since 2018, the 19% growth that we put up in 2022 off the 41% that we had put up the year. Prior in 2021, and a big part of that was our ability to cross sell and up sell in <unk>.

<unk> to all the other measures that you see and I think that the reason I mentioned all those growth rates is with our overall business growing that way to keep that same mix, we've talked about before of 90% of our revenue being driven by the pre screen, the pre hire screening and 10% by identity and monitoring the.

And monitoring obviously need to grow really really fast in order to keep just didn't maintain that 10% given our overall growth rates. We do think over time that identity presents us some really good breakout opportunities, we're not changing our long term targets today.

And our drivers, but it is something that we continue to be excited about and we think that if we are really successful, let's say it does provide upside to that cross sell upsell number.

Great. Thank you I appreciate the color.

The next question is from Toni Kaplan from Morgan Stanley Tony. Please go ahead. Your line is open.

Thanks, so much.

A couple of times on the call you had mentioned Youre.

Science slowed post Thanksgiving and into December and that it's been better year to date.

Is there any way that you could give.

Maybe it's directionally or any sort of color on how much better. The first two months have been an and.

Any reason like January February is as usually.

Got it.

Sorry.

Arch volume.

Just confidence that this is a sort of sustainable trend upward.

Thanks, Toni So again I think.

First Peter did share our expectations for Q1.

Being the low point for us in the year with minus eight to minus 10.

<unk> growth so just to sort of start start with that what we said was that we saw an improvement in January and February from what we were seeing in December , particularly on that base growth line. So.

I think that that's baked into those numbers and in terms of how you think about it there is always been.

Seasonality in our business from the end of the year to the beginning of the year. So we're talking about it is in terms of what we're seeing in a year over year basis. So year over year December 'twenty two versus December 21 year over year January and February 23 versus January and February 22.

We've seen an improvement we've seen it pretty much remained there since January one right up through the end of February .

So and it's consistent with what our clients told us coming into the year based on the plan they've put in place.

Yes got it okay and.

And the pathway for <unk>.

Got some increased pricing from some of your suppliers have you seen any pricing moderation there or has that continued sort of full steam.

Any update on on that would be helpful.

Sure I think what I would say is that there are some provider. So again, a lot of our criminal costs, which are state fees et cetera, those have not really changed so that's one big piece most of our providers with maybe one exception on the verification side have generally remained consistent or in some cases, even reduced our pricing for <unk>.

Competitive reasons.

And then of course, we do have the one big provider who continues to increase prices. We continue to pass those along in.

Have those baked into our expectations, both on revenue and margin.

Great and then just lastly, I'll sneak one more in.

Could you talk about how good has been trending and your view on whether it's a.

Any update on how.

You look at it as a growth driver more long term.

Sure. So I think for us I'm going to separate U S and international gig for just a moment I think U S gig performed more or less in line with our expectations for last year and we do expect it to be an area of growth for us going into this year as you see on our chart of verticals that we provided you with an update.

It's still a relatively small percentage of our overall U S business internationally, where we think we really are the leader in gig we did see a relatively big drop off in 2022 and international gig from where in particular U S delivery service, sorry, UK gig delivery services during Covid and 2020 had huge.

Hiring that they had done for all the delivery and they slowed that significantly in 'twenty two.

In effect on our UK business, but we do continue to see it be a growth driver and we think that there is a lot of new business out there that we can go in to add to our book.

Due to time constraints participants are asked to limit themselves to one question. So we can get through the queue and good John and the next question comes from Scott Hudson from Bouffe Research Scott. Please go ahead. Your line is open.

Hey, guys. Good morning, and thanks for taking my questions I guess going back to the Socrates backwards acquisition.

I was wondering if you can maybe touch on the competitive dynamics within the Latam space.

Now it maybe compares to some of the other international geographies you've expanded into.

Thanks, Scott So I think that Latin America is an area, where it's a very nascent market for background screening, particularly for domestic local businesses and they are really are very few players in Latin America, It's obviously, a very big <unk>.

Region, and so there really is only one of our.

One of our competitors that has a true Latin American business, it's very highly concentrated in Mexico from our understanding what we really like about Socrates is the significant presence also in Brazil, and Colombia, which are important markets, where we think we're a clear leader in addition to having a Mexico presents and the opportunity to grow there.

So those are three very key markets for US we were thrilled to see that importantly, I will say Socrates does actually support some of our competitors in terms of some of the business that they have done historically, so we see that as a continued opportunity as well in the market.

The next question comes from Shlomo Rosenbaum from Stifel. Please go ahead. Your line is open.

Hi, Thank you very much hey, Josh I just wanted to ask a question in terms of like retention.

I understand that you Sterling has a lot more capabilities, particularly with above the.

And to the market, but there is a tier two where just as several large firms that are actually.

Not public and don't have to report their margins to.

Wall Street.

Concerning about them.

Particularly low balling on price I know net pricing is not.

The main aspect when it comes to clients selecting a provider, but it's certain.

Something thats taken into consideration and do you think that there could be some kind of impact in terms of retention as we think about it this year.

Thanks, Shlomo I think that to the extent that that's true that's always been true and it's baked into the 96% that we've had for the last two years on our gross retention rate where it is it is the case that we do compete with mid and smaller sized players what I will tell you is we do not see them.

Really undercutting price to get there that's not one of the dynamics that we see in terms of losses and I think that.

One important thing I would say is I can't remember a single conversation with a client where they told us they chose us for staying with us because of price.

Use us because of the service the quality the tools the product the people.

And the final question today comes to Jason <unk> from Keybanc, Jason Your line is open. Please go ahead.

Hey, guys. Thanks for fitting me in just maybe a quick one sounds like the new business pipeline is holding up.

Maybe can you talk about the factors, which get customers to change or add a background check.

Which isn't affected by macro.

Sorry, I think I just I just wanted to clarify that last part of your question. So the question is about why clients choose to come to us from a new business perspective, or why clients choose to do background screening who weren't doing it before.

Yeah.

The first one on the Sterling you talk.

But I can rephrase it if you want.

No no. That's okay. So I think when we when we are out there pitching business and I go on many of these.

Thats myself for anything over 100000, or so I try to be there if I can.

What we hear from clients is a few things first of all the moment, we show them our products and what the experience looks like for their employees doing their job of ordering background screens managing the process.

Being able to do adverse action if it's in the U S being able to look at our analytic tools. The experience that their candidates are going to have in our mobile first tool. The fact that we are able to collect most of the information if not all of it that we need upfront where many of our competitors have to keep going back and having an ongoing dialogue that almost sells it.

And then the next piece that really comes into play is that clients always want to make sure that they are dealing with someone who understands their unique business and our approach to verticals, where we've really developed product capabilities by vertical.

Way that we integrate with ACS is an HCM systems by vertical the way that we're able to work from a professional services standpoint to onboard clients by vertical really shows them that we are a specialty firm. So this positioning that we've had since 2019 of being the only player that can deliver this experience of <unk>.

Being a boutique firm that specializes in your industry that knows you with people who know your name who you know to call. While also providing the global scale and benefit of those amazing tools I mentioned of the the turnaround times that we believe are right.

Right up there if not best in class in terms of how quickly we can do things and I shared some of those statistics right. So 50% of our U S. Criminal searches being returned in five minutes like that is something that people really can't touch and so that those are the kinds of things that we hear from clients. So as long as we can.

A chance to talk to them, we feel really confident we're going to win that deal.

We have no further questions in the queue. So this concludes today's Q&A session and thus concludes today's call. We thank you very much for your attendance and you may now disconnect your lines.

Okay.

Okay.

Yes.

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