Sterling Check Corp. Q1 2023 Earnings Call

May 9, 2023

Good morning. Thank you for attending today's Sterling first quarter 2023 earnings call. My name is Megan and I'll be your moderator for today's call.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if he would like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to Judo Socal head of Treasury and Investor Relations Joe. Please.

Please go ahead. Thank you operator welcome to Sterling's first quarter 2023 earnings call. Joining me today are John <unk>, Chief Executive Officer of Darling, and Peter Walker, Chief Financial Officer of Sterling.

We will reference during this presentation can be accessed on Sterling its investor Relations website under news <unk> events.

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

After prepared remarks, we will open this call for questions before we discuss our results I encourage all listeners to review the legal notice on slide two which explains the risks of forward looking statements and the use of non-GAAP financial measures. Additionally, please refer to our most recent Form 10-K filed with the Securities and Exchange Commission for a discussion of risk factors that could cause actual results to differ materially from these forward.

We're looking statements.

Our slide presentation and discussions on this call will include certain non-GAAP financial measures for such measures reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued this morning, I'll now turn the call over to Josh.

Thank you Judah good morning, and thank you for joining US Sterling's first quarter of 2023 was a successful period of execution and I am very proud of the accomplishments and results the team delivered.

The year is unfolding as we expected and as a result, we are reiterating our 2023 guidance slide four shows highlights of the quarter first and foremost this was a quarter, where we took steps towards achieving our long term strategy and ambitious 2023 goals our financial results were incurred.

<unk>, our revenues were slightly favorable to our prior expectations, even against the uncertain macro environment and our progress in executing our cost savings programs in the first quarter helped us to deliver on adjusted EBITDA adjusted net income and free cash flow that we're solidly above.

Of our expectations.

These positive results in outperformance were driven by the Sterling team's continuous hard work to enhance our value proposition customer service and technology through an unyielding commitment to innovation and operational excellence in the first quarter, we made great strides on several key initiatives.

That we set at the beginning of the year and which I will further explore in the following slides identity verification cost optimization and M&A.

Turning now to slide five which summarizes our long term strategy in 2023 goals.

On our fourth quarter earnings call, we mentioned a strategic refresh we completed in 2022, which set the foundation for our company's long term aspirations, we aspire to be the world's most trusted background and identity services company differentiated by our deep market expertise unrivaled client <unk>.

<unk> best in class data and seamless workflows to achieve these goals, we have several specific growth strategies, including development of innovative new products to upsell geographic expansion and M&A the.

The strategic framework directly fueled our focus areas for 2023 with concrete near term goals that we believe will drive our company closer to that long term vision.

Specifically, we are focused this year on doubling down on the organic revenue drivers, we can control scaling our identity verification business optimizing our cost profile and M&A.

In the first quarter, we saw positive results on each of these four areas.

Starting with organic revenue growth on slide six in the first quarter, we continued to execute on the organic revenue drivers in our control.

We won new logos in all our geographic regions increased our client spend and maintained strong gross client retention rates.

To do this we enhanced our core offerings with continued investment into exceptional client service and cloud based technology capabilities.

When combined with our innovative culture those characteristics enabled us to perform slightly ahead of the expectations. We provided in March.

In the first quarter growth from new clients remains solid at 5% this was slightly better than our expectations, albeit a bit lower than our long term target in the levels. We have previously delivered.

As discussed on our fourth quarter call. We saw some signed new client implementations pushed till later in the first quarter and to the second quarter.

As those implementations come online, we expect our new client growth to return to the long term target of 7% to 8% over the course of 2023, we continue to see our new business pipeline remained robust and supportive of our long term targets.

In the first quarter of 2023, we delivered growth from upsell and cross sell in line with our long term target an accomplishment. We are very proud of given the uncertain macro environment.

Our innovative culture combined with the past work, we did to complete project ignite continues to drive the release of new products and new functionality at a swift pace.

During the first quarter, we saw traction in our newer solutions such as identity verification clinical concierge services and post hire services like monitoring and <unk> nine.

We also increased our automation powering faster time to hire and delivering high accuracy at low hiring cost.

Last quarter, we shared our milestone achievements and the improvement of U S criminals fulfillment turnaround time and now we can say the same about motor vehicle records and civil searches with the recent release of improved automation capabilities.

Moreover, we made progress on fulfillment automation outside of the U S where background screening and digital integrations into courthouse data are less mature.

Moving to the right half of the slide we made great progress during the first quarter and identity verification.

We believe our investments into identity create true market differentiation, which significantly amplify our addressable market and our right to win and we are pleased to see positive outcomes of our identity verification investments paying off.

Identity adoption has been consistently growing at a robust pace since we first released our exclusive I'd me identity Verifications workflow to the market in early 2022.

In the first quarter of 2023, our global suite of identity solution saw a continued strong growth on both a quarter over quarter and year over year basis, while we are seeing traction with all types of clients enterprise clients are leading the adoption of identity and in the first quarter, we added identity.

<unk> to several large client programs.

Regardless of size, all clients, who adopt identity can benefit from stronger screening programs and an increase in criminal records identified.

Candidates are no longer able to submit inaccurate information either intentionally or accidentally into the background screening process.

We have also been pleased that the U S candidate experience as fast and efficient and takes just 30 to 90 seconds to complete.

Finally, we continue to invest in fortifying, our competitive advantages within identity and partnership with <unk>, our exclusive I'd verification partner in the U S. We have built an in person verification pathway, enabling individuals to verify their identity at a physical location.

We were pleased to recently announce a major milestone by achieving <unk> certification.

This certification recognizes our pathway is conforming to the federal digital identity guidelines set by the National Institute of standards and technology and opens the path for other government agencies to utilize our verification services.

Those conversations have already begun and we are excited about the large growth potential that can arise from this milestone.

Turning now to cost optimization on slide seven we have shared in recent earnings call. We launched a series of initiatives aimed at building a more scalable and profitable company.

We expect these initiatives to drive long term meaningful cost savings and efficiency gains and we are targeting $25 million of run rate savings, including $10 million of in year savings during 2023.

We have a history of driving productivity and cost savings through financial discipline and by leveraging technology. For example, our proprietary and cloud based technology platform is supported by our powerful artificial intelligence driven fulfillment platform leveraging more than 3300 automation integrations.

Including API and RPI bonds.

In 2023, we aim to continue our rich history and achieve our cost savings targets through a three pillar approach first through project nucleus, we aim to reduce labor and data costs in our cost of goods sold through reengineering fulfillment processes and increased automation.

Second we are reducing our facilities cost by leaning even more into our virtual first approach and reducing our real estate and facilities footprint.

This strategy has served us well since its adoption in 2020 with the closure of multiple offices around the world and we are now closing additional offices.

Third we are enhancing functional alignment by streamlining our organization to align with the go to market structure. We established in 2022 and initiatives. We believe will result in meaningful Opex savings.

Q1 was a strong first step in executing against our goals in particular, we made progress towards closing eight offices and facilities globally streamlining our functional teams and we made strong early steps towards process reengineering and automation of our fulfillment engine.

Our progress in the quarter gives us increased confidence in our goal of margin expansion during 2023 and beyond.

The final 2023 goal I will discuss is M&A shown here on slide eight.

As a result of the large and fragmented addressable markets, which we serve and the cash flow. We generate we have a great opportunity to increase our scale through both organic and inorganic growth.

As we shared on our March earnings call during the first quarter, we executed on two acquisitions Socrates NHS.

Our January acquisition of Socrates achieves our goal of using M&A to expand geographically into attractive new regions.

Outside the U S. We are already a leader in several key regions and with our new found presence in Latin America. We can now serve the rapidly growing hiring needs of multinational and local clients in another region.

Our other acquisition was of a check a highly complementary deal which builds on our successful M&A strategy of growing market share in the U S through accretive tuck in deals.

The company possesses a high quality enterprise focused client base diversified across attractive verticals, including healthcare industrials and tech media.

As with Evi, we expect this deal to yield significant synergies from platform migration, SG&A rationalization and upsell of Sterling products in.

In the early months of integrating both deals we are pleased with the revenue trends inclusive of a healthy new business pipeline.

We are also pleased early on by the deal integration with the expertise and skills, we built from the Abi deal and other initiatives yielding clear dividends.

And acquirers ability to integrate cultures operations and performance goals effectively and efficiently is a key determining factor of a deal success and we are laser focused on executing this important goal during 2023.

We plan to complete the integration of Socrates by the end of 2023 and for <unk> by the second quarter of 2024.

With the expectation to realize increasing synergy gains throughout that period.

Thus far during the first quarter of 2023, the team's execution has been highly encouraging.

I will conclude with slide nine the market for background screening and identity verification services is attractive with a large and growing total addressable market driven by multiple secular tailwind.

These include remote work millennial churn and continued growth of the contingent and gig economy.

Overseas the opportunity for geographic expansion is particularly attractive with background screening adoption still nascent.

We're excited about the growth of the global market and believe that our strong competitive advantages innovation led culture and financial discipline will enable us to execute on our 2023 goals and take another step forward towards achieving our long term strategy.

We look forward to continuing to update you on our progress as the year unfolds with that I will hand, it over to Peter Walker, our CFO to take you through our financial results Peter.

Thank you Josh and good morning, everyone, turning now to an overview of our financial performance starting with revenues on slide 11.

During the first quarter of 2023, we reported revenue of approximately $179 million, a 7% decline compared to the first quarter of 2022 on both a reported and organic constant currency basis.

Quarter included 150 bps contribution from M&A, partially offset by a 100 bps drag due to foreign currency translation.

Results were slightly favorable to the expectations. We provided on our March earnings call as our team is executing on our 2023 goals. We continue to see success in the areas of our business most within our control including growth from new clients and cross sell upsell alongside strong revenue retention rates.

We are focused most on these areas and we feel that our momentum in winning market share and expanding wallet share with clients can help offset the unpredictability of base growth over time.

Following nine consecutive quarters of new client growth at or above our 7% to 8% long term target. This quarter's new client growth was 5%. This result was slightly above our expectation as we discussed in March. This was caused by some signed new business implementations pushed out to late Q1 and Q2.

<unk> 2023.

With those implementations now ramping as planned and our new business pipeline remains robust, we expect our new client growth to return to 7% to 8% over the course of the year.

In the first quarter, our revenue from existing clients was down approximately 13% year over year.

Within those existing client declines we saw upsell cross sell on gross retention performing within our long term target ranges, which were outweighed by expected base business declines.

As we mentioned in March our clients base hiring volumes have been down year over year, primarily due to macroeconomic uncertainty.

It's worth noting the current industry hiring volumes remain strong relative to history and are down year over year, only when measured against 2020 two's record levels, including a robust 38% revenue growth in the first quarter of 2022 looking further back our revenues have grown at a 15%.

CAGR over the past three years, demonstrating the strong secular growth, we've been able to deliver through this past cycle.

These base business trends tempered our positive results in other revenue drivers, including upsell cross sell where we've seen robust traction and our newer fast growing areas such as identity verification.

As Josh described client adoption has been very strong for services, we provide to our exclusive identity partnerships as we've discussed we view identity verification as a significant opportunity to expand our addressable market and revenue growth along with accretive margins, it's exciting to see our investment coming to fruition now.

Looking at revenues by region, our U S business was down 6% year over year in the first quarter within the U S. We have a diversified in attractive vertical mix, which has been instrumental in supporting our compelling revenue growth in recent years and the first quarter. Our U S performance was led by our healthcare and industrials.

Articles, which continued to grow year over year, we saw softness in some other verticals, including tech media and 10 beds.

Turning to international revenue in our international business was down 10% in the quarter.

Similar to the U S base volume declines offset good trends in our revenue drivers. We can control international revenues were led by the EMEA region, which saw good growth in our core screening markets tempered by softer gig vertical trends, we are seeing increased opportunities in digital identity and right to work.

Ruled by our newest partnership with Vod as well as new client wins in the UK and EU.

In the first quarter, we delivered one 5% of inorganic revenue growth from Socrates in APAC. The two acquisitions, we closed in January and March of this year and these first months. We've been pleased with both companies performance is with results matching or exceeding our initial expectations.

As Josh described the integration work is well underway to deliver on the upside potential from these deals, including the attractive geographic expansion capabilities presented by Socrates and a robust synergy potential at HVAC.

Turning to slide 12, our first quarter, adjusted EBITDA was $46 million or.

A 4% year over year decline compared to last year, primarily due to the base revenue decline.

Despite the softer top line trends, we're pleased to expand our adjusted EBITDA margins this quarter by 60 basis points to 25, 4%.

This exceeded our prior expectations and was driven by early progress on our cost savings initiatives and financial discipline.

As we introduced last quarter and Josh described in greater detail today, we have several cost initiatives underway, which are aimed at driving meaningful cost savings and efficiency gains.

These programs will be executed over 2023 and 2024.

When complete we are targeting a run rate cost savings of $25 million and expect to see in year savings of $10 million during 2023.

We plan for these initiatives to drive permanent reductions in our cost profile and position the company to scale efficiently and profitably over the long term. So far we are quite pleased with the progress and we will keep laser focused on execution going forward.

In the first quarter of 2023, we had adjusted net income of 23 million or <unk> 24 per diluted share representing year over year decline in adjusted EPS of 4%. This year over year decline was similar to the decline in adjusted EBITDA with a lower tax rate, partially offset by higher interest expense.

Yes.

Turning to slide 13 free cash flow in the first quarter was $7 million a substantial increase from the prior year period.

Q1 free cash flow is our seasonal low point and the results in <unk> 2023 exceeded our expectations. The drivers of the quarter's improvement included increased collections lower cash tax payments and a decrease in purchases of property plant and equipment, we remain very focused on free cash.

Cash flow and are forecasting full year free cash flow conversion of adjusted EBITDA in our target range of 40% to 50%.

Our net leverage at quarter end was two three times net debt to adjusted EBITDA at the lower end of our two to three times net leverage target in the quarter. We spent approximately $49 million of net cash on our two acquisitions and $8 million on share repurchases. Despite these outlays, our net leverage remain.

And at an attractive level and is poised to continue declining absent any future M&A or buybacks. We ended the quarter with total debt of $504 million cash and cash equivalents of $51 million and $193 million available under our credit facility, providing us with ample capacity to execute our growth strategy.

Reinvesting in organic revenue growth and pursuing M&A during the quarter. We also enhanced our capital structure through the implementation of an interest rate hedging program, which fixed approximately 60% of our floating rate debt our.

Our capital allocation priorities remain investing in organic revenue growth pursuing M&A and maintaining a healthy balance sheet. This includes opportunistic share buybacks under our previously announced share repurchase program.

These priorities hold true in a lower growth environment as we see macro uncertainty is opportune times to build the foundation for future success as.

As we discussed last quarter, our rising cash position allowed us to use cash on hand for our two M&A deals in the quarter.

Following these two deals we remain well positioned to continue pursuing M&A to supplement our organic revenue growth and make further compelling investments that said we are focused in the near term on the integration of these two assets and executing our core strategy.

On slide 14, we reaffirm our guidance for 2023, which is unchanged since we provided it in March for 2023, we expect to generate revenues of $760 to $800 million representing year over year growth of minus one to positive, 4% adjusted EBITDA of $198 million to $218 million.

Representing year over year growth of 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 continue to see solid growth in items within our control, including new client wins and upsell cross sell these are being offset by base revenue declines.

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

We continue to expect year over year declines during the first half of the year based on what we've seen so far in April and part of May Q2 will likely see year over year revenue declines comparable to Q1.

We are seeing positive signs in multiple parts of our business and are encouraged by the new client and upsell cross sell trends at the same time, we are cycling over our strongest quarter of 2022 and in our company's history. Both in terms of revenue dollars and growth rate when measured on a multiyear basis.

This tougher comp will temper <unk> year over year growth.

As we move into the second half of this year, we expect to see show year over year growth due to several key items.

First new client onboarding throughout the year second ramping client hiring plans third upsell and cross sell based on our pipeline and fourth easing year over year comps, especially in Q4.

From the combination of our two M&A deals we expect two five to three points of inorganic revenue growth. In 2023, we are now assuming no impact from foreign currency slightly less favorable than our previous assumption.

Turning to profitability. Our 2023 guidance includes adjusted 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 of over 100 basis points versus 2022 muted by approximately <unk> <unk>.

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

The first quarter's margins were stronger than we previously expected due to some early success against our cost savings targets as well as strong financial discipline. These results give us increased confidence in our ability to hit our targets for cost savings and margin expansion.

To give you some more color on our thoughts by quarter, we expect <unk> adjusted EBITDA margins to be in line with first quarter as Josh mentioned, we are doubling down on our virtual first strategy by closing additional facilities.

In the second quarter, we expect these closures to result in impairment charges and accelerated rent expense of $8 million to $10 million, which will be added back for the purposes of adjusted EBITDA.

We expect margins over the back half of 2023 to improve from the first half and for the year over year margin expansion to increase as our revenue trends improve the benefits of our cost actions ramp in year over year comps ease.

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

<unk> adjusted net income growth ahead of adjusted EBIT growth.

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

In closing we are reaffirming our long term targets on slide 15 over the long term, we are targeting 911% organic revenue growth levels with margin expanding towards 29% to 32% plus and adjusted net income growth of 15% to 20% per year, even in the absence of robust revenue.

Growth. This year, we expect 2023 to be a healthy step towards achieving our profitability targets.

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

Absolutely.

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We will pause briefly ask questions are registered.

Our first question comes from the line of George Tong with Goldman Sachs. Your line is now open.

Hi, Thanks, good morning.

You mentioned, new client growth of 5% reflected signed new business that was pushed to late <unk> into <unk>.

That new client growth should return to 7% to 8% over the course of the year can you elaborate on how much new business was pushed into <unk> and when we should see a return to 7% to 8% growth in new plant.

Hey, George Good morning, it's Josh Thanks for the question. So let me just start again by reminding you that last year, we put up record new business growth from a revenue perspective of $57 million in.

And that was in.

That was notwithstanding the Q4 piece.

Piece that we shared on the last call, where it was a little bit lighter than our expectations based on these deals pushing out so as we look at this year, we would expect the number to come in a little bit lower than that but by the end of the year. So figure sometime in Q3 or Q4, we would expect to be back at the 7% to 8%.

And that's both the new business that we know is coming on as.

As well as the pipeline of deals that we believe we're going to win from our existing win rates and things that we see in the timelines. We expect there. So we would expect sort of sequentially to see some improvement, but getting back to the seven to eight in the in the back half of the year.

Got it that's helpful.

You mentioned, you're seeing continued market share gains and increased client spend that's helping to mitigate base business declines can you talk about where you're seeing share gains and where clients spend is increasing and then also discuss how these trends have evolved over the course of <unk>.

Steady or whether you saw a deterioration or improvement.

Yes, Thanks, George I'll go first and if Peter wants to add any additional color.

So first I would say that we are winning share in all of our key regions and markets and in all of our key verticals. So it's not in one place or another and so again.

A pickup in the quarter of 5% the deals that we know that we've closed the deals. We believe we're going to win we're seeing those share gains really from competitors of all sizes as well as in all geographies I would emphasize again I think one of the dynamics in our market that we really like is the fact that there is this long tail of.

Smaller competitors. There's also the reality that we face of sort of nascent markets around the world that give us great opportunity to grow as well so theres a lot of room.

For this industry to grow as a whole and for us to gain share within that.

So that's important I think on the upsell cross sell we were very pleased to be within our long term target and notwithstanding the slowdown in base growth because it's those same clients and theyre still buying more and newer things from us in particular around the identity.

And the post hire monitoring and other services for post hire.

We are pleased with the trends that we're seeing there we're actually for the first time in Q1, we saw the mix from post hire and identity.

<unk> north of the 10% figure that we've been saying in terms of our revenues in the quarter. So we think that that was a really good.

Point for us in the first quarter and then finally the base business trends. We continue to believe that December was the trough of what we've seen and we saw the trend throughout Q1, and thus far into Q2 as being steady.

Very helpful. Thank you.

Thank you.

Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.

Hi, Good morning, guys. This is Daniel Maxwell on for Andrew today.

Just curious starting off.

Anything on the second quarter performance through five weeks, you mentioned some trends there, but any specific vertical or geographic callouts.

Matt.

Yes.

So as I mentioned in the prepared remarks, our expectation for Q2 is that we would be down year over year similar to Q1 from a percentage basis and then I also highlighted on the call that health care in our industrial verticals, which are our largest verticals in the U S continue to perform really well and grow.

On a year over year, and then I highlighted.

Some other spots that were a little bit soft we've seen a continuation of that trend.

Through may.

Okay. That's helpful.

And then given the strength that you're calling out a new product and in moving above 10%.

Their own identity, just wondering what's changed there.

There has been any specific things to call out in terms of the level of interest in those and just general cyclicality.

<unk> upgrades.

Upsell more broadly.

Hi, Daniel It's Josh I think there's like eight or nine questions in there I'll try to cover it and then if you have.

Further questions.

But I think first of all whats changed if anything with identity and monitoring honestly is we have been successful in starting to gain traction in the market through educating clients through building.

In refining the products based on client feedback and getting to the point, where we have largely driven by our our big enterprise clients interest in these products because in the case of identity. It saves them money and make sure that theyre actually doing the proper work to get the right people on board and we have a very differentiated.

<unk> solution, particularly in the U S relative to what anyone else has on the monitoring side I think there has been.

A real demand thats been pent up, but it's been difficult to match that with the capabilities and the products as we shared on the last call. We moved to more of a subscription model and less of a full kind of re checking and redoing all the packages.

In our releases last quarter. So we're very excited about the fact that we're seeing early traction there again with some of our largest accounts who had that pent up demand. So honestly I think the biggest shift has been that we've been able to find the products that the market wants and to position them well and to be differentiated versus.

Editors, who don't have similar products and thats been a part of that success and why we thought it was noteworthy to call out.

On this call.

Okay.

Got it I appreciate the detail thanks.

Thank you.

Our next question comes from the line of Toni Kaplan with Morgan Stanley . Your line is now open.

Hey, Good morning. This is Greg Harrison on for Tony Thanks for taking my question.

I just wanted to kind of circle back and talk about the ramp so you're tracking new business to get back to seven to eight and then I think Peter called out second half improvement, partially driven by ramping hiring plan and there are some other items in there I missed but could you just maybe help parse out like why you're confident in the second half improvement sort of ignoring the easier.

Comps.

Yes, Josh let me start and then Peter if you want to jump in so first I think the biggest factor is the comps right. So we're not expecting a macro change we're expecting to have continued uncertainty continued choppiness in the macro but we do have the plans from our clients of what they're going to hire in the year.

We know where those are slated we also have the new clients, who we know are coming on board and we also have cross sell upsell deals that we know are signed and clients are currently in the testing phase and so we know all of those things are coming online. In addition to the lower comps, particularly in Q4, so those things have given us confidence.

Since since when we set the guidance and everything we've seen in Q1 was slightly better than our expectations, but very much.

It gives us confidence that the year is unfolding as we.

We thought I don't know Peter if you wanted to add.

Yes, I was just going to add I mean this is for US it's always been a first half back half story, where we're seeing the acceleration.

In Q2, albeit against a very difficult comp in terms of our record revenue growth rate and dollar perspective in the Companys history, and then the easing comps in the back half of the year along with pipeline that just spoke to in terms of new clients upsell cross sell.

Yes.

Okay, great. Thank you for the color there.

Just wanted to ask about the cost optimization plan in terms of timing the $25 million run rate is that expected to be achieved by the end of this year. So the full 25 should be realized in 2024.

And then the $10 million of in year savings was that sort of already baked in the guidance last quarter I just wanted to I wasn't sure if there's sort of upside there.

Sure. So first in terms of the $10 million. It is reflected in our guidance expectations and Thats a part of the.

North of a 100 basis points of margin improvement that is somewhat muted by the 30 basis point drag from the M&A we did.

So that is baked into the assumptions in terms of the $25 million run rate I think we will have to come back to you on the next call to give you. The exact timeline I would say that we would get to the point of having most of those initiatives action between by the end of this year or sometime in Q1 early Q2 of next year. So.

We should get most of the savings into next year, there could be a couple million dollars that may be spills out of Q1 into the following Q1, but we should get almost all the way there for next year.

Yes.

Great. Thank you.

Thank you.

Our next question comes from the line of Andrew Steinman with Jpmorgan. Your line is now open.

Yes, Hi, this is Alex on for Andrew Steinman.

I just wanted to walk through some of the volume.

The volume and base base volume math that you guys pointed to some new logos were up 5% and organic.

Was down it was down slightly.

Wouldn't that point to something like a low teens base volume trends for the quarter is that about right something like 13%.

Yeah.

I would guide you slightly lower than that but you're in the ballpark and thats similar to the base volume declines we saw in Q4.

Got it.

And then maybe can you give us any sort of Dimensionalize Asian around around identity I know last quarter, you guys called out.

250% increase in.

And sort of transaction volume or screening volume using the identity solution.

Could you maybe dimensionalize any of what you saw on <unk> and help us understand a bit more how.

How much of a tailwind that could be as the year progresses. Thank you.

Yes, Thanks, Alex I think we're very excited about what we saw with identity in Q4 and in Q1, I think what I shared in my remarks was we saw quarter over quarter growth was strong as well as year over year growth for Q1 that was strong we didn't give specific numbers, we're not going to get in the habit of breaking out identity or other.

<unk> every single quarter, but we did want to give the color, which I think starts to give you. The most important dimensionalize nation.

Part of our overall mix identity and post hire monitoring for the first time have moved north of the 10% that we've had them at since the time, we went public. So we're excited about that trend. We think that that is really great green shoots that we're seeing on products that are still less than a year old.

And we're excited about the traction that we're getting.

And Alex just a reminder, on that right. What we've shared previously is 90% of our revenue comes from pre hire 10% of our revenue comes from identity and post hire and as Josh mentioned, we're seeing that 10% start to grow.

Percentage of total revenue.

Got it thank you all.

Thank you.

Our next question comes from the line of Kyle Peterson with Needham.

Your line is now open.

Great. Thanks, Hey, guys I'm on for Kyle today, Thanks for taking the questions.

Just wanted to touch on the market share gains you guys have been talking about.

Are you guys seeing any changes in win rates across any of the key verticals or geographies.

Hey, Sam it's Josh no we're not we're continuing to see good.

Win rates overall, particularly against the smaller and less sophisticated providers and domestic only providers and other markets, but we also continue to take share from some of our larger competitors.

Got it okay. That's helpful. Thanks, and then I.

I know you guys talked a little bit about it on the call, but just wanted to get a sense.

For the M&A appetite.

Get a sense for what kind of valuation that you guys are seeing out there.

What some of the key priorities there are on the M&A front.

So as we shared on the last call we were thrilled with the acquisition of soccer team and really the price of that acquisition.

Coming in line with our expectations and then we also talked about the acquisition of <unk> and what we shared is that we paid for acts synergize EBITDA for <unk> sorry.

Socrates gives us the geographic expansion.

Latam, that's so important for us with new business and existing clients and a check really brought a great book of business to us its very complimentary to our current verticals. Our view is we have capacity for additional M&A, but for the rest of this year, where most likely focused on integrating both of those acquisitions realizing the.

<unk> from a check and.

Growing the business of soccer team.

And Sam I would just add to Peter's point, I think that as Peter highlighted in his prepared remarks, we haven't changed our capital allocation strategy. Our focus is still on the investments to drive organic growth and profitability and I think that at a time like this we're happy to be towards the low end of our leverage target.

We'd like to stay there we don't think it's a time that makes a lot of sense to spend a lot of money on things that are questionable. So we were happy to get these two.

M&A deals in Q1 that really fit our model perfectly but right now we're just in hardcore execution mode for this year on everything execution against our cost targets execution against the revenue drivers in our control execution against integrating and getting the synergies from our M&A deals.

And just continuing to innovate in these key product areas that we mentioned, where we're starting to now see that traction grow as a percentage of our overall mix. So I think the theme you're going to hear from us throughout this year is it's a great time to execute well deliver on this year, but is set up the future to be.

Larger more profitable and have.

Even more competitive advantages in these key product areas that we're already a market leader in.

Yes, Okay got it yeah. That's helpful. Alright, thanks, guys.

Thank you.

Our next question comes from the line of Scott Wurtzel with Wolfe Research. Your line is now open.

Great. Good morning, guys and thanks for taking my questions I wanted to just go back to the integrations of soccer season, Jack just sort of wondering if you can give a little bit more color on some of the performance there and noticed that you brought up the low end of your inorganic contributions assumptions from two to two 5% Joe just any more color there.

You are seeing there and also maybe what you sort of learned about the Latam market with Socrates relative to some of the other international geographies that you're in thanks.

Thanks, Scott, It's Josh I guess two comments first just on a check or what I'll say is anytime you do these acquisitions you always want to make sure that.

You don't get out over your skis in terms of understanding what risks may exist in terms of the revenue base clients that you do the diligence you can but as soon as you own it and you have those client calls you get more of a sense of some things so I think for us.

It was a little bit better than we thought in Q1, but again, we had one month of performance in Q1, I think what we've seen just says that some of the conservatism that we put into the low end we felt comfortable.

Aching out versus any.

Change in performance expectations. It was more that we didn't have negative surprises as we took the asset on in terms of Socrates in Latin America, I think that what we're seeing is the number of U S clients in particular, who really want to be able to do screening programs in Latin America that.

Align with what Theyre doing in the U S. As much as possible is a very very large demand for us.

And thats driven by offshoring that can be done.

In the same time zones, the Spanish language in particular being really important.

For some of our clients and people are setting up more and more operation centers throughout Latin America, among our clients as they are seeing that to be beneficial from a cost perspective as well as.

Easier to manage than being halfway around the world in some cases. So we're excited about that dynamic. We also believe that there is a lot of domestic demand in some of the key markets in Latin America, which has really not been tapped at all and we're excited to have a chance to go after that thats not reflected.

Something we see growing this year, but it is something that over time, we expect to be able to grow and see contribute meaningfully to the company similar to the way we've had success with that when we've acquired assets in Canada Europe .

Australia and Asia.

Got it that's very helpful. And then just a quick follow up here and I apologize if I missed this earlier, but just on the sort of sales cycles and implementations. I know you said you had called out some sort of pushed out implementations into <unk> have we seen that trend sort of re normalized with some of the newer business that you're signing right now.

Yes, we're seeing pretty normal trends with everything except for this group that we talked about in Q4, which are some blue chip name brands you would know them.

If you look at what they are reporting publicly they have been very focused on their own internal initiatives for the last quarter or two and are now returning into their more normal operational modes.

We don't share those names but.

It's quite reasonable and obvious that these clients would be in the mode of waiting a quarter or two longer than they normally would have given what else. They have had going on but in terms of like new business. We're signing now we're seeing more normalized implementation dates.

Got it thanks guys.

Thank you.

Your next question comes from the line of Mark Marcon with Baird. Your line is now open.

Good morning, and thanks for taking my questions.

One question.

When we take a look at the.

The base volumes.

You mentioned.

Basically comparing against last year, where it was absolute record levels how would.

These levels.

On the base perspective compare to more normalized levels say back in 'twenty, one or even pre COVID-19.

How are you thinking about that and how that gives you confidence that hey, we're basically seeing a normalization.

Steadiness.

Thanks, Mark I guess, a couple of comments, one which is not directly on base growth, but it is a very very big driver of the trend. We've shared in the prepared remarks that we have seen a 15% CAGR even on the Q1 number over the last three years, we think that's obviously in excess of our.

Long term target and so we're pleased overall and a big part of that has been.

<unk> growth, obviously exceeding our long term target.

A pretty good amount over the last few years I think as we look at base growth. We have in the long term targets, 2% to 3% for base growth given all the trends that we see in our industry, which we highlight in our in our presentation slides today, we continue to see the churn.

Be it at more muted rates than we saw last year, but still far above what we would've seen pre COVID-19, we continue to see particularly millennials and Gen Z Ers churn fat.

<unk> faster than normal we believe that that trend will continue the use of contingent.

And gig workers, obviously, there are times like you would see right now where maybe the contingent workforce doesn't grow as rapidly but overall, that's a trend that we think supports our our industry and so as we look at what we saw from last year, where Peter and I shared in our Q3 and then our Q4 call that we.

We saw this space growth kind of turn.

Negative earlier.

So we still have muted earlier in the year, and then turned negative particularly in Q4.

And we shared that the trough of what we've seen for that was December and then we've seen.

Pick up that's been stable so far from January through May.

Yes.

So far this year, so we think that that sort of falling and then hitting our <unk>.

Tow happened and we would expect that to then normalize to the 2% to 3% as we look into next year and beyond.

Great and then you've done a great job in terms of expense rationalization, obviously, the margins have been holding in really well.

And improving.

And part of that has been through your RPI efforts I'm wondering just from a longer term perspective, what your initial thoughts might be in terms of the application of generative AI and these large language modules.

Models in terms of.

Being able to further increase the efficiencies of the operations.

Thanks Mark.

<unk> optimistic and cautious at the same time in the short term I think that we've been at the forefront of using various technological capabilities, including what I'll call kind of one dato AI capabilities that we do use in the normalization of our data and the fulfillment engine, but I think we now believe that there is a chance to really rethink.

A lot of what we're doing.

Some of it will utilize I'm sure. The AI capability is not just that exist today, but we're seeing the speed with which those capabilities.

Grow obviously to be exponential at this point I think for our view, we want to make sure that we're doing it in a secure way that complies with all law and that also protects the data and the integrity of the information that we provide to our clients because in the end People's jobs and livelihoods are on the hook, if we get something wrong.

We think it's important that we are using these tools in a way that delivers low cost deliver speed and allows for our clients to get the benefit of that as theyre hiring but also to do so in a way that meets our obligations under the CRA the various state and city laws laws around the world.

For the work, we do as well as for general protection of data and otherwise. So we're very excited for the opportunities that exist in some of the tools that are being provided that are not public facing and that you can use without risking your data being exposed publicly and we plan to utilize those and we believe those can dry.

Down costs and increase our overall effectiveness over time.

Maybe just two things to add on cost optimization.

Yes, we're excited about the cost optimization, but also we expect to improve that candidate and the client experience out of that and improve turnaround time. So it's not just focused on cost, but it's really setting up the business for continued success with clients and customers and then the other thing just to highlight is the $10 million.

In year savings in 'twenty, three that is baked into the guidance that we provided in Q4 and reaffirmed as part of this call.

That's great and then last question for this call.

Can you talk a little bit more about international and.

How youre thinking about that from a long term perspective, obviously macro factors impacting international markets as well as short term but.

Just in terms of the potential for new business ads and more countries coming.

You know.

Bigger parts of the Sterling platform.

Yes, Thanks, Marc I think again, we believe we're the most global of any of the providers in terms of having more revenue and a higher percentage of our risk of our revenues outside of the U S versus our competitors and we believe that that sets us up for great share gains we continue to see new business.

Wins, we're seeing more and more consolidation of regions by clients, which is exciting for us and the opportunity to serve them on our single core platform. We shared some statistics around how our migrations have gone there and so we're very excited about that future outside of the U S really in all the markets. We operate in we think that.

We've got a position that's a winning position we've got products that are winning products. We've got a team that's the best in the business and overtime, we expect to continue to grow international and ultimately for it to grow faster than the U S. As we look down the road a few years.

Yes.

Thank you.

Our next question comes from the line of Jason <unk> with Keybanc capital markets. Your line is now open.

Great. This is devin on for Jason. This morning. Thanks for taking my question, maybe just one from us.

I know you've called out softness in your potential business services vertical.

Given recent prices.

Any color you can provide on how much exposure do you have with banks.

Just based on your conversation with customers in that vertical how are you thinking about hiring plans for the rest of the year versus maybe like a quarter ago.

Yeah. Thanks, Kevin So again, I think we have financial and business services together. So I think your question specifically more applicable in financial services and banks in particular, so again, our financial services verticals broader than banks.

So it is it is not something that has a significant impact our exposure.

Two the sort of mid tier and smaller banks is low relative to more of the.

Sort of too big to sell banks, let's say in banks in other countries that are also similarly, too big to be less sale. The hiring plans again, that's all baked into our guidance for the year those are industries, where in particular, the largest parts of our revenues in any given year would be through their summer intern program and they're new hire.

Programs, we're not hearing about any pullbacks in that it's much more at the higher levels of the organization, where we've seen that pullback.

Great I appreciate the color guys.

Thank you.

Our next question comes from the line of Shlomo Rosenbaum with Stifel.

Your line is now open.

Hi, Thanks for fitting me in this is James the homes on for Shlomo Rosenbaum.

Maybe a quick one can you talk about attrition are you seeing the current environment starting to have any impact on retention rate.

And has there been any change in the pricing environment.

Thanks, Dave It's Josh So first I would say, we're pleased to still be at our long term target on retention. We continue to think that that bodes well for the future. We really havent seen major changes in trends I think one of the things we are seeing on the offensive side as well as.

On the.

Existing client side is there are a lot more rfps out there we believe that we win more than our fair share. So we're excited about that and that gives us the chance to really earn more new business, but a lot of that is clients just taking the time when they have a little bit of a slowdown to make sure they're getting the right services and as you say on pricing and I think there we haven't seen a.

Real change in the pricing dynamics at all we do expect to be able to implement price increases mid year as we've.

Done for the last few years.

And again at the high end of the market the largest clients they always have.

Some amount of pricing impact on us, but we're not seeing anything materially changed over the last few years on price.

Great. Thank you.

Thank you.

There are no additional questions waiting at this time, so that will now conclude the Sterling first quarter 2023 earnings call. Thank you for your participation I Hope you have a wonderful rest of your day.

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Good morning. Thank you for attending today's Sterling first quarter 2023 earnings call. My name is Megan and I will be your moderator for today's call.

Please go ahead. Thank you operator welcome to Sterling's first quarter 2023 earnings call. Joining me today are Josh <unk>, Chief Executive Officer of Sterling, and Peter Walker, Chief Financial Officer of Sterling.

Slides, we will reference during this presentation can be accessed on Sterling Investor Relations website under news <unk> events.

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

After prepared remarks, we will open this call for questions before.

Before we discuss our results I encourage all listeners to review the legal notice on slide two which explains the risks of forward looking statements and the use of non-GAAP financial measures. Additionally, please refer to our most recent Form 10-K 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.

Such measures reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued this morning, I'll now turn the call over to Jos Peres.

With our expectations.

That we set at the beginning of the year and which I will further explore in the following slides identity verification cost optimization and M&A.

Turning now to slide five which summarizes our long term strategy in 2023 goals.

The strategic framework directly fueled our focus areas for 2023 with concrete near term goals that we believe will drive our company closer to that long term vision.

Specifically, we are focused this year on doubling down on the organic revenue drivers, we can control scaling our identity verification business.

Optimizing our cost profile and M&A.

In the first quarter, we saw positive results on each of these four areas.

Starting with organic revenue growth on slide six in the first quarter, we continued to execute on the organic revenue drivers in our control we won new logos in all our geographic regions increased our client spend and maintained strong gross client retention rates.

To do this we enhanced our core offerings with continued investment into exceptional client service and cloud based technology capabilities.

When combined with our innovative culture those characteristics enabled us to perform slightly ahead of the expectations. We provided in March.

As discussed on our fourth quarter call. We saw some signed new client implementations pushed till later in the first quarter and to the second quarter.

Those implementations come online, we expect our new client growth to return to the long term target of 7% to 8% over the course of 2023.

We continue to see our new business pipeline remained robust and supportive of our long term targets.

In the first quarter of 2023, we delivered growth from upsell and cross sell in line with our long term target an accomplishment. We are very proud of given the uncertain macro environment our.

Our innovative culture combined with the past work, we did to complete project ignite continues to drive the release of new products and new functionality at a swift pace.

During the first quarter, we saw traction in our newer solutions such as identity verification clinical concierge services and post hire services like monitoring ni nine.

We also increased our automation powering faster time to hire and delivering high accuracy at low hiring cost.

Last quarter, we shared our milestone achievements and the improvement of U S. Criminal fulfillment turnaround time and now we can say the same about motor vehicle records and civil searches with the recent release of improved automation capabilities.

Moreover, we made progress on fulfillment automation outside of the U S where background screening and digital integrations into courthouse data are less mature.

Moving to the right half of the slide we made great progress during the first quarter and identity verification, we believe our investments into identity create true market differentiation, which significantly amplify our addressable market and our right to win and we are pleased to see positive outcomes of our idle.

Entity verification investments paying off.

Identity adoption has been consistently growing at a robust pace since we first released our exclusive I'd me identity Verifications workflow to the market in early 2022.

In the first quarter of 2023, our global suite of identity solutions saw a continued strong growth on both a quarter over quarter and year over year basis.

We are seeing traction with all types of clients enterprise clients are leading the adoption of identity and in the first quarter, we added identity verification to several large client programs.

Regardless of size, all clients, who adopt identity can benefit from stronger screening programs and an increase in criminal records identified.

Candidates are no longer able to submit inaccurate information either intentionally or accidentally into the background screening process.

We have also been pleased that the U S candidate experience as fast and efficient and takes just 30 to 90 seconds to complete.

We were pleased to recently announce a major milestone by achieving <unk> certification.

Those conversations have already begun and we are excited about the large growth potential that can arise from this milestone.

Turning now to cost optimization on slide seven we have shared in recent earnings calls we launched a series of initiatives aimed at building a more scalable and profitable company.

We expect these initiatives to drive long term meaningful cost savings and efficiency gains and we are targeting $25 million of run rate savings, including $10 million of in year savings during 2023.

Including API and RPI bonds.

Second we are reducing our facilities cost by leaning even more into our virtual first approach and reducing our real estate and facilities footprint.

This strategy has served us well since its adoption in 2020 with the closure of multiple offices around the world and we are now closing additional offices.

Third we are enhancing functional alignment by streamlining our organization to align with the go to market structure. We established in 2022 and initiative. We believe will result in meaningful Opex savings.

Our progress in the quarter gives us increased confidence in our goal of margin expansion during 2023 and beyond.

The final 2023 goal I will discuss is M&A shown here on slide eight.

As a result of the large and fragmented addressable markets, which we serve and the cash flow. We generate we have a great opportunity to increase our scale through both organic and inorganic growth.

As we shared on our March earnings call during the first quarter, we executed on two acquisitions Socrates NHS.

Our January acquisition of Socrates achieves our goal of using M&A to expand geographically into attractive new regions.

Our other acquisition was of a check a highly complementary deal which builds on our successful M&A strategy of growing market share in the U S through accretive tuck in deals.

The company possesses a high quality enterprise focused client base diversified across attractive verticals, including healthcare industrials and tech media.

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

In the early months of integrating both deals we are pleased with the revenue trends inclusive of a healthy new business pipeline.

We are also pleased early on by the deal integration with the expertise and skills, we built from the Abi deal and other initiatives yielding clear dividends.

We plan to complete the integration of Socrates by the end of 2023 and for <unk> by the second quarter of 2024.

With the expectation to realize increasing synergy gains throughout that period.

Thus far during the first quarter of 2023, the team's execution has been highly encouraging.

Ill conclude with slide nine the market for background screening and identity verification services is attractive with a large and growing total addressable market driven by multiple secular tailwind.

These include remote work millennial churn and continued growth of the contingent and gig economy.

Overseas the opportunity for geographic expansion is particularly attractive with background screening adoption still nascent.

We look forward to continuing to update you on our progress as the year unfolds with that I will hand, it over to Peter Walker, our CFO to take you through our financial results Peter.

Thank you Josh and good morning, everyone, turning now to an overview of our financial performance starting with revenues on slide 11.

During the first quarter of 2023, we reported revenue of approximately $179 million, a 7% decline compared to the first quarter of 2022 on both a reported and organic constant currency basis.

Quarter included 150 bps contribution from M&A, partially offset by a 100 bps drag due to foreign currency translation. These.

These results were slightly favorable to the expectations. We provided on our March earnings call as our team is executing on our 2023 goals. We continue to see success in the areas of our business most within our control including growth from new clients and cross sell upsell alongside strong revenue retention rates.

We are focused most on these areas and we feel that our momentum in winning market share and expanding wallet share with clients can help offset the unpredictability of base growth over time.

Two 2023.

With those implementations now ramping as planned and our new business pipeline remains robust, we expect our new client growth to return to 7% to 8% over the course of the year.

In the first quarter, our revenue from existing clients was down approximately 13% year over year within those existing client declines we saw upsell cross sell on gross retention performing within our long term target ranges, which were outweighed by expected base business declines.

As we mentioned in March our clients base hiring volumes have been down year over year, primarily due to macroeconomic uncertainty.

It's worth noting the current industry hiring volumes remained strong relative to history and are down year over year, only when measured against 2020 two's record levels, including a robust 38% revenue growth in the first quarter of 2022 looking further back our revenues have grown at a 15% <unk>.

CAGR over the past three years, demonstrating the strong secular growth, we've been able to deliver through this past cycle.

These base business trends tempered our positive results in other revenue drivers, including upsell cross sell where we have seen robust traction and our newer fast growing areas such as identity verification.

Josh described client adoption has been very strong for services, we provide to our exclusive identity partnerships as we've discussed we view identity verification as a significant opportunity to expand our addressable market and revenue growth along with accretive margins.

Exciting to see our investment coming to fruition now.

<unk>, which continued to grow year over year, we saw softness in some other verticals, including tech media and 10 beds.

Turning to international revenue in our international business was down 10% in the quarter.

Similar to the U S based volume declines offset good trends in our revenue drivers. We can control international revenues were led by the EMEA region, which saw good growth in our core screening markets tempered by softer gig vertical trends, we are seeing increased opportunities in digital identity and right to work.

By our newest partnership with Vod, as well as new client wins in the UK and EU.

In the first quarter, we delivered one 5% of inorganic revenue growth from Socrates in HVAC. The two acquisitions, we closed in January and March of this year and these first months. We've been pleased with both companies performance is with results matching or exceeding our initial expectations.

Turning to slide 12, our first quarter, adjusted EBITDA was $46 million or 4% year over year decline compared to last year, primarily due to the base revenue decline.

Right the softer topline trends, we were pleased to expand our adjusted EBITDA margins this quarter by 60 basis points to 25, 4%.

This exceeded our prior expectations as it was driven by early progress on our cost savings initiatives and financial discipline.

As we introduced last quarter and Josh described in greater detail today, we have several cost initiatives underway, which are aimed at driving meaningful cost savings and efficiency gains.

These programs will be executed over 2023 and 2024 when complete we are targeting a run rate cost savings of $25 million and expect to see in year savings of $10 million during 2023.

Turning to slide 13 free cash flow in the first quarter was $7 million a substantial increase from the prior year period Q1 free cash flow is our seasonal low point and the results in <unk> 2023 exceeded our expectations. The drivers of the quarter's improvement included increased.

<unk> lower cash tax payments and a decrease in purchases of property plant and equipment. We remain very focused on free cash flow and are forecasting full year free cash flow conversion of adjusted EBITDA in our target range of 40% to 50%.

Our net leverage at quarter end was two three times net debt to adjusted EBITDA at the lower end of our two to three times net leverage target.

In the quarter, we spent approximately $49 million of net cash on our two acquisitions and $8 million on share repurchases.

These outlays, our net leverage remains at an attractive level and is poised to continue declining absent any future M&A or buybacks. We ended the quarter with total debt of 504 million cash and cash equivalents of $51 million and $193 million available under our credit facility, providing us with ample capacity to.

Execute our growth strategy of reinvesting in organic revenue growth and pursuing M&A during the quarter. We also enhanced our capital structure through the implementation of an interest rate hedging program.

Fixed approximately 60% of our floating rate debt.

These priorities hold true in a lower growth environment as we see macro uncertainty is opportune times to build the foundation for future success as.

As we discussed last quarter, our rising cash position allowed us to use cash on hand for our two M&A deals in the quarter.

Representing year over year growth of 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 continue to see solid growth in items within our control, including new client wins and upsell cross sell these are being offset by base revenue declines.

This tougher comp will temper <unk> year over year growth.

As we move into the second half of this year, we expect to see shell year over year growth due to several key items.

First new client onboarding throughout the year second ramping client hiring plans third upsell and cross sell based on our pipeline and fourth easing year over year comps, especially in Q4.

From the combination of our two M&A deals we expect two five to three points of inorganic revenue growth in 2023.

We are now assuming no impact from foreign currency slightly less favorable than our previous assumption.

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

To give you some more color on our thoughts by quarter, we expect <unk> adjusted EBIT margins to be in line with first quarter as Josh mentioned, we are doubling down on our virtual first strategy by closing additional facilities.

We expect margins over the back half of 2023 to improve from the first half and for the year over year margin expansion to increase as our revenue trends improved the benefits of our cost actions ramp in year over year comps ease.

Driving adjusted net income growth ahead of adjusted EBIT growth to.

Further help with your modeling we've included a page in the appendix with our updated assumptions for 2023, and a detailed breakdown of our revenue guidance.

In closing we are reaffirming our long term targets on slide 15 over the long term, we are targeting 9% to 11% organic revenue growth levels with margin expanding towards 29% to 32% plus and adjusted net income growth of 15% to 20% per year, even in the absence of robust revenue.

Growth. This year, we expect 2023 to be a healthy step towards achieving our profitability targets.

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

Absolutely if you will.

Like to ask a question. Please press star followed by one on your telephone keypad.

Is there any reason you would like to remove a question. Please press star followed by two again to ask a question press Star one.

As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.

We will pause briefly ask questions are registered.

Our first question comes from the line of George Tong with Goldman Sachs. Your line is now open.

Hi, Thanks, good morning.

You mentioned, new client growth of 5% reflected signed new business that was pushed to late <unk> into <unk>.

And that was in.

That was notwithstanding the Q4 piece that we shared on the last call where it was a little bit lighter than our expectations based on these deals pushing out so.

As we look at this year, we would expect the number to come in a little bit lower than that but by the end of the year. So figure sometime in Q3 or Q4, we would expect to be back at the 7% 8%.

And that's both the new business that we know is coming on.

Well as the pipeline of deals that we believe we're going to win from our existing win rates and things that we see in the timelines. We expect there. So we would expect sort of sequentially to see some improvement, but getting back to the seven to eight in the in the back half of the year.

Got it that's helpful.

Mentioned, you're seeing continued market share gains and increased client spend that's helping to mitigate base business declines can you talk about where you're seeing share gains and where client spend is increasing and then also discuss how base trends have evolved over the course of <unk>.

Or whether you saw a deterioration or improvement.

<unk>.

Yes, Thanks, George I'll go first and if Peter wants to add any additional color.

So first I would say that we're winning share in all of our key regions and markets and in all of our key verticals. So it's not in one place or another and so again.

Smaller competitors. There's also the reality that we face of sort of nascent markets around the world that give us great opportunity to grow as well so theres a lot of room.

For this industry to grow as a whole and for us to gain share within that.

And the post hire monitoring and other services for post hire.

We are pleased with the trends that we're seeing there we're actually for the first time in Q1, we saw the mix from post hire and identity.

<unk> north of the 10% figure that we've been saying in terms of our revenues in the quarter. So we think that that was a really good.

Very helpful. Thank you.

Thank you.

Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.

Hi, Good morning, guys. This is Daniel Maxwell on for Andrew today.

Just curious starting off.

On the second quarter performance through five weeks, you mentioned some trends there, but any specific vertical or geographic callouts.

Matt.

Yes.

So as I mentioned in the prepared remarks, our expectation for Q2 is that would be down year over year similar to Q1 from a percentage basis and then I also highlighted on the call that health care in our industrial verticals, which are our largest verticals in the U S continue to perform really well and grow.

<unk> year over year, and then I highlighted.

Some other spots that were a little bit soft we've seen a continuation of that trend.

Through may.

Okay. That's helpful.

And then given the strength that you're calling out in new products and moving above 10%.

Their own identity, just wondering what's changed there.

There has been any specific things to call out in terms of the level of interest in those and just general cyclicality.

Package upgrades and up sell more broadly.

Hi, Daniel It's Josh I think there's like eight or nine questions in there I'll try to cover it and then if you have further questions.

But I think first of all whats changed if anything with identity and monitoring honestly is we've been successful in starting to gain traction in the market through educating clients through building.

And refining the products based on client feedback.

Getting to the point, where we have largely driven by our our big enterprise clients interest in these products because in the case of identity. It saves them money and make sure that they are actually doing the proper work to get the right people on board and we have a very differentiated solution, particularly in the U S relative to what anyone else.

Has on the monitoring side I think there has been.

Our competitors, who don't have similar products and thats been a part of that success and why we thought it was noteworthy to call out.

On this call.

Got it I appreciate the detail thanks.

Thank you.

Our next question comes from the line of Toni Kaplan with Morgan Stanley . Your line is now open.

Hey, Good morning. This is Greg Harrison on for Tony Thanks for taking my question.

Comps.

Yes, Josh let me start and then Peter if you want jump in so first I think the biggest factor is the comps right. So we're not expecting a macro change we're expecting to have continued uncertainty continued choppiness in the macro but we do have the plans from our clients of what they're going to hire in the year, we nowhere.

Those are slated we also have the new clients, who we know are coming on board and we also have cross sell upsell deals that we know are signed and clients are currently in the testing phase and so we know all of those things are coming online. In addition to the lower comps, particularly in Q4, so those things have given us confidence since.

When we set the guidance and everything we've seen in Q1 was slightly better than our expectations, but very much.

It gives us confidence that the year is unfolding as we thought I don't know Peter if you wanted to add.

Yes, I was just going to add I mean this is for US it's always been a first half back half story, where we're seeing the acceleration.

Yes.

Okay, great. Thank you for the color there.

Just wanted to ask about the cost optimization plan in terms of timing the $25 million run rate is that expected to be achieved by the end of this year. So the full 25 should be realized in 2024.

And then the $10 million of in year savings was that sort of already baked in the guidance last quarter. Just wondering what is your if there's sort of upside there.

Sure. So first in terms of the $10 million. It is reflected in our guidance expectations and Thats a part of the.

North of a 100 basis points of margin improvement that is somewhat muted by the 30 basis point drag from the M&A we did.

We should get most of the savings into next year, there could be a couple million dollars that may be spills out of Q1 into the following Q1, but we should get almost all the way there for next year.

Yes.

Great. Thank you.

Thank you.

Our next question comes from the line of Andrew Steinman with Jpmorgan. Your line is now open.

Yes, Hi, this is Alex on for Andrew Steinman.

I just wanted to walk through some of the <unk>.

The volume and base base volume math that you guys pointed to some new logos were up 5% and organic.

Was down it was down slightly.

Wouldn't that point to something like a low teens base volume trends for the quarter is that is that about right something like 13%.

Yeah.

I do have slightly lower than that but you're in the ballpark and thats similar to the base volume declines we saw in Q4.

Got it.

And then maybe can you give us any sort of Dimensionalize Asian round around identity I know last quarter you.

Guys called out.

250% increase in.

And sort of transaction volume or screening volume using the identity solution.

Maybe dimensionalize any of what you saw on <unk> and help us understand a bit more.

How much of a tailwind that could be as the year progresses. Thank you.

Yes, Thanks, Alex I think we're very excited.

Pitted about what we saw with identity in Q4 and in Q1, I think what I shared in my remarks was we saw quarter over quarter growth was strong as well as year over year growth for Q1 that was strong we didn't give specific numbers, we're not going to get in the habit of breaking out identity or other products every single quarter, but we did want to give the color, which I think starts to.

Give you the most important dimensional edition that is part of our overall mix identity and post hire monitoring for the first time have moved north of the 10% that we've had them at since the time, we went public so we're.

We're excited about that trend, we think that that is really <unk>.

Green shoots that we're seeing on products that are still less than a year old and we're excited about the traction that we're getting.

Vantage of total revenue.

Got it thank you all.

Thank you.

Our next question comes from the line of Kyle Peterson with Needham your.

Your line is now open.

Great. Thanks, Hey, guys Sam on for Kyle today, Thanks for taking the questions.

Just wanted to touch on the market share gains you guys have been talking about.

Are you guys seeing any changes in win rates across any of the key verticals or geographies.

Hey, Sam it's Josh no. We're not we're continuing to see good win rates overall, particularly against the smaller and less sophisticated providers and domestic only providers and other markets, but we also continue to take share from from some of our <unk>.

Larger competitors.

Got it Okay. That's helpful. Thanks, and then I know you guys talked a little bit about it on the call, but just wanted to get a plus.

<unk>.

For the M&A appetite.

Get a sense for what kind of valuation that you guys are seeing out there.

With some of the key priorities there are on the M&A front.

So as we shared on the last call we were thrilled with the acquisition of soccer team and really the price of that acquisition.

Coming in line with our expectations and then we also talked about the acquisition of a check and what we shared is that we paid for acts synergize EBITDA for a check.

Socrates gives us the geographic expansion.

Tam that's so important for us with new business and existing clients and a check really brought a great book of business to us. It is very complementary to our current verticals. Our view is we have capacity for additional M&A, but for the rest of this year, where most likely focused on integrating both of those acquisitions realizing the.

<unk> from a check and.

Growing the business of soccer team.

He'd like to stay there we don't think it's a time that makes a lot of sense to spend a lot of money on things that are questionable. So we were happy to get these two.

Larger more profitable and have.

Even more competitive advantages in these key product areas that we're already a market leader in.

Yes.

Yes, Okay got it yeah. That's helpful. Alright, thanks, guys.

Thank you.

Our next question comes from the line of Scott Wurtzel with Wolfe Research. Your line is now open.

Great. Good morning, guys and thanks for taking my questions I wanted to just go back to the integrations of soccer season.

Just sort of wondering if you can give a little bit more color on some of the performance. There I noticed that you brought up the low end of your inorganic contributions assumptions from two to two 5% Joe just any more color that youre seeing there and also maybe what you sort of learned about the Latam market with Socrates relative to some of the other international geographies that youre in.

Yes.

Thanks, Scott, It's Josh I guess two comments first just on a check or what I'll say is anytime you do these acquisitions you always want to make sure that.

Aching out versus any.

Align with what Theyre doing in the U S. As much as possible is a very very large demand for us.

And thats driven by offshoring that can be done.

In the same time zones, the Spanish language in particular being really important.

Australia and Asia.

Yes, we're seeing pretty normal trends with everything except for this group that we talked about in Q4, which are some blue chip name brands you would know them.

We don't share those names but.

Got it thanks guys.

Thank you.

Your next question comes from the line of Mark Marcon with Baird. Your line is now open.

Good morning, and thanks for taking my questions.

One question.

When we take a look at the.

The base volumes.

You mentioned.

Basically comparing against last year, where it was absolute record levels how would.

These levels.

From a base perspective compare to more normalized levels.

Back in 'twenty, one or even pre COVID-19.

How are you thinking about that and how that gives you confidence that hey, we're basically seeing a normalization.

Steadiness.

Long term target and so we're pleased overall and a big part of that has been.

Base growth, obviously exceeding our long term targets.

Obiit it at more muted rates than we saw last year, but still far above what we would've seen pre COVID-19, we continue to see particularly millennials and gen Z or churn fab.

<unk> faster than normal we believe that that trend will continue the use of contingent.

We saw this base growth kind of turn.

Negative earlier.

So we saw a muted earlier in the year and then turned negative particularly in Q4.

And we shared that the trough of what we've seen for that was December and then we've seen.

Pickup that's been stable so far from January through May.

Yes.

So far this year, so we think that that sort of falling and then hitting our <unk>.

<unk> happen then we would expect that to then normalize to the 2% to 3% as we look into next year and beyond.

Great and then you've done a great job in terms of expense rationalization, obviously, the margins have been holding in really well.

And improving.

Models in terms of.

Being able to further increase the efficiencies of the operations.

Thanks Mark.

We're optimistic and cautious at the same time in the short term I think that.

We've been at the forefront of using various technological capabilities, including what I'll call kind of one dato AI capabilities that we do use in the normalization of our data and the fulfillment engine, but I think we now believe that there is a chance to really rethink a lot of what we're doing.

Some of it will utilize I'm sure. The AI capability is not just that exist today, but we're seeing the speed with which those capabilities.

Down costs and increase our overall effectiveness over time.

Maybe just two things to add on cost optimization.

As in year savings in 'twenty, three that is baked into the guidance that we provided in Q4 and reaffirmed as part of this call.

That's great and then last question for this call.

Can you talk a little bit more about international and.

How youre thinking about that from a long term perspective, obviously macro factors impacting international markets as well as short term but.

Just in terms of the potential for new business ads and more countries becoming.

<unk>.

Bigger parts of the Sterling platform.

Thank you.

Our next question comes from the line of Jason <unk> with Keybanc capital markets. Your line is now open.

Great. This is devin on for Jason. This morning. Thanks for taking my question, maybe just one from us.

I know you've called out softness in your potential business services vertical.

Given recent prices.

Any color you can provide on how much exposure do you have with banks.

Based on our conversation with customers in that vertical how are you thinking about hiring plans for the rest of the year versus maybe like a quarter ago.

Okay. Thanks, Kevin So again, I think we have financial and business services together. So I think your question specifically more applicable in financial services and banks in particular, so again, our financial services verticals broader than banks.

So it is it is not something that has a significant impact our exposure.

Two the sort of mid tier and smaller banks is low relative to more of the.

Programs, we're not hearing about any pullbacks in that it's much more at the higher levels of the organization, where we have seen that pullback.

Great I appreciate the color guys.

Thank you.

Our next question comes from the line of Shlomo Rosenbaum with Stifel.

Your line is now open.

Hi, Thanks for fitting me in this is James the homes on for Shlomo Rosenbaum.

Maybe a quick one can you talk about attrition are you seeing the current environment starting to have any impact on retention rate.

And has there been any change in the pricing environment.

On the.

Real change in the pricing dynamics at all we do expect to be able to implement price increases mid year as we've.

Done for the last few years.

And again at the high end of the market the largest clients they always have.

Some amount of pricing impact on us, but we're not seeing anything materially changed over the last few years on price.

Great. Thank you.

Thank you.

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