Successful Execution on 2023 Goals and Long-Term Strategy
Early Realization of $25M Annualized Cost Savings Target
Separately Announces Transaction with First Advantage; Cancels Q4 2023 Earnings Conference Call
INDEPENDENCE, Ohio, Feb. 29, 2024 (GLOBE NEWSWIRE) — Sterling Check Corp. (NASDAQ:STER) (“Sterling” or “the Company”) a leading global provider of technology-enabled background and identity verification services, today announced financial results for the fourth quarter and full year ended December 31, 2023.
Fourth Quarter 2023 Highlights
All results compared to prior-year period.
Revenues decreased 0.3% year-over-year to $169.4 million. Organic constant currency revenue decreased 2.8% and inorganic revenue growth was 2.2%. Organic revenue growth included a return to our long-term growth target of 7% for new business and an acceleration in up-sell/cross-sell to 8% alongside continued delivery on our long-term target for gross revenue retention of 96%.
GAAP net loss decreased year-over-year to a loss of $3.4 million, or $(0.04) per diluted share, compared to GAAP net loss of $7.7 million, or $(0.08) per diluted share, for the prior year period.
Adjusted EBITDA increased 1.5% year-over-year to $41.9 million. Adjusted EBITDA Margin increased 40 bps year-over-year to 24.7% due to continued progress in our cost optimization programs and financial discipline.
Adjusted Net Income decreased 3.8% year-over-year to $19.7 million. Adjusted Earnings Per Share—diluted was flat year-over-year at $0.21 per diluted share due to the benefit of our share repurchase program.
Full Year 2023 Highlights
All results compared to prior-year period.
Revenues decreased 6.1% year-over-year to $719.6 million. Organic constant currency revenue decreased 8.2% as base declines offset solid results in other growth drivers in our control. Inorganic revenue growth was 2.3%.
GAAP net loss was $0.1 million, or $0.00 per diluted share, compared to net income of $19.4 million, or $0.20 per diluted share, for the prior year period.
Adjusted EBITDA decreased 6.8% year-over-year to $185.0 million. Adjusted EBITDA Margin decreased 20 bps year-over-year to 25.7%.
Adjusted Net Income decreased 11.9% year-over-year to $93.9 million. Adjusted Earnings Per Share—diluted decreased 7.4% year-over-year to $1.00 per diluted share.
Organic constant currency revenue growth (decline), Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Earnings Per Share—diluted are non-GAAP measures. Please see the schedules accompanying this earnings release for a reconciliation of these measures to their most directly comparable GAAP measures, as applicable.
Josh Peirez, Sterling CEO, said, “The fourth quarter of 2023 capped off a solid year in which we made continued progress on our long-term strategy and near-term focus areas. Throughout the year, we executed on the items within our control, both on the top line and in our cost structure, and our focused efforts have enabled early realization of our $25M annualized cost savings target as well as an enhanced revenue exit velocity going into 2024.
The challenges created by the macro environment in 2023 lasted longer than we had anticipated, leading to base declines in excess of our initial expectations. Still, we saw strong results and improvement through the year, including substantial acceleration in our new business and up-sell/cross-sell during the fourth quarter. During the quarter, we achieved or exceeded our long-term targets for all revenue drivers in our control – new business, up/cross-sell, and customer attrition – an exciting accomplishment which provides us significant momentum for 2024 in addition to the benefit of easier year-over-year comps in our base business.”
Mr. Peirez continued, “2023 was also a year of compelling success in M&A. The integration of our two acquisitions, Socrates and A-Check, continues to yield benefits, and we were excited to announce the acquisition of Vault Workforce Screening in early January 2024. Ownership of Vault extends Sterling’s drug and health testing capabilities with a broader range of clinical options, delivery channels, and service models. This acquisition helps us strategically in-source a key component of our supply chain and build scale within the attractive healthcare and industrials verticals, enabling Sterling to better meet hiring demands and drive growth, consistent with our long-term strategy to expand through organic revenue growth and strategic M&A.”
Fourth Quarter 2023 Results
Three Months Ended December 31,
(in thousands, except per share data and percentages)
2023
2022
Change
Revenues
$
169,416
$
169,920
(0.3)
%
Net loss
$
(3,384)
$
(7,700)
(56.1)
%
Net loss margin
(2.0)
%
(4.5)
%
250 bps
Net loss per share—diluted
$
(0.04)
$
(0.08)
(50.0)
%
Adjusted EBITDA(1)
$
41,916
$
41,297
1.5
%
Adjusted EBITDA Margin(1)
24.7
%
24.3
%
40 bps
Adjusted Net Income(1)
$
19,686
$
20,474
(3.8)
%
Adjusted Earnings Per Share—diluted(1)
$
0.21
$
0.21
—
%
_________________________
(1) Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Earnings Per Share—diluted are non-GAAP measures. Please see the schedules accompanying this earnings release for a reconciliation of these measures to their most directly comparable GAAP measures.
Revenue for the fourth quarter of 2023 was $169.4 million, a decrease of $0.5 million, or 0.3%, compared to $169.9 million for the fourth quarter of 2022. The revenue decrease for the fourth quarter of 2023 included a 2.8% organic constant currency revenue decrease, partially offset by 2.2% inorganic revenue growth from the acquisitions of Socrates and A-Check and 0.3% benefit due to the impact of fluctuations in foreign exchange currency rates. The organic revenue decrease was driven by a 14% decrease in base business with existing clients due to macro uncertainty, which offset growth of 11% from the combination of new clients, up-sell / cross-sell, and attrition.
Full Year 2023 Results
Year Ended December 31,
(in thousands, except per share data and percentages)
2023
2022
Change
Revenues
$
719,640
$
766,782
(6.1)%
Net (loss) income
$
(116)
$
19,410
(100.6)%
Net (loss) income margin
—%
2.5%
(250) bps
Net income per share—diluted
$
0.00
$
0.20
N/M
Adjusted EBITDA(1)
$
185,024
$
198,503
(6.8)%
Adjusted EBITDA Margin(1)
25.7%
25.9%
(20) bps
Adjusted Net Income(1)
$
93,910
$
106,545
(11.9)%
Adjusted Earnings Per Share—diluted(1)
$
1.00
$
1.08
(7.4)%
_________________________
(1) Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Earnings Per Share—diluted are non-GAAP measures. Please see the schedules accompanying this earnings release for a reconciliation of these measures to their most directly comparable GAAP measures.
Revenue for full year 2023 was $719.6 million, a decrease of $47.1 million, or 6.1%, as compared to $766.8 million for full year 2022. The revenue decline in full year 2023 included 8.2% organic constant currency revenue decline and a 0.2% unfavorable impact of fluctuations in foreign exchange currency rates partially offset by 2.3% inorganic revenue growth from the acquisitions of Socrates Limited (“Socrates”) and A-Check Global (“A-Check”). The organic revenue decrease was driven by a 15% decrease in base business with existing clients due to macro uncertainty, which offset growth of 7% from the combination of new clients, up-sell / cross-sell, and attrition.
Balance Sheet and Cash Flow
As of December 31, 2023, cash and cash equivalents were $54.2 million and total debt was $498.0 million, compared to cash and cash equivalents of $103.1 million and total debt of $505.5 million as of December 31, 2022. The decrease in cash since December 31, 2022 was primarily driven by the acquisitions of Socrates and A-Check (funded with $49.5 million of cash on hand) and repurchases of Sterling’s common stock ($67.8 million) during the year. Sterling ended the fourth quarter of 2023 with a net leverage ratio of 2.4x net debt to Adjusted EBITDA. As of December 31, 2023, available borrowings under Sterling’s revolving credit facility, net of letters of credit outstanding, were $193.8 million.
For the year ended December 31, 2023, Sterling generated net cash provided by operating activities of $96.9 million, compared to $104.3 million for the prior year period. Capital expenditures for the year ended December 31, 2023 totaled $20.4 million, compared to $20.2 million for the prior year period. For the year ended December 31, 2023, Sterling had $76.5 million of Free Cash Flow, compared to $84.1 million of Free Cash Flow for the prior year period. The decrease in Free Cash Flow compared to the prior year period was primarily driven by lower operating income and higher interest expense.
Sterling acquired Vault Workforce Screening for approximately $70 million in January 2024. The purchase price was funded through a combination of revolving credit facility drawdown (approximately $65 million) and cash on hand (approximately $5 million).
Free Cash Flow is a non-GAAP measure. Please see the schedule accompanying this earnings release for a reconciliation of Free Cash Flow to net cash provided by operating activities, its most directly comparable GAAP measure.
Transaction Conference Call Details
In a separate press release issued today, Sterling announced it has entered into a definitive agreement to combine with First Advantage Corporation (“First Advantage”). First Advantage will host a conference call to review its fourth quarter and full year 2023 results and discuss details of the transaction today, February 29, 2024, at 8:30 a.m. ET. Details for such call are available in the separate press release issued today. In light of the transaction announcement, Sterling will forego its fourth quarter and full year 2023 earnings conference call.
Forward-Looking Statements
This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and it is intended that all forward-looking statements that we make will be subject to the safe harbor protections created thereby. Forward-looking statements can be identified by forward-looking terminology such as “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “will” or “would,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements that address market trends or projections about the future, and statements regarding Sterling’s expectations, beliefs, plans, strategies, objectives, prospects or assumptions, or statements regarding future events or performance, contained in this release are forward-looking statements. Sterling has based these forward-looking statements on current expectations, assumptions, estimates and projections. Such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond Sterling’s control. Important factors relating to the proposed transaction with First Advantage could also cause actual future events to differ materially from the forward-looking statements in this release, including but not limited to: (i) the risk that the proposed transaction may not be completed in a timely manner or at all, (ii) the failure to satisfy the conditions to the consummation of the proposed transaction, including the receipt of certain governmental and regulatory approvals, (iii) the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement, (iv) the effect of the announcement or pendency of the proposed transaction on Sterling’s business relationships, operating results, and business generally, (v) risks that the proposed transaction disrupts current plans and operations of Sterling or First Advantage and potential difficulties in Sterling employee retention as a result of the proposed transaction, (vi) risks related to diverting management’s attention from Sterling’s ongoing business operations, (vii) unexpected costs, charges or expenses resulting from the proposed transaction, (viii) certain restrictions during the pendency of the proposed transaction that may impact Sterling’s ability to pursue certain business opportunities or strategic transactions and (ix) the outcome of any legal proceedings that may be instituted against First Advantage or against Sterling related to the Merger Agreement or the proposed transaction. These and other important factors, including those discussed more fully elsewhere in this release and in Sterling’s filings with the Securities and Exchange Commission, particularly Sterling’s most recently filed Annual Report on Form 10-K and Sterling’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2023, may cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements, or could affect Sterling’s share price. The forward-looking statements contained in this release are not guarantees of future performance and actual results of operations, financial condition, and liquidity, and the development of the industry in which Sterling operates, may differ materially from the forward-looking statements contained in this release. Any forward-looking statement made in this release speaks only as of the date of such statement. Except as required by law, Sterling does not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this release.
Non-GAAP Financial Information
This release contains “non-GAAP financial measures,” which are financial measures that are not calculated and presented in accordance with GAAP.
Specifically, Sterling makes use of the non-GAAP financial measures “organic constant currency revenue growth (decline)”, “Adjusted EBITDA,” “Adjusted EBITDA Margin,” “Adjusted Net Income,” “Adjusted Earnings Per Share” and “Free Cash Flow” to assess the performance of its business.
Organic constant currency revenue growth (decline) is calculated by adjusting for inorganic revenue growth (decline), which is defined as the impact to revenue growth (decline) in the current period from merger and acquisition (“M&A”) activity that has occurred over the past twelve months, and converting the current period revenue at foreign currency exchange rates consistent with the prior period. For the year ended December 31, 2023, we have provided the impact of revenue from the acquisitions of Socrates and A-Check during the first quarter of 2023. We present organic constant currency revenue growth (decline) because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance; however, it has limitations as an analytical tool, and you should not consider such a measure either in isolation or as a substitute for analyzing our results as reported under GAAP. In particular, organic constant currency revenue growth (decline) does not reflect M&A activity or the impact of foreign currency exchange rate fluctuations.
Adjusted EBITDA is defined as net income (loss) adjusted for provision (benefit) for income taxes, interest expense, depreciation and amortization, stock-based compensation, transaction expenses related to the IPO, one-time public company transition expenses and costs associated with financing transactions, M&A activity, optimization and restructuring, technology transformation costs, foreign currency (gains) and losses and other costs affecting comparability. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue for the applicable period. We present Adjusted EBITDA and Adjusted EBITDA Margin because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management and our board of directors use Adjusted EBITDA and Adjusted EBITDA Margin to evaluate the factors and trends affecting our business to assess our financial performance and in preparing and approving our annual budget and believe they are helpful in highlighting trends in our core operating performance. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools and should not be considered in isolation or as substitutes for our results as reported under GAAP. Adjusted EBITDA excludes items that can have a significant effect on our profit or loss and should, therefore, be considered only in conjunction with net income (loss) for the period. Because not all companies use identical calculations, these measures may not be comparable to other similarly titled measures of other companies.
Adjusted Net Income is a non-GAAP profitability measure. Adjusted Net Income is defined as net income (loss) adjusted for amortization of acquired intangible assets, stock-based compensation, transaction expenses related to the IPO, one-time public company transition expenses and costs associated with financing transactions, M&A activity, optimization and restructuring, technology transformation costs, and certain other costs affecting comparability, adjusted for the applicable tax rate. Adjusted Earnings Per Share is defined as Adjusted Net Income divided by diluted weighted average shares for the applicable period. We present Adjusted Net Income and Adjusted Earnings Per Share because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding certain material non-cash items and unusual items that we do not expect to continue at the same level in the future. Our management believes that the inclusion of supplementary adjustments to net income (loss) applied in presenting Adjusted Net Income provide additional information to investors about certain material non-cash items and about items that we do not expect to continue at the same level in the future. Adjusted Net Income and Adjusted Earnings Per Share have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.
Free Cash Flow is defined as Net Cash provided by (used in) Operating Activities minus purchases of property and equipment and purchases of intangible assets and capitalized software. We present Free Cash Flow because we believe it provides cash available for strategic measures, after making necessary capital investments in property and equipment to support ongoing business operations, and provides investors with the same measures that management uses as the basis for making resource allocation decisions. Free Cash Flow has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP.
About Sterling
Sterling—a leading provider of background and identity services—offers background and identity verification to help over 50,000 clients create people-first cultures built on foundations of trust and safety. Sterling’s tech-enabled services help organizations across all industries establish great environments for their workers, partners, and customers. With operations around the world, Sterling conducted more than 103 million searches in the twelve months ended December 31, 2023.
Contacts
Investors
Judah Sokel
IR@sterlingcheck.com
Media
Angela Stelle
Angela.Stelle@sterlingcheck.com
CONSOLIDATED FINANCIAL STATEMENTS
STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Three Months Ended
December 31,
Year Ended
December 31,
(in thousands, except share and per share data)
2023
2022
2023
2022
REVENUES
$
169,416
$
169,920
$
719,640
$
766,782
OPERATING EXPENSES:
Cost of revenues (exclusive of depreciation and amortization below)
91,961
92,729
384,653
407,683
Corporate technology and production systems
9,706
11,681
44,415
50,487
Selling, general and administrative
39,012
48,829
173,755
175,459
Depreciation and amortization
15,736
16,542
62,853
73,140
Impairments and disposals of long-lived assets
178
203
7,371
1,008
Total operating expenses
156,593
169,984
673,047
707,777
OPERATING INCOME (LOSS)
12,823
(64)
46,593
59,005
OTHER EXPENSE (INCOME):
Interest expense, net
9,330
8,828
36,233
29,547
Gain on interest rate swaps
—
—
—
(297)
Other income
(521)
(612)
(1,891)
(2,034)
Loss on extinguishment of debt
—
3,673
—
3,673
Total other expense, net
8,809
11,889
34,342
30,889
INCOME (LOSS) BEFORE INCOME TAXES
4,014
(11,953)
12,251
28,116
Income tax provision (benefit)
7,398
(4,253)
12,367
8,706
NET (LOSS) INCOME
$
(3,384)
$
(7,700)
$
(116)
$
19,410
Unrealized loss on hedged transactions, net of tax benefit of $(1,746), $0, $(702) and $0, respectively
(5,022)
—
(3,468)
—
Foreign currency translation adjustments, net of tax benefit of $(138), $(288), $(138) and $(288), respectively
2,694
2,985
2,425
(5,005)
Total other comprehensive (loss) income
(2,328)
2,985
(1,043)
(5,005)
COMPREHENSIVE (LOSS) INCOME
$
(5,712)
$
(4,715)
$
(1,159)
$
14,405
Net (loss) income per share attributable to stockholders
Basic
$
(0.04)
$
(0.08)
$
0.00
$
0.21
Diluted
$
(0.04)
$
(0.08)
$
0.00
$
0.20
Weighted average number of shares outstanding
Basic
89,816,230
94,080,123
91,587,311
94,052,435
Diluted
89,816,230
94,080,123
91,587,311
98,866,004
STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands, except share and par value amounts)
2023
2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
54,224
$
103,095
Accounts receivable (net of allowance for credit losses of $2,816 and $2,304 at December 31, 2023 and 2022, respectively)
142,179
139,579
Insurance receivable
2,937
921
Prepaid expenses
9,651
13,433
Other current assets
15,800
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