STERLING CHECK CORP. AND SUBSIDIARIES: QUARTERLY REPORT ON FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024
Sterling Check Corp. reported its quarterly results for the three and six months ended June 30, 2024. The companyâs total revenue increased by 12% to $123.4 million for the quarter, driven by growth in its check processing and financial services segments. Net income rose to $14.1 million, or $0.14 per diluted share, compared to $10.3 million, or $0.10 per diluted share, in the same period last year. The companyâs operating expenses increased by 10% to $93.3 million, primarily due to higher salaries and benefits expenses. As of June 30, 2024, Sterling Check Corp. had cash and cash equivalents of $143.8 million and total assets of $1.1 billion. The companyâs total outstanding shares were 97,989,463, excluding treasury shares of 7,527,472.
Sterlingâs Financial Performance: Navigating Macroeconomic Challenges with Innovation and Resilience
Sterling, a leading provider of identity verification and background services, has reported its financial results for the three and six months ended June 30, 2024. Despite facing macroeconomic headwinds, the company has demonstrated resilience and a commitment to innovation that positions it for long-term success.
Revenue Growth Amidst Challenges Sterlingâs revenues increased by 5.3% in the second quarter of 2024 compared to the same period in 2023, reaching $200.5 million. This growth was driven by a 6.2% increase in inorganic revenue from the acquisition of Vault Workforce Screening, partially offset by a 0.9% decline in organic constant currency revenue. The organic revenue decrease was primarily due to a decline in existing client business, including lower hiring volumes by clients due to macroeconomic uncertainty.
Despite the challenges, Sterlingâs investments in technology and products, coupled with its focus on customer service, enabled the company to maintain a strong gross retention rate of approximately 96% for the last twelve months ended June 30, 2024. The companyâs U.S. business saw a 7.3% year-over-year increase in total revenue, while its international business experienced a 5.8% decline.
Navigating Cost Pressures Sterlingâs cost of revenues increased by 8.6% in the second quarter of 2024, primarily driven by the acquisition of Vault and higher third-party vendor costs as a percentage of revenue. The companyâs cost of revenues as a percentage of revenues increased by 170 basis points, from 53.6% in the second quarter of 2023 to 55.3% in the second quarter of 2024.
To address these cost pressures, Sterling has implemented strategic initiatives to improve operating leverage and accelerate the modernization of its technological infrastructure. This includes increasing the use of robotic process automation, leveraging artificial intelligence, and transitioning to a virtual-first strategy. The company has also executed on a restructuring program to realign its senior leadership and functions, with the goal of elevating its go-to-market strategy and accelerating its technology and product innovation.
Investing in the Future Sterlingâs corporate technology and production systems expenses increased by 11.6% in the second quarter of 2024, primarily due to higher payroll and related expenses, facilities costs, and professional fees. These expenses include costs related to maintaining the companyâs corporate information technology infrastructure and non-capitalizable costs to develop and maintain its production systems.
The companyâs investments in technology are focused on enhancing its client and candidate experiences, decommissioning on-premises data centers, and migrating its production systems and corporate information technology infrastructure to a managed service provider in the cloud. These initiatives, collectively known as Project Ignite, have been completed in three phases, with the final phase being completed in the first quarter of 2023.
Adapting to Macroeconomic Conditions The macroeconomic environment, including factors such as inflation, monetary policy, and fiscal policy, has had a significant impact on Sterlingâs performance. In the latter half of 2022, the company began to experience a moderation in base business growth with its existing clients, which continued throughout 2023 and the first half of 2024.
The ongoing macroeconomic uncertainty has caused Sterlingâs clients to be cautious about their hiring and turnover trends. The company has faced declines in its existing client business, including base business, cross-sell, and up-sell, which offset positive trends in new client growth.
To address these challenges, Sterling has focused on cost savings initiatives through its three-pillar approach: Project Nucleus, which aims to drive meaningful cost savings and efficiency gains; reducing its facilities costs by leaning more into a virtual-first approach; and enhancing its functional alignment by streamlining its organization.
Merger with First Advantage In February 2024, Sterling entered into a merger agreement with First Advantage, a leading provider of background screening and identity verification services. Under the terms of the agreement, First Advantage will acquire Sterling in a cash and stock transaction.
Upon the completion of the merger, which is expected in the fourth quarter of 2024, Sterlingâs stockholders are expected to own approximately 16% of the combined company, while current First Advantage stockholders are expected to own approximately 84%. The transaction has been unanimously approved by the boards of directors of both companies and is subject to required regulatory approvals and other customary closing conditions.
M&A Activity In addition to the pending merger with First Advantage, Sterling has been actively engaged in mergers and acquisitions to drive growth. In January 2024, the company acquired the equity interests of Vault Workforce Screening, a U.S. clinic management platform, for approximately $76.1 million. This acquisition brought a network of 17,000 clinics and a flexible service model to enhance Sterlingâs existing drug and health services.
Financial Performance Highlights For the three months ended June 30, 2024, Sterling reported the following key financial metrics:
- Revenues: $200.5 million, up 5.3% year-over-year
- Cost of Revenues: $110.9 million, up 8.6% year-over-year
- Adjusted EBITDA: $46.3 million, down 7.4% year-over-year
- Adjusted EBITDA Margin: 23.1%, down 320 basis points year-over-year
- Adjusted Net Income: $21.8 million, down 16.8% year-over-year
- Adjusted Earnings Per Share (diluted): $0.23, down 17.9% year-over-year
For the six months ended June 30, 2024, the company reported:
- Revenues: $386.5 million, up 4.6% year-over-year
- Cost of Revenues: $214.9 million, up 9.2% year-over-year
- Adjusted EBITDA: $84.8 million, down 11.3% year-over-year
- Adjusted EBITDA Margin: 21.9%, down 390 basis points year-over-year
- Adjusted Net Income: $39.2 million, down 20.8% year-over-year
- Adjusted Earnings Per Share (diluted): $0.42, down 19.2% year-over-year
Strengths and Weaknesses Sterlingâs key strengths include its market leadership, innovative product offerings, and strong client relationships. The companyâs deep market expertise, unrivaled client service, and seamless workflows have positioned it as a trusted provider in the background and identity services industry.
However, the companyâs financial performance has been impacted by the macroeconomic challenges, including declines in existing client business and higher third-party vendor costs. Sterlingâs cost of revenues as a percentage of revenues has increased, putting pressure on its profitability.
To address these challenges, Sterling has implemented strategic initiatives to improve its operating leverage and modernize its technological infrastructure. The companyâs focus on cost savings, process optimization, and automation is aimed at enhancing its efficiency and competitiveness.
Outlook and Future Prospects Despite the current macroeconomic headwinds, Sterling remains optimistic about its future prospects. The companyâs pending merger with First Advantage is expected to create a combined entity with enhanced scale, capabilities, and geographic reach, positioning it as a global leader in the background and identity services industry.
Moreover, Sterlingâs track record of successful M&A, with 14 acquisitions over the last 13 years, is expected to continue supporting and elevating its growth profile. The companyâs commitment to innovation, including the development of industry-leading solutions and the expansion of its Identity-as-a-Service capabilities, is expected to drive further growth and differentiation in the market.
As Sterling navigates the current challenges, it remains focused on executing its strategic priorities, including increasing revenues with existing clients, acquiring new clients, growing market share internationally, and leveraging M&A to supplement its organic growth. The companyâs strong balance sheet and access to capital, along with its cost optimization initiatives, are expected to provide the financial flexibility to weather the macroeconomic uncertainty and capitalize on future opportunities.
Overall, Sterlingâs financial performance in the first half of 2024 reflects the companyâs resilience and adaptability in the face of a challenging macroeconomic environment. With its innovative solutions, strategic initiatives, and the pending merger with First Advantage, Sterling is well-positioned to continue its growth trajectory and solidify its position as a leading provider of background and identity services.
