Sterling Check Corp. (STER)·Q1 2024 Earnings Summary

Executive Summary

• Q1 2024 revenue grew 3.8% year over year to $186.0M, driven by 8.7% inorganic contributions (Vault, A‑Check) while organic constant currency declined 4.9% as base business fell 16%; GAAP diluted EPS was $(0.09) and Adjusted EPS was $0.19 .
• Profitability compressed: Adjusted EBITDA fell 15.5% to $38.5M and margin declined 470 bps to 20.7% due to lower‑margin inorganic mix and higher third‑party vendor costs; management expects margins to improve as M&A synergies and base business conditions normalize .
• No earnings call was held given the pending merger with First Advantage; the transaction remains the key stock narrative and catalyst (deal terms announced Feb 29) .
• Balance sheet/cash: net leverage rose to 2.8x, cash from operations was $3.7M and free cash flow was $(1.9)M, reflecting lower operating income and higher cash taxes; total debt increased to $559.2M after Vault financing .
• Consensus estimates for Q1 2024 via S&P Global were unavailable through our tool; estimate comparisons are therefore not included.

What Went Well and What Went Wrong

What Went Well

• Strong growth from controllable drivers: new business, up/cross‑sell, and customer attrition combined grew 11%, ahead of Sterling’s 7–8% long‑term target, supported by product innovation and technology excellence .
• Inorganic contribution healthy: Vault and A‑Check added 8.7% to revenue growth, with integrations progressing and targeted synergies expected over the year .
• Cost optimization benefits evident despite mix headwinds: management underscores ongoing streamlining to improve flexibility, profitability, and cash generation; expects margin improvement as synergies are realized .

What Went Wrong

• Base business declines: hiring market weakness caused a 16% year‑over‑year decline in base revenue, offsetting gains in new/up‑sell drivers and pressuring margins .
• Margin compression from mix: increased revenue in lower‑margin product categories and higher third‑party vendor costs reduced Adjusted EBITDA margin by 470 bps to 20.7% .
• Free cash flow negative: FCF of $(1.9)M vs $7.0M in prior year, driven by lower operating income and higher cash taxes; cash from operations fell to $3.7M vs $11.3M .

Financial Results

Estimates comparison: S&P Global consensus for Q1 2024 was unavailable via our tool; therefore, no “vs. estimates” deltas are shown.

KPIs and Operating Metrics

Note: Dashes indicate metrics not disclosed for that period in the cited documents.

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “We were particularly pleased to report year-over-year growth of 11% from the combination of new business, up/cross-sell, and customer attrition, well ahead of our 7-8% combined long-term target... we remain in execution mode following our exciting February announcement of a combination with First Advantage.” — CEO Josh Peirez .
• “Our margins were impacted year-over-year by lower-margin inorganic revenue growth, particularly the Vault deal... We expect margins to improve over the course of the year as we anticipate realizing additional synergies from M&A and improvement in base business.” — CEO Josh Peirez .
• “In light of the pending merger with First Advantage, Sterling will not be hosting an earnings conference call to review its first quarter...” .

Q&A Highlights

• No Q1 2024 earnings call was held due to the announced combination with First Advantage; therefore, no contemporaneous Q&A. For context, Q3 2023 Q&A focused on:
  • Base hiring volumes softness and expected moderation from comps rather than improving underlying volumes .
  • New client ramp and pipeline strength; up‑sell/cross‑sell traction including identity and post‑hire .
  • Cost optimization levers (automation/AI, variable data costs, SG&A streamlining) and expected $25M annualized savings .
  • Capital allocation and buybacks within 2–3x leverage target .

Estimates Context

• Wall Street consensus (S&P Global) for Q1 2024 EPS, revenue, and EBITDA was unavailable via our tool for STER; as a result, “actual vs. consensus” comparisons are not provided.

Key Takeaways for Investors

• Inorganic tailwind with Vault/A‑Check drove top‑line growth in Q1; however, mix shift and vendor costs compressed margins materially, making synergy capture and integration discipline critical for near‑term margin recovery .
• Base business remains the swing factor; management expects moderation across 2024, but absolute hiring volumes are still a headwind — monitor macro hiring indicators and vertical mix (healthcare/industrials vs financials/tech) .
• Free cash flow inflected negative in Q1 and leverage increased to 2.8x following Vault financing; watch operating cash flow normalization and working capital discipline as integrations mature .
• The pending First Advantage acquisition is the principal catalyst: closing timeline, regulatory approvals, synergy targets ($50M run‑rate at combined level per FA release) and integration plans will likely drive sentiment more than quarterly variability .
• Identity and monitoring solutions continue to underpin share gains and larger deals, but carry lower margins in some categories; pricing/terms and in‑sourcing (Vault) may mitigate third‑party data cost pressure over time .
• Absent a Q1 call and with no guidance provided, expectation‑setting shifts to transaction milestones and cost‑synergy execution — traders should watch deal progress headlines and subsequent pro forma disclosures .