Sterling Check Corp. (STER)·Q2 2024 Earnings Summary

Executive Summary

• Revenue grew 5.3% year-over-year to $200.5M, with inorganic growth of 6.2% offsetting a 0.9% organic constant-currency decline; sequentially, revenue rose 7.8% from Q1 ($186.0M) as base declines moderated .
• Adjusted EBITDA was $46.3M with margin of 23.1%, down 320 bps YoY but up 240 bps QoQ, driven by improved revenue trends and continued expense discipline; YoY margin pressure reflected lower-margin M&A mix and higher third-party vendor costs .
• GAAP net loss was $(6.2)M (diluted EPS $(0.07)), improving vs Q1’s $(8.0)M (EPS $(0.09)); prior-year Q2 was a modest $0.3M profit (EPS $0.00) .
• Cash and equivalents were $74.2M and total debt $555.5M; net leverage remained 2.8x. Post quarter, the company repaid $20M on the revolver; expected merger with First Advantage remains the key catalyst and the company is not hosting earnings calls during the pending transaction .

What Went Well and What Went Wrong

What Went Well

• Strength in controllable organic drivers: New business growth accelerated to 7% YoY, up/cross-sell to 9%, and client retention was 97%; base declines narrowed from Q1. CEO: “The second quarter was another period of solid business momentum… accelerated our revenue growth to 5% year-over-year” .
• Sequential margin expansion: Adjusted EBITDA margin improved 240 bps QoQ to 23.1% due to revenue acceleration and expense discipline .
• M&A contribution: Inorganic growth of 6.2% supported topline; integration work (decommissioning redundant systems at A-Check/Vault) continued to enhance delivery of drug and health services .

What Went Wrong

• Organic constant currency revenue declined 0.9% YoY; base business remained a headwind at -14% YoY, reflecting ongoing hiring-market challenges .
• Margin compression YoY: Adjusted EBITDA margin fell 320 bps to 23.1% on lower-margin M&A revenue mix and increased third-party vendor costs tied to revenue mix shifts .
• Free cash flow pressure YTD: H1 2024 FCF was $8.8M vs $23.7M in the prior year, driven by lower operating income and higher cash taxes; quarterly FCF improved to $10.8M in Q2 from Q1’s $(1.9)M .

Financial Results

Sequential Trend (Q4 2023 → Q1 2024 → Q2 2024)

YoY Comparison (Q2 2023 → Q2 2024)

Estimates vs Actuals (Q2 2024)

Balance Sheet and Liquidity (Quarter-End)

KPIs and Operating Drivers

Segment Breakdown

Sterling does not disclose segment revenue breakdown in the release; reported results are presented on a consolidated basis .

Guidance Changes

Management commentary indicates expectations for “further improvement over the course of the year” and margin expansion as base declines moderate, but no numerical guidance ranges were issued .

Earnings Call Themes & Trends

Sterling did not host an earnings call due to the pending merger with First Advantage . Themes are drawn from company releases.

Management Commentary

• “We accelerated our revenue growth to 5% year-over-year, with particularly robust organic revenue growth from new business, up-sell / cross-sell, and client retention… Moderated base declines should also help drive further expansion in our margins” — Josh Peirez, CEO .
• “In the first quarter… we were particularly pleased to report year-over-year growth of 11% from the combination of new business, up/cross-sell, and customer attrition… We expect margins to improve over the course of the year” — Josh Peirez, CEO .
• On the merger: “We are excited by the pending transaction with First Advantage, expected to close in Q4 2024, and we look forward to even greater innovation, client experiences, and shareholder value creation once the synergistic deal closes” .

Q&A Highlights

• No Q&A this quarter; Sterling did not host an earnings conference call given the pending First Advantage merger .
• Any clarifications on drivers and margins were provided in the press release, including non-GAAP reconciliations and base/organic/inorganic contributions .

Estimates Context

• S&P Global Wall Street consensus estimates for STER Q2 2024 were unavailable in our dataset due to a CIQ mapping error; as a result, we cannot quantify beats/misses vs consensus. Actual results are shown above, and estimate comparisons are marked N/A.
• Given sequential improvement in revenue and margin vs Q1, sell-side models may need to reflect a faster narrowing of base declines and M&A integration progress, but formal consensus verification was not possible this quarter .

Key Takeaways for Investors

• Sequential acceleration: Revenue rose 7.8% QoQ and Adjusted EBITDA margin expanded 240 bps QoQ, indicating the thesis of base-decline moderation and cost discipline is playing out into H2 .
• Controllable growth drivers strong: New business (+7%), up/cross-sell (+9%), and 97% retention support a constructive topline mix even as base hiring remains a headwind .
• Margin dynamics: YoY margin pressure from lower-margin M&A and vendor costs persists, but improving base trends and integration efficiencies should support further margin recovery over the year .
• Liquidity and leverage: Cash increased to $74.2M, total debt at $555.5M, with net leverage steady at 2.8x; post-quarter $20M revolver repayment underscores ongoing cash generation and balance sheet management .
• Merger catalyst: Expected Q4 2024 close with FA positions Sterling to invest more in AI/digital ID and realize synergies; absence of earnings calls may reduce near-term information flow but the strategic narrative is supportive .
• Near-term trading: Watch for regulatory/closing updates on the merger and continued signs of base-decline moderation; FCF trajectory improved sequentially and can be a support to deleveraging .
• Medium-term thesis: Combination with FA plus integration synergies and stabilized hiring cycles could drive margin normalization and EPS accretion; monitor vendor cost mix and M&A margin impacts to gauge sustainability .