Executive Summary

Q4 2023 revenue was $169.4M, down 0.3% year over year; GAAP net loss improved to $(3.4)M (−2.0% margin) while Adjusted EBITDA rose 1.5% to $41.9M with margin expansion to 24.7% (+40 bps), reflecting cost optimization benefits .
Organic constant currency revenue declined 2.8% (base −14%), offset by inorganic growth (+2.2%) and FX (+0.3%); new business returned to 7% and up-sell/cross-sell accelerated to 8%, with gross revenue retention at 96% .
Sterling canceled its Q4 earnings call due to the announced acquisition by First Advantage (cash/stock deal valuing STER at ~$2.2B including debt, with at least $50M run-rate synergies and expected double-digit EPS accretion on a run-rate basis)—this transaction is the dominant stock catalyst (cash election $16.73 per share, 35% premium to prior close) .
Balance sheet at year-end: cash $54.2M, total debt $498.0M, net leverage 2.4x; FY23 Free Cash Flow was $76.5M, reflecting lower operating income and higher interest expense .

What Went Well and What Went Wrong

What Went Well

Early achievement of the $25M annualized cost savings target drove margin resilience; Q4 Adjusted EBITDA margin expanded to 24.7% (+40 bps YoY) despite macro softness .
Commercial engines performed strongly: new business growth returned to 7%, up-sell/cross-sell reached 8%, and gross revenue retention was 96%—management noted “substantial acceleration” in Q4 and “momentum for 2024” .
Strategic M&A integration of Socrates and A‑Check continued to yield benefits; Sterling also acquired Vault Workforce Screening in January 2024 to in‑source drug and health testing capabilities and build scale in healthcare and industrials .

What Went Wrong

Base revenue with existing clients fell 14% in Q4 due to macro uncertainty, pressuring organic growth (−2.8%) despite strength in new business and up/cross‑sell .
GAAP profitability remained challenged: Q4 GAAP net loss $(3.4)M and diluted EPS $(0.04), though improved vs. prior year; Adjusted Net Income declined 3.8% YoY to $19.7M .
Management reiterated that 2023 macro headwinds lasted longer than anticipated, leading to base declines above initial expectations (context from FY commentary) .

Financial Results

Metric	Q4 2022	Q3 2023	Q4 2023
Revenue ($USD Millions)	$169.9	$180.6	$169.4
GAAP Net Income ($USD Millions)	$(7.7)	$2.4	$(3.4)
Net Income Margin (%)	−4.5%	1.3%	−2.0%
GAAP Diluted EPS ($USD)	$(0.08)	$0.03	$(0.04)
Adjusted EBITDA ($USD Millions)	$41.3	$47.6	$41.9
Adjusted EBITDA Margin (%)	24.3%	26.3%	24.7%
Adjusted Net Income ($USD Millions)	$20.5	$24.7	$19.7
Adjusted EPS – Diluted ($USD)	$0.21	$0.26	$0.21

KPIs and Drivers

KPI/Driver	Q2 2023	Q3 2023	Q4 2023
Organic CC Revenue Change (%)	−10.1%	−11.9%	−2.8%
Inorganic Revenue (%)	+3.2%	+2.4%	+2.2%
FX Impact (%)	−0.5%	+0.1%	+0.3%
Base Revenue Change (%)	Decline (offset growth)	−17% (Q&A detail)	−14%
New Business Growth (%)	10% combined new + up/cross-sell	~5% new; up/cross‑sell at 4–5%	7% new; 8% up/cross‑sell; retention 96%

Balance Sheet and Cash Flow

Metric	Q3 2023	Q4 2023
Cash and Cash Equivalents ($USD Millions)	$49.9	$54.2
Total Debt ($USD Millions)	$499.9	$498.0
Net Leverage (Net Debt / Adj. EBITDA)	2.4x	2.4x
Free Cash Flow – Quarter ($USD Millions)	$27.2	$25.6
Free Cash Flow – FY ($USD Millions)	—	$76.5

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenues ($USD Millions)	FY 2023	$760–$780 (Aug 8, 2023)	$720–$730 (Nov 8, 2023)	Lowered
Adjusted EBITDA ($USD Millions)	FY 2023	$198–$208 (Aug 8, 2023)	$186–$191 (Nov 8, 2023)	Lowered
Adjusted Net Income ($USD Millions)	FY 2023	$106–$114 (Aug 8, 2023)	$95–$99 (Nov 8, 2023)	Lowered
Q4 Revenue (Implied)	Q4 2023	—	Flat to +6% YoY implied in guidance commentary	Provided (implied)
Transaction Synergies	Combined Co.	—	≥$50M run-rate synergies; immediate double-digit EPS accretion (run-rate basis)	New (deal-specific)

Note: Sterling provided no new 2024 guidance in the Q4 press release and canceled the Q4 earnings call due to the announced merger with First Advantage .

Earnings Call Themes & Trends

Topic	Q2 2023 (Prior −2)	Q3 2023 (Prior −1)	Current Period (Q4 2023)	Trend
AI/automation & cost programs	Project Nucleus launched; cost savings initiatives; technology transformation spend winding down	Focused automation, efficiency; implementing AI (OCR, chatbots, dev productivity); on track for $25M run-rate savings	Early realization of $25M annualized savings target; margin expansion despite macro	Improving margin profile
Identity verification	Extended exclusive ID.me partnership through 2028; expanding digital identity overseas	Konfir partnership in U.K.; identity adoption up; pipeline growth	Q4 drivers hit: new (7%), up/cross‑sell (8%); identity emphasized in strategy (no new identity metric disclosed)	Ongoing adoption
Macro/base hiring	Base declines offset growth drivers	Base −17% in Q3; improved comps expected in Q4	Base −14% in Q4; organic decline narrowed to −2.8%	Moderating decline
M&A & integration	Socrates/A‑Check acquisitions; integration on track	Integration progressing; inorganic growth +2.4%	Vault Workforce Screening acquired Jan 2024; First Advantage to acquire Sterling	Accelerating strategic actions
Capital allocation	Net leverage ~2.4x; buybacks ongoing	$46M YTD repurchases; net leverage 2.4x; hedging ~60% floating debt	$67.8M FY23 repurchases; net leverage 2.4x	Balanced with deleveraging
Legal/regulatory	Non-recurring settlements impacting comparability (footnotes)	Continued footnote settlements	Small settlement cost in Q4 (net of insurance)	Lapping discrete items

Management Commentary

“The fourth quarter of 2023 capped off a solid year...early realization of our $25M annualized cost savings target as well as an enhanced revenue exit velocity going into 2024.” — CEO Josh Peirez .
“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.” — CEO Josh Peirez .
“Ownership of Vault extends Sterling’s drug and health testing capabilities…helps us strategically in‑source a key component of our supply chain and build scale within the attractive healthcare and industrials verticals.” — CEO Josh Peirez .

Q&A Highlights

Note: Sterling canceled its Q4 earnings call; no Q&A occurred . Key Q3 Q&A themes:

Base volume trends: base declined −17% in Q3; improvement in year-over-year decline expected in Q4 due to comps, not volume increases .
New contracts: ramping in Q4 from mid/large clients; wins from both large peers and mid/small vendors; identity present in >50% of new deals; monitoring typically up-sold separately .
Cost levers: additional automation and AI opportunities; variable data costs and more flexible staffing underpin rapid cost response; adjusted OpEx expected to be lowest in eight quarters in Q4 .
Capital deployment: prioritizing organic growth and disciplined M&A; buybacks balanced against leverage (target 2–3x) .

Estimates Context

Wall Street consensus estimates via S&P Global for STER’s Q4 2023 were unavailable due to missing mapping in SPGI systems; therefore, beats/misses vs consensus are not included. Values retrieved from S&P Global were unavailable for this period.

Key Takeaways for Investors

Cost optimization is translating into margin resilience: Q4 Adjusted EBITDA margin expanded to 24.7% (+40 bps YoY) despite a 14% base revenue decline, signaling structurally improved cost profile ahead of demand normalization .
Commercial traction is solid: new business 7% and up/cross‑sell 8% in Q4, with 96% gross revenue retention, supporting share gains irrespective of macro cycles .
Macro drag is moderating: organic decline narrowed to −2.8% in Q4 as comps ease; investors should watch base trends and hiring activity across healthcare, financial/services, industrials, and EMEA (Q3 context) .
Transaction dominates near-term narrative: First Advantage deal (35% cash premium; ≥$50M synergies; expected double-digit EPS accretion on run-rate basis) likely anchors valuation and arbitrage dynamics into close (expected around Q3 2024, subject to approvals) .
Balance sheet supports flexibility: year-end cash $54.2M, total debt $498.0M, net leverage 2.4x; FY Free Cash Flow $76.5M and $67.8M buybacks reflect disciplined capital allocation .
Watch integration and in‑sourcing strategy: Vault acquisition expands drug/health testing and in‑sources parts of supply chain, potentially improving speed, cost, and vertical penetration (healthcare/industrials) .
Near-term trading: merger spread, regulatory milestones, and combined company synergy updates are the primary catalysts; fundamental beats/misses are secondary given the canceled call and pending deal .

Sterling Check Corp. (STER)·Q4 2023 Earnings Summary