Sterling Check Corp. (NASDAQ: STER) is a leading global provider of technology-enabled background and identity verification services. The company offers a comprehensive hiring and risk management solution that begins with identity verification, followed by criminal background screening, credential verification, drug and health screening, employee onboarding document processing, and ongoing risk monitoring.

Financials

In the latest fiscal year, Sterling Check reported annual revenue of $719.64 million, a testament to the company's strong market position and growing demand for its services. However, the company faced some challenges, reporting an annual net loss of $116 million. Despite this, the company generated robust annual operating cash flow of $96.86 million and annual free cash flow of $76.5 million, indicating its ability to generate substantial cash flow to fund its operations and investments.

For the latest quarter ended March 31, 2024, Sterling Check reported revenues of $186 million, up 3.8% from the prior-year quarter. This growth was driven by an 8.7% increase in inorganic revenue from recent acquisitions, partially offset by a 4.9% decline in organic constant currency revenue. The organic revenue decline was primarily due to a decrease in existing client business, including base business, cross-sell, and up-sell, which offset new client growth of approximately 6%.

The company's gross profit margin for the quarter was 44.1%, down from 47.1% in the prior-year quarter, primarily due to increased volume from lower-margin acquisitions and higher third-party vendor costs as a percentage of revenue, partially offset by cost optimization efforts. Sterling Check reported a quarterly net loss of $8 million, compared to net income of $0.6 million in the prior-year quarter, driven by higher selling, general, and administrative expenses, including transaction costs related to the pending merger with First Advantage Corporation and an out-of-period adjustment to contingent consideration.

Liquidity

Despite the quarterly net loss, the company generated $3.7 million in operating cash flow and had $67 million in cash and cash equivalents as of March 31, 2024. The company's liquidity position remains strong, with $129.5 million of available capacity under its $400 million revolving credit facility.

Business Overview

Sterling Check's business is diversified across a wide range of industries, including healthcare, financial and business services, retail, technology, and more. The company serves a global client base, with approximately 40% of its revenue generated outside the United States. This geographic diversification helps mitigate the impact of regional economic fluctuations.

The company's growth strategy focuses on several key initiatives, including increasing revenue from existing clients, acquiring new clients, expanding internationally, and pursuing strategic acquisitions. In January 2024, Sterling Check acquired Vault Workforce Screening, a U.S. clinic management platform, to enhance its existing drug and health services offerings.

Outlook

Looking ahead, the company's management has provided limited guidance due to the pending merger with First Advantage Corporation. However, the company has highlighted its focus on cost optimization initiatives, such as Project Nucleus, which aims to drive meaningful cost savings and efficiency gains in its cost of revenues.

Recent Developments

The pending merger with First Advantage Corporation, announced in February 2024, is a significant development for Sterling Check. The all-cash and stock transaction values Sterling Check at approximately $1.6 billion and is expected to create a leading global provider of background screening, identity verification, and workforce management solutions. The merger is subject to regulatory approvals and is expected to close in the third quarter of 2024.

Conclusion

Sterling Check's financial performance has been mixed, with strong cash flow generation offset by quarterly net losses. The company's growth initiatives, including acquisitions and international expansion, have contributed to its top-line performance, but the integration of these initiatives has also weighed on profitability. The pending merger with First Advantage Corporation presents both opportunities and risks for Sterling Check's shareholders, as the combined entity will have a larger scale and broader capabilities, but the integration process may also present challenges.

Overall, Sterling Check remains a significant player in the background screening and identity verification market, with a diversified client base, robust cash flow, and a strategic growth plan. Investors will closely monitor the company's progress in executing its growth initiatives and the successful integration of the pending merger with First Advantage Corporation.