Sterling Check Corp (STER) 2021 Q3 法說會逐字稿

Hello, and welcome to the Sterling Third Quarter 2021 Earnings Call. My name is Emma and I'll be your operator today. (Operator Instructions) It's now my pleasure to hand the call over to Judah Sokel, Vice President of Investor Relations, to begin. Please go ahead Judah.

Thank you, operator. Welcome to Sterling's third quarter 2021 earnings call. Joining me today are Josh Peirez, Chief Executive Officer of Sterling; and Peter Walker, Chief Financial Officer of Sterling. The slides we will reference during this presentation can be accessed on Sterling's investor relations website under news and events. The slides will be posted at the conclusion of this call, and a replay will be made available on the website. After prepared remarks, we will open this call for questions.

Before we discuss our results, I encourage all listeners to review the legal notice on slide 2, which explains the risk of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our recently filed final prospectus for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued this morning. I will now turn the call over to Josh Peirez.

Thank you, Judah. Good morning, and thank you for joining us on our first quarterly earnings call as a public company. Sterling's third quarter was exceptional. We successfully completed our IPO while delivering record financial results, including 43% organic constant currency revenue growth, 69% adjusted EBITDA growth, and 168% adjusted EPS growth. In addition to reviewing these results with you today, we will also provide you with 2021 guidance and spend some time discussing the people, products and technology that makes Sterling unique and differentiated.

Before turning to the core of my presentation, I'm proud to note that on September 23 we completed our IPO of nearly 16.4 million shares, approximately 17% of our diluted shares outstanding, and we began trading on the NASDAQ Global Select Market under the symbol STER. The offering priced above our range at $23 per share and ended the first day of trading with a market cap of $2.6 billion, providing net primary proceeds of approximately $94.5 million. Our IPO was a proud moment for Sterling, and I would like to thank our team who supported that successful process, as well as our clients and partners for the continued support of our business.

I also want to take this opportunity to welcome Judah Sokel as our Vice President of Investor Relations. Judah joins us from JPMorgan where he covered the business and information services sector for nearly a decade, and we are thrilled to have him join as we embark in this next stage as a public company. Our hiring of a talent like Judah demonstrates the value we place in partnering with the investment community. I'm sure many of you know Judah, and he is excited to work with you in his new role.

To those of you are newer to the Sterling story, I would like to share some information about our company and industry.

Let's start on slide 5. Sterling is a world-class global provider of technology-enabled background and identity verification services. We offer a comprehensive suite of tech-enabled services in a human capital management or HCM lifecycle area. We participate in four critical areas of the HCM value chain: the pre-hire identity verification, pre-hire screening, onboarding, and post hire monitoring areas. We are deeply integrated into our clients' HR, risk management, and compliance functions, and our services are mission-critical to them.

Clients rely on Sterling to protect their brand and reputation, to create great first impressions with candidates through our branded tools that can be white labeled, and to be compliant with rules around the world through our compliance by design approach to product development. Our solutions also enhance clients' organizational efficiency by substituting for their manual processes. This is essential in the current market, where there is a war for talent and companies need to move with speed and reduce their time to hire. This has allowed us to serve a highly diversified blue-chip global client base. We have over 47,000 clients around the world, including over 50% of the Fortune 100 as clients, for whom we have performed over 89 million screens in the last 12 months.

Over the first two and half years since launching our new corporate strategy at the beginning of 2019, we signed over $150 million in new customer annualized contract value, and our momentum in new client wins has notably continued in the months since. We have also increased our gross client retention rate to 96%, a testament to our focus on exceptional client service and a demonstration of our predictable recurring revenue profile. Our top 100 clients have an average tenure of nine years, and we have very low client concentration risk, with our largest client representing less than 5% of revenues and our top 25 clients less than 30% of revenues. Additionally, we have low concentration of clients in any one industry vertical, allowing us to have a balanced portfolio across the many sectors in which we operate. Furthermore, we operate in the cloud and we have invested significantly into technology in order to build a best-in-class, scalable, cloud-based technology platform. Over 95% of our revenue is already in the cloud, yielding multiple client benefits, including superior availability, improved security, rapid product launches, and the ability to customize and localize service offerings. We have over 75 platform integrations, in addition to our world-class API. Over half of our revenue is integrated today, and the percentage continues to increase. I will provide additional color on our cloud-based technology platform shortly when I discuss our competitive advantages.

Turning to slide 6. Sterling operates in a highly attractive global market. The global background and identity verification industry is large and highly fragmented with a total addressable market of $16 billion as of 2020, and it is growing with the TAM expected to increase at a 12% CAGR to $29 billion by 2025. Importantly, the majority of this opportunity is outside of the US, where we have a leading position and are uniquely able to continue capturing that opportunity in the future. We believe that there are several secular demand drivers that are increasing the need for comprehensive screening and hiring solutions. The gig economy continues to grow quickly, enabling people to have more than one job at the same time, with each of those gig relationships involving a background check. Similarly, the use of contingent workforces and freelancers continues to increase driving greater needs for background checks. The ongoing increase in employee churn is also an important driver of growth for us. We've all heard about the Great Resignation and prevalence of remote work and increased desire for flexibility. We believe this has led to a structural shift in the workforce, increasing voluntary employee turnover, particularly with millennials and Gen Z.

Another key driver is the greater adoption of background screening outside the US. Historically, international markets have been slower adopters of hiring technology compared to the US. Many international markets are only just beginning to view employment background checks as critical components of their hiring function, which presents tremendous upside for our business. The value placed on identity verification is another important secular trend we see increasing around the world. Given the rising risk of fraud and identity theft in an increasingly digital world, the market is ready and hungry for digital identity services as a critical step in the pre-hire screening process.

And finally, continuous post hire screening processes are increasing. As employers look to manage risk in the workplace, we are seeing an increased demand for continuous screening and monitoring. We see an opportunity to capitalize on this growing market and continue to enhance our post hire monitoring solutions, including screening for healthcare sanction, medical licenses, motor vehicle registration monitoring, and social media monitoring. All of these dynamics underpin the critical need for employers to access sensitive information through safe and effective background screening capabilities, and they support the clear demand we are seeing for Sterling's deep expertise and tailored solutions.

So what makes Sterling unique? Slide 7 summarizes several ways in which we have differentiated ourselves from the competition. First is our global scale. Our international revenue increased 52% year over year on an organic constant currency basis during the third quarter, and we see opportunity to continue to grow outside the US. The secret to our success internationally is that we empower local leaders and teams to make decisions that serve local customers. In particular, global gig and enterprise clients are driving our international growth.

The next area of differentiation is our verticalized business model. Sterling's go-to market strategy is organized around geographies and verticals through which we deliver deep market expertise, thought leadership, and exceptional client service. These are critical elements of our success in both winning new clients and retaining current clients. In some organizations, verticals are just a way to organize the sales function, but in Sterling our vertical teams are fully functional. Each vertical team is accountable for delivering in their client set. They are empowered to create and drive retention and growth strategies based on their deep understanding of the industry, strong relationships with clients, and clear view of the whitespace opportunities. This allows us to have the personal touch of a boutique firm while also providing the global reach, scale, and resources of an industry leader.

Technology is another key area of differentiation. Sterling is constantly modernizing, and we see ourselves as best-in-class in all elements of the user experience. We have invested in our technology through a three-phase initiative called Project Ignite; we are already two-thirds of the way complete. Phase 1 involves modernizing the experience for our clients and their candidates with state-of-the-art mobile-enabled products. Phase 2 was around migration to the cloud where we are now running over 95% of our revenue. Phase 3 involves the consolidation and decommissioning of our older platforms. Project Ignite has transformed our business, particularly around our cloud-based technology and product delivery. By eliminating on-premises infrastructure and the related complexity, we've been able to achieve the highest levels of availability for our clients and provide offerings that are both reliable and scalable. This shift to the cloud has also resulted in our ability to shift resources to building next gen capabilities and solutions for our clients.

Our advantage in technology extend to how we fulfill orders. We have been investing for more than a decade with the goal of having the most automated systems in the business, delivering the fastest turnaround times with the highest quality and lowest dispute rate among the industry. In particular, we have over 3,000 automations, leveraging APIs and RPA bots, representing over 90% of our US criminal searches. But for us, it is not the number of automations; it is the results it drives for our clients. 70% of US criminal screens are completed within the first hour, and 90% are completed within the first day.

To demonstrate how we put our clients first in delivering results, last year, at the height of the pandemic, we were able to fulfill searches in at least 98% of US jurisdictions, even though most courthouses in the country were closed. Our turnaround times and ability to service clients even during challenging times are attributes that set us apart and are critical reasons why we win and retain business. And finally, we are very differentiated in our approach to identity verification. We do not view identity verification as a product, but rather as a service and a strategic pillar equal to background checking in terms of our growth opportunities.

We believe identity should be the first step of any background screening process. With increasing data breaches and the growth of remote work, identity verification is a more powerful tool for employers than ever before, especially in the pre-hiring process. We are excited about our exclusive partnership with ID.me, a best-in-class identity verification provider with over 60 million verified users. Through this partnership, we will give employers access to candidate data faster and more accurately, which in turn speeds up the hiring process. Identity as a service presents a huge opportunity for us. Identity verification is not widely adopted today and is a small but growing percentage of our revenues, and we believe this will become the first step in the majority of all screens over time.

Now let me comment briefly on our third-quarter. Looking at slide 8, we saw strong performance across all regions and industry verticals. Our US business grew by 41%, and our international business grew by 52% on an organic constant currency basis. We also continued to experience strong client retention of 96% for the trailing 12-month period ending September 2021, up 300 basis points from the prior-year period, a demonstration of our exceptional client service and proactive approach to retention. And finally, we strengthened our position in the financial services vertical by expanding our identity verification offering through an exclusive partnership with FINRA, an exciting opportunity which we announced yesterday. In the third quarter, the macroeconomic environment remained positive with the Great Resignation continuing and employee turnover broadly remaining a key theme in the employment market; our business significantly outpaced US job growth in the third quarter.

And now, I will hand it over to Peter Walker, our CFO, to take you through our financial results for the quarter and full-year 2021 guidance. Peter?

Thank you, Josh, and good morning, everyone. Before diving into our Q3 results, I want to review the key attributes of our financial model on slide 10. Our financial model's strength and resilience drives our ability to deliver strong organic growth and continued margin expansion. We have high predictability in revenue generation as the majority of contracts and revenues are multiyear with auto renewal and have exclusivity or primary designation. We have fixed pricing for the period of the contract with the ability to increase prices annually and there's no termination clause for convenience in our contracts. We also have a very strong recurring revenue base, as Josh mentioned earlier. All of this results in strong free cash flow generation for the business. Our highly scalable cloud-based technology platform allows us to add new clients and books of business with minimal incremental cost. We have high incremental adjusted EBITDA margins, with $0.45 to $0.50 of every incremental revenue dollar dropping to adjusted EBITDA. Capital requirements in this business are minimal, comprising mostly of capitalized software. And last, we have favorable working capital dynamics with days sales outstanding of approximately 60 days, and days payable outstanding of approximately 50 days.

Turning to an overview of our most recent quarterly performance on slide 11. The dynamics of our industry are attractive, and we continue to benefit from the trends that Josh mentioned as well as the execution of our growth strategy during the third quarter. We reported revenues of $169.6 million for the quarter, a company record for quarterly revenues. This was a 44% increase compared to the third quarter of 2020, including 43% organic constant currency revenue growth and 1% due to foreign currency. There was no impact to results from acquisitions in the quarter. The $52 million revenue increase included 33% of base growth, including cross-sell, upsell, net of attrition, and 11% of new customer growth. Revenues in our US business grew 41% compared to the third quarter of 2020. We saw double-digit revenue growth in all our industry verticals with particularly exceptional results in our healthcare and financial and business services vertical as we executed our growth playbook, and the US economy continued its recovery from the impact of the COVID-19 pandemic.

Approximately 18% of revenue was generated outside of the US in the third quarter of 2021 compared to approximately 16% of revenue generated outside the US in the third quarter of the prior year. Year over year, international revenue grew by 52% on an organic constant currency basis demonstrating our growing international presence. All our international businesses saw strong growth in the third quarter in large part driven by our market-leading position in gig, in the UK, and Asia Pacific.

As a result of our strong topline results and attractive incremental margins, third quarter adjusted EBITDA was $51.3 million, a company record for quarterly adjusted EBITDA. This represents a year-over-year increase of 69% compared to the third quarter of 2020. Adjusted EBITDA margin for the third quarter of 2021 was 30.3%, a 440 basis point expansion from 25.9% in the prior year period, reflecting incremental adjusted EBITDA margins of 40% in the third quarter and 44% September year to date. This was the company's second consecutive quarter with record adjusted EBITDA margins, proving that our net profitability scales as revenue scale. Looking ahead, our model should continue to drive adjusted EBITDA margin expansion as our revenues grow and we take advantage of automation and other cost optimization initiatives to further streamline our cost base.

We had adjusted net income of $31.6 million or $0.33 per diluted share in the third quarter of 2021 compared to adjusted net income of $11 million or $0.12 per diluted share in the third quarter of 2020. This represents year-over-year growth in adjusted earnings-per-share of 168%. This growth was primarily driven by strong year-over-year revenue growth and improved operating leverage. The Q3 effective tax rate was low due to a change in estimate triggered by tax elections related global transfer pricing policies. I expect the rate to return to 26% for Q4 of 2021 and full-year 2022.

Now I'd like to touch on historical performance and the resilience of our financial model. As seen on slide 12, from Q1 2020 to Q3 2021, our average year-over-year organic revenue growth has been 16%, including the drag from COVID-19 which impacted our business most significantly during Q2 and Q3 2020. Our revenues reflect a broad-based macroeconomic slowdown during that period, but performance bounced back very quickly in Q4 2020 as the economy opened back up. The return to growth in Q4 2020 set us up well for strong performance resulting in September 2021 LTM revenue of $597 million. Looking at our profitability trends on slide 13, you can see adjusted EBITDA has followed a similar path to revenues. Since Q1 2020, our average year-over-year growth in adjusted EBITDA has been 42%, with strong momentum in 2019 that was interrupted by COVID-19, followed by a strong recovery resulting in September 2021 LTM adjusted EBITDA of $163 million.

Turning to slide 14. Year to date, we've generated free cash flow of $58.3 million, normalized for one-time cash nonoperating charges related to the IPO. This was an increase of $46 million over the prior period and was due to strong revenue growth as well as permanent expense reduction implemented during 2020. Our Q3 2021 net leverage was 2.6x net debt to adjusted EBITDA, squarely inside our 2x to 3x net leverage target. We ended the third quarter with total debt of $612 million, and cash and cash equivalents of $192.4 million. Our cash balance is inclusive of $94.5 million of net primary proceeds we received in connection with our IPO. On November 1, we used IPO proceeds together with cash on hand to pay down $100 million of our first lien credit facility. With this prepayment, we have gross debt of $512 million, and we've reduced our interest expense by at least $4.5 million annually. Also, in connection with the IPO, we increased the borrowing capacity under our revolving credit facility to $140 million from $85 million and extended the maturity date from June 2022 to August 2026. At Q3 2021, available borrowings under the revolving credit facility, net of letters of credit outstanding, was $139.3 million.

Let's now turn to slide 15 to touch on our capital allocation priorities. First, we remain focused on internal investment opportunities: new product development and other projects that would increase organic growth, and continued improvement in operating leverage through robotics, process automation, and vendor network optimization. Second, we have a robust pipeline of acquisition opportunities. We are focused on targets that are either small US tuck-ins, provide us with increased scale in existing international markets or expanded in new geographies. And finally, we are committed to maintaining a strong balance sheet with a targeted long-term leverage ratio of 2x to 3x net debt to adjusted EBITDA absent any temporary variations as a result of potential future acquisitions.

On slide 16, we provide our guidance for full-year 2021, which is now three quarters complete with continued strong momentum so far in the fourth quarter. For 2021, we expect to generate revenues of $617 million to $622 million, representing year-over-year growth of 36% to 37%, and adjusted EBITDA of $171 million to $175 million, representing year-over-year growth of 71% to 75%. This guidance assumes a benefit of 100 to 150 basis points from fluctuation in foreign currency and no contribution from acquisition. Thus, our implied organic constant currency revenue growth for full year 2021 is 35% to 36%. As you all noticed, the guidance implies that Q4 2021 will continue the notable strength we have displayed through the first nine months of 2021, albeit at a more moderated pace, given that we will be growing over stronger Q4 2020. Q4 2021's revenue growth will be driven by favorable macroeconomic tailwinds, strong base growth, robust new client wins, industry-leading client retention, and continued upsell, cross-sell. Our guidance implies an adjusted EBITDA margin of 28%, which would be a 600 basis point expansion from 2020. Q4 2021 should continue to benefit from our strong operating leverage and cost discipline, and we continue to look for additional ways to optimize our cost base through savings and cost optimization initiatives, including the consolidation of our real estate footprint.

Finally, to help with your modeling, we are assuming 2021 CapEx of approximately $20 million, stock-based compensation expense of approximately $33 million, interest expense of approximately $29 million, and a share count of 90.1 million.

And now, I will hand it back to Josh to close with a review of our long-term targets.

Thanks, Peter. Slide 18 summarizes our many compelling growth opportunities to continue thriving in the growing background and identity markets. We have already touched on some of these, including our momentum and winning new clients, geographic expansion, and exploring strategic M&A. In addition to these, we see a significant opportunity to increase adoption of new services within our large base of existing clients. We have a flexible operating model that allows us to increase package density by cross-selling and up selling our products with minimal added cost. In fact, we are very successful in cross-selling to our clients, with over 55% of new clients in the US purchasing more than one product line, and we see the opportunity to further increase package density with products such as identity and fingerprinting. We also continue to introduce innovative new products to the market. One such example is a new COVID-19 vaccination verification solution we launched in the third quarter. We are also expanding our identity verification offering with our identity wallet and by recently securing an exclusive partnership with FINRA to serve as the agency's designated fingerprint provider. This is an exciting opportunity for us as FINRA has outsourced both their fingerprint collection and FBI channeling work to us. The partnership has not yet contributed to our strong results and is in transition to go live soon.

Let's turn to slide 19 to close our prepared remarks with a discussion of our long-term targets. Longer term, beyond 2021, we are confident in our targeted annual organic revenue growth rate of 9% to 11%, with adjusted EBITDA margins ultimately expanding to 29% to 32% or more over that period. The 9% to 11% target includes 2% to 3% base growth, 4% to 5% upsell/cross-sell, and 7% to 8% from new business; offset by 4% to 5% from attrition. We plan to provide guidance for 2022 when we report our fourth quarter results in February, but we feel very good about our momentum heading into next year as we close out what has been a record year of revenue and profitability thus far in 2021.

To close my comments, we are thrilled with the trajectory of our Company and our Q3 results. We have further runway for growth as we continue to execute on our strategy and drive new client wins, expand our business with existing clients, and enhance client retention. We will continue to lead the industry with our people-first approach, global scale, geographic and verticalized delivery model, and comprehensive and differentiated solutions. And finally, I want to thank the entire Sterling team for your incredible focus, can-do attitude, and care for our clients, the qualities which truly make Sterling such as special place. That concludes our prepared remarks. At this time, operator, please open up the line for questions.

(Operator Instructions) George Tong, Goldman Sachs.

Congratulations on your first earnings release as a public company. So if revenue grew 44% in the quarter year-over-year, can you deconstruct that into how much of the growth came from new customer wins, base growth, cross-sell/upsell among existing customers and what customer attrition was? And then if you do report it separately, how much growth came from APAC?

It's Peter. I am going to address this consolidated so APAC will be included in the numbers I cover. So if we think about the base growth of 33% that we disclosed in the call, that's net of attrition, and you should think about attrition at the low end of our target range to 4% to 5%, so let's say base growth of 37%. And then there are two components in there that you should think about. One is volume growth, and the other is cross-sell/upsell. Our target for cross-sell/upsell is 4% to 5%, and for the quarter we well outperformed that target. Our target for base growth volume is 2% to 3%, and we significantly outperformed that target. It is driven a lot by the rebound post COVID.

Okay, got it. The gig economy was a significant tailwind that results in the third quarter. Can you remind us how much gig revenues contributed to revenues outside of the US, and then within the US? And what trends you are seeing broadly in the gig vertical?

Sure. We do not disclose that information publicly, but what I can share with you is some additional information from prior discussions. We talked internationally that you should think of our three regions, EMEA, Canada, and APAC, as 1/3 and 1/3 and 1/3. I would say with our 3Q results printed, EMEA now sits at 40%, Canada at 30%, and APAC at 30%. So you are seeing the growth in EMEA being driven by gig along within APAC.

And George, it's Josh. I'll just add, we are very excited about what we are seeing in our global gig business, particularly continuing in Europe and in Asia Pacific, with focuses throughout the Asia-Pacific region, and we are just now starting to move into Continental Europe. So if you think about our international growth, it's really driven by the combination of gig and enterprise clients, both growing significantly across our regions. And in the US, we do not disclose the specific number, but we are seeing good growth in gig and expect that to continue going into the future.

Andrew Nicholas, William Blair.

I appreciate you taking my questions. My first one, I was hoping you could expand a little bit more on the FINRA contract and that relationship. I think two questions within that. One, if you could size the incremental revenue or the impact from a financial perspective that you'd expect from that relationship. And maybe more importantly, number two, what the follow-on effects are of this relationship in terms of your go-to market strategy, your ability to pitch, I believe, financial services companies in particular, and what the impact to new client logos or new client growth could be from this relationship relative to pre-contract.

Thanks, Andrew. It's Josh. Thanks for the question. We are very excited about this FINRA partnership. It has been in the works for quite some time, and we do expect it to go live soon as we are in the implementation phase right now. I think you are nailing exactly the two parts. So first, the way the relationship works is that every single fingerprint that is going to be processed for FINRA and channeled to the FBI would go through Sterling regardless of whether we directly collect that fingerprint or if it's collected by another provider, including all of our competitors. So in that sense, we are like a tollbooth, from a revenue perspective, for all fingerprints that have to be processed for FINRA and channeled to the FBI. We haven't disclosed, and won't as a regular practice, disclose the financial impact from any single deal, but you should expect this to be into the seven figures for sure.

And then the second part is since all financial institutions will be processing their FINRA fingerprints through us, that does in our mind give great reason for them to think about Sterling as their background screening provider. And we've already seen our pipeline grow from financial institutions. And our financial services vertical is seeing great growth, and has a really strong pipeline going into next year.

Great. That's very helpful. And then for my follow-up, I was just hoping you could spend a little bit more time on the M&A environment right now, what the opportunity set looks like. I know you disclosed or included in your slides and in your prepared remarks what some potential areas of interest might be but didn't know if you could provide some color on competitiveness of those processes right now, how easy it is to get a reasonable price in this market, or any other color you could provide on the M&A outlook.

Great, thanks for the follow-up. So we are excited about the M&A prospects. We expect the industry to continue to consolidate both organically and inorganically as we continue to win organic deals from smaller mid-sized players as well as larger but also from the other large players. And again, the three large players are only probably less than 25% of the US market, let alone globally. So that is exciting to us. In terms of inorganic, we actually have a strong pipeline of things we're looking at. Obviously nothing that we can share today, or we would have. But our focus is going to be on those tuck-ins in the US where we see -- and in other markets where we have a significant scaled presence already. We see that as a great opportunity for us to have synergies and to improve the profitability of those smaller players. And there are a number of those out there.

In terms of competitiveness, again, for us, it's much more about fit. I think where we see the fit, we think we can win those deals at prices that makes sense for us. We haven't seen those prices really change much in the last four, five years. Then in terms of other areas that we would look at, if there is a chance to gain a foothold in a market where we don't have scale and [bias-scaled] assets, we would certainly look to do that; that's something that would be exciting for us. And then in other markets around the world where we have already a scaled presence, anything that we could tuck-in there to continue to grow given the outpaced growth, the 52% that we shared outside the US organically, we think we can service those providers even better. So we are really excited about the opportunities and hope to have things to share with you in the future.

Toni Kaplan, Morgan Stanley.

Congrats on a strong quarter. You mentioned the 3- to 5-year target for revenue of 9% to 11%, and you talked about the drivers that got you there. Where do you see the most upside to those drivers? Where do you see the most risk? What are the innovations you're most excited about to drive that growth?

Thanks for the question. It's Josh. A couple of thoughts, and then maybe Peter has more to add. But I think first of all, we over performed on all of those drivers in the third quarter and also for the year to date. We do think there is potential on all of them to do better at any given period. For us, when we look at the things we most control, it is the cross-sell/upsell of new business generation and continuing to improve on our retention. So I think when we think about new business, that's a metric where we are winning more than our fair share, growing faster than the market in our view, and that is an area we think there is potential to continue to outpace. Secondly on cross-sell/upsell, particularly when we think about solutions in the identity space, adding those identity checks upfront in background screens as well as adding other services on the post hire monitoring, so increasing that package density is something that we see is in our control. Again, whether our clients grow in their base is not in our control; that is up to their own decisions. So we think the two where we control are the areas that we are most focused on being able to improve those numbers into the future.

I will remind you, we have shared previously that roughly 90% of our revenue is in the pre-hire screening space, with the other 10% split between the post hire monitoring and the identity space. And that our going forward long-term targets that I provided really do not reflect a shift in that mix, although we do expect over time to see the post hire monitoring and the identity grow faster. And when we hit those inflection points, those would provide upside and you would see it both in the cross-sell/upsell through package density and in the acquiring new customers where we have capabilities that others don't have in those spaces.

I think, Toni, the only thing that I would add to that is for [George], we unpacked the base growth for the quarter. So if you think of base growth at 37% and the two components being volume, cross-sell/upsell, significant over performance on both of those. But what's really interesting there is the cross-sell target we gave you of 4% to 5%, that we are significantly over performing that. And then new clients, we gave you the 7% to 8% as a target, and the quarter delivered 11%. So just proof points behind what Josh shared.

Terrific. And then just for my follow-up, I was hoping you could talk about sector exposure and where you think you might be over, underexposed versus peers. You mentioned the gig economy being a potential tailwind for you and also, I imagine e-commerce as well. So how do you feel like you are exposed to either those two particular areas or others as well, whatever you think might be helpful for investors to understand you versus peers?

Great. Thanks, Toni. And I will say one of our things is we focus on us. We think we are the best provider. We think we are winning our fair share. And we have chosen our verticals and our geographies based on where we think we've got a proposition that's a winning formula. So we think in all of our verticals, we have that chance to win. We aren't discussing exact exposures in verticals, but as we shared in our opening remarks, we don't believe we are overexposed in any individual vertical and we are not as concentrated as others are in the space, which we think is actually one of our benefits in terms of being well-balanced to take advantage of different cycles. Maybe I'll have Peter just share a little bit about where we saw some oversized performance.

Sure. So really pleased with the performance for the quarter over the prior year quarter. As we shared, double-digit growth across all our verticals in the US. But we did note exceptional performance in healthcare and financial and business services because those were areas when we launched the strategy at the beginning of 2019 that we were focused in growing in, so really pleased to see the execution against that strategy.

(Operator Instructions) Jason Celino, KeyBanc Capital Markets.

Great, thanks for taking my questions. Maybe building off that previous question, it looks like we are seeing some very nice recovery here. As we think of further potential upside from more recovery, what areas maybe have you not seen or industries not seen fully recovered yet, which still could?

Jason, it's Josh. Maybe I'll go first and see if Peter wants to add. I think our view is that part of this is recovery, but a lot of this is trends that we were seeing in 2019 and the first two months of 2020 before we entered COVID. So when you look at our overall growth rate by quarter, as Peter shared, I think he said [16%] for the period starting in the beginning of 2020. So for us, this is really where we kind of expect it to be. And so in terms of full recovery, I think we are seeing things like hospitality begin to ramp up, so we have a number of clients in the restaurant, hotel side businesses. We are just seeing that coming back online. There is probably more there. I think again, even in the areas that Peter shared, like financial and business services, we think there is good tailwinds there as those entities were pretty slow to hire throughout the period and are still poised to ramp back up. But I think in our view, there is plenty of tailwinds whether you call it from recovery or from our general business momentum across all our verticals and all our regions, and that is what we are seeing in the quarter. It is what we have seen year to date, and it is what is embedded in our strong guidance for the year as well as the assumed Q4 guidance that underlies it.

Perfect. And then maybe one on identity verification. When we think about the industries that could find these solutions to be most compelling -- said another way, how should we think about the industries that could be the early adopters here?

I think it's both the geographies and industries to think about. First of all, anywhere where remote work is a key element of the strategy going forward, and we think that that is going to be increasingly true in all service sectors. Obviously, restaurants need to have you in person and perhaps other hospitality sectors do. But when you think about other sectors, any time you could have remote work where you are not even maybe meeting the person in person when you hire them, we think that identity verification plays a very key role. Also in markets outside of the US, if you think about right to work for example in the UK, if you think about our B2C model that we have in Australia, these are areas where identity has a very strong play. And we are starting to see this come up in high-volume hiring areas, whether it would be warehousing or delivery type services, and those are both gig and non-gig industries. So in those places where you're trying to hire so many people quickly, having that identity verification happen upfront can save you a lot of time and money as you're trying to onboard people. So we really see this as broad based.

And then even on the industries that are going to be face-to-face, if you think about the United States you are required to do an I-9 after somebody starts. That's a regulatory requirement that we expect to continue. But honestly, you've already spent all the time and money on the background check for that person where you could have done that confirmation upfront. So our view is it makes sense everywhere, but hopefully my answer gives you a little bit of color on the places that we think might adopt it sooner and where we are seeing the pipeline build earlier.

Mark Marcon, Baird.

Congratulations on the strong quarter. I'm wondering if you could talk a little bit about the source of new logos. They have really impressive contribution in terms of new sales. Did you see most of those come from some of the smaller players that would be naturally disadvantaged? Or how would you characterize that? What was the split in terms of international versus domestic in terms of the new logos?

Mark, great to hear from you this morning. We don't provide the split internationally or by verticals, but I would say that the growth in new revenue we saw across the business, so really contributed to growth through the verticals and in all the regions. So really healthy performance across the globe there.

Mark, it's Josh. I think I'll just jump in. That's by design. So when we established our vertical and geographic go-to market approach and we have our general managers and managing directors managing their business, they have targets around each of our growth metrics. They have targets around new business, they have targets around base growth, they have targets around cross-sell/up sell. So it is very much required for them to beat and hit these targets that we've given them which add up to what we provide, and it's part of what gives us confidence in the long-term numbers that we've provided to you. So as Peter said, it was broad-based; there's not a particular thing that stands out in the quarter, which is great because it's good to see that happening across the business.

Great. And then one follow-up just on that is when we were going through the IPO process, there's a lot of discussion about how outside of the big three, most of the competitors are fairly disadvantaged in terms of lacking scale or breadth or technology. I'm wondering, did a lot of the new logos come from those incumbents or were some of the incumbents the other, quote unquote, peers?

It was both, Mark. We did take logos from our large peers, our mid-sized peers, and our smaller competitors as well. So for us, we are not only focusing on one competitor or another. We are focusing on the clients we think we can serve well, and we strongly believe that we can serve every client better than their current provider if they're not with us and so we just try to get the opportunity to show that to them. So it really does come from all of the competitors. And the one other point I would make, some of the wins come from greenfield, from white spaces where they are not currently using someone and we are able to go in and replace on us work that the client is doing, particularly outside the US; we see that a lot.

Great. And then you obviously had a tremendous quarter on the international markets, particularly EMEA and the UK. You highlighted in the past how well the UK was doing in the localized approach. I'm wondering if you can give us an update in terms of what other markets are approaching the same level of infrastructure and scalability that the UK did.

So I would say, Mark, we've got the same level of infrastructure in the three markets that we are in today. And we believe that what we have, we can scale the business from. We can do that without adding additional costs. So I would say that in our Asia Pac business, two things that were pretty exciting was expansion into New Zealand and expansion into India. So just an example for you of where we are leveraging our current footprint to win new business and expand.

Great. And then your target leverage is already at 2x to 3x, so you are already there. How should we think about capital allocation? Should we expect you to pay down even more debt? Or from an acquisition perspective, which markets seem like the most interesting?

Yes, so we did -- we are at a 2.6x leverage ratio, which is well within the target of 2x to 3x, and our plan is to really sit there, right? When I think about capital allocation strategy, first priority will be investing in organic growth. We still have a lot of opportunity to invest in new product and drive the organic growth of the business. Second, we will be focused on M&A. As we covered during the call, really three areas there that we would be focused in. One would be US tuck-ins, the other would be things that provide us increased scale in existing international markets, and the third would be expanding into new geographies. And then lastly, making sure that we maintain that leverage ratio of 2x to 3x. We do have quite a bit of dry powder available to us right now with about $100 million on the balance sheet plus the $140 million of the revolver, and that puts us in a place where we can continue to evaluate and make the right investments for the company going forward to drive the growth.

And probably the other thing worth mentioning as well is S&P did upgrade us this morning, so not sure if you saw that come across the Newswire, but they took us from a creditwatch positive B to a B+ stable. So really thrilled to see the recognition from the rating agencies of the strength of our balance sheet, and expect maybe other rating agencies would follow.

Shlomo Rosenbaum, Stifel.

Hi, this is Adam on for Shlomo. The significant EBITDA margin expansion in the quarter, is this all from incremental revenue drop through or were there other significant items at play as well, like increased automation or data cost sourcing?

Yes, I would say this is purely from flow-through and the ability for us to grow revenues without growing OpEx nearly the same level. So we have a 40% flow-through for the quarter compared to the prior quarter last year.

It's Josh. I would say we also do have the opportunity through initiatives to continue to expand margins and improve the drop through over time based on investments we think we can make and additional automation and some other tactics that we have. And we've started making those and we expect to see that, and we look forward to sharing that with you on future calls.

I would say we are thrilled at a 30% adjusted EBITDA margin for the quarter. So as we mentioned, it is a record for the company.

We have no further questions today. So this concludes the Q&A session and also today's call. Thank you all for joining Sterling's third quarter 2021 earnings call. Please enjoy the rest of your day. You may now disconnect your lines.