Sterling Check Corp. (STER) Q1 2022 Earnings Call Transcript

Sterling Check Corp. (STER 0.33%)
Q1 2022 Earnings Call
May 10, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning or good afternoon, and welcome to the Sterling first quarter 2022 earnings call. My name is Adam, and I'll be your operator today. [Operator instructions] I'd now hand you over to Judah Sokel to begin. So Judah, please go ahead when you're ready.

Judah Sokel -- Vice President, Investor Relations

Thank you, operator. Welcome to Sterling's first quarter 2022 earnings call. Joining me today are Josh Peirez, chief executive officer of Sterling; and Peter Walker, chief financial officer of Sterling. The files we will reference during this presentation can be accessed on Sterling 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 risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our recently filed Form 10-K 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 for the most directly comparable GAAP measures are in the appendix of the presentation and in our earnings release issued this morning. I will now turn the call over to Josh Peirez.

Josh Peirez -- Chief Executive Officer

Thank you, Judah. Good morning, and thank you for joining us. Sterling's first quarter of 2022 was exceptional and continued the momentum we saw throughout our record 2021. Starting with Slide 4, our results this quarter were stellar.

We reported approximately 38% revenue growth, including organic constant currency revenue growth of 30%, even as we laughed a strong 17% revenue growth in the first quarter of 2021. We also saw 8% growth from our EBI acquisition, which has been outperforming our expectation thus far. We saw a double-digit organic revenue growth in almost all of Sterling's regions and verticals, and we are particularly proud of the 10% growth we saw from new business in the quarter. The U.S.

saw particularly strong results at 46% growth, and international grew low double digits on a constant currency basis, in line with our long-term expectation, and 24% when normalized for one-time revenues in the UK during the first quarter of 2021. Importantly, we are not solely relying on cyclical trends to drive our strong results. We are executing on our playbook and winning new logos at a fast pace and outperforming our cross-sell, upsell targets due to our innovative product offerings and reputation for customer service excellence. Base growth also continues to be a contributor to our strong results.

These first-quarter results are excellent but are not new for us. As shown on Slide 5, this was Sterling's fifth consecutive quarter of double-digit revenue growth and our seventh consecutive quarter of sequential revenue growth in dollars. It's been just a few years since we launched our strategy at the end of 2018, and we have hit our stride with consistency and momentum that we expect to continue. As a result of our strong first quarter and confidence in our outlook for the full year, we have increased our full-year revenue and adjusted EBITDA guidance while also being mindful of the macro-environment.

For 2022, we now expect to generate revenues of $770 million to $780 million, representing year-over-year growth of 20% to 21.5%, adjusted EBITDA of $210 million to $216 million, representing year-over-year growth of 17% to 20.5%, and adjusted net income of $112 million to $115 million, representing year-over-year growth of 21% to 25%. We continue to feel great about our playbook and execution. At the same time, we are cognizant of the near-term recessionary risks and the impacts an economic slowdown could have on the overall economy and our industry. We are not seeing these cyclical pressures on client orders and revenue at this time, but our outlook accounts for a potential slowdown from inflationary or recessionary pressures.

We believe that our continued success in new business, upsell from new products such as identity, and client retention, make us a resilient company through different cycles. Moving to Slide 6, we continue to refine our corporate strategy and are committed to delivering shareholder value by executing on the growth opportunities in front of us. We are focused on our aspiration to be the world's most trusted background and identity services company and have a number of key execution elements to help us achieve our goals. These include increasing our revenues with existing clients, acquiring new clients, growing market share internationally, and utilizing M&A to supplement our organic revenue growth among the other focus areas on Slide 6.

We believe we are well-positioned and differentiated from competitors due to our deep market expertise, unrivaled client service, best-in-class data, and seamless workflows. Turning now to Slide 7. During the first quarter, we executed against our growth strategy through a continued focus on innovation and execution. Today, I will discuss two areas of innovation, seamless workflows and our identity offerings.

Peter will speak about our new business growth and M&A execution in the course of his financial discussion of the quarter and guidance. Let's start with innovation. Innovation has always been a part of our DNA. We pioneered criminal fulfillment technology, arrest record and incarceration alert products, post-hire monitoring capabilities, AI-enhanced record review and validation processes, the industry's only proprietary technology in a single-source U.S.

nationwide fingerprint network, and identity verification combined with background checks. Sterling's dynamic culture of improvement and innovation is as strong as ever. We are constantly modernizing our platforms and tools, and we believe we are the best-in-class across our candidate and client experiences. Sterling's Candidate Hub and Client Hub remain a big reason for our growth since 2019.

These simplified and streamlined experiences help us win new business and enable us to have strong retention of our existing client base. The Sterling hubs are mobile-optimized and designed to allow Sterling to collect the information necessary to process any combination of criminal checks, identity verifications, drug and health screening, and education and employee e-verifications. Moreover, the hubs are scalable to serve our global client base and flexible to adapt to changing dynamics across industries. Looking at Slide 8, we offer a modern and mobile-friendly candidate experience.

Over the last few years, we have focused on optimizing the interface of the hub to be intuitive and easy to use, creating a modern streamlined experience that helps candidates manage their background screening tasks with ease, and while on the go. In fact, 68% of candidates use their mobile device throughout the screening process, and candidates can complete the process in around six minutes. Candidates can provide new information necessary to complete screening and upload documents with ease from any device. As part of our culture to constantly modernize, we have made several recent feature enhancements to the candidate experience.

In the first quarter, we added a new self-service Check My Status Tool, which provides candidates with a quick streamlined way to check the current status of their background check, including target dates for completion by email notification. We have also continued adding new preferred languages to help more candidates complete screening tasks with ease. With the recent additions of Brazilian Portuguese, Bulgarian, Dutch, Italian, and Turkish, we now fully support 15 languages in our core global platform, while supporting 35 languages globally. We will continue to add more languages to our candidate experience, as it is integral to our international expansion strategy and distinguishes us from competitors.

Finally, we are continuously striving to meet Web Content Accessibility Guidelines with feature enhancements to our candidate experience that help improve inclusion by serving a wider audience. We are proud to offer a candidate experience that's accessible to all people, regardless of technology or ability. Moving to Slide 9, our modern client hub is designed to help clients manage screening tasks with ease through an intuitive order dashboard and front and center real-time order status and results. Client Hub is designed with our clients screening workflows in mind, and we believe we do this more effectively than anyone.

Clients can monitor the progress, distribute work across their teams, view reports, and most importantly, review candidates and get them into their roles, all while remaining compliant. This is important to all our clients but especially important to our high-volume clients. Recently, we have made several innovative enhancements to our client experience, which have received positive reviews from clients. We introduced a new data comparison feature that offers a quick easy way for clients to detect candidate data differences between information provided to our clients and what candidates provide to us.

Clients can easily confirm the most accurate and up-to-date candidate data, accelerating time to hire. Clients are thrilled that a previously manual process is now simplified, saving them valuable time. We also introduced an easy-to-read overview tab that streamlines how searches appear in the client hub. With this enhancement, clients can view a high-level summary of all services associated with an order, including completed searches, searches currently out for fulfillment by Sterling, and searches that are still in a draft status.

This streamlines the client experience by making it easier to locate search details and manage as the candidate moves through the hiring process. Turning to Slide 10, identity verification is another great example of our innovation-led approach and first-to-market solution. So I thought I would share some updates on our traction today. As we discussed in our last earnings call, we've used Sterling Identity as a strategic pillar on equal footing to background screening, and we are very excited about our early traction.

Our exclusive partnerships with FINRA and ID.me are significant competitive differentiators, and we only started capitalizing on these opportunities at the end of 2021. Several secular trends continue to drive demand for identity verification services, including the increasing number of fraud and identity theft globally, and the rise in remote or hybrid work models. In order to capitalize on these macro-trends, we are focused on innovative product development and strategic alliances. As FINRA's designated fingerprint provider, all financial services industry fingerprints must now flow through Sterling.

Clients can continue to use their existing provider for collection, in which case we still process and channel the fingerprints on FINRA's behalf. Those that switch and come to Sterling directly benefit from the modern consolidated experience, gaining access to our convenient nationwide biometrics network and streamlining their candidates experience through a single application process to launch a background check and biometric validation. The benefits of switching are resonating with prospective clients, as around 30% of FINRA's 3,800 member firms have voluntarily chosen to move their fingerprinting services to Sterling. We are thrilled at the initial adoption rate and expect this trend to continue.

Even more importantly, the FINRA deal is a testament to our leadership in the identity space and is serving as a strong lead generation tool within the financial services industry. When prospect switched to fingerprinting directly with Sterling, there's an opportunity to upsell Sterling's background screening offerings. We are just getting started on this front and expect to have exciting updates to share with you in coming quarters. We've also had some exciting early traction with identity verification in our ID.me partnership where we can increase our package density through the adoption of identity services.

After running pilots with a few key enterprise clients during the summer and fall, we recently went live with our first handful of enterprise clients. The number of clients choosing to add identity verification to their background screening packages is growing, and we made great strides during the first quarter in optimizing our identity workflows, designing the support models and creating automated customizable reporting to lay the groundwork for growth over coming quarters and years. We also increased our focus on educating the market in recent months. There is a common misconception among most of our clients and prospects that identity verification is already happening as part of a background check.

When clients are made aware that it is not, the interest of adopting identity services is significant. As an example, one large financial services client recently had instances of bad actors purposefully throwing off social security numbers and other key data screens in an attempt to evade the background check. Several other clients have reported cases of one person going through a Zoom interview and a completely different person showing up for work. We are partnering with clients like these and more to implement ID.me, and early results have been very positive.

During the first quarter, we saw significant momentum in identity verification. We went live with several new enterprise clients. One deals with several new enterprise clients which will go live over coming months and have a deep pipeline of other firms with whom we are in serious discussion. In terms of the economics, the addition of identity services to existing packages is currently driving a greater than 10% increase in package price, with increasing margins.

Given that we are in the very nation stages of adding identity to our background packages, we are very excited about the opportunity this presents for our business. In conclusion, we entered 2022 with a lot of enthusiasm, and thus far, we have been executing ahead of plan. We are confident in our ability to execute organically and to build for the future, with our belief that a focus on innovation and new business wins will pave a path toward continued sustainable and profitable organic revenue growth for years to come. And now, I will hand it over to Peter Walker, our CFO, to take you through our financial results and updated 2022 guidance.

Peter Walker -- Chief Financial Officer

Thank you, Josh, and good morning, everyone. Turning now to an overview of our most recent quarterly performance on Slide 12. During the first quarter of 2022, we reported company record quarterly revenues of $192 million. This was approximately 38% increase compared to the first quarter of 2021, including over 30% organic constant currency revenue growth, and 8% contribution from M&A, partially offset by 70 basis points drag due to foreign currency translation.

The organic revenue increase included over 20% of base revenue growth, including cross-sell, upsell, net of attrition, and approximately 10% of new customer growth. We are very encouraged that our quarter strong results are driven by all four of our revenue drivers performing at the high-end or above the target range. We are seeing significant success in the areas of our business within our control. Our growth from new logos remain strong with approximately 10% revenue growth during the quarter and many sizable deals rolling in overcoming quarters.

Notably, the first quarter's revenues from new business was a solid sequential increase compared to the fourth quarter of 2021. As part of our strategic transformation over the past few years, we've invested in enhancing our sales and go-to-market strategies to be well-positioned to take market share in the fragmented background screening market, and those investments continue to bear fruit. We've also seen encouraging progress in our cross-sell, upsell strategy, where we've been consistently delivering at the high-end, or above our 4% to 5% target range, with continued encouraging adoption of newer products and features, such as identity verification, fingerprinting, and post-hire monitoring. Prospects and clients value our innovation-led approach to product development, and we've rolled out many new tools and features to our platform, which increase customer satisfaction, clients stickiness, and package density.

Base growth also continues to be a significant contributor to our results due to a strong labor market and secular tailwinds, such as remote work, millennial churn, and continued growth of the gig economy, which are driving increased labor turnover. It's not enough to simply win new logos and increase wallet share with clients. We are laser-focused on keeping our clients and we've seen consistent improvement in our gross retention rate since we launched our strategy in 2018. Our investments in technology and product, coupled with our best-in-class turnaround times and customer-first focus, drove more than a 200 basis point improvement in our last 12 months' gross retention rate to 96%.

A significant achievement, even as we still see room for improvement. Moving to revenues by region, revenue in our U.S. business grew by robust 46% compared to the first quarter of 2021. We saw broad-based strength across our industry verticals, with particularly exceptional results in our gig and industrials verticals.

As we executed our growth playbook and the U.S. economy benefited from strong macro-economic factors. In recent years, we've been strategic in selecting high-growth verticals with significant opportunity for our business. We saw those efforts pay off during 2021 and the momentum has continued during 2022.

Revenue in our international business grew by 11% on an organic constant currency basis, solidly within our long-term expectations with three points of impact from currency fluctuations. As we anticipated, the first quarter of 2020 solid results included a lower growth rate in Europe, specifically driven by one-time COVID revenues from a government agency in Q1 of 2021. Normalizing the prior-year period for this non-recurring item, internationals organic constant currency revenue growth during the first quarter of 2022 was 24%, and our total company's revenue growth was 41%. The 8% percent in organic revenue growth during the first quarter reflects the contribution of EBI, our November 2021 acquisition.

We're very pleased with this performance as it was above our expectations, driven by strong base growth and client retention. We've increased our four-year outlook for EBI contribution to revenues. I'll provide more color on that shortly. Due to our strong top-line results, first-quarter adjusted EBITDA was $47.6 million representing a 29% year-over-year increase compared to the first quarter of '21.

Adjusted EBITDA margin for the first quarter of 2022 was approximately 25%. In line with our expectations, and with the guidance we provided during our fourth-quarter earnings call, as anticipated, our attractive underlying incremental margins were balanced by a full quarter of public company costs, EBIs lower margins, and some incremental investments to staff ahead of new business coming online. We expect the impact of margins from public company costs and EBI will continue during 2022, we will moderate over the course of the year as we lap our September IPO, as well as integrate the EBI acquisition and realized cost synergies. We had adjusted net income of $24.4 million or $0.25 per diluted share in the first quarter of 2022, representing year-over-year growth and adjusted earnings per share of 47%.

This growth is primarily driven by strong year-over-year revenue growth and operating income. Our adjusted effective tax rate in the first quarter was 30% due to a discrete tax item, and we expect the rate to be in the range of 27% to 29% for the full year, including approximately 26% to 28% for the balance of 2022. Turning to Slide 13, free cash flow in the first quarter was a usage of $2 million. This was in line with our internal expectations and driven by return to our normal cadence of cash bonus payments, including overperformance for 2021 versus significantly lower payments in the first quarter of '21 as well as the timing of interest in tax payments in the quarter.

We continue to expect full-year free cash flow conversion of adjusted EBITDA of 45% to 50% similar to the rate achieved in 2021. Our net leverage at quarter-end was 2.4 times net debt to adjusted EBITDA, squarely inside our two to three times net leverage target. Our net leverage continues to decline due to our strong adjusted EBITDA growth and is poised to continue declining absent any future M&A. We ended the quarter with total debt of $509 million, cash and cash equivalents of $44 million, and approximately $140 million available under our revolver, providing us with ample capacity to execute our growth strategy reinvesting into organic revenue growth and pursuing M&A.

In terms of capital allocation, our priorities have not changed since the time of our IPO, investing into organic revenue growth, pursuing M&A, and maintaining a healthy balance sheet. While our top priority remains organic revenue growth through share gains and market share, we see a compelling opportunity to complement our strong growth with a targeted, disciplined approach to strategic M&A. We expect market consolidation to accelerate over the coming years, and we plan to be a key player in that dynamic. Sterling has a successful history in M&A, completing 11 deals in 11 years, including EBI that I will speak to in a moment.

Many of these transactions laid the groundwork for the healthy version of Sterling that you see today. After taking a three-year pause on M&A from 2018 in order to focus on our strategic transformation, there are several reasons why Sterling is now well-positioned to once again be an active player in M&A. First, our core business engine is firing on all cylinders with very strong organic revenue and EBITDA growth demonstrating our belief that Sterling strategy, customer service, and operations are best in class. Second, our tech transformation is mostly behind us, enabling us to integrate deals rapidly through automation and API integration.

And third, the deal pipeline has expanded with some targets looking to exit post-pandemic. We reentered the M&A market with our November 2021 acquisition of EBI. And so far, the deal's been even more successful than we expected both from a business and financial perspective. We are in the midst of the deal integration and are very encouraged by the enthusiasm EBI clients to move on to our platform quickly in order to benefit from enhanced capabilities, and access to new products.

The success of this deal and integration provide us with confidence that we are well-prepared to pursue additional M&A. On Slides 14 and 15, we provide our updated guidance for 2022. For 2022, we now expect to generate revenues of $770 million to $780 million representing year-over-year growth of 20% to 21.5%. Adjusted EBITDA of $210 million to $216 million, representing year-over-year growth of 17% to 20.5%, and adjusted net income of $112 million to $115 million representing year-over-year growth of 21% to 25%.

As shown on Slide 15, our guidance includes full-year organic constant currency revenue growth of 14.5% to 16.5% a substantial increase from our previous guidance of 10% to 12%. For the contribution from the acquisition of EBI, we are trending toward the high end of our previous guidance of 5% to 5.5%. And we are assuming at least a 25 basis point drag from fluctuation in foreign currency compared to assuming no impact in our previous guidance. We've increased our full-year organic constant currency revenue guidance to reflect the excellent quarter we just reported an increase confidence in our outlook for the remainder of the year.

As Josh mentioned, we have not seen any significant impact from macroeconomic slowdown but we're being thoughtful in our forecasts, and have thus incorporated some possibility of economic slowdown into our 2022 guidance. If fears around recession ultimately failed to materialize in a meaningful way, that would represent upside to our guidance. Turning to profitability, our guidance includes adjusted EBITDA growth of 17% to 20.5% and implies a 2022 Adjusted EBITDA margin of 27.5% at the midpoint, which would be slightly below our 2021 levels and at the lower end of our previous guidance. As we said last quarter, 2022 underlying margin expansion of at least 100 basis points is being muted by the absorption of three quarters of public company costs and the acquisition of lower margin EBI prior to full integration.

Moreover, the benefits from margins from better than expected organic revenue growth is being balanced by a few items. First, we're seeing more contribution from the lower margin EBI revenues than originally forecasted. Second, we've recently hired additional staff earlier than our historic onboarding time lines. This ensures we can find staff in the challenging labor market while supporting the incremental business coming online.

And third, related to this incremental hiring, wage inflation for entry-level workers has picked up since our March earnings call. The year-over-year impact on margins for public company costs and EBI will be most felt at the beginning of the year, but should steadily alleviate as we go through 2022 and benefit from lapping the IPO plus EBI cost synergies. Additionally, the new revenues coming online, the impact from our advanced hiring will be normalized. As a result, we expect Q2 margins in line with our Q1 margins, and for margins to improve sequentially in the back half of the year.

Finally, turning to our adjusted net income growth guidance of 21% to 25%. We will benefit this year from reduced DNA, which should drive strong growth to the bottom line well in excess of our revenue and Adjusted EBITDA growth. We've taken into account the macroeconomic environment and increased our four-year interest expense assumption by $4 million, or roughly three points of adjusted net income growth. We remain encouraged by the leverage in our financial model, driving strong adjusted net income growth during 2022, even in the absence of Adjusted EBITDA margin expansion.

To further help with your modeling, we've included a page in the appendix with our assumptions for 2022. In closing, we are reaffirming our long-term targets on Slide 16. Over the next three to five years, we are targeting an annual organic revenue growth rate of 9% to 11% with adjusted even of margins, ultimately expanding to 29% to 32% or more over that period, as well as annual adjusted net income growth of 15% to 20% per year. We're thrilled with the trajectory of our company and the resilient business model we built.

That concludes the prepared remarks. At this time operator, please open the lines for questions.

Questions & Answers:

Operator

[Operator instructions] And our first question today is from George Tong from Goldman Sachs.

George Tong -- Goldman Sachs -- Analyst

So Sterling is at a strong start to the year. I guess, relative to your initial expectations, can you elaborate on the factors that drove the upside in the quarter? And if some of those trench continue or if you're expecting a mean reversion or any sort of reversal in some of the upside drivers.

Josh Peirez -- Chief Executive Officer

Thank you, George, it's Josh. So I think, you know, first of all, we're very pleased with our Q1 results. It is better than what our expectations were coming into the year. And we saw ourselves, you know, at the high end or beating each of our growth drivers, which is a continuation of the trend that we've seen actually for the last, you know, couple years, particularly last year, which is why we've had the five straight quarters of double-digit growth and the seven straight quarters of sequential quarter over quarter growth.

So we are continuing to see that trend as we look out over the rest of the year, as we said in the call, you know, we're seeing really no change to the macro environment for us. We're not hearing from clients any changes to their hiring plans. You know, I think if you look at, you know, the churn rates, a recent report from Gardner, for example, those are expected to be elevated for, you know, the foreseeable future and Gartner estimated it at a 20% increased churn rate, you know, over kind of pre-pandemic levels on a long term basis. So all those trends continue to be in our favor and we continue to benefit from those.

I think we just look at the rest of the year, and first of all, the comps do get tougher which, you know, is the result of our great year last year. And also as we said, you know, we are taking a little bit of a conservative view for the rest of the year, just in terms of the macro environment and making sure that if there is any pullback, we have room for that, but that's in our four-point raise to revenue guidance and our, you know, $30 million raise overall to our revenue guidance. So we feel very good about the year, feel good about the new guidance and, you know, expect to see our trends continue in terms of beating those metrics. Certainly, the ones that we control.

George Tong -- Goldman Sachs -- Analyst

Got it. Very helpful. And then secondly, you talked about seeing some inflationary impact on the business. Can you elaborate on how input costs at Sterling are trending in the current environment? And what type of pricing increases are you currently passing through to customers and do those increases fully offset the inflationary impact of input costs?

Josh Peirez -- Chief Executive Officer

Great. Thanks, George. So first of all, I think the main comment that Peter made in the presentation is that because of our strong revenue growth and our expectation that our revenue growth continues to be strong, we're actually making sure that we're hiring the people we need to support that revenue. And given how challenging the job market has been in terms of getting people on board, which is actually helping our business, we're hiring those people sooner than we normally would have.

So that's the biggest driver on our cost lines, versus actual inflation is actually just that hiring ahead that we're doing. We are seeing for those entry-level jobs, a little bit of wage inflation, which is also a factor that we're being aware of. We don't expect that to be a long-term impact on the business but it is short-term as we're bringing those people on in advance of the revenue by a couple of months more than what we normally would have. In terms of input costs, to the extent that we're seeing cost raise increases from a particular vendor, we pass those along straight through with a pass-through cost.

So there, it's just getting passed through it 100%. I think as we're seeing overall costs rise, however, and the things that we don't pass through, we are considering a price increase sometime later in the year. We've been taking a wait-and-see approach to be careful. Typically, in the past, we've done CPI level increases.

Obviously, that's a more significant number if we look at that, you know, given the current macro environment, and we'll be happy to come back and share more details on what we decided to do with that. But we would expect to be able to cover those cost increases that we're seeing through a price increase.

Operator

The next question is from Andrew Steinerman from J.P. Morgan.

Alex Hess -- J.P. Morgan -- Analyst

This is Alex Hess on for Andrew Steinerman. I want to talk about the 10% new logo growth in the quarter. Can you maybe drill down on some of the sectors where that's coming from? And then maybe is that more on the domestic or the international side and where's there still room to improve there in your view?

Josh Peirez -- Chief Executive Officer

Sure. So, you know, first of all, we're really excited that we continue [Inaudible] 10% and do logo growth. As you know, our long-term algorithm is 7% to 8%. So continue to overperform that and for first quarter the actual dollars of new logo were higher than 4Q.

And to answer your question about where we're seeing it, we're seeing broad-based new logo growth across the verticals and across our regions. So really strong performance across the business.

Alex Hess -- J.P. Morgan -- Analyst

Great. And then a quick follow-up on the EBI acquisition, can you maybe provide us some color on how that integration process is going and how you're sort of weighing the transports versus what's left of Project Ignite? And that's all from me.

Josh Peirez -- Chief Executive Officer

Great. Thanks, Alex. It's Josh. So first, I think we're very pleased with the overall EBI acquisition, particularly the client responses, they've seen our tools and our workflows and what we're able to bring to them.

And then, you know, once we moved them, our ability to upsell them, as they're getting excited about some of the offerings we have, that were not available on the EBI platform. What we've started to do is move some customers earlier than we expected, just based on where those customers, you know, really wanted to move more quickly to get those benefits. But we have not at this point changed our plans in terms of the 12 to 18 months that we gave in terms of getting to the full synergy run-rate and finishing the integration. We do continue to look at whether accelerating that versus transport makes sense.

But thus far, you know, we've really continued to move down the path we were in before the EBI acquisition. Most of our technical work for transport should be completed in Q2, and very early in Q3. So we want to finish that work first and then when it's just about which customers we move, we'll revisit that as we get into Q3 and update to that.

Operator

The next question is from Toni Kaplan from Morgan Stanley.

Greg Parrish -- Morgan Stanley -- Analyst

This is Greg Parrish on for Toni. Congrats on the strong results. I want to talk about your long-term 29% to 32% Adjusted EBITDA margin, and I appreciate all the factors you called out impacting this year. As we think about the pacing to get to those target to the sort of straight line, are you expecting to kind of hit the bottom end in year three from now maybe, you know, broadly, how should we think about that?

Josh Peirez -- Chief Executive Officer

Yes. So I [Inaudible] you up to what we've talked about in terms of incremental revenue flow through which we expect to be 45% to 50%. And as we can achieve that, that's going to move us forward in the Adjusted EBITDA targets, you know, from where we projected this year to be about 27.5% to the 32% plus. So we're not giving, you know, guidance by year at this point looking out, but with EBI being fully integrated sometime in 2023, we're closing out of the Ignite Project.

We can continue to see opportunities for margin expansion.

Greg Parrish -- Morgan Stanley -- Analyst

Great. And then from a follow-up, I just wanted to talk to Josh about owning data in the industry and maybe like why you have the strategy that you do and, you know, one of your competitors is taking a different approach. Do you think that's a competitive advantage or, you know, maybe the answer is no? But maybe you can kind of talk about, you know, why you have the strategy that you do and, you know, how was that versus your competitor?

Josh Peirez -- Chief Executive Officer

Sure. Thanks, Greg. So I think, first, I would point you to the strategy Slide that we have in the presentation where we do talk about a slight refinement to our strategy. And you'll note in there that one of the differentiators we call out is best-in-class data.

And so best in class data, to us, doesn't always mean proprietary. It means whatever is the most quality data, and most up-to-date data that can be delivered to our client. And in many cases, that's going to the primary source like a courthouse in the criminal, which is, you know, the overwhelming majority of what we do, or going to, wherever, you know, the most reliable source might be if it's a vendor. So that is key to us and it's a reason we win new business, because clients know that we're not skimping, we're giving them the best result that we possibly can.

But you'll also note that we talk about, you know, really leveraging proprietary data in our strategy statement, which is a slight adaptation from where we were, and part of what we're saying there is, longer term, we do think that we have very, very valuable data that could be used in other contexts, not even necessarily just in background screening. We have very, very large numbers of records, very, very specific data, similar to what our competitors talk about. We just don't give numbers that don't have real meaning in terms of value to our investors today or our clients. So, you know, when it's appropriate, we can use that, and certainly, as the data becomes, you know, a larger part of what we have in terms of records, we'll use that more frequently and that'll be something we'll start to talk about as a value in terms of being able to improve margins down the road.

But what we're more excited about is the opportunity to actually monetize that data outside of our core business and create another revenue stream that we believe could be at much higher margin. And you know, with my experience, from Dun & Bradstreet and in MasterCard, where I managed some of those data assets, what we have is really unique and could be valuable over time. So that's something as we think of a three to five-year strategy going forward and refine that now as a public company, we see that opportunity as something that we think can really benefit our shareholders over time as we find ways to monetize that. So I think, you know, I would just point you to that, happy to talk about it, you know, more in the future.

Operator

[Operator instructions] The next question comes from Andrew Nicholas of William Blair.

Andrew Nicholas -- William Blair -- Analyst

First question I had was just a follow-up to all the comments on M&A. Peter, I think, obviously, it seems like the pipeline's large and you have the capacity and the interest in doing deals. I'm just wondering, to the extent a slow-down does materialize over the second half of the year, I know your outlook contemplates some of that, how does that change the strategy there? Do you become more aggressive because there are targets with more openness to being acquired? Are you a little bit more hesitant to protect the balance sheet? Just any thoughts on kind of how that strategy would evolve in a less constructive macro backdrop?

Peter Walker -- Chief Financial Officer

Yes. So our perspective is if the economy does turn, and there's a, you know, stronger recession, and that would hit some of the smaller players, we really see that as an opportunity for us, because a lot of those players are currently looking to exit as it is now. It will probably cause more of them to want to exit and it will make prices softer. As you know, we have a very strong balance sheet.

We've got great discipline around evaluating targets and then integrating those targets. So I'd say that's upside for us.

Andrew Nicholas -- William Blair -- Analyst

Got it.

Peter Walker -- Chief Financial Officer

From an M&A.

Andrew Nicholas -- William Blair -- Analyst

That's helpful. Yes. And then, I think, in the Slide, you noted wanting to add identity to every background screen and create stand-alone identity-based offerings. Just on the first part, kind of adding identity to every background screen, obviously, that's an ambitious goal.

I'm just curious, you know, how do we get there? What verticals make the most sense to start with? I would imagine the thinner relationship would be a good starting point. But just kind of curious how you kind of see that evolving and materializing over the next couple of years, which verticals make the most sense, and where you would expect adoption to pick up first.

Josh Peirez -- Chief Executive Officer

Great. Thanks, Andrew. It's Josh. So I think, first of all, you know, it's obviously a bold aspiration, but it's one that we think makes sense for our industry.

And what we're seeing in early days, as I shared in the script, is good interest now from enterprise clients, a few that have started, a few that have signed contracts and haven't yet started and we expect to onboard later in the year, and a growing rich pipeline of interest. And it's something we're out there, you know, educating the market and teaching the market. And we happen to have, you know, currently two long-term unique, competitive advantages in terms of our relationships with FINRA and ID.me, and we think that there's others that we can go have as well and plan to go have from an alliance perspective. And so this is really just the selling motions of teaching clients, and having those proof points, which we're starting to see, which is why I shared two of those examples.

You know, what we're seeing outside the U.S. is a global gig. This is a big take up for them, really important. It's places where you tend to either not really see or employ someone directly in a physical location, so anywhere with remote work, which is obviously a growing trend, and anywhere that has high volume hiring, where they don't want to waste time waiting days for a background check to come back if the person is not actually who they said they were in the first place.

So we're seeing that kind of traction as well with, you know, warehouse retail you know, type work. So we actually think it's a very broad-based attractive offering. We're pleased to see the uplift of more than 10% on the package price when we do add identity. So that's a great proof point early in the game.

And we're also happy to see that, that comes at a higher margin as we've said, at the same time, when we're able to put that ID.me product in there. You know, with FINRA, that's a good example where we have some stand-alone offerings, where we may not be doing the background check, but are doing the biometric fingerprint validation in that case. We also have some examples of that with IDME, where we're just doing the identity verification without the background check with it. So we think, you know, on both fronts, those are just starting to gain traction.

We're very excited about it and we think that, you know, this is a good year to build that momentum. We built in a lot of the workflow tools and management tools we needed in the first quarter, which is great. And now we've got the clients coming on and those things tend to gain traction. And we'll probably hit an inflection point somewhere in the next, you know, call it 12 to 24 months, and we'll certainly update you as we got there.

Operator

The next question comes from Mark Marcon with Baird.

Mark Marcon -- Baird -- Analyst

Congratulations on the strong results. I'm wondering, with regards to the U.S., you mentioned gig and industrial were particularly strong in Q1. Was that due to new logos or an increase with regards to hiring within the existing base?

Peter Walker -- Chief Financial Officer

So Mark, nice to hear from you this morning. I mean, the U.S. had fantastic growth at 46% growth rate over 1Q '21. So I'd say, you know, overall, all the verticals perform very strongly and the new business wins.

We're consistent in terms of performance across those verticals.

Mark Marcon -- Baird -- Analyst

OK. Great. And then, in terms of the monthly trends that you ended up seeing during the quarter, were those relatively consistent on a year-over-year basis or was there any sort of fluctuations?

Peter Walker -- Chief Financial Officer

So, you know, we don't typically speak to monthly trends on the call. I would tell you that, you know, the seasonality for the business has shifted in terms of we no longer see that kind of peak in 3Q with a drop-off in 4Q. So as we look at the rest of the year, we should think about the fact that you're going to see, you know, the sequential revenue growth year over year, albeit against tougher comps. And you know, just a reminder, right, we've had seven consecutive quarters of sequential revenue growth, and depending on the assumptions you make in the model, given the guidance that we provided, you know, you should expect that to continue.

Mark Marcon -- Baird -- Analyst

Great. And then can you talk a little bit about the margin differential between EBI and organic Sterling, just in terms and how quickly that'll normalize?

Peter Walker -- Chief Financial Officer

Yes. So we haven't given the specific difference in the margins. But for the quarter, you can think about the fact that EBI had -- Obviously, we were thrilled with the overperformance at 8% of inorganic revenue growth from EBI versus our prior guide to 5% to 5.5%. And because of the overperformance, it had a drag on our adjusted EBITDA margin of about 30 bit.

So the 24.8 would have been 25.1 had it not been for, you know, that higher revenue on EBI.

Mark Marcon -- Baird -- Analyst

OK. Great. And then ID.me it sounds like we're still early days, but it sounds like there is some enthusiasm among the companies that you just put it in with. How quickly can you educate your existing client base, that identity verification isn't included in the background check and what the benefits are?

Josh Peirez -- Chief Executive Officer

Mark now it sounds like you were listening in on my call with our Sales Team telling them all to get out there and educate. I think, you know, a lot of it is just buying cycles, right? Like, a lot of times it'll be in a renewal or when a client has a particular challenge. I think for us having a few, you know, anchor clients in the market now, where we can have some white papers and some proof points and some references for the value of the product, we think will really accelerate the trend. And it's part of the plan that we've had all along by piloting last summer, you know, fixing some things that we saw that we needed to get, you know, better so that the workflow is as seamless as it is.

When you're not using ID.me now, it's even better when you do use it. So I think that we're at the point now where that education is something we're going to be doing a lot of, and it's something that we're happy to do, because really no one has a competitive offering. So when we educate clients, there is nowhere else for them to go.

Mark Marcon -- Baird -- Analyst

That's great. And then one last one, with regards to the international markets, any sort of variances with regards to the growth there?

Peter Walker -- Chief Financial Officer

So as I mentioned on the call, Mark, in 1Q of '21, we had about $3.5 million of COVID revenue. We were actually hired by one of the large government agencies in the UK to be their trusted partner on background screening at high volume. So we kind of consider that definitely one-time revenue. So when we normalize for that, we look at the international organic currency growth rate, 1Q to 2Q.

You should think about that more of about 24% and that's very comparable to the growth we had 4Q of '21 over 4Q of '20. And then if you translate that to the overall growth rate, right, our headline is 38% but if you adjust it that one-time revenue 1Q of '21 of $3.5 million, you're 41% revenue growth for the quarter. And then long term, I guess this was a great partnership for us to demonstrate our capabilities, and the client has continued on with us albeit not with a large one-time request related to COVID.

Mark Marcon -- Baird -- Analyst

Understood, Peter. I meant just between the countries, you know, obviously given there's, you know, varying, you know, impacts in terms of what's occurring economically and energy price-wise. If you're seeing any sort of changes between the different countries internationally in terms of their growth rates.

Peter Walker -- Chief Financial Officer

Yes, good question. So we have not been impacted by the war between Russia and Ukraine. And I would say that all three of our regions and the countries in those regions continue to perform very strongly.

Operator

The next question is from Jason Celino.

Unknown speaker

Great. This is actually Devin on for Jason this morning. I guess I'll start my first one, I guess, broader question. There's been some news recently, I guess, on companies implementing cost control measures and are laying off employees but mostly within the tech sector.

And I know that Sterling has large exposure in industries that are more regulated now more insulated to these cost control measures, but just curious if you're seeing any of these trend of cost control measures within your verticals that you said or maybe within your customer base.

Josh Peirez -- Chief Executive Officer

Thanks, Devin. It's Josh. Thanks for the question. So first I do want to emphasize two things before kind of diving into your particular question on tech.

You know, we're very well diversified. We are not concentrated in any one industry which we think is one of our competitive strengths. We also have our top client is less than 3% of our revenue so we're just not exposed to any individual client or industry, you know, overall. And you mentioned, you know, tech is around 7% of our U.S.

business in terms of verticals. So it's not a huge percentage and we're not seeing those trends affect our clients' hiring plans. I would also note that layoffs don't necessarily, you know, impact our business, it's hiring that impacts our business. So to the extent that they're continuing to hire for new roles, entry level jobs, things that they need, you know, for the future.

So in [Inaudible], you know, they may pull back on their hiring of people who are on W-2s, you know, as employees but we're not seeing them pull back on onboarding deliverers or drivers or caretakers. You know, that is the lifeblood of their business and they need to continue doing that and we're not seeing that trend really change at all. You know, we don't feel like we're, you know, overexposed there and we're not seeing any of our clients really come to us and tell us that they've made changes to their hiring plans yet. But as we said, our guidance does, you know, take into account that given the macro trends, there could be some pressure.

And so you know, I think as Peter said, you know, if that does not materialize for us, that would be upside to what we've provided.

Unknown speaker

Got it. Oh, no. That's great [Inaudible]. Maybe just one more for me.

I mean, it seems like the background screening space is doing better or holding in relatively better than other sectors. Are you also seeing improvement in sales cycle, close rates and even win rates on the quarter?

Josh Peirez -- Chief Executive Officer

You know, we don't report those really on a quarterly basis, but otherwise, what we have said is, you know, we did have 10% new business and greater new business dollars in Q1 than what we had in Q4. So that continues to accelerate and be a good trend for us. You know, we're continuing to see many RFPs and opportunities for us to win business, including with very large clients out there who haven't RFP-ed for a very long time. So, you know, we're excited about that.

The other thing we're seeing is that, you know, the normal cyclicality that we saw historically in hiring trends by clients, they're really hiring throughout the year now versus just in peak seasons as well as our mix, you know, shifting intentionally as we've, you know, expanded into newer verticals, which has normalized that trend as well. So, you know, we feel very good about where we are. You know, we are watching the macro-environment very carefully. I think, you know, the one thing we saw, which Peter mentioned is the need to onboard people to support the revenue growth that we know is there for us, because we've signed those contracts.

We felt that we needed to hire people earlier than we historically would have because it is so challenging to bring people on board. And so that has really been the one area so far that we've reacted to. And then of course the interest expense going up which caused us to just sort of, you know, narrow our range on the A&I guidance.

Operator

[Operator instructions] As you have no further questions, I'll hand back to the management team for any closing remarks.

Josh Peirez -- Chief Executive Officer

Thank you all for joining us, and we'll look forward to talking to you next quarter.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Judah Sokel -- Vice President, Investor Relations

Josh Peirez -- Chief Executive Officer

Peter Walker -- Chief Financial Officer

George Tong -- Goldman Sachs -- Analyst

Alex Hess -- J.P. Morgan -- Analyst

Greg Parrish -- Morgan Stanley -- Analyst

Andrew Nicholas -- William Blair -- Analyst

Mark Marcon -- Baird -- Analyst

Unknown speaker

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