i3 Verticals, Inc.

Good day, everyone, and welcome to I3 Vertical's 4th Quarter 2021 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through November 25th. The number for the replay is 877-344-7529, and the code is 101-617-3900. The replay may also be accessed for 30 days at the company's website. At this time, for opening remarks, I'd like to turn the conference call over to Scott Merriweather, Chief Operating Officer. Please go ahead, sir.

Good morning, and welcome to the fourth quarter 2021 conference call for i3 Verticals. Joining me on this call are Greg Daley, our Chairman and CEO, Clay Whitson, our CFO, and Rick Stanford, our President. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by reviewing yesterday's earnings release. It is the company's intent to provide non-GAAP financial information to enhance understanding of its consolidated financial information as prepared in accordance with GAAP. This non-GAAP information should be considered by each individual in addition to, but not instead of, the financial statements prepared in accordance with GAAP. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's expected financial and operating performance and the expected and potential impact of the COVID-19 pandemic. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. You are hereby cautioned that these forward-looking statements may be affected by the important factors, among others, set forth in the company's earnings release and in reports that are filed or furnished to the SEC, including risk and uncertainties associated with the COVID-19 pandemic. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it, except as may be required under a bookable law. I now turn the call over to the company's chairman and CEO, Greg Daly.

Thanks, Scott, and good morning to all of you. We are pleased to report our fourth quarter 2021 results. We set new quarterly records in revenue, adjusted EBITDA, software revenue, payment volume, and integrated volume. As we close our fiscal year, we're extremely excited about what fiscal year 22 holds for for I3. Our vision has been to grow into a software company that focuses on embedded payment opportunities. Our results highlight consistent execution of this vision as software revenues have grown to 42% of our total revenue and integrated payments now represent 63% of our payment volume. We have great momentum throughout I3. I expect this momentum will continue to drive further growth in our technology-enabled revenue. Our total software and related services revenue was up 178 percent for the quarter over this time last year. The increase in software and related services fueled our fourth quarter net revenue increase of 76 percent over 2020. Our adjusted EBITDA increased 79 percent. We are delivering on our software-focused strategy. For fiscal year 21, our adjusted EBITDA from proprietary software and payment segment exceeded the adjusted EBITDA from our merchant services segment. The $11 million of adjusted EBITDA from our proprietary software and payment segment was a new quarterly record. Our software segment will be our primary driver going forward, and we expect this trend to accelerate as we expect more total software sales to increase, and we attach other value-added solutions such as payments within our customer base. Public sector is our largest vertical. There is a need for modern software and payment solution within this market. We believe our software solution can digitally transform how governments interact with their constituents. Our product suite streamlines back office work streams and also enhances customer facing experience for governments. For example, our software allows citizens to electronically file court cases or pay court fines online and it allowed the justice system to set court dockets. Video conference involved people and managed court cases from inception to ruling in a paper-free process. Another example, our software also allows citizens to register new vehicles, and it also powers DMV to issue temporary tags, collect taxes, manage license plate inventory, and interface with car insurance companies. Our software solutions cover a spectrum of government needs, as we have software that runs a municipal court, and we have software that powers statewide systems. Tuesday, we announced our largest contract in history in our public sector vertical, a statewide e-filing and case management system in Louisiana. This contract is evidence of our ability to leverage our full product suite to create significant market wins and deliver value to our customers. The fourth quarter was our full fiscal quarter with our utility technology acquisition closed in May. And we have integrated our proprietary software solution into this software package and installed our first customer in New York. In addition, this utility technology acquisition had developed a market-leading IVR product that we have begun to interface across the rest of our country company. These two efforts are a direct reflection of our overall strategy. Optimizing our product integration and delivering integrated and embedded payment solutions are core in our approach to all verticals. Our school products within public sector also provided greater revenue and EBITDA contributions than we had expected in the fourth quarter. Due to government programs, lunch payments remain below historic levels. However, we captured more non-lunch payments and we have installed many new districts. As a result, our education customers contributed more than our preliminary forecast for the school year, which gives us greater confidence as we move into fiscal year 22. During our last conference call, I noted that healthcare had grown into our second largest vertical. we closed our most recent acquisition within this sector on October 1. Our healthcare software suite includes a cloud-based electronic health records and practice management workflow. The software also allows providers to manage their entire revenue cycle, including all billing, while also providing patient engagement services that control scheduling, appointment confirmation, patient communication, and patient payments. Our software serves medical practices, laboratories, hospital-based physicians, radiology centers, and medical billing companies. A recent acquisition expands our product suite. The acquisition provides comprehensive revenue cycle management and related administrative and consulting services for hospitals and other medical practices. This business leverages its proprietary software, its integration with various medical record systems, and its direct claim settlement with Medicaid, Medicare to offer customers prompt and reliable services. We have a robust platform within healthcare, and we will continue to enhance our software product suite and our customer-facing portals. This is a significant opportunity in attaching payments, our invoice presentment software, and our text-to-pay solution within these software platforms. Healthcare will be a significant focus for I3 moving forward. On a broader note related to our overall IT infrastructure, we have begun to transition to an AWS environment for many of our platforms. We believe this move will allow us to remain nimble and responsive both in new product development and serving in our M&A strategy. We expect to gain operational efficiencies over the long term from the transition and believe this move will allow us greater support services to our various product platforms. We will continue to grow our business as we win new customers, as we integrate our products and cross-sell them to our existing customer base, as we enter into new geographic territories through new product launches and through M&A. We are very confident in our strategy and well-positioned to deliver strong financial results in fiscal year 22. I also want to take a moment to welcome DaCosta Jenkins to our board of directors. DaCosta's experience as a CEO of Nashville Electric Service, a large, complex organization, will provide a unique and valuable perspective to our boardroom, especially as we continue to pursue public sector vertical. He is a man of integrity. He has given back greatly to the city and the region by furthering the cause of numerous nonprofit organizations. I have no doubt that DaCosta will prove to be a fantastic addition to our board. Now I'll turn the call over to Clay, and he will provide you more details on the fourth quarter financial performance. Following Clay's comments, Rick will give an update on M&A, and then we'll open up the call for questions.

Good morning. The following pertains to the fourth quarter and fiscal year ended September 30th, 2021. Before getting to results, I want to update listeners on a recent accounting development. During our discussion of the fiscal third quarter into June 30th, we highlighted a change in presentation regarding the write-down of deferred revenues in connection with the acquisition of companies with software revenues. As we hoped, the FASB has removed requirements under ASC 805 that necessitated the write-down of deferred software revenues by acquirers. Beginning with acquisitions completed after September 30th, 2020, we have adopted the change, leaving only 600,000 of write-downs during fiscal 21 held over from acquisitions completed during fiscal year 2020. Going forward, we will not need to write down deferred software revenues in connection with acquisitions in the first place. We consider this a very welcome development, which better aligns our GAAP results with our performance and restores a level playing field with our peers. Moving on to results, please refer to the slide presentation titled Supplemental Performance on our website for reference with this discussion. We had another solid quarter with record payment volume, revenues, and adjusted EBITDA. Revenues for the fourth quarter ended in September increased 76% to $67.2 million from $38.3 million for Q4 2020, reflecting healthy organic growth and acquisitions. The momentum we experienced during the June quarter continued through September quarter and October and the early part of November. Almost all of the metrics we track are headed in the right direction. For companies we have owned for at least two years, payment volumes continue to grow in the mid-20% over a two-year period. To clarify, that represents total growth, not compound annual growth. Our integrated payments percentage hit a new high of 63%, helping our revenue yield improve to 120 basis points for the quarter from 96 basis points for Q4 2020. Software and services revenue continued strong growth, representing a record 42% of revenues for the quarter, compared to 26% for the fourth quarter of 2020, reflecting the software weighting of recent acquisitions. This percentage increased despite a continued rebound in payments revenues. Acquisitions completed after September 30, 2020, almost exclusively in our proprietary software segment, contributed $22.3 million of revenues during the quarter. Adjusted EBITDA increased 79% outpacing revenues to $17.1 million for Q4 2021 from $9.5 million for Q4 2020. We showed strength across the board with continued momentum in proprietary software, even in education, as well as a continued rebound in hospitality and retail despite the emergence of the Delta variant. Adjusted EBITDA as a percentage of revenues increased to 25.4% for Q4 2021, an improvement sequentially and year-over-year, principally reflecting lower corporate overhead as a percentage of revenues. The EBITDA margin was 24.9% for Q4 2020. Proforma adjusted diluted earnings per share increased 65% to $0.33 for Q421 from $0.20 for Q420, a great way to wrap up the year. Again, please refer to the press release for full description and reconciliation. Segment performance. Revenues in our proprietary software and payment segment increased 165% to a record $36.9 million for Q4 2021, from $13.9 million for Q4 2020, principally reflecting growth in our flagship public sector vertical, but also growth in our healthcare vertical. Education outperformed our expectation, with growth in revenues over 40% from Q4 to Q4. The free lunch program has continued, but schools have been open, and we've have more of them, we have more schools every year. The segment suggested EBITDA improved 131% to $11.1 million for Q4 2021 from $4.8 million for Q4 2020, a new quarterly record. The growth was principally driven by our public sector vertical, but also the healthcare acquisitions. On a run rate basis, public sector now represents roughly half of our consolidated business, while healthcare is an estimated 20%. The proprietary software and payment segment's adjusted EBITDA margin was 30% for the quarter. For the fiscal year and quarter, the segment contributed more EBITDA at a higher EBITDA margin than the merchant services segment, marking a transition we believe will continue in the future as our public sector and healthcare verticals continue to power growth. Revenues for our merchant services segment also set a quarterly record, increasing 24% to $30.7 million for Q4 2021 from $24.8 million for Q4 2020, reflecting a rebound in hospitality, retail, and B2B. The recovery can be seen in record payment volume of almost $5 billion for the quarter. Adjusted EBITDA for our merchant services segment increased 21% to $9.1 million for Q4 2021 from $7.5 million for Q4 2020. The adjusted EBITDA margin was 29.5% for Q4, improving sequentially two quarters in a row with higher revenues. Our strong balance sheet has allowed us to continue to execute our acquisition strategy. On September 30th, we had $101 million borrowed under our revolver net of cash under a $275 million facility. The face value of our convertible notes are $117 million. As of September 30th, our total leverage ratio was 3.5 times while the current constraint is five times. As mentioned by Greg, we completed a healthcare acquisition on October 1st for $60 million, but we expect our total leverage ratio to remain less than four times for Q1, the December quarter, in the absence of additional acquisitions before the end of the calendar year. The interest rate for the convertible notes is 1%. while the interest rate for the revolver is currently less than 4%. Over time, we expect to convert roughly two-thirds of adjusted EBITDA into free cash flow, which can either be used for acquisitions or debt repayment. We define free cash flow as adjusted EBITDA minus capital expenditures, internally capitalized software, cash interest, and cash taxes. We recently put an at-the-market shelf filing in place for $125 million. We have not yet sold any stock under the shelf, but will update investors quarterly if we utilize the shelf in the future. Outlook. Looking forward, the strong finish to our fiscal year gives us confidence in the following guidance for fiscal year 2022. It excludes acquisitions that have not yet been closed and transaction-related costs. Revenues, $280 to $300 million. Adjusted EBITDA, $70 to $78 million. Proforma adjusted diluted EPS, $1.25 to $1.40. From a seasonal standpoint, we have different verticals with different seasonal patterns, which generally counterbalance each other with our current mix of companies. As we become more software-centric, quarters might vary based upon perpetual license sales, even though our trend is generally toward more recurring revenue streams. Following our recent healthcare acquisition, we estimate the following revenue run rates by vertical. Public sector, which includes our K-12 public schools, 50%, healthcare, 20%, and all other All other includes, in equal parts, hospitality, retail, nonprofit, and B2B. I'll now turn the call over to Rick for company updates and M&A activity.

Thank you, Clay. Good morning, everyone. I'll begin with an update on a few things I've addressed before. After that, I will discuss M&A. First, we are aggressively moving on our unified product offering within our public sector vertical. Over the last quarter, we've expanded both our geographic and product reach with i3 software solution sales in North Carolina, Georgia, Alabama, and Tennessee. We've also successfully secured multiple AI judicial product software sales in North Carolina, Georgia, and Tennessee through a collaboration among i3 public sector entities. Our utilities companies have expanded into Alabama with our billing solution and we also signed our first state-level court contract in Georgia, which encompasses multiple types of courts within a county. Additionally, we recently signed and secured a significant statewide contract with LACRE, the Louisiana Clerks' Remote Access Authority. That was a direct result of our UPO efforts. For the first time, all parish clerks of court will be able to provide their constituents an electronic or in-courthouse experience that will be comprehensive and standardized across the state. This solution aligns with Lecrae's vision for technology support of standardized processes throughout Louisiana. In addition, other state agencies will benefit from unified data feeds from the system. This solution is a result of coordination among seven integrated software solutions by three I3 companies. The solutions include our integrated e-filing paperless civil and criminal case management systems, AI smart bench and calendaring from clerks, insight reporting, and a fully integrated payment interface. Through our domain expertise and seamless integrations, we are assisting our public sector customers and enabling them to provide an expanded offering of responsive solutions for their constituents. It should be noted that we have seen an average uptick in the number of requests for new product presentations and demonstrations in the fourth quarter. While we believe some of this is tied to the growing education around American Rescue Plan, of which $350 billion was earmarked for state and local governments, we still believe it's too early to see those effects in real purchases. A gradual increase over the next year or two is a more likely outcome. On the ISV front, our total number of signed and integrated ISVs at the end of our fourth fiscal quarter was 87, with seven more in the process of integration. Regarding technology updates, we continue to enhance our Burton platform, which is critical to realizing our vision for how our product and technology investments will come together. The Burton platform is a suite of modular technologies purposely built to bring together acquired capabilities and services into a single destination for end users and developers. We continue to make significant investments in cloud-based technology, using solutions from AWS and others to allow us to better support the infrastructure needs of our many products across all verticals. Expanding our use of modern serverless architecture and other cloud-based patterns, including infrastructure as code and microservices, allows us to accelerate that vision. I use the term infrastructure as code specifically as rather than managing network hardware directly across the enterprise, These settings would be managed in code rather than accessing the hardware directly. This would allow a person to manage resources for multiple products and server farms without having to be educated on each specific piece of hardware. This is just one example of infrastructure adjustments made in mitigating the pace at which we acquire technology and the control that needs to take place post-close on each of our acquisitions. It also allows us to save templates and quickly deploy new hardware and make sure it exactly matches other machines and settings, allowing us to quickly spin up new hardware with that assurance. Now I'll speak to M&A. Last quarter, we mentioned an execution of a non-binding term sheet that was in the diligence process. That deal closed on October 1, and we're thrilled to announce the completion of that acquisition, our second largest to date, and look forward to expanding our position in our healthcare vertical. The business is over 50 years old and provides soup-to-nuts revenue cycle management, among other products, with the only exception being collections. They operate primarily in the southeast. This business provides comprehensive revenue cycle management and related administrative and consulting services for hospitals, including major academic teaching institutions with residents, practice groups, and healthcare providers. This business leverages its secure, customizable proprietary software seamless integrations with various medical record systems and establish relationships with payers, including direct claims to Medicare and Medicaid, to offer its customers prompt and reliable services. The original founder intends to remain with the business, but he has a fantastic successor that has stepped up to become CEO. There are a couple of attractive synergies that we are focused on initially. cross-pollination of coding and other previously purchased businesses that have not been able to provide that service, and payments. To be clear, this acquisition is defined as a platform purchase in the healthcare vertical. By combining software technologies and revenue cycle management expertise, billing efforts are optimized, resulting in improved accounts receivable performance and increased cash flow. Legislative implications and reimbursement trends are modeled to allow clients to stay ahead of the shifting healthcare marketplace. Analytics resources are devoted to trends, reimbursement, physician coding, and proactive auditing. Opportunities for enhanced reimbursement are pursued from varied angles, including negotiating intergovernmental transfer agreements for clients who service safety net hospitals. The research team has stayed ahead of impending business changes by issuing critical briefs on telehealth and COVID reimbursement processes managing grants and loan applications during the pandemic. This expertise and prompt action has attracted consulting contracts from hospital systems, health departments, and an array of medical practices for potential new business. Now that we have created enough size and breadth of product within our healthcare vertical, we have begun the process of creating a unified product offering similar to our public sector vertical. We have a successful template and we intend to replicate it within the healthcare vertical. We remain disciplined in our approach relative to multiples, and this acquisition fell within our standard range. Our M&A pipeline has an emphasis on public sector and healthcare in that order, and we look forward to sharing more on the acquisition front in the near term. This concludes my comments, Jamie. At this time, we'll open the call for Q&A, please.

Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, you may press star and then one using a touchtone telephone. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. At this time, we will pause momentarily to assemble the roster. Our first question today comes from John Davis from Raymond James. Please go ahead with your question.

Hey, good morning, guys. Maybe a couple quick ones just on the health care deal that you guys just recently closed, I think, October 1st. So, Rick, appreciate the commentary on valuation ranges. But maybe, Clay, just help us margins similar to corporate average, just trying to kind of back into the revenue impact that is in the guide.

Yeah, we expect margins in the 20s percentages area, like most of our businesses expect.

Okay. And then, you know, Rick, you talked a little bit about the revenue synergy potential here. The business today, is it 100% software, or what's the payments and software kind of revenue split as the business stands today?

The payment piece is small today of total revenue. That's a big opportunity for us. And obviously cross-selling products into our other healthcare businesses is

It's more of a services model. JD, they have some software revenues, obviously, but they're dependent on services where they use their software to perform those services. Got it. Okay.

And then just on the guide, Clay, I think obviously at the midpoint it's a 27% rev growth. My math is getting somewhere low double-digit on the organic side, but just any commentary there on kind of what the organic growth implied in the guide is.

Yeah, it is. We do expect double-digit growth this coming year.

Okay, great. And then margins I think are implied about 26% or so. That's about 100 basis points. Is that mostly organic? I think most of the deals you've done have been around the corporate margin level. So just curious there if that's kind of the way we should think about margins going forward, kind of 100 basis points or any color there.

Well, at the midpoint, I get 25.5%, which is not quite 100 basis points. But where we expect to get our leverage is on the corporate line. If you look at the fourth quarter, as an example, we fell from 7.2% of revenues to 6% of revenues on the corporate line. So the corporate expenses are relatively fixed, and as revenues go up, we get pretty good leverage there.

Okay, last one on the guide, quickly, Clay. So if you just take 4Q and you annualize it and you add in the deal, you kind of get the midpoint of the guide. So I guess the question is clearly it appears to me to be conservative, but maybe just talk about some of the factors that could swing it to the higher end of that guide, closer to $80 million and vice versa, how much conservatism is built in for unknown impacts of Delta over the next few months.

Yeah, when I think about the variability in our earnings, I think of two things, which I'm sure you all do, but one is the general economy. You know, the Delta variant, I feel like it's not a very scientific number, but internally we feel like we're back like 90% from that. You know, restaurants are open, but if they used to hold 100 people, now they hold 60 people. California keeps going in and out, Hawaii. But anyway, we feel like there's another 10% upside on just the general economy. We're forecasting as if it remains the same as it is today. And the other big factor in our earnings variability is perpetual license deliveries. Those are almost 100% margin. They drop straight to the bottom line. In our Q4 of this year versus our Q4 of last year, perpetual sales fell from 15% of the total to 9% of the total. And so in any given quarter, that's a fair amount of percentage margin and bottom line. Okay. Very helpful. That's it for me guys. Thanks.

Our next question comes from George Mahalos from Cowan. Please go with your question.

Great. Congrats on the results guys. Um, wanted to ask Clay, you, you, you talked about, or you mentioned sort of seasonality and there are some changes going on in your business, obviously, um, you know, compared to sort of historical norms, you don't have as big of an education business, a lot more sort of public sector and, uh, and health in there. So just anything you can kind of call out or you may want to sort of point us to as we think about modeling the next fiscal year on a quarterly basis.

When we look at it, there are different factors in different quarters. We have a company that does licenses for all types of boards like nursing boards, that sort of thing. They're strong in the calendar fourth quarter. I think we've spoken about the warrant roundup in the past. So in some of our companies, you know, after people get tax refunds, they go out and pay their traffic tickets and respond to warrants. And so that's a bump for us in the March quarter. In the fourth quarter, the September quarter, we have our best education quarter. But so all these things sort of balance out. And so I think the best, if there's a week quarter, it's the June quarter when schools are completely closed. But I think the best advice I could give is just to model it with, you know, a little bit of growth every quarter so the back half of the year would be a little steeper than the front half. We're not as seasonal as we used to be because of our diversification across verticals.

Okay, that's helpful. Appreciate that color. Then maybe just a question for Rick here. As you think about the DM&A pipeline, just some of the smaller verticals, I think now sort of hospitality, B2B, nonprofit. Is that really still a focus for the company, given the opportunity you have in public sector and health? And obviously, you expect schools to start coming back. And are you at all constrained, even if it be temporarily from a leverage standpoint, near term?

Yeah, George. So public sector and healthcare are our focus going forward. That's not to say that if we find something in B2B or nonprofit, we won't take a look at it, but we want you to understand that public sector and healthcare are our big focus in M&A going forward, and that's the majority of our pipeline today. The second question he asked was, how far back was that?

Just related to leverage, Rick, if you feel at all constrained near-term based on the leverage ratio.

No, depending on my partner, Clay, I'm continuing to go out and look for deals, the entire M&A team. The pipeline's still full. There's plenty of stuff out there, and people want to talk.

So we're keeping the pedal to the middle. Yeah, I mean, we cash flow a fair amount. And so I think last quarter, people felt like we were a little constrained, but we just did a $60 million acquisition, and we'll pay it down again by December. So You know, our usual deal, 60 is pretty big for us. Our usual deals are much smaller, and if Rick does find something that's outsized, we'll figure out a way to finance it. Okay, great. Thank you, guys. Congrats on the quarter. Thank you, George.

Our next question comes from Peter Heckman from D.A. Davidson. Please go ahead with your questions.

Morning, and congrats on the Louisiana deal. Sounds like a real nice opportunity. As regards to that one, would that be structured as a multi-year deal that has both fixed fees and variable fees, and then as well, when would you expect, if that deal has a perpetual license, or when would you expect to begin recognizing revenue on the Lecrae deal?

Pete, we'll get a little bit of it in fiscal 22, like in the fourth quarter, some payment revenues for e-filing. But the bulk of it will be over three to five years. And so this is something I hope people will understand about our business is that this contract is great for us in the short term. we're going to need to hire 15 pretty pricey people to build some things and customize some things over the course of the year and then get it installed. And so for fiscal 22, it won't help our bottom line, but for the out years, it really will. And a number of our businesses are that way. If we're lucky enough to land big contracts, I can think of a couple in health care that would act this way. Also, we'll need to staff up, you know, invest for six months to a year before we reap any rewards from it. But that's certainly the case with the Lecrae contracts you brought up. That's great. That's great.

And then just bigger picture on here, you really – It built an impressive list of functionality and software in public sector and crossing a number of different areas from courts to public sector to citizen engagement. Have you thought about an umbrella brand to unify? I mean, is the umbrella brand i3 Verticals? Or have you thought about potentially creating a new brand that would really mean something to the public sector over time as you build your roster of contracts?

Yeah, good question. We are continuing to allow the individual subcompanies to use their DBA, but we've added the I3 public sector brand, and that's how we'll brand my vertical. And most of the shows they attend today, all of the materials and the booths itself says i3 public sector so we're moving in that direction it's gradual um but that's definitely the way we're going okay all right that makes sense that's all i have right now thanks and our next question comes from jason kumperberg from bank of america please go ahead with your question hey guys this is cassie i'm for jason first i just wanted to to go back and ask about margins

I guess a two-part question there. So first, you know, obviously you guys have some seasonality, so like the back half of the year is typically stronger. You know, is that 25% that you guys did in F4-2 kind of the right way to think about as the jumping off point when we think about how we, the progression throughout fiscal 22 and maybe like further acceleration throughout the back half of the year? And then the second part of that two-part question, sort of like, I know historically you talked about, you know, maybe long-term guidance, 50 to 100 basis points annual margin expansion. This is obviously materially higher, even though it sounds like you guys have some investments in the pipeline as well. You know, just talk about how we should be thinking about that. Thanks.

Well, this is 80 basis points guidance here. Okay. The first half of this fiscal year through March or certainly through February was still a little depressed from COVID. And so bigger revenues just help leverage that corporate expense line. And so that might account for, you know, 80 basis points as opposed to 50 basis points this year. I think our guidance has always been 50 to 100 basis points, but we probably plan more on the 50 basis point range. As far as the seasonality, I think if you grow the quarters by a modest percentage, As opposed to focusing on comparisons to the previous year, you know, fiscal 21, the first half had some distortions, which, you know, it's just not a normal year to compare off of. 2019 was a normal year. But, you know, in any given year, we have acquisitions through the course of the year. So if you look at historical quarters and take percentages, you'd need to factor out the acquisitions that were made during those quarters. Does that help? That was kind of a long answer.

Yeah, yeah, that was helpful. Yeah, we can go back and take a look at that. That's fine. And then I guess also just wanted to ask, I guess, about revenue growth. Obviously, it's outclipped payment volume growth in the last couple of quarters. Understanding that obviously has to do with the business mix and how that's changed. Can you just talk a little bit about maybe any take rate you're seeing, trends you're seeing, maybe by vertical or something, and if revenue growth is going to grow around, call it 30%. for the full year of 2022? Is volume growth maybe more in the zip code of 20%? Any help on that?

Well, I do expect our revenue yield to continue to increase. It's been increasing since the IPO. And the principal driver of that is the fact that we've been buying software companies. And so in the beginning, software companies were usually don't come with any payment revenues. If they have payment revenues, they're outsourced to some third party and the software company is getting 20% of it or something. So over time, you know, we add in our own payments and that will increase volume. But in the beginning, there's not much, there's no volume to go along with the software revenues. And so that's why the proprietary software software payment segments, revenue yield jumped from 6% to 9% over the year. As far as the merchant services segment goes, normally you would expect a pretty steady ratio between revenues and volume. I think in the last couple of quarters, what we've seen is that there are some revenues in the merchant services segment, which are things like monthly fees that don't carry any volume with them. Equipment doesn't carry any volume with them. And so when the economy bounced back from COVID, volume jumped, but those monthly fees and equipment don't jump with them. So you have a little bit of a decline there. But We're getting to pretty normal comparisons now. I do think there's still some hesitancy in the economy from COVID, but that segment should be pretty steady going forward.

Okay. Yeah, that makes sense. So it's more just like business mix, obviously, not anything that's really changed. Okay, that's good to know. And I guess if I could slip in like a really quick last one. I guess way back when, a couple of years ago, like historically kind of thought the business as a, you know, mid to high single digit organic growth profile. You know, it sounds like you guys are going to grow, you know, higher than that, obviously, maybe in the double digits, like kind of given how the business has evolved since then by vertical, you know, and the growth profile of the acquired businesses that are now kind of fully integrated into the company. You know, is that still the right way we should be thinking about it? Or is that actually, you know, maybe a structurally higher growing story? Yeah.

Well, I'm glad you asked this. In 2022, we think we'll grow double-digit, but like I say, the first half of 21 was a little bit hampered. 2023 is the question. These rates we give are normally long-term rates, and so 2023... Our target is double-digit growth. Our guidance, I think, remains high single-digit until such time as we have the clarity of seeing we can sustain a double-digit growth rate. And so our target is double-digit. Our guidance long-term remains high single-digit.

Okay. Sounds good. Thank you, guys. Take care.

Our next question comes from Mark Palmer from VTIG. Please go ahead with your question.

Yes, good morning, and thanks for taking my question. You mentioned in your remarks that there's going to be $350 million that's going to be dispersed through the American Rescue Plan to state and local governments, and that that is likely to translate into revenue opportunities over the next couple of years. We just saw the enactment of a a trillion-dollar infrastructure plan as well with, of course, much of that devoted to bridges, roads, et cetera. But it is going to be aimed toward municipalities, state and local governments. Do you see that there's going to be any incremental benefits or potential benefits for INS from the infrastructure bill as well?

It's hard to say, Mark. I do think when there's more money washing around, they find ways to spend it. We've heard tell of, you know, things targeted for, you know, security, people buying a forklift truck with it. So, you know, the vast majority of it gets spent the way that's intended, but other... People find a way to spend money when they need to spend it. And so I think the more money, the better, as far as the public sector goes, even if it's not targeted in a particular area.

Do you agree? I agree with you.

And just one more question. We've seen a nice progression, both in terms of the percentage of the company's total revenues derived from software, as well as the percentage of the company's total revenues derived from integrated payments. Of course, these are the two major thrusts of the strategy. How do you see those percentages evolving over time? And is there, you know, for example, in terms of integrated payments, is there any point at which, you know, there would be a cap on what would be achievable? Thank you.

Well, our target for the software versus payments mix has been 50% for the last several years. We're now approaching that, and I think we'll end up adjusting that target to a higher number because there's no doubt in our mind when a customer purchases services, it's all about the software, not the payments. The payments is a secondary thing. We want to be in the driver's seat more and more often. We've felt the success of owning the software, and that's clearly where we want to be. So I think that will go higher. As far as the integrated percentage, we've always thought we would cap out around 80%. and it should get slower going the closer we get to 80%. That could end up changing. That was a vision from three years ago. Do you feel any differently about that? No, I agree with you. Okay.

Thank you. Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Once again, that is star and then one to ask a question. And our next question comes from Chris Donat from Piper Sandler. Please go ahead with your question.

Hi, good morning, gentlemen. Thanks for taking my question. Hey, maybe two for Rick on the Louisiana win. Just first, if you could give us some background on it, like was it an RFP? Was it, you know, how long the sales process was, if you will? And then sort of looking forward, is this one – It seems like the Louisiana Clerks Remote Access Authority has sort of a unique structure. I'm wondering if there are similar structures out there, or is this kind of a unique transaction because of how Louisiana is organized and also, you know, their parish system and all that?

Yeah, thanks for your question, Chris. It definitely was a bid process. It took us a while. The pandemic slowed it down a little bit. We found out that we were in good shape probably three months ago, and we were dwindled down to a smaller list and then obviously very excited to get the contract. I think it absolutely is unique. The whole state of Louisiana is unique, how the parishes operate, who makes decisions parish to parish. We're very excited for this win. We think it's going to be wonderful for the clerks across the state. and we're excited for our people that had a hand in pulling this off because it was definitely the biggest contract we've ever signed, and it's a good relationship for us to have. Did I answer all your questions?

Yes, you did, and then you caused me to think of another one. You just mentioned that the pandemic slowed things down. Is that something you've seen elsewhere in the public sector where decision-making has been slowed down, and is that now picking up or even – bidding processes starting that had been delayed because of the pandemic?

Definitely picking up. You know, early on in the pandemic, yes, decisions were being delayed. Projects that we had executed were being delayed, so we couldn't start those. But we're full steam ahead right now on all fronts in public sector. Okay. Thanks very much, Rick.

And ladies and gentlemen, at this time, we'll be ending today's question and answer session. I'd like to turn the floor back over to Greg Daly for any closing remarks.

Thank you, everyone, for participating. You know, I feel like momentum is a key word that we throw around more than ever here with I3 in all facets of our company. And I think we've done a good job explaining our pivot to more of our focus going forward in health care and in public sector. Stay tuned. There will be more updates on that. But things are well. And, again, have a good day. Appreciate your participating in our call today.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.