i3 Verticals, Inc.

Second quarter of our fiscal 2022, which is the quarter ended March 31st, 2022. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion. We had a great quarter with record revenues, adjusted EBITDA, and pro forma adjusted diluted earnings per share. Revenues for the second quarter increased 59% to $78.1 million from 49.2 million for Q2 21, reflecting continued double-digit organic growth and acquisitions. The key metrics we track are headed in the right direction. Our integrated payments percentage improved to 62% for Q2 22, from 59% for Q2 21, which helped our revenue yield improve to 146 basis points for the quarter, from 115 basis points for Q2 21. Organic growth for this quarter was 16%. Software and related services revenue continued strong growth representing a record 50% of revenues for the quarter, an important milestone in our evolution. From here on out, we expect to be a software and service company first with a complimentary integrated payments platform that helps us add value for our customers. Annual recurring revenues totaled $258.8 million in Q2 22 compared to $173.3 million in Q2 21, a growth rate of 47%. Over 80% of our revenues in the quarter came from recurring sources. Adjusted EBITDA increased 59% to $19.5 million for Q2 2022 from $12.2 million for Q2 2021. We showed strength across the board with continued momentum in proprietary software and merchant services. Adjusted EBITDA as a percentage of revenues increased to 25% for Q2 2022 from 24.9% for Q2 2021. reflecting lower corporate overhead as a percentage of revenues. For the six months, the adjusted EBITDA margin expanded 50 basis points. Pro forma adjusted diluted earnings for share increased 61% to 37 cents for Q2 22 from 23 cents for Q2 21. Again, please refer to the press release for a full description and reconciliation. Segment performance. Revenues in our proprietary software and payment segment more than doubled to a record $49 million for Q2-22 from $23.8 million for Q2-21, principally reflecting growth in our two largest verticals, public sector and healthcare. Revenues in our education vertical continued a strong rebound, increasing 43% Q2 to Q2, thanks to the reopening of existing customers and organic sales to new school districts. The segment's adjusted EBITDA improved 95% to $16.3 million for Q2 2022 from $8.4 million for Q2 2021, a new quarterly record. The growth was principally driven by our two largest verticals, public sector and healthcare. On a run rate basis, public sector represents roughly half of our consolidated business, while healthcare is an estimated 20%. Revenues for our merchant services segment increased 12% to $29.2 million for Q2-22, from $26.1 million for Q2-21, reflecting broad-based growth in hospitality and B2B. Adjusted EBITDA for our merchant services segment increased to $8.1 million for Q2 2022 from $7.6 million for Q2 2021. Our balance sheet. Our strong balance sheet has allowed us to continue to execute our acquisition strategy. On March 31st, we had $182 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 March 31st, our total average ratio was 3.9 times, while the current constraint is 5.0 times. As mentioned by Greg, we have subsequently completed a small healthcare acquisition, but we currently expect to remain below 4x for Q3, the June quarter. The interest rate for the convertible notes is 1%, while the interest rate for the revolver is currently around 4.25%, but will increase as the Fed continues to raise rates. Over time, we expect to convert roughly two-thirds of adjusted EBITDA into free cash flow, which can be used for debt repayment, acquisitions, and earnouts. We define free cash flow as adjusted EBITDA minus CapEx internally capitalized software, cashed interest, and cash taxes. Outlook. Looking forward, our strong first half gives us confidence in raising guidance for fiscal year 22. It excludes acquisitions that have not yet closed and transaction-related costs. Revenues, $300 to $312 million. Adjusted EBITDA, $75 to $81 million. pro forma adjusted diluted EPS, $1.40 to $1.47. From a seasonal standpoint, we have different verticals with different seasonal patterns, which generally counterbalance each other with a current mix of companies. One exception is our education business, which slows down during the June quarter when school lets out. 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. I'll now turn the call over to Rick for company updates and M&A activity.

Thank you, Clay. Good morning, everyone. Before I discuss M&A, I'll give an update on a few items. Our public sector unified product offering system to have strong results with success in local, municipal, county, and state markets. Over the last quarter, we've expanded our product reach by adding new solution software sales in Georgia, Alabama, Tennessee, and Kentucky. In other words, we are beginning to bring products into states and customers where those products had not been utilized before. We expanded our territorial reach by entering four new states with contribution from four I3 public sector entities. Expansion includes additional instances of our public safety, courts, payment processing, digital signature and certification, tax, records management, and digital customer engagement software solutions. We continue to implement on our recently announced LACRAE, Louisiana Clerk's Remote Access Authority software contract, which is supported by statewide e-filing. This effort is going extremely well. Our education and product offerings have unified under the i3 Education brand with related marketing, sales, development, and support. Our education businesses are coordinated in bringing a full and robust solution to K-12 schools. And to that end, we continue to make investments in our software. i3 Education has been responsive to school needs by installing technology that lessens traditional lunchroom interactions and leverages staff given labor shortages. We've been pleased with the results in education, which are being driven by successful focused sales campaigns, product line expansions, cost consolidations, and more relaxed COVID protocols. From a technology perspective, we continue to focus on moving infrastructure into AWS, which allows us to centrally manage and support our products across the enterprise. This effort is more than a change to a hosting environment. and will bring significant enhancements to our products, including rapid scaling, increased geographic redundancy, and improved security oversight. In addition to modernizing infrastructure, we are investing in load code application technologies that will allow us to rapidly deploy new products where we have gaps in our current offering or a need to modernize architecture. Load code platforms will give us better access to data across the organization as solutions become more integrated. We've expanded training and are creating cross-divisional teams to build a platform on which we can launch full suite solutions. I'll now speak to M&A. As Greg mentioned, we recently closed a tuck-in acquisition within the healthcare vertical. For nearly 20 years, this company has provided software solutions to a wide range of healthcare providers. The company was born out of a personal experience that the owner had with an antiquated healthcare system in the 90s. he realized that there were vast opportunities to improve operational efficiencies in the healthcare world. This personal backstory has allowed them to build products that do not lose sight of the patient first. This business offers an array of services including electronic health records, electronic patient engagement or patient portal, revenue cycle management, population health and data analytics, and compliance program assistance. Their flagship product is their EHR offering, a solution that fills a much-needed gap in our healthcare product offering. This EHR solution, combined with their robust patient portal, brings us to a complete unified product offering in the healthcare space. The patient portal is a meaningful upgrade on our front-end patient engagement side of the house and fits nicely with our existing back-end solutions that our other healthcare businesses offer. This business is a natural strategic fit in i3's healthcare vertical, and in fact, they already do business with three of our existing healthcare companies. I wanted to note at this point, this acquisition fell within our standard range relative to multiples. Our healthcare vertical is reimagining the delivery of software products by bringing together complementary businesses. The current industry strains that came out of COVID required a commensurate pivot in the way we provide support services. For example, in response to the pandemic, we've built upon our invoicing systems to adapt best practices for our lab and mobile healthcare delivery clients, and we continue to educate providers and staff on the ever-changing requirements of telemedicine. 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, Matt. At this time, we'll open the call up for Q&A, please.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from John Davis with Raymond James. Please go ahead.