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spk06: Good day, everyone, and welcome to the I3 Vertical's first quarter 2023 earnings conference call. Today's call is being recorded and a replay will be available starting today through February 16th. The number for the replay is 877-344-7529, and the code is 313-2661. The replay may also be accessed for 30 days, the company's website. At this time for opening remarks, I'd like to turn the floor over to Jeff Smith, SVP of Finance. Please go ahead, sir.
spk00: Good morning, and welcome to the first quarter 2023 conference call for I3 Verticals. Joining me on this call are Greg Daly, our Chairman and CEO, Clay Woodson, 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 to the most directly comparable GAAP financial measure by reviewing yesterday's earnings release. It is the company's intent to provide non-GAAP financial information to enhance understanding of its consolidated GAAP financial information. This non-GAAP financial information should be considered by each individual in addition to, but not instead of, the GAAP financial statements. 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. 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 important factors, among others, set forth on a company's earnings release, and reports that are filed or furnished to the SEC. Consequently, actual operations and results may differ materially from those 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 applicable law. I now turn the call over to the company's Chairman and CEO, Greg Daley. Thanks Jeff and good morning to all of you.
spk02: We're excited to present to you our results for the first quarter fiscal year 23. To kick things off, we set new records in revenue and adjusted EBITDA and you will be pleased with our results of our focus on recurring revenue and adjusted EBITDA margin. Here today, adjusted EBITDA grew 29% from Q1 fiscal year 22 to Q1 of fiscal year 23. The last several quarters, you've heard me discuss recurring revenue, which has been above 80%. It was 84% this quarter, and you will notice that we had a lighter quarter of software license deliveries as multiple projects pushed into Q2. The backlog of software sales has never been deeper, but license revenue which does not recur, can fluctuate. In a quarter like this one, the power of our model is reinforced. SaaS, software transaction-based revenue, payments, and other recurring revenue helped us achieve consistent quality earnings. This quarter includes our first results of the operation of Kelty. We're pleased with their results, but even more excited about what is to come. Celtic is already going to market with our 2021 acquisition, DIS, who has a much more robust sales function than Celtic could ever avail itself of. Celtic and DIS have complimentary best of class products for transportation departments at the state level. And we can't wait to expand our already significant footprint across the United States and Canada. When we talk about acquisition targets with untapped recurring revenue opportunities, Celtic is a fantastic example. Earlier this quarter, we announced an acquisition of AccuFund, a strategic product for public sector. We hosted an internal sales conference in Nashville this week, and our sales team was ecstatic about how this product can be cross-sold in the public sector and the education verticals. Our teams are off to a great start. Now I'll turn the call over to Clay, and he'll provide you more details on our first quarter financial performance. Following Clay's comments, Rick will provide an update on some role changes and addressed M&A, and then we'll open up the call for questions.
spk01: Thanks, Greg. The following pertains to the first quarter of our fiscal year 2023, which is the quarter ended December 31st, 2022. 2023, sorry. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion. We had another great quarter with record revenues and adjusted EBITDA. Revenues for the first quarter increased 16%, in line with the seasonality comments we gave on the last call, 86 million from 73.9 million for Q1 2022, reflecting organic growth and acquisitions. Our revenue yield improved to 146 basis points for the quarter from 139 basis points for Q1 2022. Organic growth for this quarter was approximately 8%. Annual recurring revenues totaled 290.2 million for Q1 2023, compared to 240.4 million for Q1 2022, a growth rate of 21%. Organic ARR growth generally runs a few percentage points above our total organic revenue growth. Over 80% of our revenues in the quarter continued to come from recurring sources. Software and related services remain the largest portion of our revenues representing 48% for Q1. Payments represented 47% and other 5%. Adjusted EBITDA increased 29% in line with expectations to 23.6 million for Q1 2023 from 18.3 million for Q1 2022, reflecting continued momentum in our software and services segment. Adjusted EBITDA as a percentage of revenues increased to 27.4% for Q1 2023, from 24.7% for Q1 2022, principally reflecting margin improvement in our software and services segment. Pro forma adjusted diluted earnings per share increased to 37 cents for Q1, 2023 from 35 cents for Q1, 2022. Again, please refer to the press release for a full description and reconciliation. Segment performance. Revenues in our software and services segment increased 19% to 53.2 million for Q1, 2023. from $44.8 million for Q1 2022, principally reflecting growth in our flagship public sector vertical, which includes education. Revenues in our education vertical continued a strong rebound thanks to organic sales to new school districts and higher lunch and activity fees at existing districts. Federal and state subsidies for lunch have decreased significantly since the pandemic. Software license revenues were light for the first quarter at 1.2 million, down from a big Q4 of 3.5 million. This is the most variable and difficult line item for us to forecast. Installations depend on our customers' schedules, which can be a moving target, particularly in public sector. Greg mentioned some software license deliveries, which pushed from Q1 to Q2. If those had landed in this quarter, Q1 2023 would have approximated our Q1 2022 number of 2.1 million. While we are focused on SAS and other recurring sources of revenue, license sales carry 90% gross margin, so they favorably impact quarterly results, as we saw in Q4. Despite light license sales, the segments adjusted EBITDA improved 38% to $18.9 million for Q1 2023, from $13.6 million for Q1 2022, outpacing revenues. The growth was principally driven by our public sector vertical, including education. Public sector represents over half of our consolidated business. Adjusted EBITDA as a percentage of revenues improved to 35.4% for Q1 2023 from 30.5% for Q1 2022, reflecting high margin software and services acquisitions such as Celtic over the past year and a return to traditional high margins in education. The AccuFund acquisition effective January 1st is high margin as well. Revenues for our merchant services segment increased 13% to $32.8 million for Q1 2023, from $29.2 million for Q1 2022, principally reflecting growth in our ISO, ISV, and B2B channels. Adjusted EBITDA for our merchant services segment increased 8% to $9.4 million for Q1 2023, from 8.7 million for Q1 2022, with higher revenues partially offset by higher residual expenses. In keeping with our strategy since the IPO, we have steadily redirected acquisition and internal resources from traditional merchant services into higher growth and higher margin software and services, coupled with integrated payments. Our strong balance sheet has allowed us to continue to execute our acquisition strategy. On December 31st, we had $259.6 million borrowed under our revolver net of cash under a $375 million facility. The face value of our convertible notes are $117 million. As of December 30th, our total leverage ratio or December 31st, our total leverage ratio was approximately four times while the current constraint is five and a quarter times. The AccuFund purchase effective January 1st was 12.5 million cash plus 2 million in stock for total consideration of 14.5 million at closing. We paid roughly 10 times for AccuFund, the high end of our range, because it is a strategic asset integral to our unified public offering. The interest rate for the convertible notes is 1%, while the interest rate for the revolver is currently around 8%, 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, cash interest, and cash taxes. Looking forward, the strong start to our fiscal year gives us confidence in the following guidance for fiscal year 2023. It excludes acquisitions that have not yet closed and transaction-related costs. Revenues, 360 to 380 million, no change. Adjusted EBITDA, 95 to 103 million. We increased 1 million to account for the AccuFund acquisition. Proforma adjusted diluted EPS, $1.50 to $1.62, no change. From a seasonal standpoint, acquisition activity could prove different this year. but we still expect the quarters of fiscal year 2023 to follow a similar pattern to those of fiscal year 2022. 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.
spk08: Thank you, Clay. Good morning, everyone. Before I discuss M&A, I want to comment on a few developments within our business. The public sector vertical continues to show exponential growth as we further develop our existing products and add new products, both from the ground up and via acquisition. As a result, we've seen enhanced levels of adoption. The combination of our motor carrier title registration and driver's licensing offerings into the I-3 transportation sector has been well received by the market. The I3 justice technology offering now effectively serves public safety as well as court offerings that span all levels of courts for a state. Financial ERP solutions are performing well, especially with the addition of the online general fund accounting company to our sector. In early January, we acquired AccuFund to lead our online general fund accounting GFA products lead. As a result of the architecture and configurable nature of the technology, we will deploy the AccuFund family of solutions to counties, municipalities, special districts, and select tribal nations. In addition, our modular solutions support a range of nonprofits, including social services, education, endowments, and faith-based organizations. We continue to expand our cross-vertical pollination our public education healthcare verticals will offer the enterprise AccuFund solution. As i3 education looks to the future, we continue to see the normalization of school activities post-pandemic. In addition to lunch, there is an increase in broad-based student spending, inclusive of athletics, ticket sales, and club activities. Our core objective is to provide our customer base with a seamless software experience across multiple departments. We are experiencing increased revenue as a result of high levels of adoption. I3 Healthcare continues to refine and expand our product solutions through the application of the I3 Unified Product Offering, or UPO, disciplines. The depth and breadth of our healthcare offering, coupled with the responsiveness to customer needs, is resulting in multiple I3 Healthcare subsidiaries participating in new contracts. We just signed three large-scale agreements with providers in Louisiana, Mississippi, and Texas. I3 Healthcare, like the public and education verticals, is seeing growth with a reduction of friction, increase of synergies, and cross-vertical collaboration. I'll now speak to M&A. We continue to pursue growth by performing acquisitions of companies that fit with our strategy, with an emphasis on companies in our public sector and healthcare verticals. On January 6th, we announced our latest acquisition. The acquired business AccuFund is a provider of fund accounting solutions for government entities, including education and nonprofits in the United States. The addition of this talented team will fuel growth in many of our verticals. We're very proud to have the AccuFund deal done and look forward to exciting things to come with this product and team. I would like to note that this deal fell within our normal range of multiples. Our pipeline remains healthy with opportunities for acquisitions in public sector and healthcare that are similar in size to many of our acquisitions today. This concludes my comments, Jamie. At this time, we'll open the call for Q&A, please.
spk06: Ladies and gentlemen, at this time, we'll begin the question and answer session. To get in the question queue, you may press star and then one. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. Once again, that is star and then one to join the question queue. Our first question today comes from John Davis from Raymond James. Please go ahead with your question.
spk03: Hey, good morning, guys. First, I just wanted to touch up, Clay, on your comments about the push-out and license revenue. Just want to make sure I got it right. It was about $900,000 difference. I think it was 1.2 versus you said it would have been closer to 2.1. I just wanted to clarify that.
spk01: That's correct.
spk03: Okay. And then on the margins, I think those were better than expected. You obviously raised margins for the full year despite some of the software mix in one queue. So Have you guys taken any cost actions maybe that weren't planned three months ago to help offset it, or is it just business mix and things performing better?
spk01: It's mainly business mix and education. The rebound in education has brought it back to its historical margin.
spk03: Okay. And then maybe, Greg, big picture changes in macro versus where we were three months ago, maybe comments. comment on January trends versus kind of your first quarter, you know, any changes in your view for the full year from a macro perspective for your verticals?
spk02: Good question. Last three months, you know, obviously we've been talking about a recession for nine months. We're not seeing it in our verticals. You know, it seems like we're in for a soft landing. It's, you know, we're kind of protected in government and our verticals. But no, no real changes. Just kind of feel like our timing is good. We're kind of in a sweet spot. And I think we'll finish the year strong.
spk03: Okay, thanks. And then any commentary on January, how January, I know we're lapping some Omicron from a year ago. So some of your peers have seen some acceleration in January. Just curious how your January looked relative to the December quarter.
spk01: You know, we never read much into January or February for that matter. They're the two weakest months of the year. You get a lot of returns from Christmas spending and I don't know that we've seen anything notable in January or February so far. Okay.
spk03: All right, Richelle, call your guys.
spk06: Thanks. Thanks, J.D. Once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and 2. Our next question comes from James Fawcett from Morgan Stanley. Please go ahead with your question.
spk05: Thanks. This is Sandy Bedion for James. First, a question on M&A. It feels like your team continues to execute here. What would slow or stop the pace of deal closures for your team? Just mindful of a potential slowdown in growth or increase in interest rates or even the balance sheet. Is there anything on the horizon that would challenge the cadence that your team has generally been pretty consistent with?
spk02: I don't see it slowing down. We are pickier because we've got, I think we've done 46 deals. We've got hundreds of products, very defined by verticals. This latest one, AccuFund, was like a bullseye of exactly what we needed. Took a while to talk this guy in to join the team, but we have gotten him involved, excited. But we don't worry about capital. If we had a large deal, we'd probably do an offering and say, guys, the reason we're out here doing it is because this large deal was too good to be true or we needed it. I think four a year, five a year is kind of what we can digest comfortably. I'd like them to be larger, but it's not our sweet spot. It's still $2 to $5 million of EBITDA.
spk05: Got it. That's helpful. And then just one follow-up. Looking at ARR and ARR growth, it looks like it's slowed a little bit. on a sequential basis, so the year-on-year growth numbers, but also just versus 4Q. And I wanted to ask if there was anything to piece out just with regards to seasonality, any correlation with the comments on license sales, even the organic growth profile, anything that we should keep in mind within that ARR piece?
spk01: Yeah. Well, ARR does not include the license sales, but from an organic standpoint, each million dollars of license sales is 1.4% of organic growth. So if Q1 this year had been like Q1 last year, we would have been at 9.4% organic instead of 8%. And then in Q4, of course, we jumped up to 12% because we had 3.5 million on that line. That is a pretty good line to look at if you're looking at small variations in organic growth. That's really been the difference in the last several quarters. It jumped from 10% to 12% in Q4, and the reason was that line. And this quarter, it's 8%, and the reason is that line. So that seems to be the big variable for us.
spk05: Got it. Thank you for the questions. Thank you. Thank you.
spk06: Once again, if you would like to ask a question, please press star and then 1. Our next question comes from Charles Nadin from Stevens. Please go ahead with your question.
spk07: Hi, good morning, and thank you for taking my question. Just a quick follow-up on M&A. I wanted to get a sense for if you're seeing anything different in terms of seller expectations on valuation. I know in the past you've commented that you're seeing valuations at the lower end of your target range. I wanted to just get a sense for the environment right now.
spk08: Yeah, great question. We're not seeing any changes right now. Keep in mind that We're kind of the smaller sweet spot, and the trickle-down of that kind of activity takes a while to get there. We feel like we're in a good position to negotiate at the lower end of our range on most of our deals. You know, if it's a high-growth company, it's a great fit in our product suite. We may pay a little bit at the higher end of our range, but we're not seeing any changes right now.
spk02: I think the key thing you do is you self-source your deals.
spk08: Yeah, these aren't guys that are getting called four and five times a week. We're typically the only ones talking to them, and these are a referral from one of our existing companies. So we're in a good position going in, and our model's drastically different than some of the guys out there with a lot of cash. We don't expect to lay off half the staff post-acquisition to justify the price, and they like that.
spk07: Got it. And just as a quick follow-up, I know you touched on the spend environment and public sector being favorable. And in the past, you've commented on federal funding providing a bit of a tailwind to spend. But I wanted to drill into that a little further and just get a sense for any particular areas of strength, whether from a geographic standpoint or or a sector standpoint that you're seeing, you know, areas of strength and weakness. And any general comments you might have on public sector spending I think would be helpful as well.
spk08: So I'll talk to the spending, and maybe Greg can chime in on any strengths or weaknesses. You know, the ARP was 2.1 trillion, I believe, and government entities haven't through 2024 to use those funds. We don't think a lot of governments have fully spent the funds. We're still in the process of educating them on the money that they have available to them and where they could use it. But I don't see any weakness there. I just see people taking their time. There were a lot of projects that pushed during the pandemic, and those are first order of business, and the new sales are gradually coming in. We are responding to a lot of RFPs. We're pleased with the uptick in RFPs. And the fact that we have multiple subsidiaries combining efforts on one RFP is giving us a better success level on those RFPs.
spk02: I feel like education and utilities are on fire. As exciting as education can get, which is limited, but they are investing in technology. Things cost more, so inflation has helped us. And then utilities, we have this one particular company internally called Milestone that has a pipeline that's insane. We're pretty confident about that over the next couple of years.
spk01: And geographically, I think it follows our acquisitions, but we're strong in the southeast, Texas, the Midwest. We've got a smattering out west, but that's our current geographic strength. Got it. Thank you.
spk06: And our next question comes from Peter Heckman from DA Davidson. Please go ahead with your question.
spk04: Morning, everyone. Just on healthcare, wanted to talk a little bit about where you, you know, which solutions you lead with and how are you in terms of kind of bundling solutions focused on individual niches within healthcare? I mean, where do you think you're strongest in terms of solution set and niche market within healthcare?
spk08: So our strongest product is our RCM. You know, we do quite a bit of coding work. We have a portal, patient portal today. We're enhancing the features and capabilities of that portal. We think that'll be strong in the future. Obviously, the addition of AccuFund, some products are in the works, are going to fill out our product suite a lot better. I will tell you that last quarter, I guess we announced that Paul Christians had been promoted to COO. One of his three initiatives is to create the unified product offering within healthcare, similar to how we did it in public sector. And we're extremely pleased with the amount of work that's been done in a short period of time in healthcare. And I think we'll have some more exciting things to talk about in healthcare in the next quarter.
spk02: I think the icing on the cake in healthcare is payments. We just really haven't scratched the surface yet. And, you know, it takes a few quarters, a few years to get that put in place. But we haven't even, you know, we're first base on that. So I'm excited about payments. Great.
spk04: That's great to hear. And then just back to public sector, on the statewide deals, I think between a number of your deals, you have easily a dozen states, maybe close to two dozen on a statewide deal. But as you continue to grow that business and get more referenceability, do you expect that we could see some deal sizes that get quite a bit larger and could be notable on a quarter-to-quarter basis?
spk08: Yeah, the combination of Celtic and BIS is strong in the market. Celtic, as you know, is in 18 different states and a couple of provinces in Canada. We think all of those deals that they land are going to be higher-end deals for us.
spk02: We're optimistic, but don't put it in your model yet.
spk07: All right.
spk02: Well, we will stay tuned.
spk06: I appreciate it. And ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd like to turn the conference call back over to Greg Daly for any closing remarks.
spk02: Again, thank you for your interest. Thanks for joining us this morning. Call us if you need us.
spk06: And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. You may now disconnect your lines.
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