i3 Verticals, Inc.

the organization to maintain market sensitivity and domain expertise. The next generation of UPO discipline is being deployed in public, education, and healthcare sectors with enhanced infrastructure and development resources being pulled from within the vertical sub-companies to strengthen sales, product development, operations, implementations, and deployment. These internal customer-facing market services are being bolstered by I3 teams focused on enterprise-level infrastructure, security, cloud services, development, and project management. The next evolution of public sector focuses on four primary sub-verticals, including justice technology, or Justice Tech, utilities, ERP, and transportation. Justice Tech is modernizing online court systems with fully integrated digital solutions, including e-filing, CMS, digital evidence management, and attendant reporting for full-scope state court systems. The Utility Subvertical serves large utility clients and local utilities with unmatched data delivery, IVR, digital customer engagement, and CIS solutions. The Transportation Subvertical boasts motor vehicle, motor carrier, and driver service solutions. And the ERP Subvertical includes GFA, land records, permits, licensing, and business tax solutions. As the education sector continues to expand, we deliver a fully integrated, seamless user experience to our clients. With school activities reaching a post-pandemic high, our focus is on three primary sub-verticals, nutrition services, ticketing and events, and payments. The combination of BIS and Celtic into I3 transportation delivers a needed solution to meet the demands of the transportation market. Two new state contracts and transportation sub-vertical proved the market recognizes the depth and breadth of our solution suite. In addition, the application of AccuFund across the public sector and the I3 Verticals family has proved to be a very well-received addition. As I3 Healthcare Solutions executes its UPO strategy with unified sales, marketing, product, and software engineering teams, the sector is accelerating the strategy to monetize payments across the revenue spectrum. Throughout the portfolio, subsidiaries are advancing their technology platforms to connect with patients through in-app payment, text-to-pay, e-statements, and payment portals. Additionally, i3 Healthcare Solutions continues to see the results of the UPO disciplines through the synergies of our practice management and EHR platforms targeted at geographic expansion. i3 Healthcare Solutions continues to be recognized as a market leader for delivering revenue cycle management services, evidenced by a recent award of a state-level contract to provide RCM technology and services at the agency, clinic, and laboratory levels. Demonstrating the sector's breadth across the healthcare ecosystem, i3 Healthcare Solutions also secured a contract to deliver software and consulting services to one of the top five U.S. healthcare payers. It goes without saying, but an additional result of many of these structural changes that I just mentioned will also allow us to prioritize our product investment opportunities. I'll now speak to M&A. While we didn't have a closing this past quarter, we continue to have discussions with multiple targets. The number of opportunities we look at each quarter has not changed. As you all know, acquisition timing can tend to be lumpy. This is driven by three dynamics. We're reorienting our pipeline and are looking for larger deals than we have historically. Two, we are searching for targets in new states and looking to take out potential competition in those new geographies and are dealing with a very fragmented market. And three, the trickle-down of lower valuations in the current environment has not been realized by many prospects. We remain disciplined when it comes to multiples, and as usual, we continue to self-source our acquisition targets. We still believe we will be able to continue to complete four to five deals per year, and our pipeline remains healthy with opportunities for acquisitions in public sector and healthcare. This concludes my comments, operator. At this time, we'll open the call for Q&A, please.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're 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 two. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Davis with Raymond James. Please go ahead.

Hey, good morning, guys. Clay, I just wanted to start off. Apologies if I missed it, but did you disclose organic growth in the second quarter?

Yes, it was 12%, and the $3.5 million of software license sales contributed to that. That's sort of the X factor every quarter, whether we're above or below the 10% mark.

Okay, that's great to hear. And then, Rick, just wanted to follow up on your last comment about pursuing larger deals. Historically, you guys have kind of been – you know, under $5 million of EBITDA paying 8 to 10 times. So just curious, you know, what you guys would define as larger deals and, you know, could we see a, you know, $100-plus million deal? Just curious kind of what you're thinking there.

Yeah, so historically, J.D., we've been, you know, between the $2 and $3 million, maybe $4 or $5 here and there, but we're looking at deals as high as $10 or $12 million in EBITDA. So I think that's possible. Whether we get there this year or this quarter, I don't know yet. But the pipeline's healthy. We've got a lot of businesses that we're talking to. It's just getting them to that place where we can generate a term sheet and have a deal.

Okay. Then two quick follow-ups for Clay. One is just the revenue yield improvement, you know, up 12 basis points. year-over-year, anything specific to call out there? And then one last clarification, Clay. When you said 3Q REBS and EBITDA similar to 2Q, I'm assuming you meant on a dollar basis, but just wanted to confirm.

Yeah, on a dollar basis, both revenues and EBITDA look very similar to Q2 right now. But on the revenue yield, You know, payments have come back, particularly in the education area, and so that's helped a lot with the yield. And then just the greater share of software and services, you know, going above 50%, that gradually improves our yield every quarter.

Okay. Appreciate all the color. Thanks, guys.

Thanks, Jamie.

The next question comes from James Fossett with Morgan Stanley. Please go ahead.

Great. Thank you very much. I just want to follow up on the question around acquisitions, et cetera. I mean, I know that your targets typically aren't in the same kind of realm or domain as VC-funded privates, but I'm wondering what you're seeing from a valuation perspective. And it sounds like you're pretty optimistic about being able to do larger deals, but how's the changing interest rate environment impacting how you think about where valuation should be and kind of funding mix or if there needs to be a bigger equity component, et cetera?

Well, on the higher interest rates, it obviously makes us more sensitive to acquisition multiples. During COVID, we were generally paying 10 times for businesses. We're now trying to pay closer to eight times for businesses. Rick, do you want to handle the other part?

Yeah, as far as valuations, you know, we're self-sourcing our deals, so there's not somebody in these companies' ears telling them how valuable they are. At the same time, we're running into some prospects that have had valuations done and The third party that did the valuation has done exactly what they were paid to do, make them happy and tell them how valuable they are. We hate to run into those kind of deals, but we haven't seen any change. You know, these smaller guys under $10 million in EBITDA, they don't recognize that the value has changed in the market and the trickle down takes a lot longer to affect. But, again, we're going to be disciplined. We're going to. not pay over 10, hopefully pay closer to 8, and do a fair deal for us and the seller.

We walk a fine line. These guys have worked 30 years. They built this baby. They're 60 years old. They never thought they would sell their business. We self-sourced it and tell them our story about what we're building, and they agree to join the company. And so they like that story. Timing is everything. We've had some deals fall in our lap over the last five years. M&A is part of our DNA, so you'll see a lot more of it.

The last thing I'll add to that is these guys, they all want you to pay them for all the hard work they've put in over the last 30 years. And that's not what we're paying for. We're paying for the strategic potential value being combined into our enterprise go forward. So there's that dichotomy we have to address all the time.

That's great, Keller. And then I wanted to follow up on the software portion of the business. We've kind of been through this extended period of normalization on the payment side. And you mentioned just this quarter that you're starting to see the education come back as Things like subsidized lunch from during COVID, et cetera, expire in different states. So how should we be thinking about that software piece of the business? Is it growing faster or at least more durably than the payments portion? I guess, you know, outside of M&A, how should we think about the pace of software transition, perhaps on a more organic basis?

Well, our ARR grows a few percentage points above M&A. our organic growth rates. And that is, we do expect more of that to come from software and services than from payments. Payments has been through a normalization now, and so it'll be pretty steady. However, we haven't started adding payments to our healthcare vertical in a meaningful way yet. and will continue to penetrate more of the public sector. But over time, we do expect the software and services percentage to grow from 50% to 60% and maybe 65% over the next couple of years. Got it, got it.

That's really helpful. Thank you.

The next question comes from Charles Knoppen with Stevens. Please go ahead.

Good morning and thank you for taking my question. I wanted to get, I had a follow up on Rick's comments around some of the internal initiatives you guys have pertaining to the RFP process. As we think about that going forward, should we anticipate any sort of impact on either OpEx or CapEx as a result of some of those projects you have ongoing?

No, not meaningfully. We're mainly reshuffling internal resources into a uniform team so that all of our responses are tailor-made and consistent. We do make some efficiencies from time to time, but we're also always investing, so I wouldn't expect so, no.

Yeah, the biggest point is sharing the wealth. We're going from a decentralized system to more centralized, so we're plucking people out of our sub-companies to form enterprise-level teams that will assist all companies enterprise-wide.

Got it. And just as a quick follow-up, I know the post-COVID rebound in education has provided a bit of a tailwind and should continue to do so over the next few quarters, it sounds like, but As we think about 24 and the lapping of some of those rebounds, should we anticipate any sort of a step down in growth as a result of lapping those comps? Or is it fair to think that some of the new business wins could provide an offset going forward in that business?

Well, I do think the payments piece will level out. because we've sort of had a return to what we consider fully normal in the education group, but we are always adding software and services products so that, you know, education, we're always planning the year ahead as opposed to the year we're in. That's how the selling cycle works. We've got an old, experienced hand in that business who's always full of ideas and understands the product really well. And so, no, I don't expect a slowdown, but I do expect it to shift less from payments and more from software and services.

I feel like we've got seven or eight months. We'll sell some of our existing customers of 15 million or 15,000 schools. Yeah. Another product. Yeah.

Greg makes a good point. When we've studied, you know, our first customers in their first year generally buy one product, and that's historically for us been the lunch product. And then on average every year they add one more software module. And so there is a lot of cross-selling to expense. Got it.

If I could sneak one more in. If I caught your comments correctly, the increase to the EBITDA guide, which is roughly $2 million at the bottom end, if I heard you correctly, you said that was attributable to AccuFund. Is that correct? Largely attributable to AccuFund?

So, we've added $2 million this year. $1 million we added last quarter, and that was attributable to AccuFund. We added another million this quarter. And that is more attributable to the general demand environment we're seeing mainly in public sector. And, Paul, I don't know if you want to elaborate on that a little bit.

Sure, Clay. As Clay indicated, generally we're seeing increased demand in public sector. And as we look at that, we believe it's really tied to positive budget levels and trends with property tax revenue for our clients, sales tax revenue. And still some American Rescue Plan funds that had been delayed a bit. In addition to those drivers, we're also seeing, like in the healthcare industry, public sector is also struggling with staffing and staffing shortages and increased awareness on aging infrastructure and security. So given that, we're seeing activity as a result that is positive across the board with RFIs, RFPs, product upgrades, and to Greg's point, product line module expansions.

Got it. Thank you for the caller. Appreciate it.

As a reminder, if you have a question, please press star, then want to be joined into the queue. Our next question comes from Matt Wanleet with BTIG. Please go ahead. Matt, is your line on mute? Matt, as a reminder, is your line on mute? We're not able to hear you. Can I move on to the next question? I can't hear him. Yes. All right. Our next question comes from Peter Heckman with DA Davidson. Please go ahead.

Hey, good morning, everybody. Good morning. Good morning. In terms of revenue cycle management, can you talk a little bit about that sub-niche? It appears that it's a fairly fragmented industry. What type of companies are you competing with there? In terms of winning a consulting and software deal with a top five healthcare payer, that has to have a significant amount of due diligence on the part of the customer. How do you go about winning something like that and are there other of those type of relationships or is that something that periodically you win one of those? and it cycles through, or does this represent maybe a move up in terms of capabilities and size of contract?

Well, I don't know if you want to... Sure, in touch on that.