i3 Verticals, Inc.

Good day, everyone, and welcome to the I3 Vertical Second Quarter 2025 Running Conference Call. Today's call is being recorded, and a replay will be available starting today through May 16th. The number for the replay is 877-344-7529, and the code is 5899-364. The replay may also be accessed for 30 days at the company's website. At this time for opening remarks, I would like to turn the call over to Clay Whitson, Chief Strategy Officer. Please go ahead, sir.

Good morning, and welcome to the second quarter 2025 conference call for I3 Verticals. Joining me on this call are Greg Daley, our Chairman and CEO, Rick Stanford, our President, Jeff Smith, our CFO, and Paul Christians, our Chief Revenue Officer. 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 in the company's earnings release and in 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 will now turn the call over to the company's chairman and CEO, Greg Daley.

Thanks, Clay, and good morning to everyone on the call. We have some exciting things to discuss on the call today. I'd like to start by saying thank you to everyone in our healthcare revenue cycle management or RCM business. It's been a pleasure to have you on the team, and I know you're going to do great things together with Infinex. We're proud of your performance and wish you the very best. After the divestiture of our RCM business, we're excited to be streamlined and focused on public sector vertical market. That business had a second quarter revenue growth of 12%. and SAS revenue growth grew at 23. It's an exciting time to be building in the public sector. There's been a lot of focus on efficiency and cost savings, particularly at the federal level. When we're focused at the state and local level, we embrace this national conversation. We believe that better software is one of the best ways for government Better ways that government can become more efficient while improving their services to their citizens. That is what we're committed to, helping government deliver on their promises with excellence. Something that excites me is that there are many small public sector focused software businesses that share that perspective. One such business joined us on April 1. Rick's going to share more later. but we're excited about the management team and the increased market presence in utilities. I will now turn the call over to Clay, or to Jeff, and he'll provide us more details on the financial performance. When he's finished, Rick will address our most recent deal, and finally, Paul will discuss revenue, and then we'll open up the call for questions.

Thanks, Greg. The following pertains to the second quarter of fiscal year 2025. which is the quarter ended March 31, 2025. Please refer to the slide presentation titled supplemental information on our website and provided with our format K for reference with this discussion. On Tuesday, we announced the sale of our healthcare RCM business. The business we sold had approximately 39 million of revenues and approximately 8 million of adjusted EBITDA and our guidance for fiscal 2025. The sale will reduce our head count by over 400 employees. This sale follows the sale of our merchant services business last September, and we need to start by clarifying some labels and classifications. The sale of our healthcare RCM business did not qualify as assets held for sale or discontinued operations as of March 31st, our current reporting period. As such, for financial reporting purposes, when you look at our earnings release or later our 10Q, Continuing operations refers to our results, exclusive of the merchant services business, but including the healthcare RCM business. The healthcare RCM business will then become discontinued operations as part of our Q3 reporting cycle, or June quarter. And we will be able to give more complete historical financial information related to the divested business then. For now, when we remove the impact of the divested healthcare RCM business, we will call that RemainCo, and our discussion on our quarterly results in the Outlook section will be focused there. RemainCo revenues for the second quarter of fiscal 2025 increased 11.6% to $54.1 million from $48.5 million for Q2-24, reflecting $4.4 million of organic growth, or 9%. and $1.2 million of revenue from the permitting and licensing acquisition we made last year in the public sector. Growth for the education revenues were in line with organic growth for RemainCo as a whole. Annual recurring revenues for RemainCo increased 9.2% to $164.5 million for Q2 2025, compared to $150.6 million for Q2 2024. 76% of our revenues from the quarter came from recurring sources, driven by SaaS revenue growth of 23%, transaction-based revenue growth of 8%, and recurring software services growth of 12%. Non-recurring sales of software licenses for RemainCo increased to $2.8 million for Q2 2025 and just $1 million for Q2 2024. We expect software license sales to be lower for the second half of the fiscal year relative to the first half. Romainco software and related services represented 70% of Romainco revenues for Q2, with payments 26% and other 4%. Adjusted EBITDA for Romainco increased 17% outpacing revenues to $15.8 million for Q2 2025 from $13.5 million for Q2 2024. Adjusted EBITDA as a percentage of revenues was 29.3%. an increase from 27.9 for Q2 2024, reflecting higher software sales, which carry high margins. Regarding the balance sheet, following the sale of our merchant services business last September and the sale of our RCM healthcare business this week, our balance sheet is strong and well positioned for the future. As of March 31, net debt stood at $4 million. We repaid the balance of our convertible notes at maturity during February. Following quarter end, we purchased the utility billing software company for $9 million, which we'll profile. We also paid an earn out of $1.5 million associated with the divested healthcare RCM business. We sold the RCM healthcare business for $96 million, less transaction costs and taxes of almost $18 million. So we currently have a cash position of approximately $64 million. We still have $400 million of borrowing capacity under our evolving credit facility with a 5x leverage constraint. We intend to use the cash and any borrowings for acquisitions and potential stock repurchases. The following introduces guidance for RemainCo for fiscal 2025. The outlook does not include acquisitions or dispositions that have not been announced or transaction-related costs. The utility billing software acquisition is a high-margin business, and the price of $9 million was on the high end of our normal multiple range. The effective date was April 1st. Revenues, $207 to $217 million. Adjusted EBITDA, $56 to $61 million. Appreciation and internally developed software amortization, $11 to $12 million. Cash interest expense, $0 to $750,000. Per forma adjusted diluted earnings per share, $0.96 to $1.06. In view of recent trade friction between the US and Canada and ongoing delays with our Manitoba contract, We have removed about $2.5 million of revenues which were previously included in our outlook for fiscal 2025, principally in the second half of the fiscal year. We still continue to expect high single-digit organic revenue growth for Remainco in the absence of the healthcare RCM business, and we continue to expect adjusted EBITDA margin improvement of 50 to 100 basis points per year. From a seasonality standpoint, we currently expect our revenue distribution for the remaining two quarters to approximate the following. Q3, 48%. Q4, 52%. Public sector payments and software services revenues declined seasonally during Q3, along with education revenues while school was out. Although software license sales are less a factor than in years past, they still represent the most variable line item forecast and can distort seasonality in any given court. I will now turn the call over to Rick for comments on M&N.

Thank you, Jeff. Good morning, everyone. I'll speak about our most recent acquisition, and then I'll turn the call over to Paul for updates. In last night's earning release, we announced that we have closed another public sector acquisition in the utility billing space. This acquisition expands our business in various states, but also creates a new footprint in many states where we do not operate today. With this acquisition, we feel this will give us ample room to run in those new states in the future from a sales perspective. The company we acquired serves small to medium-sized municipal utilities, providing utility billing and inventory solutions, such as inventory cost tracking and supply management that supports purchase orders, project management, and work order integration. Their software is cloud-based and mobile compatible. Utility Billing Platform allows users to import meter reads and supports both AMI, Advanced Metering Infrastructure, or two-way communication, and AMR, automated meter reading via walk-by or drive-by reading integration. This helps streamline the billing process and seamlessly integrates into various accounting systems. The software also offers email and text alerts for automated billing reminders. The company has recurring payments, and print and mail revenue streams, both of which are outsourced today. This acquisition should enhance I3's offerings in the utilities market overall. For example, being able to track and bill multiple meters per account is a feature that we needed to supply with current and new potential customers. In addition, there are areas of our business model that offer us opportunities for growth. For example, they have historically not licensed their software on a SAS basis. which is already in the process of changing. In addition, we feel that i3's internal payment processing platform should improve the economics of that portion of their business. They currently outsource that function. We are encouraged by our integration of prior acquisitions and the ability of our engineering group to build full payments integration into new products and our time to market with our software and payments as a combined solution. To that end, this acquisitions engineering team has already begun the process of coding to our current API so that payments can be made in-house versus using a third-party vendor. Beyond printing and payments, i3 has several other products in the utility market, including a best-in-class eIVR, enhanced interactive voice response, and customer portal. While these products generally are sold to larger utilities, we expect over time to find cross-sell opportunities acquisitions existing customer base. Our acquisition pipeline continues to be strong with our primary focus on acquisitions in the public sector vertical and the markets they serve. We look forward to sharing more information on M&A activity as it becomes available. I'll now turn the call over to Paul for final comments.

Thank you, Rick. At i3 Verticals, we remain committed to a domain-specific approach across our targeted markets. By offering tailored solutions and deep domain expertise, we create meaningful adoption and barriers to entry. Our customers know that with I3, there is certainty of deliverables and execution, which fosters trust and long-term relationship. This is evident in select enterprise markets that interface with consultants or selection companies that are domain specific. That has been positive for I3 as the broader market understands our branding, market focus, domain expertise, and responsive software solutions. We are monitoring the geopolitical landscape and see opportunity for I3. We do not currently have any direct business with the federal government. However, we have seen opportunities emerge at the state and local levels which appear to be tied to evolving DOGE style efficiency requirements. While those developments are encouraging, it is too early to determine whether they represent a trend. Our ability to monetize software systems by offering perpetual licensing, SAS, user fee plus payment models to our customers drives significant advantages for I3. This structure lowers barrier to entry by reducing upfront financial hurdles. In turn, it accelerates implementation timelines, enhances speed to market for our customers, and helps them protect their operating budget. And it insulates us from volatility associated with shifts in government priorities or funding cycles. Cross-selling activities across our public sector markets of VRP, public safety, justice tech, public education, utility, and transportation remain robust. By concentrating on these markets, we deliver highly integrated solutions that address a wide range of customer needs. Our continued execution in these areas will remain a significant driver of organic growth over time. This has resulted in a healthy balance of contracts across the spectrum of our markets with the number of contracts and bookings revenue up double digits on a sequential quarter basis. The public education market has been particularly productive with new contracts, with contracts in five new markets, including Idaho, Texas, Oklahoma, North Carolina, and Delaware. We're also in the process of finalizing contract for a statewide court system in our justice tech market. We're anticipating having more to share on this on next quarter's call. I am also pleased to share the status of our artificial intelligence applications and initial market acceptance. We have created an I3 infrastructure group leveraging common infrastructure security and development platforms in support of our public sector market efforts. Our focus mirrors our domain-specific product sales and deployment model, initially looking to solve client pain points while enhancing client efficiency. This includes the release of an AI service agent in our transportation market that is deployed across the state in each of the 95 counties. In our ERP market, we are just releasing a module in our land records application focused on automated indexing. The module provides clients with significant improvement in accuracy and efficiency. On our last call, I discussed the success of our I3 customer engagement ePortal, particularly in enterprise utilities markets. We have continued our product evolution by enhancing our AI market offerings that we introduced this week. The initial release focuses on I3 generative AI bots capable of handling complex end-to-end transactions that integrate with an I3 agent assist dashboard that summarizes account history, generate recommended actions, and automate communications, improving customer satisfaction. This is accomplished via a secure I3 AI knowledge layer integrated into billing systems and accessible across I3's ePortal, eIVR, and CSR interfaces. This concludes my comments, Rocco. At this time, we will open the call for Q&A, please.

Absolutely, sir. If you'd like to ask a question, please press star then one on your telephone keypad. If your question has already been addressed and you'd like to remove yourself from queue, please press star then two. Today's first question comes from John Davis at Raymond James. Please go ahead.

Hey, good morning, guys. Jeff, appreciate the color on the go-forward kind of growth algo, you know, more or less unchanged. You know, good to see 9% organic growth in the quarter. Our math suggests that The HCM divestiture is probably about 100 basis points, accretive to revenue growth and overall margins. As we go into next year, how should we think about, or even this year, the run rate of what's left of the healthcare business? So if you've annualized the first half of the year, it would be a $10 million business. If you annualize the second quarter, it's more like seven. So just curious how big that remaining healthcare business is.

So the remaining healthcare business is this piece of the healthcare setting that was focused on workflow software for providers specifically. We'll resegment this coming quarter, and it will probably not be large enough to stand on its own as a segment go forward. This growth profile should be fairly consistent with the rest of the remaining public sector business and the education business. It's revenue approximately $8 million for the fiscal year, roughly.

Okay. And margin profile look more like public sector or look more like health care?

Margin profile, fairly consistent with public sector.

Okay. Yeah, no, that's great. And then? Just as we think about free cash flow conversion of RemainCo, obviously this quarter of free cash flow was muddied by a bunch of different stuff, but historically you guys have talked about two-thirds of EBITDA from a free cash flow conversion perspective. Is that something similar we should expect for RemainCo or any kind of puts and takes there?

Yeah, it will remain kind of a little bit muddy because of taxes from these divestitures, but the go-forward free cash flow conversions in kind of a steady state right where we are right now, should be well in excess of two-thirds. And that's partially driven by the fact that not only will we not have interest expense the remainder of this year, assuming no M&A activity, we'll have interest income. So, you know, even though we're kind of increasing investment in the rate of CapEx and, you know, what we're developing on the software side, There's things kind of cutting the other direction on that, too, between AI, offshoring. We're kind of increasing our output without having to increase our cost substantially. And then, yeah, obviously our balance sheet puts us in a position where our free cash flow conversion is just excellent right now.

Okay. And then last one for me, Jeff, just. Any help on cadence, 3Q, 4Q, revs and margins? We've got a lot of moving pieces here over Maine Co. So, obviously, lots of detail on the updated guide and the moving pieces there, but just curious if you can help us, Annie, with 3Q, 4Q cadence for revenue and or margins.

Yeah, so we noted that the Q3 revenue, that'll be our low point. should be about 48% of the remaining revenue, and Q4 should be, you know, we expect about 52%. There's a little bit that could kind of move in or out of those depending on when some of the one-time revenues hit. But given the drop in revenue in Q3 that we kind of expect seasonally, that will also kind of be the low point from a margin perspective, you know, dip down into the mid-20s for that quarter before back up into the high 20s in Q4.

Okay. Appreciate all the color. Thanks, guys.

Thank you. And our next question today comes from Peter Huckman with DA Davidson. Please go ahead.

Hey, good morning. Thanks for taking the questions, and congrats on the sale of the RCM business. Looks like a nice deal, and the Remain Co. certainly is much more of a focused pure play. Just a couple questions on fine-tuning, but the $64 million in cash at the end of this week, Do you anticipate any additional taxes on either divestiture that still need to be paid, or is that a good net number?

Yeah, that's a net number I think you could come up with.

Okay, great. And then is the small utility billing acquisition included in updated guidance?

It is, yeah.

Okay. Okay, great. And then, go ahead.

I mean, when you're kind of modeling that, expect high end of our range and a high margin business.

Got it. Okay, that's helpful. So really, as John said, the domestic share really should be enhancing to organic growth rate and to margins and really create almost a pure play on the public sector and and give you some really good dry powder to go after M&A. I guess in terms of that pipeline, you said it was quite strong. I guess are you seeing deals? Actually, we expect deals kind of consistent with your historical practice with most of the deals being kind of relatively smaller tuck-in deals and then potentially from time to time something that's more of a mid-sized deal.

Yeah, we've looked at some larger ones, but that's really not our specialty. I think you'll see us do smaller tuck-ins, very fragmented. You know, our focus has become very, very focused. I mean, just more rifle shot now, public sector, utilities, education. You know, I'd like to say we'd do a larger one here or there, but I think you can count on more regular small deals in the next couple of years.

That makes sense. That makes sense. Okay, and then just last question on Manitoba. I guess, is that taking, I think you said $2.5 million, but taking some future revenue out of the guidance system? Is that something that you feel like that's a formal decision, or is that conservatism just based on some of the discussions you had with the customer at this time?

Definitely conservatism based on discussions with the customer. That's something that has repeatedly been delayed, and there now appears to be a sequencing issue with the customer in terms of they have some other large enterprise projects, including an ERP one that they think needs to sequentially happen before we can kind of keep progressing on our end. Some of the discussions are exciting in the long run. So, I mean, you know, we're still really happy and grateful to have that relationship with that customer. We obviously wish that we could go faster, but, you know, we are in client service and we have to kind of fall in line with what they think. And so the picture at the, you know, we thought we had kind of adequate conservative guiding last fall, and everything was kind of moving in that direction from a momentum perspective. And the picture's just kind of changed right now, unfortunately, so that's why we've made the choice we have.

Okay, that's helpful. I appreciate it.

Thank you. And as a reminder, if you'd like to ask a question, please press star then 1 on your telephone keypad. We'll pause for just a moment to assemble our roster. And our next question today comes from Alex Markrath with KeyBank Capital Markets. Please go ahead.

Thanks. Hey, Jeff, just curious on the Romainco ARR growth number that you gave. I think it was 9.6%. Any sort of compare you can give for us sequentially or otherwise just to understand how that has trended?

Yeah, so... I think substantially it's down just slightly. Main culprit of that being the payments revenue. I have a much more optimistic view of payments revenue in the back half of this fiscal year. There's a few situations where we're on a pricing structure that is convenience fee, and we're enduring some higher interchange rates before our price increases went into effect. And so we... We expect the margin to kind of tick up a little bit, and that kind of leads to a little bit better growth the back half of the year on payments growth. So expect that to be – it was only 4% year-over-year this quarter. Expect that to be back in line with kind of the broader company growth rate by the end of this fiscal year. And we still think that most quarters the ARR growth is going to lead our normal organic growth. it's a little bit out of sync this quarter because we had such a great license quarter. But normally, you know, that would be the leader. And you can see that, especially as the SaaS momentum kind of continues to grow and launch forward, that's just really gonna keep carrying us and carry a further outsized kind of a pull on the overall picture.

Thanks, and then maybe one for maybe Greg or Paul, just on the AI products that are being introduced. Could you just speak to sort of the readiness for AI at your customer segment? Thank you.

Yeah, I can take that one, Greg. The interest level has been really high. I think part of the reason that the interest level has been so high is that our focus is on solving pain points and doing that in a in a very specific focused fashion. And so it's tangible for customers in the sense that they've struggled with something for a period of time and they're having a hard time being responsive to it. And by having the company organize its domain expertise and the deliverables the way they do, we can get to market quicker on those and solve those pain points. So the interest level has been high. And the adoption indicators of adoption on that continue also to be high. And it's evident that there's a need there. And they're a little bit lost in the sense of really large enterprise things about how to employ that. And we developed platforms internally to support it. But the application of it's really more of an applied AI technology. which makes it more tangible and easier for them to pull the trigger on, which is being well received.

Great. Thank you. I appreciate the comments.

Thank you. And, ladies and gentlemen, this concludes our question and answer session. As it's time, I'd like to turn the conference back over to Greg Daley for any closing remarks.

Again, thank you for your interest and support. We're excited about what our next couple of years, so stay tuned. And reach out to us if you have any questions. Thank you.

Thank you. And this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.