i3 Verticals Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 12 speakers on the call.

Operator

Good day, everyone, and welcome to the I3 Verticals Third Quarter 2023 Earnings Conference Call. Today's call is being recorded and a replay will be available starting today through August 16. The number for the replay is 8,000,000,344,750 9 and the code is 5,250,524. 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 Jeff Smith, SVP of Finance.

Operator

Please go ahead, sir.

Speaker 1

Good morning, and

Speaker 2

welcome to the Q3 2023 conference call for i3 Verticals. Joining me on this call are Greg Daley, our Chairman and CEO Clay Woodson, our CFO Rick Stanford, our President and Paul Christians, our COO. 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.

Speaker 2

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 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 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'd now like to turn the call over to the company's Chairman and CEO, Greg Daily.

Speaker 3

Thanks, Jeff, And good morning to everyone on the call. We're excited to present our Q3 results for the fiscal year. This quarter we set another record for revenue and adjusted EBITDA, which were up 17% 26% over the same quarter last year, which reflected our improving margins. We continue to focus on bringing excellent software to our vertical markets. We monetize these solutions primarily through recurring sources of revenue through a variety of means, such as Software as

Speaker 1

a Service or SaaS,

Speaker 3

which grew 20% over the prior year or volume based payments, Fees which grew at 14% over the prior year. Depending on our needs of our customers, we can align incentives and lock Overall, software and related services revenue made up over 50% of total revenue. Rick will elaborate in M and A later, but we continue to explore opportunities. There are many in our markets of focus such as public sector. Our standards are very high and we are patient and disciplined.

Speaker 3

We want deals that fit our culture and offer us more tools to execute in our vertical strategy. However, to say that our team is staying busy despite the slower pace of M and A would be an understatement. We have seized on the moment to accelerate internal optimization and are proud of the strides we have made. We've always intentionally counter positioned ourselves against private equity or other strategic buyers who would focus on quick wins, Short term home periods and aggressive synergies, this has served us well in leading into acquisitions Many great businesses and attractive financial profiles. We have retained incredibly talented people and have accomplished this mostly through a proprietary pipeline of M and A.

Speaker 3

The word is out that i3 Can be trusted with your business, which might be your life's work. However, when the deal is closed, There is much integration work that is necessary. This is where our culture makes the difference. Post close, our sellers quickly see what can be accomplished together and I'm always amazed at the willingness to collaborate, Some of the areas that our team has centralized and upgraded This year include our enterprise RFP response team and enterprise support team and consolidation of many of our professional services functions. Please join many other shared services such as marketing, accounting and legal that are always continuing to improve.

Speaker 3

These wins have the business clicking on all cylinders. To illustrate that, we are proud to announce 2 state level wins from our Justice Tech and Transportation Divisions of Public Sector. We've never been better positioned to compete in many more similar processes And I'm excited about the additional detail Rick has to share. But first, I'll turn the call over to Clay And he will give you more details on our Q3 financial performance. Following Clay's comments, Rick will provide more detail and update on the business

Speaker 4

Good morning. The following pertains to the Q3 of our fiscal year 2023, which is the quarter ended June 30, 2023. 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 Q3 increased 17 percent to $93,900,000 from $80,600,000 for Q3 2022, reflecting organic growth and acquisitions.

Speaker 4

Our revenue yield improved to 150 basis which totaled $2,800,000 Although software license sales are not a part of annual recurring revenues, growth from quarter to quarter. ARR totaled 311,400,000 for Q3 2023 compared to $266,700,000 for Q3 2022, A growth rate of 17%. Over 80% of our revenues in the quarter continued to come from recurring sources. Software and related services remained the largest portion of our revenues, representing over 50% for Q3. Payments represented 45% and other 5%.

Speaker 4

Adjusted EBITDA increased 26 percent outpacing revenues to $25,300,000 for Q3 2023 from $20,100,000 for Q3 2022, reflecting continued momentum in our Software and Services segment. Adjusted EBITDA as a percentage of revenues increased to 26.9 percent for Q3 2023 from 24.9 percent for Q3 2022, reflecting margin improvement in our Software and services and merchant services segments. Pro form a adjusted diluted earnings per share increased to $0.38 For Q3 2023 from $0.37 for Q3 2022. Again, please refer to the press For a full description and reconciliation. Segment performance.

Speaker 4

Revenues in our Software and Services segment increased 23 percent to $58,900,000 for Q3 2023 from $47,800,000 for Q3 2022, reflecting broad based growth in our public sector vertical and healthcare verticals. Public sector represents over half of our consolidated business. It includes the education which deserves special mention. Revenues in our education subvertical continued a strong rebound, thanks to organic sales to new school districts and higher lunch and activity fees at existing districts. Federal and state lunch subsidies have decreased significantly since the pandemic.

Speaker 4

The segment's adjusted EBITDA improved 33 percent to $20,800,000 for Q3 2023 from $15,600,000 for Q3 2022 outpacing revenues. Adjusted EBITDA as a percentage of revenues improved to 35.4% for Q3 2023 from 32 such as Celtic over the past year and a return to traditional high margins in education. The AccuFund acquisition effective January 1 was high margin as well. Revenues for our Merchant Services segment increased 7% to $35,000,000 for Q3 2023 from $32,700,000 for Q3 20 20 to reflecting growth in our B2B and ISO channels. Adjusted EBITDA for our Merchant Services segment increased 16 percent to $10,200,000 for Q3 2023 from $8,800,000 for Q3 2022 outpacing revenues.

Speaker 4

Both our B2B and ISO channels Our balance sheet remains strong and well positioned for 2024. On June 30, we had 272 point $4,000,000 borrowed under our revolver net of cash. The face value of our convertible notes are $117,000,000 As of June 30, our total leverage ratio remained approximately 4.0x. The current constraint is 5 times under our new $450,000,000 revolving credit led by JPMorgan Chase. The interest rate for the convertible notes is 1%, while the interest rate for the revolver is currently around 8.5%.

Speaker 4

Over time, we expect to convert roughly 2 thirds of adjusted EBITDA into free cash flow, which can be used for debt repayment, acquisitions and earn outs. We define free cash flow as adjusted EBITDA minus capital And we have not closed an acquisition. With only 1 quarter to go, we could have narrowed guidance ranges, The midpoints remain the same, which are our own best estimates of where we think things will shake out. For revenues, we do not expect quite as large a step up from Q3 to Q4 as we saw last year. The end of free lunch and education last year represented a $2,000,000 sequential step up from Q3 to Q4.

Speaker 4

We also had our largest historical quarter for software license sales of $3,500,000 in Q4 last year, a $1,400,000 sequential step up from Q3 last year. On the flip Our adjusted EBITDA margin has trended well, running 2 percentage points ahead of last year and we expect that to continue for Q4. As in the past, we will give guidance for fiscal 2024 when reporting our fiscal Q4 of 2023. I'll now turn the call over to Rick for company updates and pipeline.

Speaker 5

Thank you, Clay. Good morning, everyone. I'll start with updates on the business and then cover M and A. When I sit down to prepare for this call each quarter, I think about where we've been, Where we are today and where we want to be tomorrow. 11 years ago when Greg spoke to me about his idea to create a software company comprised We worked together on a strategic plan and began quickly executing it.

Speaker 5

When I look back at that plan today, little has changed from the original design. To date, we have completed 48 acquisitions. Since going public in June of 2018, both run rate revenue and EBITDA have more than tripled from $101,000,000 in revenue and $28,000,000 in EBITDA. At this point in our evolution, we are devoting more effort to creating one team with one brand focused on driving results together. Over the last 6 months, we've aligned many departments and sub companies in the public, education and healthcare sectors under a common i3 Verticals model.

Speaker 5

The alignment augments infrastructure and development resources across both vertical and enterprise service delivery areas. To ensure domain expertise, many of the resources are being combined with like roles from sister vertical sub companies. Adoption has been enthusiastic and increased infrastructure and development synergies are strengthening sales, Product development, operations, implementations and deployment. In addition, these internal customer facing markets are being bolstered Our i3 team is focused on enterprise level infrastructure, security, cloud services, development and project management. Given the vertical alignment success, we are aligning the entire organization so that we operate as one cohesive company.

Speaker 5

As a result, we have adopted and refined our shared services model and brought individual sub company departments coordinated and cohesive enterprise level. The enterprise level teams historically consisted of finance, marketing, HR and legal. We have added an RFP response team, professional services, infrastructure and security. Resources are being deployed to meet organization wide operation and sales support, while maintaining vertical and domain expertise. Our marketing team is coordinating with vertical heads enterprise wide to position our messaging in a strategic effective manner.

Speaker 5

The enterprise level marketing team coordinates with dedicated vertical market and product managers to ensure domain and brand continuity Professional services, client migration, implementation and integration who have both vertical product and functional expertise and will serve all verticals company wide. The group delivers a seamless, consistent, client focused experience throughout software implementations. The unification of the RFP team, project management and professional services is expected to increase services revenue and decrease the time between contract signature and client delivery. Our enterprise RFP The response team is comprised of domain experts from across the organization. The team is creating precise, comprehensive and unified We are investing in this team to meet increasing demand from large utilities, healthcare systems and statewide public entities.

Speaker 5

Our unified approach to research and writing, solution engineering, negotiation and legal review has been effective thus far and we are winning new deals under this We are committed to leveraging robust technological solutions, so we are accelerating our Cloud migration strategy for critical technology over the next 2 years. Our cloud first approach to delivering technology includes a blend of both public and We have strategic relationships with both AWS and Microsoft who are assisting us with this transformation. Our remaining cloud agnostic, we choose the best technology to deliver optimal solutions to our customers. The cloud empowers us to adapt swiftly to evolving customer needs, ensuring that we can provide real time solutions, seamless interactions and state of the art data security. We use Microsoft 365 to improve our abilities in the areas of identity and access management, threat protection, Information Protection and Security Management.

Speaker 5

We are utilizing Azure Virtual Desktops to manage global resources from a centralized While integrating seamlessly with other Microsoft tools across the enterprise,

Speaker 4

we are

Speaker 5

currently working on a single sign on solution based purely on Azure technology to allow our customers to log into our software applications and services using a single set of credentials. Our payment technologies utilize AWS Fargate to deploy and manage serverless containerized applications in a secure Highly available redundant manner allowing us to auto scale our applications when needed to handle spikes in customer demand. AWS allows for seamless integration with 3rd party tools such as CloudFair giving us the ability for automatic We are also using instances of artificial intelligence in select customer service environments. In all circumstances, the knowledge base is internal to I3 in response to the specific product solutions where there is market acceptance. We are leveraging I3 India to enhance cost and speed to market when developing our proprietary vertical, enterprise and payment technologies.

Speaker 5

Terry Vertical, Enterprise and Payment Technologies. I3 India gives us access to skilled talent allowing for improved delivery utilization. Our focus is on rapid development tools such as low code accelerate certainty of execution and speed to market. We have implemented an enterprise wide agile software development lifecycle giving us Flexibility to meet market demands, enhanced quality for better user experience and a customer centric approach focused on collaboration, Continuous improvement and transparency. The public sector continues to see positive market response to our wide range of solutions.

Speaker 6

With the

Speaker 5

support of Align Marketing Enterprise Solutions and RFP teams, i3 Public successfully sold and deployed enterprise level solutions. Our Justice Tech division closed a 5 year contract with a state level judiciary AOC to deploy our online dispute resolution product and our utility vision expanded its portfolio with a Tier 1 utility with our digital customer engagement portal solution and our payments. In addition, the transportation division specifically the formerly known Celtic part of that group won a significant state level DMD 3rd quarter sales in Education sector are strong and contribute to a record year for i3 Education. As a result of focusing on software sales and strategic partnerships, we are adding more than 100 new districts to our customer base across the spectrum of the i3 Education Software Suite. I3 Healthcare Solutions is strengthening its market position By closing enterprise deals, leveraging enterprise and vertical specific synergies, i3 Healthcare expanded their reach in the Louisiana and Alabama, they also formalized a new partnership with a state level respected health science system to deliver RCM services.

Speaker 5

Adoption of the common i3 alignment model within i3 Healthcare has yielded improved profit margins for professional services has produced record utilization rate for the quarter. This has allowed us to do more with fewer resources. I3 Healthcare's software engineering team delivered an integrated solution between our EHR and medical billing platforms to facilitate the delivery of patient statements and payment portals to further monetize the process. I3 Healthcare is engaged in A highly focused business process strategy to optimize current business processes and look to new service delivery technology leveraging artificial intelligence, machine learning and robotic process automation. It should also be noted that all verticals have adopted a unified Salesforce to represent the entire product suite of the respective verticals.

Speaker 5

In addition, i3 has enterprise software suite It spans all verticals and can be sold by the entire i3 sales force.

Speaker 7

Products

Speaker 5

include TruSign, TruCertify, IVR, Digital Community Portal, EOS and the I3 PayTech product suite. Market and vertical We looked at several companies this past quarter, but elected not to execute any term sheets. This stems largely from our desire to bring the offer multiples down We can determine early if the company will be a good fit if the financials make sense and if we can grow and further monetize through the company. If not, we gracefully back away from the table. Our pipeline continues to be full of companies in both public sector and healthcare coming in and going out of the pipe.

Speaker 5

We expect that we will continue our normal pace of acquisitions and are not concerned about our ability In the meantime, we will continue to focus on growing the company, streamlining operations and paying down debt. As usual, we continue to self source our acquisition targets. This concludes my comments, Megan. At this time, we'll open the call for Q and A, please.

Operator

We will now begin the question and answer session. The first question comes from Matt Val Lehend with BTIG. Please go ahead.

Speaker 7

Yes, good morning. Thanks for taking the question. I guess, first, as you look across the pipeline ahead, how are you feeling about A number of large deals, any specific verticals where you feel like the pipeline is maybe even more robust than the rest of it As you've had some really recent good recent success here and how some of those reference customers are helping you, Help us just kind of look towards the next few quarters on where you think you'll see the most strength?

Speaker 3

So public sector still dominates Our pipeline, we're still very How well it's performing? Healthcare has though picked up activity. I would say Last quarter, public sector was probably 80% and healthcare was The balance of that, it's more probably sixty-forty in the pipeline with Public sector is still leading the way. As far as large deals concerned, I think we're still sticking to our Sweet spot. We would do one if it came along, but it's not something that we In our pipeline that I foresee us doing in the next year, $1,000,000 to $5,000,000 of EBITDA is still our sweet spot.

Speaker 3

Our multiples are probably in the Our normal plan, but feel really good about The pipeline and it seems like it had slowed down 6 months ago that The activity in the last 60 months in 30, 60 days has been pretty amazing.

Speaker 7

Okay. Very helpful. And then as you look at a number of the newer products you've rolled out and maybe more Importantly, the shared services teams now over the overlaying a number of your vertical go to market teams. How are you seeing overall deal sizes trend? Are you seeing customers maybe buying more than 1 module upfront?

Speaker 7

Or is this still A little bit more of a land and expand strategy and the shared services teams are just helping everyone be a little more informed on what the opportunities are after landing.

Speaker 5

So, good morning, Matt. Yes, so We ship our model typically to sell one product and then go in with the second and third and fourth and so on over time. The fact that we've got enterprise level teams working across the entire vertical, our sales people as well as our product teams are aware of the entire suite. So I think we're able to offer 2 and 3 more products at a time at this juncture because we

Speaker 6

We have an expanded knowledge

Speaker 5

across the vertical as far as the proprietary software that we've created in house that spans all verticals. We continue to push that And train our customers on the availability of those products.

Speaker 7

Great. Thank you. Appreciate the questions.

Operator

Our next question comes from Peter Heckmann with D. A. Davidson. Please go ahead.

Speaker 8

Good morning, gentlemen. Thanks for taking

Speaker 7

the question.

Speaker 8

When you think about kind of the largest deals from an RFP standpoint that you'd be willing to go after, When you're whether you're talking about TCV or annual contract value, are these deals going to be $1,000,000 $2,000,000 a year? I mean, You see the potential for winning deals that could be, let's say, dollars 40,000,000 over 5 years?

Speaker 9

This is Paul Christians. We are seeing in our because of our RFP team and

Speaker 5

Depth and

Speaker 9

history in the public sector and healthcare to a degree, A more natural a little bit more of a natural movement to larger enterprise opportunity that require Multi products for execution on those. As Jack, we've been seeing that over the last several years. It's beginning to get a little bit more steam at this point given the recognition and the joining of Calsicom BIS for that whole transportation sector. That's been useful for us and in our court systems as well. So generally, we see that those deals tend to be We don't see them as often as what we see county or municipal level deals.

Speaker 9

So they tend to surface with Without any consistent regularity, but we're very happy where we're positioned with them.

Speaker 3

I think one of the key things is the duration. I mean, these are 5 and more and more 7 year contracts. I would say that we're talking $5,000,000 to $10,000,000 deals where we never saw those and now we are responding to A couple of those per month and the jury is out, it's early, but we're optimistic about Winning a fair amount of those larger deals over 5 to 7

Speaker 10

We feel really good about our pipeline.

Speaker 8

Great, great. I mean, certainly we've seen it. I think you have statewide deals in, I don't know, 15 4 or 5 Canadian provinces. So clearly doing it, but the potential is there and those type of deals provide some great visibility recurring revenue. In terms of ramping those up, I mean, I know that each many of the companies that you purchased had existing Software Solutions, but typically how do you think about the any either implementation Work on professional services or kind of discretionary custom development that you might have to do for some of these deals?

Speaker 8

As you move up, does that get a little bit more significant or not?

Speaker 9

I do believe it gets more significant, We also have more resources than we've historically had and an organization aligned to support that. So the movement to enterprise level Continue to do that and enhance the certainty of delivery even over what we've done historically.

Speaker 3

Their existing technologies got to be 20 years old, maybe 30. And so we are definitely bringing them out of the dark ages. COVID helped us, but it's quite dramatic what we are installing versus what they're using today.

Speaker 8

Right, right. Okay. And if I could just squeeze just one more in, in terms of thinking about 10% organic growth in the quarter, that's great. In terms of do you have a preliminary thought for Fiscal 'twenty four, I mean we're thinking high single digits is appropriate?

Speaker 4

We are thinking high single digits. This year education provided a tailwind as free lunch went away and we saw that in the Q4 of fiscal 'twenty two. So but we're still thinking high single digit, which is consistent with what we've guided since the IPO.

Speaker 8

Great. I appreciate it. Thanks.

Speaker 3

Thank you.

Operator

Our next question comes from John Davis with Raymond James. Please go ahead.

Speaker 11

Hey, good morning guys. Rick and Greg, appreciate all the comments on But Greg, I want to dig in a little bit on your comment around valuations. What are you seeing from a private market perspective? Obviously, public markets have reset, but it seems like still a little bit of a hang up. So is that the biggest hurdle to doing deal today?

Speaker 11

And then how do you think about is your valuation and what you're willing to pay? I assume that's impacted by the fact that you're kind of paying 8% on the debt, so the hurdle becomes higher. But just curious like what the big hang up is and how you guys think Broadly about kind of paying down debt versus doing M and A.

Speaker 3

Great question. Valuations, we self source the deals JD, so they believe us, they trust us. Very rarely do we talk multiple. We send them a term sheet that says Here's $15,000,000 for your $3,000,000 worth of EBITDA. We moved that up with an earn out Based on growth, we give them stock options.

Speaker 3

It's a deal that is fantastic. We've done a deal with Milestone. We've done one with SSI. And these companies are growing dramatically, perfect fits. And so We probably paid 8, 9 or 10 times and gave them a sweet earn out.

Speaker 3

We don't those deals don't come across our desk very often. We're being conservative on valuations because I think we have a lot more to choose from. I mean, it seems like we used to do half of the deals we look at. Now we do Less than 10%. We're pickier.

Speaker 3

We've got we don't need More case management systems, we've got 5 of them. And a lot of it boils down to the person. I mean, I walked back into the office after a meeting in Houston last week and I go, wait till you meet these guys that I just met. And that's big. We're looking for 40 year old Family owned software businesses that need upgraded, that need shared services, that need marketing, legal.

Speaker 3

It's all about timing.

Speaker 11

Okay. That's helpful. And then Clay, just I heard Rick's comments about kind of moving to the cloud over the next 2 years. You guys have historically guided to 50 basis points to 100 basis points of kind of organic margin expansion. Any reason why that move to the cloud would pressure that?

Speaker 11

Could that help margins eventually? Just Curious, you guys are making lots of investments and kind of streamlining the team going to market under one brand, also moving to the cloud. Just curious on how we should think Margin and the impacts there.

Speaker 4

Yes, I do think we will achieve 50 to 100 basis points Moving to the cloud is Temporarily a headwind for margins, but we have other things going in our favor. In the long run, it will help margins significantly because instead of updating You know all these on prem instances of software as you can update once and it just ripples out to all your customers. You noted in your note last night that our corporate expenses had gone up as a percentage of revenues And that's true. The big driver of that is we hired a new CTO last year about a year ago and He rightly recommended that we beef up our security, our project management, our development capabilities and So we've done so. So that's been sort of a step up in investment for us and I think we're seeing the benefits of that.

Speaker 11

Okay. That's helpful. And then good to see the 10% organic growth relatively consistent. I think if you normalize that line with the last several quarters. But If you look at the networks, I know a lot of your business is not very cyclical in government and education and healthcare.

Speaker 11

But Have you seen any sort of kind of slowdowns? You pointed us to the midpoint of the guide for the full year. Any pockets, any quarter to date updates sorry, any pockets of weakness or any thoughts on Trends in July and so far in August?

Speaker 4

Well, going from our Q2, which is the March quarter to our Q3, which Just the June quarter, we always have a little education, you know they close schools in the middle of May And then they're closed in June. So education is weak during that period. Going into Q4, Education came on like gangbusters last year because they did away with free lunch. And so we'll still have a strong education quarter in September, But it won't be the big step up from the previous year's comparison that you saw in Q4 last year. And then I think it's We should always keep our eye on our software license sales line item.

Speaker 4

We had our biggest quarter ever in Q4 last year And we generally expect every quarter closer to $2,000,000 And so I don't think the step up from Q3 to Q4 is as big for those two reasons as they were last year.

Speaker 11

Okay. That's super helpful. But no, you're not seeing any sort of pockets and weakness, whether it's your kind of small restaurant business or Everything is just kind of humming along as you'd expected?

Speaker 4

Yes, everything is good. Healthcare has really picked up Pivity, no, I can't think of any pockets of weakness.

Speaker 11

Okay. I appreciate all the color guys. Thanks.

Speaker 2

Thanks, J. D.

Operator

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

Speaker 6

Yes, good morning. Just wanted to ask about the opportunity to introduce payments To your healthcare vertical, what your current thinking is with regard to that opportunity? What the timing of a rollout could look like And what that would involve?

Speaker 9

We're actively involved in that today. It's important given the software In our initial harvesting and investing in additional sales personnel to accelerate that Across the spectrum.

Speaker 3

It seems like healthcare is probably 20% of our business, somewhat on a roll that We penetrated payments single digit, I mean 5% to 6% at best case. And so it's a great question. It's A big project

Speaker 4

priority

Speaker 3

In the second or third inning

Speaker 1

of where we need to be.

Speaker 6

And how should we think about the improvement to ARPU associated with the attachment of payments to healthcare?

Speaker 5

We didn't understand.

Speaker 4

The improvement of what?

Speaker 6

To ARPU, the Incremental revenue per customer that would result from attaching payments to healthcare.

Speaker 4

Well, I don't think it's as large as some of our verticals like education, for example, where this The field where insurance pays the majority of the bill and so it's a lot of co pays on the front end. And so while it's significant, it's not what you might see in education, for example?

Speaker 3

It could be as high as 20%.

Speaker 6

Very good. Thank you very much.

Operator

Our next question comes from James Faucette with Morgan Stanley. Please go

Speaker 10

ahead. Thank you very much. I wanted to ask really quickly a follow-up On margins and growth is that, you mentioned

Speaker 3

kind of

Speaker 10

the hiring CTO and that their bids have increased Expenses associated with that and certainly your qualitative commentary seems to indicate that you're Focused a bit more on integrations and advancing the capabilities of your solutions. I'm wondering How we should think about like the what that does for margins? You indicated a little bit of a headwind, but What's the long term potential there? And I guess tied into that, how much of your growth Right now is coming, if any at all, from being able to put through pricing changes perhaps related to CPI conditions and contracts, etcetera. Thanks.

Speaker 4

Well, on margins, I do think our long term guidance is still 50 to 100 basis points a year. Some of the streamlining we have done Not only delivers a better product to the market, but does result in some cost savings because we've just had duplicate functions Internally in a lot of areas resulting from some

Speaker 6

of our

Speaker 4

acquisitions. We are trying to keep pace with inflation. If you look at our revenue yield in merchant services, for example, we increased a basis point This quarter, which is not big, but we're staying even with increases from Visa, Mastercard, our costs That we're passing through. So we're doing that. We're doing modest increases In software as well, just trying to keep pace with inflation.

Speaker 4

It's no secret everybody has some wage inflation. So we're able to keep pace. Our style has never been to raise prices and so in and the resolve to pass through cost increases. But IT long term, it will be a net When getting to the cloud, in the near term it's a little bit of a headwind, but we have other Things such as streamlining, keeping us ahead on the margin front.

Speaker 10

Great. Thank you.

Operator

Our next question comes from Charles Nadeau with Stephens. Please go ahead.

Speaker 1

Hi, good morning and thank you for taking my question. As we think ahead to next year, on the top line, It seems like things are going to be pretty clean from a comp perspective. Celtic went in on October 1st and You're distancing yourself from some of the COVID related boot recovery. But I guess my question is, if we think about the Cadence of revenue growth throughout the year, is there anything notable to call out in terms of large go lives or License renewals that could swing 1 quarter or another, higher or lower?

Speaker 4

No, really, as you point out, it is a pretty clean comp. We acquired Celtic on October 1 and the year before that we acquired ACS, our healthcare company on October 1, AccuFund was a small acquisition January 1, but so that would just leave us in the absence of more acquisitions, which I think we will make More acquisitions, but until we do, I think it's just our normal seasonality and Q4 is always a good, which is the September quarter is always a good quarter. Back to school It's good there. December weakens a little bit for payments in our public sector. Q1 is strong for payments in our public sector.

Speaker 4

Q2 is weak in education Because of school closures, but all of those are just normal seasonal patterns that would make a difference between quarters next year.

Speaker 3

If there was a spike, we would be very explainable. I mean, we could put a finger on it and say, this is exactly what half of professional sales.

Speaker 4

Yes, the one time software sales line does vary every quarter and it usually explains the difference. But as you're modeling, I think just a little bit of organic growth throughout the quarters, every quarter also, You know, would explain the distribution next year. Got it.

Speaker 1

And just as a follow-up, I noticed in your M and A Terry, that the lower end of your EBITDA target guide, it's a little lower at $1,000,000 than it's been in the past. I think in the past you said $2,000,000 to $5,000,000 or $2,000,000 to 6,000,000 And I know we're focused on the larger deals, but does that reduction indicate willingness to do smaller deals? Or is there any specific area In your product mix that you think might be filled like such as an AccuFund with a smaller an acquisition on the smaller side?

Speaker 3

Yes. AccuFund is a perfect example of why I said one. They were a smaller deal and they've been fantastic Beyond our expectations, There is some small deals. If we could find another deal like Accu With the management and the software and the hold that maybe we have in our offering, we would do We really aren't crazy about the small ones, but they really have to be perfect.

Speaker 1

Got it. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Greg Daley for any closing remarks.

Speaker 3

Thanks, everybody. I'm going to ask Jeff Smith to talk Something just briefly that I know that John Davis asked about M and A and Paying down debt, why don't you walk through kind of our thoughts on paying down debt over the next 18 months?

Speaker 2

Sure. So I think something that you'll see when you look at like the last time months is We

Speaker 3

stepped up our leverage to do Celtic to

Speaker 2

do a deal that we thought was a really good value for us. And Since then, we've been staying very disciplined in bringing down our leverage into our credit facility. Refinancing was a really big win. We also had a number of earn outs this last year. So the rate at which and the velocity at which we're paying down debt coupled with higher interest, A little bit lower.

Speaker 2

As we kind of turn through some of those earn outs and you can see that on our balance sheet, the position we're in with those It's come down. I think that over the next the visibility we have through the next fiscal year, the rate at which we pay down debt will be a little And we've previously spoken to the market that we can do north of $100,000,000 a year of M and A Assuming 10 times multiples and in this current environment, as Greg alluded to earlier, we hope to do much better than that. We can do significant amounts of M and A just off our free cash flow. So we're really happy with where we are in terms of scale, Brad, And our ability to grow organic grow with M and A, but just grow with our cash flow. I think the word to kind of Hang on this, we plan to be very disciplined on this.

Speaker 2

Find the right opportunities. Craig was just speaking about Our ability to do deals that are larger or smaller, it's a smaller deal and it's a strategic fit that takes Sometimes as much effort is a larger deal, but we can do that and we're willing to do the work to get something that's going to be a great asset for us and it's going to grow. And so we think we're in a really good position in M and A. The opportunities that are out there remain really exciting, but we're staying disciplined to make We get the right deals at the right value.

Speaker 3

Great. Well, again, thanks everybody for joining us. A special shout out to Our team, they are just remarkable and I love it. So anyway, have a good day. Thanks everybody.

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Earnings Conference Call
i3 Verticals Q3 2023
00:00 / 00:00
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