Q4 2019 Earnings Call
Please standby we're about to begin.
Good day, everyone and welcome to three verticals fourth quarter 2019 earnings Conference call. Today's call is being recorded an a replay will be available starting today through November 29.
Number for the replay is 7194 or 570 late two zero and the code is 5577234.
A replay may also be access for 30 days at the company's website.
At this time for opening remarks, I'd like to turn the call over to Scott Mary Weather. Please go ahead Sir.
Good morning.
Welcome to the fourth quarter 2019 conference call Friday verticals.
Joining me on this call are gradually our chairman and CEO Clay Williams, our CFO and Rick Stanford our precedent to the extent any non-GAAP financial measures discussed in today's call. You'll also find a reconciliation of that metric most directly comparable financial measure calculated according to GAAP, they're viewing yesterday's earnings release is the company's extension provide non-GAAP measure.
Turning to enhance understanding of its consolidated financial information as prepared in accordance with gap. This non-GAAP information should be should be considered by each individual.
In addition to but not in sped up the financial statements prepared in accordance with gap. This conference call may contain forward looking statements within the meaning 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 facts.
Maybe deemed to be forward looking statements you were 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 then reports that are filed or furnished the FCC and consequently, actual operations and results may differ materially from the results discussed and forward looking statements. Finally, the information sharing on this call it.
As of today's date and the company undertakes no obligation to update it except as may be required under applicable law.
Nothing to call ever to become as chairman CEO , Greg Daily.
Thanks, Scott and good morning to all of you.
We're pleased with the performance over fourth fiscal quarter of 19.
And for the entire fiscal year fiscal year 2019 was an outstanding year for three verticals in all facets of our business from execution of our strategic plans operationally the execution of strategic M&A plans to delivering strong financial results and.
In fiscal 2019, our adjusted net revenue increased 26%.
And our adjusted EBITDA increased 28%.
And our adjusted EPS increased 45% from prior year.
We continue to execute on our software driven payment strategy, we completed nine acquisitions. This year and all nine acquisitions were focused on software based payments.
During 2019, we made significant news.
Into the public sector public sector now is our largest vertical and we remain enthusiastic about our growth prospects.
We continue to develop our proprietary software and our payment technology platforms. We're confident that these significant enhancements. We made this past year will drive revenue going forward.
Turning to the fourth quarter, we had a strong finish to the fiscal year.
This is demonstrated our 44%.
Increase in net revenue as net revenue increased to 40.6 million in Q4, it 19 from 28.1 million in Q4.
Of 18 fueled by growth in our public sector vertical and strong back to school revenue within our education vertical.
Adjusted EBITDA increased to 11.7 million in Q4, 19 from 7.8 million the Q4 18.
Clay will cover these numbers in more detail in his section.
We continue to achieve above market growth rates by delivering seamless integrated payments and software solutions to smbs and organizations and strategic verticals markets.
We continue to focus on public sector, and education verticals going forward and we will also targeted acquisitions and other verticals that have attractive margin profiles and opportunities to provide software driven payments.
Our integrated payments volumes continues to grow.
54% of our payment volume was integrated during Q4 <unk>.
Q4 up from 45% during Q4 of 18.
Integrated payments results in lower attrition higher margins and greater market growth potential.
The angry increased and for a portion of our business coming from integrated payments give us confidence in achieving long term margin improvement.
Finally.
As mentioned in our earnings release, we've promoted Scott Mary weather into a new role of Chief operating Officer. He has served the company well and his previous role as senior VP of finance and I have no doubt that Scott will flourish in his new role.
Now I'll turn the call over decline he will provide more detail on our Q4 financial performance and comments on 2020 outlook and following place comments, Rick will provide us an M&A update and then we will take questions.
Thanks, Greg.
Following pertains to the fourth quarter fiscal 2019, which is a three month period ended September 32019.
We finished the year with a strong quarter net revenues increased 44% to 40 point Sixmillion for Q4 2019 from 28.1 million for Q4 18.
Driven by 11.7 million from acquisitions, principally in our public sector and education vertical.
The pace acquisition led the group with double digit growth.
We've had it for a full quarter.
Excluding the purchase portfolios and our I Pos business net revenues grew 7% organically if post IPO acquisitions weren't food it in both periods organic growth would have been even higher.
Adjusted EBITDA grew 49% outpacing net revenues to 11.7 million per Q4, 19 from 7.8 billion for Q4 18.
Please see the press release for a reconciliation between net income and adjusted EBITDA.
Adjusted EBITDA as a percentage of net revenues was 29% for Q4 19 up from 28% for Q4 18.
Despite a 61% increase in corporate expenses.
The increase in corporate expenses was principally driven by public company costs.
As a reminder, we've expected a onetime step up in corporate expenses for fiscal 19 with inflationary level growth in future years.
The IDR acquisition did not contribute a material amount of EBITDA for the quarter. Since we closed that month. So we got half a month.
Adjusted diluted earnings per share was 24 for 24 cents per quarter again, please refer to the press release for a full description and reconciliation.
Segment performance. Please refer to the supplemental slides title segment performance on our website for reference with this discussion.
And our proprietary software and payments segment net revenues grew 178% to 12.5 million for Q4 19 from 4.5 million for Q4, 18, reflecting organic growth and acquisitions in our public sector and education verticals.
Adjusted EBITDA increased 188% to 4.9 million from 1.7 million, principally reflecting recent acquisitions in our public sector vertical.
EBITDA as a percentage of revenues improved to 39% for Q4 19 from 38%.
For Q4 18.
Due to a mix change of higher public sector, which carries a little higher margin than education.
Public sector now represents the majority of net revenues and approximately 200 employees.
These companies almost all acquired post IPO generally our strongest during our first half our December in March quarters.
Net revenues for our merchant services segment, excluding the purchase portfolios increased 23% to 26.7 million for Q4 19 from 21.8 million for Q4 18. This increase reflected growth in our direct sales channel, which includes b to b.
I also and I SV channels, including pace.
While pace, mainly signs customers in the public sector and education verticals. We include them in our merchant services segment, because we do not on the software we partner with is fees.
The purchase portfolios declined 30% to 1.3 million inline with expectations.
And our IPO less business the transition to assess that we communicated last quarter hasn't begun.
And the timing adjustments for net revenues are still baked that into our 2020 guidance.
Adjusted EBITDA for our merchant services segment increased 22% to 9.7 million for Q4 19 from 8 million for Q4 18, the EBITDA margin improved to 35% for Q4 19 from 34%.
For Q4, 18, showing operating leverage from revenue growth.
Comments on the balance sheet.
As of September Thirtyth, we had 160 million available under our revolving credit.
Our leverage ratio as defined in our credit agreement.
Was 3.25 times, while our current constraint is 4.0.
Our interest rate is currently around 5.5%.
[noise] overtime, we expect to convert roughly two thirds of EBITDA into free cash flow, which can either be used for acquisitions or debt repayment.
[noise] outlook for 2020.
Before turning to that I want to provide an update on ice threes adoption of HFC topic, six so six new revenue recognition accounting standard.
We're adopting a FC six so six as of October 1st 2019, So you'll see the changes beginning with our first quarter of fiscal year 20.
Under six of six we will report GAAP revenue net of interchange and network fees. Our historical financials have reported gross revenue and included interchange in network fees as expense line items.
We've always supplied net revenues a supplemental information. So this will not fundamentally changed anything the reason I pointed out is that 2019 periods on the face of our financials will report gross while 2020 periods will report net.
I think everyone on this call will understand that but there are robo services that could report declining revenues well in fact revenues are actually increasing.
We'll continue to provide the same supplemental net revenues for our 19 periods for an apples to apples comparison.
Looking forward the strong finish to our fiscal year gives us confidence in the following guidance for fiscal year 2020.
That excludes future acquisitions and transaction related costs and adjust for right now as of deferred software revenues in connection with purchase accounting for greater clarity, we're giving more line items this year.
Adjusted net revenues 160 to 164 million.
Adjusted EBITDA 46 to 48.
Depreciation and amortization of internally developed software.
3.75 million to four and a quarter million.
Cash interest expense seven to seven and a half million.
Pro forma adjusted diluted shares 28 to 29.5 million pro forma diluted.
Pro forma adjusted diluted EPS 91 cents to 97 cents.
From a seasonal standpoint, we have different verticals with different seasonal patterns I mentioned government a little bit earlier.
These generally counterbalance each other with our current mix of companies.
One exception I should mention as our fiscal third quarter is generally a little below trend when schools are at close for the summer while our fiscal fourth quarter is a little above trend with back to school activity.
I'll now turn the call over to Greg for an update on M&A activity. Thank you clay. Good morning, everyone before I talk about our M&A outlook I wanted to first quickly touch on our continuing strategic integration efforts within our verticals and comment on the progress we've made with pace payment systems. The acquisition we closed in June .
Business and product integration demand our constant attention last quarter, we spoke about our vertical visioning process, which is short hand for our goal of developing a unified product offering in each of our markets. In other words, we intend to provide a complete suite of products and services to our customers in each vertical.
As noted in our last call. We began this vision in process and our public sector vertical and that process is beginning to show results. During this fourth quarter. We began the same visioning process and our education vertical the working group includes business Ceos sales product and development teams. We believe this process will enable.
Plus become more efficient in each vertical sector into ultimately offer better and more targeted products and services to the market.
We were excited to announce the pace payments acquisition in June since then the pace team is settled in nicely with the rest of the three team and we see increased collaboration on a daily basis as Clay mentioned earlier, we are seeing double digit growth as a result of increased harvesting efforts on a related note. We estimate we will be.
Approximately 85% complete with the conversion of paces integrated business within the next few weeks and then we will begin the conversion of paces non integrated business.
Regarding M&A last quarter, we mentioned, we had a nonbinding term sheet with a software company that offers utility billing and other software tools for gas water and electric services.
We also mentioned that the billing product is generating substantial customer interest in our installed base. We're happy to share. This acquisition did close mid September .
This company has known in the market as a VR and is located in Houston, Texas.
Side from Avi ours utility billing software. They also offer a public works product for work orders or system field management that is used for Jack can calculate work related few field expenses.
KBR has 44 employees and sort of 650 municipal utility districts and 85 privately owned utilities independence and cities in multiple states across the us.
We're extremely happy to have RIN Nelson, the founders Grand daughter, and COO and the entire Avi our team as part of our public sector vertical and look forward to their future successes as part of the three family of companies.
We're also pleased to share that we have already cross sold.
As billing product into one of our existing municipalities under our net data subsidiary, we couldn't be more excited how the two teams worked together in an effort to gain a proof of concept for this new piece of software and its application within our existing customer cities.
This is a concrete example of the cross selling opportunities that are available to us within our verticals, which is exactly the reason we're engaged in the vertical visioning process that I mentioned, a few minutes ago.
We're continuing to look at many deals in our pipeline continues to weigh heavily towards the public sector vertical.
I do want to emphasize each target must be a good fit and we are careful in that regard.
We believe that we will remain successful in executing our M&A strategy and still believe we can generate four to five new deals per year, we look forward to sharing more information on acquisition activity as it becomes available.
This concludes my comments Garrett Derrick at this point, we'll open the call for Tonight. Please.
Thank you, Sir ladies and gentlemen, if you'd like to ask a question at this time. Please signal by pressing star one on your telephone keypad and if you are using a speakerphone. Please make sure. Your mute function is turned off your layer signal to reach our equipment again that is star one to signal for question and.
And we'll take our first question from George Mihalos from Cowen and company. Please go ahead.
Good morning. This is Allison on for George Thanks for taking my questions. Congrats on a strong quarter and also congratulations to Scott.
I just wanted to start on slide 20 outlook Clay you mentioned the revenue headwind due to the hardware transition to the soft offering is baked into the guidance. I was just curious is that headwind still to six to 7 million communicated on the last call and then also and really since the 2020 guidance what is embedded in both.
Revenue and EBITDA outlook from the recently closed public sector acquisition.
Allison on the first question.
Right.
The same guidance, we gave on the last call that is baked into the 20 to 20 plan.
The public sector acquisition, we have not disclose.
A purchase price.
It was not material acquisition.
To give you some idea of the size, we you'll be able to figure out from our cash flow statements that.
The purchase price was around the 10 million Mark and I think you can apply our normal metrics to that to give you some idea.
Okay, great. Thanks, that's very helpful.
And then just a follow up can you help us think about the cadence of organic growth in 2020 is a fair to think that should ramp throughout the year.
That is fair because as more and more of our post IPO acquisitions enter the calculation it will help our organic growth right.
Okay, great. Thanks, Thanks for taking my questions.
Thank you will next move to John Davis with Raymond James. Please go ahead.
Hey, good morning, guys.
Well I just wanted to start start off on organic growth in the quarter nice acceleration there anything to call out specific I think you did have a little bit an easier comp, but just curious if there's any part of the business that re accelerated to drive that.
Well, you're you're note mentioned an easier comp.
And that's right that in the third quarter, which is our June quarter of 18, we had a bang up quarter, an IPO at switch.
Led to the last quarter being a challenging and organic growth quarter.
That wasn't the case this quarter, we've excluded IPO s. anyway, because it going forward, we're transitioning to fast and so it won't be a comparison.
But we had strong growth across a number of areas b to b came in very strong.
Yes, the business.
And of course, the software related businesses all have a strong quarters, it's just a good quarter.
Okay. All right also looks like the acquisitions I guess you haven't lapse.
Also outperforming any specific ones a comp there I think you mentioned there Greg mentioned pace call, but any of the acquisitions that are kind of performed above expectations worth calling out.
Yes, our Texas acquisition, I, I mean, our Louisiana acquisition, and our Texas acquisition are both having good years.
Hey, sleep, both mentioned because its growth has accelerated like we had hoped it would.
Okay, and then just wanted to touch on on margins I think you called out 19, having higher corporate cost as you transition to a public company.
But in guidance implies 85 basis points of margin expansion next year at the midpoint like you did 30 ish. This year is there anything else going on there maybe future acquisitions on baked into typically come on at the lower margin than ramp over time, just curious if if we should still thinking about as kind of a 50 basis points on a run rate basis, you know kind of going forward.
We do think Thats still our guidance.
50 basis points improvement every year.
Mix will help over time as we acquire more government and education properties. They generally carry higher margins than our merchant merchant services segment.
Okay and last one for me recognizing unless you get off the hook here M&A pipeline I. Appreciate the commentary is that still mostly public sector and education deals I think the large majority of deals since you've been public have minimal and public sector and I think Clayton now mentioned thats the biggest.
Article for you guys, but just curious what the pipeline breaks out as far as verticals and if there's any other can outside those two that are have come up for on the radar.
Yeah JD.
Thanks for question, we continue to look for health care nonprofit.
We would like to be in those verticals.
We do have some contacts in those two verticals were talking to I would still say that.
Greater than 50% of the pipeline active prospects, our public sector with a little education Doubledown.
Okay, Thanks, and Scott will add my congratulations.
Thank you.
Thank you again, ladies and gentlemen that is star one to signal for a question at this time. Our next question comes from the line of Jason Kupferberg with Bank of America Merrill Lynch.
Hey, good morning, guys I, just wanted to come back to the organic revenue growth topic. As we think about fiscal 20, I know you talked about some incremental acceleration as we proceed through the year. So are we talking about kind of off of that 7% underlying number in Q4 are we saying that we kind of tick up from there.
Gradually I just wanted to get a sense of kind of where you think the full year fiscal 20 organic could land based on the guidance you presented to us.
We still think high single digit is the right number if you layer in our acquisition post IPO acquisitions.
Okay.
You know every quarter.
Other that 6789.
We don't have that much clarity or precision on that but we think that range is a good range for the year.
Okay and would you parse out a little bit further in terms of public sector versus education.
Hi, there both double digit growers.
Education, probably has a little more organic opportunity because government as more just population growth.
Given the same suite of products, if you add a new product or new customer that changes but.
The same customer probably doesn't have the growth opportunities at a school bus.
Right, Okay understood and I know you grew payment volume in the quarter, just about 30% I'm. Obviously, that's inclusive of pace is that a good proxy for that type of growth, we should see roughly until pace anniversaries.
I've I've I have no reason massively that.
Okay. Okay, that's what I figured okay. Thanks for the comments guys.
Thank you.
Josh. Thank you, we'll next go to Josh Beck with Keybanc.
Yes, thanks for taking the questions, maybe just a high level industry.
A question for Greg I mean, there's been a ton of consolidation and 29 team has that impacted you or you know relationships or strategy in any way just wondering if there's any ripple effects to call out from that.
Not really Josh.
No I met with.
Several of the new players now.
They are still you know.
Suggesting it themselves so.
We were viewing it as maybe an opportunity there going to be on the sidelines for the next.
Couple of years as they did just to these large transactions but.
Everything is pretty steady.
Okay.
Great and the I think the Visioning concepts.
Pretty interesting so what are the what are the big milestones that you're.
Looking for you don't know the timeframe is in coming years or quarters, but just.
Help us kind of understand what are some of the key you know mile markers that you're looking to achieve without process.
So number one would be coming up with the unified product offering that I spoke to we have competition in the market and people that have been acquisitive over the last few years, but they haven't seen to bring the things together, we see an opportunity there we because we do so much.
In public sector. For example, we have duplicative code that we'd like to sunset.
Management as a code base would be easier and then.
Arguing or partnering up resources amongst our.
Public sector. For example, subsidiaries allows us to get to the market on a more timely basis. So I would say those are the top three and I have a chime in Josh that one of our Keane things that we measure as percentage of integrated payments and so going from 45%. This time last.
Year to 54%.
It was a major step up.
And we will continue to do that.
Based on the acquisitions, we've done lately based on the strategy from our companies that we even had before the IPO.
We're all using more of our own software and more of a technology.
Okay, great and maybe a little bit of a related question.
Seems obviously, that's the best in class number 54 seems like there's a lot more interest just generically across industry in this.
Intersection of software and payment.
So I'm just wondering when you think about the pipeline and M&A discussions that you're happy and have you seen any.
Oh change in the multiples.
Double or has that been.
About where it has been historically for you.
What pre IPO, we were very limited.
What we could pay four or five six times now that were public we're able to pay a little little bit more and you know we go up today eight 910.
But we're very disciplined we walk away from transactions on daily basis. It if the valuations I get too high we self sourced our deal so that we're usually not in a competitive environment when we're dealing with these.
Small software companies. So you know it.
I don't think it's changed it the pipelines deeper and better but I'm not seeing valuations.
That.
Make me cringe and say Oh, you know.
This is out of control and these were we've determined very quick.
If we're going to be able to do something so we don't want to waste their time more hours.
I'd add to that and say our value prop is different when we do a deal we want to bring the company on we want to grow the business.
When and if we have competition out there they want to pay a little higher price than we are willing to pay and then they want to cut half the staff post acquisition to justify the price and that's not what the people were doing deals with want to happen.
Okay, and then maybe for places.
It seems like you know the the gross margins got a very nicely in.
2019, I'm guessing that is a little bit reflective of.
Integrated software mix so.
Anything to call out there and is the success that we've seen in 2019 with that metric.
Kind of sustainable as we look forward.
I think the main driver there as the revenue yields going up and that's mostly a function of buying software companies because you get revenues without any associated.
Well I am.
But what we've been Diane has generally higher margin.
A pure software company and can be a high margin company.
Okay.
Thats all for me thanks, everybody.
Thank you and as a reminder, that is star one to signal for a question at this time well next move to Peter Heckmann.
With Davidson. Please go ahead.
Hey, Thank you good morning.
Missed your comments on the timeline the final conversion.
Backend on pace I think I heard on the integrated business should be in the next few weeks.
And final conversion would be when.
Yes, Peter the the integrated business, we're about 85% complete.
The next few weeks and then we'll start on the non integrated piece right after that.
Okay, Okay any material level of drag in terms of duplicate expenses on your fiscal 2000 guidance that we should be thinking about picking up in next year.
No. There first the earn out is a calendar in line a calendar 20 time period January Onest December 31st and we still think they're on track for the numbers, we communicated at the time of the acquisition.
Okay. Okay, and then just I didn't catch it if he said it a number of a of I guess, he said that you're currently live and working with as well as those in the pipeline as well as any commentary of the pay deal but at the pace.
Yes, he signed up is changing at all.
Yes, Peter I'm, sorry, I didn't mention that today. We have 50 is fees that are integrated with our technology platform and one currently in the integration process as of yesterday.
That's helpful I'll get back into queue.
Thank you and gentlemen, it does appear we have no further questions at this time when they turn the conference back over to Greg daily for any additional or closing remarks.
Thank you everybody for joining us this morning I would.
I again.
Thank my team.
Or an amazing year that we've had a after going public and we're really excited about.
The momentum that we have and so with that I'll, let everybody go. Thank you for joining us today.
Thank you and again, ladies and gentlemen that does conclude today's call. We do you think you again for your participation you may now disconnect.