Q1 2020 Earnings Call

Please standby I'm about to begin.

Good day, everyone and welcome to the ice three verticals first quarter 2020 earnings Conference call. Today's call is being recorded in a replay will be available starting today through February 18th.

The number for the replay is 7194 570 820, and the code is 8962 zero to five.

A 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 Scott married whether Chief operating Officer. Please go ahead Sir.

Good morning, and welcome to the first quarter 2020 conference call for our three verticals joining me on this call our Greg Daley, our chairman and CEO quite Watson, our CFO and Rick Stanford or precedent.

To the extent any non-GAAP financial measures discussed in today's call. You'll also find a reconciliation of that measure to the most directly comparable financial measures calculated according to GAAP by refusing young vibrant viewing yesterday's earnings release. It it's a comedy content to provide non-GAAP financial information to enhance understanding of its consolidated financial information Asps.

Prepared in accordance with gap.

This non-GAAP information should be considered by each individual in addition to you, but not instead of the financial statements prepared in accordance with gap.

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.

This purpose any statements made during this call that are not statements of historical fact, maybe deemed to be forward looking statements.

You are hereby cautioned that these forward looking statements may be affected by the important factors among others and 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 in the forward looking statements. Finally, the information shared on this call is valid as of today state and.

Company undertakes no obligation to update and except as may be required under applicable law and I'll turn the call over the company's chairman and CEO Greg Daily.

Thanks, Scott and good morning to all of you.

We're pleased with our first fiscal quarter 2020.

And look forward to delivering strong performances throughout 2020.

Our first quarter to strong start to the fiscal year Clay will cover the financial results a little more detail later.

One highlight was at 41% increase in net revenue.

And I didn't ever net revenue increased to 41.6 million in Q1 at 2020 from 29.6 million in Q1 is 19.

Primarily driven by our public sector vertical and strong internal growth throughout the company.

Pro forma adjusted EBITDA increased to 11.9 million in Q1, and 2020 from 8.6 million in Q1 is 19.

We continue to achieve above market growth rates by delivering seamless integrated payment and software solutions, the smbs and organizations and strategic vertical markets.

Our integrated payments volume continues to grow.

55% of our peanut volume was integrated during Q1 of 2020 up from 46% in Q1 is 19.

Integrated payments, resulting in lower attrition higher margin and greater market growth potential.

We continued to focus.

On deploying new technology and streamlining.

Our existing technology, particularly within public sector, and education verticals as well as their payment platform.

Our sales teams are experiencing increased momentum.

These technology offerings, and we anticipate it will help drive our future growth.

We believe we can continue to leverage our distribution channels for our software offering and then we have further opportunities to leverage our payment platform.

Within our technology assets.

Rick will speak to M&A momentarily, but I will note that our pipeline is very strong.

Our focus remains primarily in public sector and education verticals. In addition, we will continue to target strategic acquisitions and other verticals that have opportunities to provide software driven payments.

Well you would you please provide financial overview.

Sure.

Following pertains to the first quarter of fiscal year 2020, which is the three month period ended December 30, Onest 2019.

We started the year with a strong quarter net revenues increased 41% to 41 point Sixmillion for Q1 2020.

From 29 point Sixmillion for Q1, 2019, driven by strong organic growth in acquisitions, principally in our public sector in education verticals.

As discussed on the call last quarter the pace of the income statement shows a decline in revenue.

As a result of adopting a FC six so six.

Q1, 2019 presents revenues gross of interchange and network fees, while Q1 2020 presents revenues net of interchange and network fees.

For an apples to apples comparison, please refer to the supplemental segment presentation contained in Yesterdays 8-K filing.

You can also axa access and on our website.

Under events and presentations.

Excluding the purchase portfolios and our I Pos business net revenues grew 9% organically.

We then benefited from strong growth in education public sector, B to B and I asked so.

Acquisitions contributed 11.5 million to net revenue growth for the quarter.

Adjusted EBITDA grew 38% to 11.9 million for Q1 2020.

From 8.6 million for Q1 2019.

Please see the press release for a reconciliation between net income and adjusted EBITDA.

Adjusted EBITDA as a percentage of net revenues was 28.5% for Q1 2020 down from 29.0% for Q1 19.

The decline resulted from a lower margin and our proprietary software segment, which I will unpacking the segment discussion.

Partially offsetting this decline corporate expenses as a percentage of net revenues improved to 6.2% for Q1 2020 from 7.2% for Q1 2019.

The improvement was expected following the step up in public company costs in the first year following our IPO.

Adjusted diluted earnings per share were 24 cents for the quarter.

Again, please refer to the press release for a full description and reconciliation.

[noise] segment performance.

Please refer to the supplemental slide titled segment performance on our website for reference with this discussion.

And our proprietary software and payments segment net revenues grew 134% to 14 point Sixmillion for Q1 2020 from 6.2 million for Q1, 2019, reflecting organic growth and acquisitions in our public sector and education vertical.

Yes.

Adjusted EBITDA increased 90% to 5.4 million from 2.9 million.

Principally reflecting recent acquisitions in our public sector vertical.

EBITDA as a percentage of net revenues was 37% for Q1 2020 versus 46% for Q1 19.

This segment is double the size it was a year ago and margins will continue to fluctuate based on the mix of companies seasonal factors and revenue streams.

Payments revenues and SaaS revenues are steady while perpetual software license sales and custom builds can vary significantly quarter to quarter.

Within the public sector, some products such as traffic tickets might carry.

8% net revenue yields while our utility bill might be 1% to 2%.

On the flip side utility bills happened every month, while traffic ticket lift tickets are in frequent [noise].

So we love the volume and consistency with utility bills.

Our latest acquisition Hbr isn't utility billing company with proprietary software. It's margins are currently in the 20 per cents cents cents or 20% range, but will grow over time as its retooled web based product and grows.

Net revenues for our merchant services segment, excluding the purchase portfolios increased 23% to 26.1 million for Q1 2020 from 21.3 million for Q1 19.

This increase reflected growth in our direct sales channel, which includes b to b.

And I S, though and I see channels, including continued double digit growth from 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 other is fees.

The purchase portfolios declined 35% to one point threemillion inline with expectations.

And our IPO es business the transition to assess that we communicated last quarter is taking hold.

And the timing adjustments for net revenues are still baked into our 2020 guidance.

Adjusted EBITDA for our merchant services segment increased 15% to 9 million for Q1 2020 from 7.9 million for Q1 19.

The EBITDA margin was 33% for Q1 2020 versus 34% for Q1 19.

[noise], reflecting conversion costs at pace, which should be finished by the end of the June quarter.

Balance sheet.

As of December 31st we had 166 million available under our revolving credit.

Our leverage ratio as defined in our credit agreement was 2.85 times, while our current constraint is 4.0 times.

Our interest rate is currently around 5.5%.

[noise] overtime, we expect to convert roughly two thirds of our EBITDA into free cash flow, which can but either use for more acquisitions or debt repayment.

Outlook.

Looking forward the strong start to our fiscal year gives us confidence in the following guidance for fiscal 2020.

It excludes future acquisitions and transaction related costs and adjust for write downs of deferred software revenues in connection with purchase accounting.

Adjusted revenues 162 to 166 million adjusted EBITDA 46 to 48 million and pro forma diluted he P. S 91 cents to 97 cents.

We have raised the range for adjusted net revenues by 2 million recognizing that the transition to Hsas and our IPO as business will take time to fully implement.

We maintain our previously issued guidance for adjusted EBITDA and pro forma diluted the D. P. S.

We do not intend to update our guidance during the year for depreciation and amortization cash interest expense or fully diluted shares outstanding.

Unless material changes occur.

I'll now turn the call over to Rick for an update on M&A activity [noise].

Thank you clay good morning, everyone.

Before I talk about our M&A outlook I want to first quickly give you a few updates relative to the information provided on the last call.

First we are continuing to pursue a unified product offering in each of our public sector in education verticals that process is going extremely well, we are moving rapidly towards offering our customers and those verticals, a more robust and comprehensive suite of products.

Second relative to the pace acquisition, we've now completed the conversion of the integrated IC business and we have begun the conversion process for the non integrated business. We hope to have the non integrated piece completed by the end of summer.

We continue to be impressed with the people at pace and the opportunities they bring to the table the decision to merge both the ice three and the pace is the teams is proving to be a winner for us at the enterprise level and allowing us to engage salespeople throughout the company in other acquisition subs that here today had little to no access to this time.

With offerings.

Third on the is the fraud, our total number of signed an integrated diocese at the end of our first fiscal quarter is 52.

Lastly regarding M&A our team is hitting their stride. This team includes M&A finance operations legal and I see functioning as one cohesive cohesive group each having apart and our overall success from nurturing new potential deals to diligence to closing and post close.

Support.

I'm very pleased to say that the pipeline for potential acquisitions is stronger today than it's been since our IPO.

While the acquisition process has a natural ebb and flow last two quarters had been especially busy for us and we are optimistic with regard to M&A activity.

To that point, we currently have for executed term sheets and process to be clear all of these terms sheets are non bonding and we're in various stages of due diligence with each of them and there's no assurance that we will ultimately close these deals.

Each of these deals in our sweet spot from public sector to education with a sprinkling of ice fees and b to B and we like the opportunities that each of them presents.

In addition to these potential deals our general pipeline is populated with a heavy emphasis on public sector with a little education and some others Nics Dan.

While we saw last year is an anomaly, where we closed on acquisitions. We believe that we will remain successful in executing our M&A strategy and still believe we can generate five or more new deals this year.

This concludes my comments were shell at this time, we'll open it up for Q and I. Please.

Thank you if you would like to ask a question. Please press star followed by the digital one if you are using this speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again star one and we'll pause for just a moment.

And our first question today, we'll hear from John Davis with Raymond James.

Hey, good morning, guys.

Clay just wanted to.

To start off on organic growth glad to hear 9% salary to 200 basis points sequentially X. I pause so anything to call out there any specific business performed well just any commentary there and I assume you still have kind of a high single digit number baked in the full year guide, but just wanted to confirm that.

Well I I can't confirm we expect high single digits or for the right right or the year or maybe not in every single quarter, but on average for the year.

It was strong across the board really from either the to government to education.

All right SV channel that even our ISO channel.

Okay, and then also the the yield improved eight basis points sequentially I think than the net revenue yields is 108 basis points versus 100, a year ago is that more integrated is that more more proprietary software just how should we think about that as we've got them all out the the rest of the year.

Well the.

Proprietary software segment has doubled in size and with that come more software revenues I think our software revenues as a percentage of our total revenues. This quarter was in the range of 22%.

That's up from maybe half of that at the IPO. So as that blends happens it takes our revenue yield higher and what was the second part of your question.

No no just how to think about it for for the rest of the your any reason that that was specifically high in the first quarter and an anomaly just kind of thinking about as we go through the rest of the year.

No I don't think there was no an anomaly.

Okay, and then a rich anything you can give us in terms of.

[noise] combined size or four deals just just anything to kind of help us frame I think my math suggests you have nearly 100 million a capacity based off of leverage into the year. So I think that's an issue but.

I'm very glad to hear for deals.

Just trying to take about size those [noise].

Yeah, that's a fair question John Unfortunately, we're at various stages, but we're early in the early stages.

And we don't have enough definitive data to give us an accurate measurement on any of these deals you have to give you a good measurement of size.

As far as timing. It's also too early there's multiple factors that go into timing size total lines of code to have to be reviewed consents from third parties. So I can't tell you at this point either when those deals were going to close.

I think we have the capacity.

So hopefully I'll be able to give you more detailed information sooner than later right now we don't mill as well we don't know.

Okay fair enough thanks, guys.

[noise] next I'll move to George Mihalos with Cowen.

Hey, guys. Good morning, Congrats on the on the accelerated growth. So maybe just to kind of started off on that point. The starting the year off hire is certainly than we were looking for I know you've said in the past the job you know the growth rates could be a little bit choppy going quarter over quarter and alike, but as we go through the remainder of the year had more of these fan.

After growing.

Inorganic revenue streams go to organic is is there the possibility where we could have a double digit growth quarter based on the trends that you're seeing across the entire business.

Oh, a possibility is always there, but I think our expectation remains high single digit.

Okay, and that's what's embedded in the indeed in the any outlook just to be clear.

Yes.

Was there any impact on the point of sale side in the in the first quarter. I know you would say $6 million to $7 million of potential headwind for the year was there any impact in the first quarter.

There was but it wasn't a huge impact.

The essential product, which is the SAP space products from NCR.

Has isn't pretty full swing now in January 50% of our new deals were essentials and so that's for you know this took a lot longer to get started than we thought it would but now that it started we're very pleased with how it selling we think its a.

Good competitive product and.

We're getting excited about it.

All right. That's that's that's helpful and just last question for me as we look at the margins.

Going forward is the right way to think about it that on a year over year basis, we could have some continued compression.

On the on the software side and there's you know a little bit of an offset if you will on the [noise] on the corporate expense line year over year.

I think it depends on where in the range of guidance, we've called George but we do hope that we can continue to improve margins.

Avi are.

It was a mix issue for us because they're lower margins.

But they have 40 people because they were a standalone company and so with double digit growth I think a lot of our public sector companies can't grow and to better margins overtime.

Okay, great. Thanks for the color guys.

Thanks.

Next we'll move on to Peter Heckmann with D.A. Davidson.

Hi, guys. This is elecsys on for key congratulations on a great quarter.

Thank you.

So I was just touching back on the IPO S. A transition could you quantify for us how that affected organic growth in the quarter.

Well organic growth would have than if we included in the calculation organic growth or whatever then smaller but not by a great amount.

I think we gave six or seven a revenue impact at the beginning of the year.

And that was assuming that all started October onest, which clearly has not happened so.

That six to seven original less than that.

It's proving to be a conservative estimate.

And we carry 2 million of revenue.

Access into the guidance.

A good portion of that is from IPO last but not all of that.

Okay. Thanks, I definitely helpful. And then just an update on how we should be thinking about seasonality.

Quarter basis.

Yes.

[noise].

Oh, well in public sector, specifically, a this coming quarter is usually a good quarter for us.

In Q3 educations quite weak because of the June July shutdowns.

And that's a bigger impact now that we have school pay before it was just pay schools, but now it's also school pay.

But.

Collections are strong and government and in the coming quarter.

Okay. So you have to combine together the impact on seasonality from public sector, and education, which quarters like you say relatively stronger versus weaker with a new acquisition.

You know I'd say all three of our quarters are relatively strong other than the third quarter that impact on education.

Is the one we feel on a consolidated basis, because we've still got all of the people and virtually no revenues for two months.

But you know in there in the non integrated business January February is weak.

And that's always been the case from the other.

Payments companies you know.

So.

It helps to have the government counterbalancing that overall weakness in January February.

Okay. Thank you and then it could you just give us an update a in growth in the direct sales force.

Well, we were consistent with were 20 120 125 today.

Hasn't changed much.

Okay, great. Thanks, guys.

Thank you.

And just a reminder, if you would like to ask your question. Please press star followed by the digit one.

Next we'll move to Josh Beck with Keybanc.

Thanks for taking my question team.

I wanted to ask about a pace certainly seems like you've been pretty happy with the team there anything to call out the terms of synergy opportunities. If you as you've had a little bit more.

Time to to work with them.

I feel like they taught us a lot about eyes species, how to sell to them how to.

Harvest their accounts.

They.

<unk> have been really upgraded us when it comes to that.

The crazy productive when it comes to say is being able to for new sales and now we're trying to roll that out and more of our distribution channels.

So.

We're very pleased I I think I've made note when we did the deal that I was hoping by mid year 2020 to say, it's the best deal we've ever done.

And I think we're on track to say that but we're not you know we're still learning a lot about each other.

Okay great.

No I think Rick you talked a little bit about the unified platform that you're building within the education and public sector verticals, maybe just help us understand some of the changes that you're making behind the scenes and then.

Ultimately you know what you are hoping for in terms of either.

Business benefit or customer benefit as those platforms that build out.

Yeah. Good question Josh.

We brought together the Ceos and salespeople the I.T. folks from let's take public sector filling in for example.

On an acquisitive business like ours, we have.

Overlapping products some are good some or not so good we took that group and we did a gap analysis on all products under a public sector vertical and then we determine which products. We wanted to move forward with what is total product suite that we need to bring to market [noise].

Once we decided on that products. We we're focused on the backend how do we get this thing the sales People's hands, and how do we price it and how do we sell and how do we communicate with each other so all of those discussions are underway.

We are seeing some cross pollination of product sales and other subs now which is our ultimate goal.

And we look at our competition, what do we need to provide that they're not providing so this unified product offering is something that's got our people really excited.

They're working as a team across multiple subs.

So do go out with one or best of breed products suite within public sector that are people are excited about I can't imagine things being better than that for us.

Yes.

Okay, that's great and your I noticed that you had called out B to B you know a couple of times, maybe you could just remind us of your exposure. There is another area of maybe growing opportunity. When you look out to the future when you either think about organic or M&A.

Opportunities.

Hi organically, it's a strong grower.

I think from an M&A standpoint, valuations are high and the B to B space them from private equity the market are in love with B to B and so I'm not all that hopeful about a b to B acquisition, but we love the one we got and it continues to its its large.

It might be.

Order of magnitude, 10% of our business and it continues to grow so that helps our organic growth when a large company has a good growth.

Josh I'll add to that and say that I mentioned to this morning is one of the company's under the for term sheets. They started in the B to B mode, and then moved into education and that's their their core focus my also I felt compelled to bring it up since its place that we operate today, but.

We weren't going after a b to B type acquisition, we found this group.

Okay. Okay. That's helpful.

Maybe just the industry question I'm not sure if it's it's too early but surely there so.

You know more coverage of the visa and some of the interchange [noise].

Changes that they plan to bags. So I'm wondering if there's you know any read on during the early read on the potential impact from that or if it's one of those things. That's just maybe too early to discuss.

We've looked at it companywide and and.

We think net it's.

A slight positive to us so it will be.

It it's not a negative so.

It's not that big of a deal but it is positive.

Okay. That's helpful. Thanks, everybody.

And that will conclude that question and answer session. At this time I'd like to turn call back over to Greg Davis for any additional for closing remarks.

Thank you everybody I feel like we had a great start to our 2020 loved the gross.

Thank the team Wow, a they have come together, a amazing and that the last year.

And I'd encourage all of you just stay tune, we've got a lot of exciting things that we're working on and.

Hopefully, we'll be able to update you very soon.

Thank you.

And that will conclude today's call. We thank you for your participation.

[music].