Q1 2022 I3 Verticals Inc Earnings Call

Speaker 1: fine items on this page, but we will report it every quarter.

Page.

But we will report it every quarter.

Okay, Okay alright.

Speaker 1: OK. OK. All right. No. Understood. Understood. Jason, if you want to use an estimate, 80% of our revenues in this quarter were ARR or recurring, and so you could take our full year guide and use that as a proxy.

Understood.

Jason If you wanted to use an estimate.

80% of our revenues in this quarter were.

Our recurring <unk>.

And so you could take our full year guide in and use that as a proxy.

Makes sense, okay, well I appreciate the color. Thank you guys.

Speaker 2: Makes sense. OK. Well, I appreciate the caller. Thank you, guys.

Thank you.

Our next question comes from George <unk> with Cowen You May now go ahead.

Speaker 3: Our next question comes from George Mahalos with Cowan. You may now go ahead.

Speaker 4: Hey guys, good morning and thanks for taking my questions and nice results here. Wanted to start off with sort of a high level question and that's just as we sort of look at

Hey, guys good morning, and thanks for taking my questions.

Nice nice results here.

Wanted to start off with sort of a high level question and Thats, just as we sort of look at.

Speaker 4: inflation and is that making its way through the markets? You talked a little bit about rising rates and the inflation expense, but how do you think about that from both a top line and bottom line perspective? I mean, you're mostly software now, fair number of convenience fees. Is inflation a tell-win to the top line and how are you sort of managing it or thinking about it from an expense?

Inflation and is that making its way through.

The markets, you talked a little bit about rising rates and in particular.

But how do you think about that from both the topline and bottom line perspective, I mean, you're mostly software now fair number of convenience fees is inflation that tailwind to the top line and how would you sort of managing it we're thinking about it from an expense standpoint.

Speaker 1: Well, from a top line you'll know that you know with all the payment processors that higher tickets are generally good for payment processors.

Well from a top line.

No.

With all the payment processors that higher tickets are generally good for payment processors.

Speaker 1: From an expense standpoint, we have raises going in or did go in January 1st.

From an expense standpoint, we have raises going in.

Did go in January one.

And they were.

Speaker 1: And they were 6 to 7%.

6% to 7%.

Speaker 1: While last year we did not have raises during the COVID period. And so that is a. An impact on our expense structure.

While last year, we did not have raises during the COVID-19 period.

And so that is a.

And the impact on our expense structure.

And so we have some 34 offices, but in certain offices Nashville being one of them.

Speaker 1: And so we have some 34 offices, but in certain offices, Nashville being one of them, we are feeling pressure on on compensation like like all companies are.

We are feeling.

Pressure on on compensation like like all companies are.

Okay. That's helpful appreciate that commentary and what you've embedded in the.

Speaker 4: Okay, that's helpful. Appreciate that commentary and what you've embedded in the...

Speaker 4: in the geyser. I wanted to also ask you guys, I'm really upbeat again on public sector. Obviously, I think you're talking about more RFPs or record RFPs out there. Are you seeing that across the board, state, municipal? Or is it skewed more to one category? And I'm wondering if the nature of the competitor that you're seeing now as you move upstream, if that's starting to change, if you're seeing different logos, if you will, in some of these RFPs.

And the Guy here wanted to also ask you guys haven't really upbeat again on public sector. Obviously I think you are talking about more rfps a record RFP is that on top.

Are you seeing that across the board today municipal.

Or is it skewed more to one category and I'm wondering if the nature of the competitors that you are seeing now as you move upstream with that if thats starting to change if you're seeing.

Different logos, if you will in some of these rfps.

Yeah, George Good question.

Speaker 5: Yeah, George, good question. It is across the board. Part of it is pin up demand. The other part is confidence with the American Rescue Plan and the dollars that are available. We're our marketing teams and sales teams continue to educate our customers on what's available to them. I believe only half of that package is available this year and a half next year and I guess they need to use that money by the end of 2024, but

It is across the board.

Part of it is pent up demand.

The other part is confidence.

American rescue plan and the dollars that are available where our marketing teams and sales teams continue to educate our customers on what's available to them I believe only half of that package is available this year and a half next year.

I guess, they need to use that money by the end of 2024, but.

Speaker 5: We haven't been able to succinctly tie the increase in RFPs to the money that's available. Again, I think it's confidence. And there's a demand for change in the technology that many of the municipalities are using today. I don't know if I answered.

We haven't been able to simply time the.

The increase in Rfps to the money that's available again I think it's confidence.

And there is there is a demand for change in the technology that many of the municipalities are using today.

I don't know if I answered all your questions.

Yes.

Speaker 4: Yeah, no, that's that's that's perfect. We're appreciated. Just one last one if I can speak in any sort of notable on the crown impact As as as as you went through December and maybe sort of the early days of January and text again guys

That's perfect Rick appreciate it just one last one if I can sneak in any sort of notable on the Corona impact.

As.

As you went through December and maybe sort of the early days of January and thanks again guys.

Speaker 1: We really didn't notice any change from Omicron from, you know, prior to Omicron. We were in a Delta environment. Having said that, I don't feel like the economy...

We really didnt.

Noticed any change from omicron from.

Prior to <unk>, we were in a better environment.

Having said that I don't feel like they.

Economies come all the way back from.

Speaker 1: COVID, I feel like there's still 10% of a headwind from it. Everything from supply shortages to short staffing is just some kind of sand in the gears of the economy. It seems like.

Covid I feel like Theres still 10% of our headwind from it.

Everything from supply shortages to short staffing.

There's just some kind of sand in the gears of the economy at same time.

Thank you.

Speaker 3: Our next question comes from Matt Schwartz with Raymond James.

Our next question comes from Matt Schwartz with Raymond James.

You May now go ahead.

Hey, guys. This is Matt on for J D. Thanks for taking my questions and congrats on another deal.

Speaker 6: Hey guys, this is Matt on for JD. Thanks for taking my questions and congrats on another deal. So I appreciate the color on organic growth. Quick question, is there any reason post COVID that 10% can't be higher as software revenue becomes a larger part of your mix? So is low teams even a possibility post COVID?

So I appreciate the color on organic growth.

Quick question is there any reason post COVID-19 .

At 10% can't be higher as software revenue becomes a larger part of your mix.

Is low teens, even a possibility post COVID-19 .

It is a possibility and it is our target.

Speaker 1: It is a possibility and it is our target. Our goal, our guidance for

Our our goal.

Our guidance for 'twenty two.

Is double digit.

Speaker 1: Is double digit? For 23, I think will address that when we come over the hill and have better visibility, but it's definitely our goal to get there. It's not yet our long term guidance.

For 'twenty three I think we'll address that when we come over the hill.

We'll have better visibility.

It's definitely our goal to get there.

It is not yet our long term guidance.

Yes.

Speaker 6: Okay, great. And then just one more on merchant services margin. On an organic basis, what is the normalized level of margin expansion there? Like are we looking at 25 to 50 base points a year ballpark? And I know there's gonna be M&A and that's gonna come with different margin profiles, but is it possible you can get that at 33, 34% ebid on margin like you did that for pointing. Thanks, guys.

Okay great.

And then just one more on merchant services margin on an organic basis, what is the normalized level of margin expansion. There like are we looking at 25 to 50 basis points, a year ballpark and I know theres going to be M&A, and that's going to come a different.

Margin profile is but is it possible you can get back to 33, 34% EBITDA margin.

Thanks, guys.

Speaker 1: Our target with our guidance with our current mix of companies long term is to expand margins 50 to 100 basis points a year.

Our target with our guidance with our current mix of company is long term is to expand margins.

50 to 100 basis points a year.

Yeah.

Speaker 1: And where we expect to get that leverage is on the corporate expense line, which should grow at an inflationary rate while the pop line, as you see, is growing at a much higher rate. And where we expect to get that leverage is on the corporate expense line, which should grow at an inflationary rate.

And where we expect to get that leverage is on the corporate expense line.

Which should grow at an inflationary rate while the top line as you see us growing at a much higher rate.

So over some time period I do think it's possible to get into the <unk>.

Speaker 1: So over some time period, I do think it's possible to get into the 30.

Okay.

Speaker 6: Okay, great. Thanks guys. That's the end of the quarter.

Okay, great. Thanks, guys, Congrats again on the quarter.

Yes, Matt.

Our next question comes from James Faucette with Morgan Stanley .

Speaker 3: Our next question comes from James Fawcett with Morgan Stanley . You may now go ahead.

Go ahead.

Great. Thank you very much I wanted to ask.

Speaker 7: Great, thank you very much. Wanted to ask quickly on acquisitions. Obviously, you guys have had a different...

Quickly on acquisitions, obviously, you guys have had.

A different end.

Speaker 7: Acquisition strategy than a lot of people and they're seeing good success and it's obviously contributing to the growth.

Acquisition strategy than a lot of people and are seeing good success in it.

Obviously contributing to the growth.

Speaker 7: What are you thinking about the current environment, especially given the volatility and valuation?

What are you thinking about the current environment, especially given the volatility in valuations and how should we think about or what would you like to see in terms of cadence of acquisitions as we go through 2022 compared to the last one or two years.

Speaker 7: And how should we think about, or what would you like to see in terms of cadence of acquisitions as we go through 2022 compared to the last?

Okay.

Speaker 1: We've generally, well, to ask the first part of your question, private company valuations, at least for the population.

We've generally.

Well to answer the first part of your question private company evaluations.

At least for the population we look at it.

Speaker 1: We're found around, maybe it's been owned 30, 40 years. It's somewhat disconnected from public valuations. So I don't anticipate a large impact from volatility in public valuations.

Its founder owned maybe it's been owned 30 40 years.

Somewhat disconnected from public valuations.

So I don't anticipate a large impact from volatility in public valuations.

Crossing over into the World.

Speaker 1: crossing over into the world where you work in.

We work in.

As far as pace of acquisitions, we've generally guided to.

Speaker 1: As far as pace of acquisitions, we've generally guided to

Speaker 1: Four to five a year, you know generally one acquisition per quarter

Four to five a year generally one acquisition per quarter.

And.

Speaker 1: you know sometimes it worked out a little differently than that just luck or opportunity. But that's how we go into each year planning. And so...

Sometimes it works out a little differently than that just lock or opportunity.

But that's how we go into each year planning.

And so.

As you know M&A is kind of.

And Theres a lot of factors that go into it and it's hard to hard by nature to predict.

Speaker 1: There's a lot of factors that go into it and it's hard to, hard by nature to predict.

Sure, but it sounds like from your perspective is that the types of companies that you're looking at and having conversations with et cetera. They havent been subject to that to the the massive moves in and the overall valuations et cetera, and so.

Speaker 7: But it sounds like from your perspective is that the types of companies that you're looking at and having conversations with et cetera, they haven't been subject to that, to the massive moves and in the overall valuations et cetera.

It sounds like from what Youre, saying is that those conversations are in.

Speaker 7: Sounds like that from what you're saying is that those conversations and

Speaker 7: I guess negotiations are pretty similar to what they have been historically then.

I guess negotiations are pretty similar to what they have been historically then.

Speaker 7: They are, you know, we go out and tell our story of not becoming part of something larger, taking care of key employees, giving them a lot of autonomy, and taking care of the customers.

They are we go out and tell our story.

Becoming part of something larger taking care of employees given them a lot of autonomy.

And taking care of the customers.

Speaker 7: And, you know, they're not always looking for top dollar. We're looking for people that...

And.

They're not always looking for top dollar we're looking for people that.

Speaker 5: have built something they're proud of and they want to stick around and be part of something for another five or ten years.

Have built something they are proud of and they want to stick around and be part of something.

For another five or 10 years.

Got it got it and then.

Speaker 7: Got it, got it. And then, you know, I think you addressed this a little bit, but I wanted to kind of re-ask it.

And I think you addressed this a little bit but wanted to kind of re ask it maybe because I didn't understand it you asked in the first place but.

Speaker 7: that didn't understand it, your answer in the first place. But when we think about the increasing contribution of software and as we go through the...

When we think about the increasing contribution of software and as we go through the integration period and kind of inorganic growth becomes organic growth just with the passage of time.

Speaker 7: an inorganic growth becomes organic growth just with the passage of time. How should we think about the leverage and the margin impact? I mean, obviously you're putting up good.

Should we think about like the.

The leverage in <unk> and the margin impact I mean.

Obviously, youre putting up good.

Speaker 7: Top lane growth numbers, et cetera, but should there be incremental margin and margin expansion over time, or what's the framework that we should be using as we think about the integration of these acquisitions?

Topline growth numbers et cetera, but should there be incremental margin and margin expansion over time or are what's our.

Kind of what's the framework that we should be using.

As we think about the integration of these acquisitions.

I think so.

For one thing everything we've purchased post IPO has been software related and those companies generally carry higher margins.

Speaker 1: For one thing, everything we've purchased post IPO has been software related. And those companies generally carry higher margins.

Speaker 1: the payments that get attached to those companies over time also have higher margins than

The payments.

Get attached to those companies over time also have higher margins then.

Speaker 1: non-integrative payments. So I do think there's a general shift.

Non integrated payments. So I do think there is a general shift.

Speaker 1: over time to improving margins. You know, an example of a company we just bought 50% margins. That's probably not as good as it gets, but.

Over time to improving margins.

An example is the company, we just bought 50% margins, that's probably about as good as it gets but.

Speaker 1: So yeah, over time, I think so, but it will depend on the mix of companies.

So yes over time, I think so but it will depend on the mix.

Of companies we purchase.

Speaker 7: Got it, makes sense. Appreciate your time this morning.

Okay.

Got it makes sense I appreciate your time this morning.

Thank you Jim Thank you.

Okay.

Okay.

Again, if you have a question. Please press Star then one.

Speaker 3: Again, if you have a question, please press star then one. Our next question comes from Chris Donut with Piper Sandler. You may not go ahead.

Our next question comes from Chris Donat with Piper Sandler You May now go ahead.

Speaker 6: Good morning, gentlemen. I wanted to just revisit one element of guidance and then also if anything's changed as far as the education business goes. What's embedded in your 2022 outlook? And then are you seeing any changes that can affect anything within the guidance period or is it more of a 2023 event at this point? If there is a change.

Good morning, gentlemen, I wanted to.

Just to revisit one element of guidance and then also if anything's changed as far as the education business goes.

What's embedded in your 2022 outlook and then are you seeing any changes that.

It can affect anything.

Within the guidance period or is it more of a 2023 event at this point.

If there is a change.

Well I think on the last call.

Speaker 1: Well, I think on the last call, we gave some rough numbers for revenues and EBITDA for education. It was a little less than 4 million revenues and EBITDA around 1.5 million. We were only slightly down from that in the December quarter and that's a normal seasonal thing.

We gave some rough numbers for.

Revenues and EBITDA for education.

It was a little less than 4 million revenues.

EBITDA of around one 5 million.

We were only slightly down from that in the December quarter, and Thats a normal seasonal thing.

Speaker 1: uh... so that gives you an idea of the the run rate going forward

So that gives you an idea of the run rate going forward.

Speaker 1: As far as lunch goes, which would be a catalyst for stepping higher on revenues in EBITDA.

As far as lunch goes which would be a catalyst for surfing higher on.

Revenues and EBITDA.

That will depend on.

Speaker 1: that will depend on politics and local jurisdictions.

Politics.

Local jurisdictions.

We think it will probably happen someday because it's very hard on district budgets free lunch for everybody.

Speaker 1: We think it'll probably happen someday because it's very hard on district budgets, free lunch for everybody. But I don't know of a timetable yet, but I feel like it's there at some point in the future. I just, we're not privy to that. We don't have that knowledge right now.

But I don't have I don't know of a timetable yet.

I feel like it's there at some point in the future I, just we're not privy to that we don't have that knowledge right now.

Okay. So I was just wondering if anything in sort of changed in the last couple of months, but.

Speaker 4: Oh, okay. So I was just wondering if anything had sort of changed in the last couple months, but it doesn't sound like it has. And then just digging into the supplemental disclosure.

It doesn't sound like it has.

And then.

Just digging into the supplemental disclosure.

As we look at the.

At the top of the page two and the recurring software services.

Speaker 4: at the top of the page two in the recurring software services, the increase in the quarter to 10.3 million from 3.2 million. Clay, is that all acquisition related or is there some other business that's kind of bouncing around quarter on quarter there?

Increase in the quarter to $10 3 million from $3 2 million Clay is that all acquisition related or is there.

Some other business that is kind of bouncing around quarter on quarter there.

That is mainly.

Speaker 1: That is mainly the healthcare acquisition we did on October 1st, as the lion share event. Okay. And um.

The health care acquisition, we did on October one.

As the lion's share of that.

Okay and.

Okay.

Hi.

Just thinking about the.

Speaker 4: I think I heard you correctly Greg that you hadn't really seen any change related to Omicron because it went from Delta to Omicron but just to double check within the hospitality businesses. It's been steady stays the last couple quarters. Specifically for that one because we're here and other things in some other places but it didn't sound like there was any change in hospitality but I wanted to double check.

Yeah.

I heard you correctly, Greg that you hadn't really seen any.

Any change related to omicron, because you went from delta to omicron, but just to double check within the hospitality businesses. It's been been steady state the last couple of quarters.

Specifically for that one because we're we're hearing other things and some other places but.

Didn't sound like there was any change in hospitality, but I wanted to double check.

Speaker 1: We have seen a slight dip.

We have seen a slight dip.

And hospitality, especially on the West coast, we have a large presence.

Speaker 1: In hospitalities based on the West Coast, we have a large presence.

Speaker 5: But it's a thinner margin business, so it really hasn't, it doesn't affect our EBITDA.

It's thinner margin business, so it really hasnt.

It doesn't affect our EBITDA.

Yeah.

Speaker 5: to speak of, but the restaurants are open, there's new ones opening.

To speak of.

The restaurants are open there is new ones opening.

The volume may be down a little debt.

Speaker 7: Their volume may be down a little bit, but it's not measurable.

Not <unk>.

<unk>.

Okay.

Thanks for that additional detail.

Speaker 3: This concludes our question and answer session. I would like to turn the conference back over a great daily for any closing remarks.

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

I want to thank everybody for their attendance and interest.

Speaker 1: I want to thank everybody for their attendance and interest and

And.

Speaker 1: Stay tuned we've got you know things are rolling along really well the team's doing awesome. Thank you

Stay tuned we've got.

Things are rolling along really well the team is doing awesome. Thank you.

Speaker 3: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.