Q1 2023 I3 Verticals Inc Earnings Call
Oh about nutrition.
Good day, everyone and welcome to the <unk> three vertical wells first quarter 2023 earnings conference call.
Today's call is being recorded and a replay will be available starting today through February 16.
The number for the replay is 87734475 to nine and the code is 313.
2661.
The replay may also be accessed for 30 days a company's website.
At this time for opening remarks, I'd like to turn the floor over to Jeff Smith.
SVP of finance. Please go ahead Sir.
Good morning, and welcome to the first quarter 2023 conference call for <unk> verticals. Joining me on this card Greg Daily, our chairman and CEO Clay Whitson, our CFO and Rick Stanford our president.
To the extent any non-GAAP financial measure is discussed in today's call. You'll 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.
non-GAAP financial information should be considered by each individual in addition to but not instead of the GAAP financial statements.
This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements among others regarding the company's expected financial and operating performance.
For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements.
You are hereby cautioned that these forward looking statements may be affected by important factors among others set forth in the company's earnings release and 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.
Now I'll turn the call over to the company's chairman and CEO Greg Daily.
Thanks, Jeff and good morning to all of you.
We're excited to present to you our results for the first quarter of fiscal year 'twenty three.
To kick things off we set new records in revenue and adjusted EBITDA.
And you'll be pleased with our results of our focus on recurring revenue and adjusted EBITDA margin.
Year to date adjusted EBITDA grew 29% from Q1 fiscal year 'twenty two.
Q1 of fiscal year 'twenty three.
Yeah.
The last several quarters, you've heard me discuss recurring revenue.
It's just been about 80%.
It was 84% this quarter and you will notice that we had a lighter quarter of software license deliveries.
As multiple projects pushed into Q2.
The backlog of software sales has never been deeper.
License revenue.
Which does not recur and fluctuate.
In a quarter like this one the power of our model is reinforced SaaS software transactional software transaction based revenue payments and other recurring revenue helped us achieve consistent quality earnings.
This quarter includes our first results of the operation of LT.
We were pleased with their results, but even more excited about what is to come.
<unk> has already gone into market with our 2021 acquisitions the eyes.
It has a much more robust sales function than Celtic could ever avail itself up.
Celtic in D. I S have complementary best of class products, where transportation departments at the state level.
And we can't wait to expand our already significant footprint across the United States and Canada.
When we talk about acquisition targets with untapped.
Recurring revenue opportunities Celtic is a fantastic example.
Yeah.
Earlier this quarter, we announced the acquisition of Accu fun, a strategic product for public sector.
We hosted an internal sales conference in Nashville, This week and our sales team was static about how this product can be cross sold.
In the public sector and education verticals.
Our teams are off to a great start.
Now I'll turn the call over to clay. He will provide you more details on our first.
Okay.
Financials, our first quarter financial performance following Clay's comments, Rick will provide an update on some rule changes and addressed M&A and then we'll open up the call for questions.
Thanks, Greg.
The following pertains to the first quarter of our fiscal year 2023, which is the quarter ended December 31 2022.
Yeah.
Uh huh.
2023, sorry.
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.
<unk> for the first quarter increased 16% in.
In line with the seasonality comments, we gave on the last call.
$86 million from $73 9 million for Q1 2022.
Reflecting organic growth and acquisitions.
Our revenue yield improved to 146 basis points for the quarter from 139 basis points for Q1 2022.
Organic growth for this quarter was approximately 8%.
Annual recurring revenues totaled 290, <unk> 2 million for Q1, 2023 compared to $240 4 million for Q1 'twenty.
22, a growth rate of 21%.
Organic <unk> growth generally runs a few percentage points above our total organic revenue growth.
Over 80% of our revenues in the quarter continued to come from recurring sources.
Software and related services remain the largest portion of our revenues representing 48% for Q1 paint.
Payments represented 47% and other 5%.
Adjusted EBITDA increased 29% inline with expectations to $23 6 million for Q1 2023 from $18 3 million for Q1 2022.
<unk> continued momentum in our software and services segment.
Adjusted EBITDA as a percentage of revenues increased to 27, 4% for Q1 2023 from 24, 7% for Q1 2022.
Principally reflecting margin improvement in our software <unk> services segment.
Pro forma adjusted diluted earnings per share increased to 37 cents for Q1 2023 from 35 cents for Q1 2022.
Please refer to the press release for a full description and reconciliation.
Segment performance revenues in our software and services segment increased 19% to $53 2 million for Q1 2023.
From $44 8 million for Q1 2022.
Principally reflecting growth in our flagship public sector vertical which includes education.
Revenues in our education vertical continued a strong rebound thanks to organic sales to new school districts and hired a lunch and activity fees at existing districts.
Federal and state subsidies for lunch have decreased significantly since the pandemic.
Software license revenues were light for the first quarter at $1 2 million down from a big Q4 of $3 5 million.
This is the most variable and difficult line item for us to forecast installations depend on our customers' schedules, which can be a moving target, particularly in public sector.
Greg mentioned, some software license deliveries, which pushed from Q1 to Q2.
If those had landed in this quarter Q1, 2023 would've approximate that our Q1 2022 number of $2 1 million.
While we are focused on SaaS and other recurring sources of revenue license sales carry a 90% gross margin. So they favorably impact quarterly results as we saw in Q4.
Despite light license sales the segment's adjusted EBIT improved 38% to $18 9 million for Q1 2023 from $13 6 million for Q1 2022.
<unk> seen revenues.
The growth was friendship principally driven by our public sector vertical including education.
Alex sector represents over half of our consolidated business.
Adjusted EBITDA as a percentage of revenues improved to 35, 4% for Q1 2023 from 35% for Q1 2022.
Reflecting high margin software and services acquisitions, such as <unk> over the past year.
And a return to traditional high margins in education.
Jackie find acquisition effective January one as high margin as well.
Revenues for our merchant services segment increased 13% to $32 8 million for Q1 2023 from $29 2 million for Q1, 2022, principally reflecting growth in our I S. O I S V and b to B channels.
Adjusted EBITDA for our merchant services segment increased 8%.
The $9 4 million for Q1, 2023 from $8 7 million for Q1 2022.
With higher revenues, partially offset by higher residual expenses.
In keeping with our strategy since the IPO, we have steadily redirected acquisition and internal resources from traditional merchant services into higher growth and higher margin software and services coupled with integrated payments.
Our strong balance sheet has allowed us to continue to execute our acquisition strategy.
December 31, we had $259 6 million borrowed under our revolver net of cash.
Under a 375 million facility.
The face value of our convertible notes are $117 million.
As of December 30th our total leverage ratio at December 31, our total leverage ratio was approximately four times, while the current constraint is five and a quarter times.
The IQ fund purchase effective January one was $12 5 million cash plus $2 million in stock for total consideration of $14 5 million at closing.
We paid roughly 10 times for App coupons, the high end of our range because it is a strategic asset integral to our unified public offering.
The interest rate for the convertible notes is 1% while the interest rate for the revolver is currently around 8%, but will increase as the fed continues to raise rates.
Over time, we expect to convert roughly two thirds of adjusted EBITDA into free cash flow, which can be used towards debt repayment acquisitions and earn outs.
We define free cash flow as adjusted EBITDA minus capex internally capitalized software cash interest and cash taxes.
Okay.
Looking forward the strong start to our fiscal year gives us confidence in the following guidance for fiscal year 2023.
It excludes acquisitions that have not yet closed and transaction related costs.
Yes.
Revenues $360 million to $380 million no change.
At EBITDA $95 million to $103 million.
We increased $1 million to account for the <unk> acquisition.
Pro forma adjusted diluted EPS.
$1 50 to $1 62, no change.
From a seasonal standpoint acquisition activity could prove different this year, but we still expect the quarters of fiscal year 2023 to follow a similar pattern to though as of fiscal year 2022.
As we become more software centric quarters might vary based upon perpetual license sales, even though our trend is generally toward more recurring revenue streams.
I'll now turn the call over to Rick for a company updates and M&A activity.
Thank you clay good morning, everyone before I discuss M&A I want to comment on a few developments within our business. The public sector vertical continues to show exponential growth as we further develop our existing products and add new products. Both from the ground up and via acquisition as a result, we've seen enhanced levels of adoption.
Combination of our motor carrier title registration and drivers licensing offerings into the <unk> III transportation sector has been well received by the market.
The <unk> III Justice technology, offering now effectively serves public safety as well as CT offerings that span at all levels of courts for a study.
Financial ERP solutions are performing well, especially with the addition of the online General Fund accounting company to our sector and.
In early January we acquired <unk> to lead our online General fund accounting GSA product suite.
As a result of the architecture and Configurable nature of the technology, we will deploy the <unk> family of solutions to counties municipalities special districts and select tribal nations.
In addition, our modular solutions support a range of nonprofits, including social services Education Endowment and faith based organizations.
We continue to expand our cross vertical pollination, our public education health care verticals will offer the enterprise <unk> fund solution.
As our three education looks to the future. We continue to see the normalization of school activities post pandemic. In addition to launch there is an increase in broad based students spending inclusive of athletics ticket sales and club activities.
Our core objectives is to provide our customer base with the seamless software experience across multiple departments.
We're experiencing increased revenue as a result of high levels of adoption.
Hi, <unk> healthcare continues to refine and expand our product solutions through the application of the <unk> through a unified product offering or disciplines, the depth and breadth of our healthcare offering coupled with the responsiveness to our customers or to customer needs is resulting in multiple at three healthcare.
Scenarios participating in new contracts.
We just signed three large scale agreements with providers in Louisiana, Mississippi and Texas.
Three healthcare.
Public and education verticals is seeing growth with a reduction of friction increase of synergies and cross vertical collaboration.
I'll now speak to M&A, we continue to pursue growth outperforming acquisitions of companies.
Our strategy with an emphasis on companies in our public sector and healthcare verticals.
On January six we announced our latest acquisition.
Acquired business <unk> is to provide our fund accounting solutions for government entities, including education and nonprofits in the United States the.
The addition of this talented team will fuel growth in many of our verticals were very proud to have the <unk> deal done and look forward to exciting things to come with this product.
I would like to note that this deal fell within our normal range of multiples.
Our pipeline remains healthy with opportunities for acquisitions and public sector and healthcare that are similar in size to many of our acquisitions today.
This concludes my comments Jamie at this time, we'll open the call for Q&A. Please.
Okay.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To get in the question queue, you May Press Star and then one to withdraw your question you May Press Star two.
If you are using a speaker phone we do ask you. Please pick up the handset prior to pressing the numbers to ensure the best sound quality.
Once again that is star and then one to join the question queue.
Our first question today comes from John Davis from Raymond James. Please go ahead with your question.
Hey, good morning, guys.
First just wanted to touch on your comments about the push out in.
License revenue I, just want to make sure I got it right. It was about $900000 difference there.
It was $1 two versus as you said it would've been closer to $2 one.
I just wanted to clarify that.
That's correct.
Okay, and then on the margins I think those were better than expected and you obviously raise margins for the full year. Despite some of the software mix and <unk>. So have you guys taken any cost actions, maybe that weren't planned three months ago to help offset it or to just business mix and thanks performing better.
It's just it's mainly business mix.
And education.
The rebound in education has brought it back to its historical margin.
Okay.
And then maybe Greg Big picture.
<unk>.
Macro versus where we were three months ago, maybe comment.
Comment on January trends versus kind of your first quarter any changes in your view for the full year from a from a macro perspective for your verticals.
Good question.
Last three months.
Obviously, we've been talking about a recession for nine months, we're not seeing it.
In our verticals.
It seems like we're in for a soft landing.
We're kind of protected and government.
And our verticals, but.
No no really changes.
Just kind of.
Feel like our timing is good we're kind of in our sweet spot and on.
I think we will finish the year strong.
Okay. Thanks, and then any commentary on January helped January I know, we're lapping some omicron.
From a year ago, so sorry.
Some of your peers have seen some acceleration in January just curious how you're doing where you look relative to the December quarter.
We never read much into January or February for that matter. They are the two weakest months of the year you get a lot of returns from Christmas spending.
I don't know that we've seen any anything notable in January or February so far.
Okay I appreciate the color guys. Thanks.
Yeah.
Thanks, Jamie once again.
Once again, if you would like to ask a question. Please press star and then one to withdraw your question you May Press Star two.
Our next question comes from James Faucette from Morgan Stanley . Please go ahead with your question.
Thanks. This is this is sandy BD on for James.
First a question on M&A it feels like your team continues to execute here.
Would slow or stop the pace of deal closures for your team just just mindful of potential slowdown in growth or increase in interest rates or even the balance sheet is there anything on the horizon that would challenge the cadence that your team has generally been pretty consistent west.
I don't see a slowing down.
We are pickier.
Because we've got.
I think we've done 46 deals we've got.
<unk> of products.
Defined by verticals.
This latest one Accu fund was.
Like a bullseye of exactly what we needed.
Took a.
While the talk this guy into joining the team that we.
<unk> has gotten an involved excited.
Net.
We don't worry about capital.
If we had a large deal.
We'd probably do an offering.
And say guys.
The reason we're out here doing is because this large deal was too good to be true or we needed it.
And just I think.
For a year five years is kind of what we can digest comfortably.
I'd like them to be larger but.
It's not.
Our.
Our sweet spot it's still.
$2 million to $5 million of EBITDA.
Got it that's helpful. And then just one follow up looking at.
<unk> and <unk> growth.
It looks like it slowed a little bit on a sequential basis. So the year on year growth numbers, but also just versus <unk> and I wanted to ask if there was anything to piece out just with regards to seasonality.
Any correlation with the comments on license sales, even the organic growth profile anything that we should keep in mind within that aarp's.
Yes.
<unk> does not include the license sales, but from an organic.
Standpoint.
Each million dollars of license sales is one 4% of organic growth. So.
Q1, this year had been like Q1 last year, we would've been at nine 4% organic instead of 8% so.
That is and then in Q4 of course, we jumped up to 12% because we had $3 5 million on that line. So that is a pretty good line to look at if youre looking at small variations in organic growth.
That's really been the difference in the last several quarters it.
Jumped from 10% to 12% in Q4 and the reason was that line in this quarter. It's.
<unk>, 8% and the reason is that line so that seems to be the big variable for us.
Got it thank you for the questions.
Thank you. Thank you.
Once again, if you would like to ask a question. Please press star and then one.
Our next question comes from Charles Nathan.
Nathan from Stephens. Please go ahead with your question.
Hi, Good morning, and thank you for taking my question just a quick follow up on M&A.
I wanted to get a sense for if you're seeing anything different in terms of seller expectations.
On valuation I know in the past you've commented that.
Valuations were at the what Youre seeing valuations at the lower end of your target range I wanted to just get a sense for.
The environment right now.
Yes.
Great question, we're not seeing any changes right now keep in mind that we are kind of the smaller sweet spot and the trickle down of that kind of activity takes a while to get there.
We feel like we're in a good position to negotiate at the lower end of our range on most of our deals.
If it's a high growth company.
It's a great fit in our product suite, we may pay all of it at the higher end of our range.
But we're not seeing any changes right now I think the key thing you do is you self source youre deal. So.
These are guys that are getting call it four or five times a week.
Typically the only ones talking to him and he's a referral from one of our existing companies.
So we're in a good position going in in our models drastically different than.
Some of the guys out there with a lot of cash we don't expect to.
Lay off half the staff post acquisition to justify the price and they like that.
Got it.
And just as a quick follow up I know you touched on the spend environment in public sector being favorable.
And in the past you've commented on federal funding, providing a bit of a tailwind to spend but I wanted to drill into that a little further and just get a sense for any particular areas of strength, whether from a geographic standpoint or.
Or a sector standpoint that youre seeing areas of strength and weakness in any general comments you might have on public sector spending I think would be helpful as well.
So I'll talk to the spending maybe Greg can chime in on any strengths or weaknesses.
ERP was $2 one trillion I believe and government entities Havent through 2024 to use those funds. We don't think a lot of governments. It fully spent the funds we're still in the process of educating them on the money that they have available to them where they could use it.
But I don't see any weakness there I just see people taking their time there were a lot of projects that pushed during the pandemic and those are our first order of business and the new sales are.
Gradually coming in we are responding to a lot of our lease.
We're pleased with the uptick in Rfps and the fact that we have multiple subsidiaries combining efforts on one RFP.
S level on those Rfps I feel like education and utilities are on fire.
Yes.
As exciting as education can get which is.
Ltd.
They are investing in technology.
If things cost more so inflation has helped us.
And then utilities, we have this one particular company and internally or milestone that.
Has the pipeline that's insane.
Pretty pretty confident about that over the next couple of years.
And do you got any of graphics, yes, geographically I think it follows our acquisitions, but were strong in the southeast Texas the Midwest.
We've got a smattering out west.
That's our current geographic strength.
Got it thank you.
Okay.
And our next question comes from Peter Heckmann from D. A Davidson. Please go ahead with your question.
Good morning, everyone. Just on healthcare wanted to talk a little bit about where you.
Which solutions you lead with and how are you in terms of kind of bundling solutions.
Focused on individual niches within healthcare I mean, where do you think you are.
Strongest in terms of solution set and niche market within healthcare.
So our strongest product as our RCM, we do quite a bit of coding or.
We have a portal patient portal today.
We are enhancing the features and capabilities of that portal, we think that will be strong in the future.
Obviously, the addition of <unk> on <unk>.
Some products are in the works are going to fill out our product suite a lot better.
I will tell you that.
Last quarter, I guess, we announced that Paul Christians had been promoted to CFO .
One of his three initiatives system to create a unified product offering within healthcare similar to how we did it in public sector and we're extremely pleased with the amount of work that's been done in a short period of time in health care and I think we will have some more exciting things to talk about in healthcare for the next quarter.
The icing on the cake healthcare's payments.
We just really haven't scratched the surface yet.
It takes a few quarters or few years.
Get that put in place that.
We Havent Stevens.
We are.
First base on that so I am excited about payments.
That's great to hear and then just.
Public sector on the statewide deals I think between a number of your deals you have.
Easily a dozen states maybe close to 2000 on a statewide deal but.
As you.
Continue to grow that business and get more reference ability.
You expect that you would see some deal sizes that get quite a bit larger.
And it could be notable on a quarter to quarter basis.
Yes, the combination of <unk> can be as strong in the market.
Celtic as you know is in 18 different states a couple of provinces in Canada.
Thank all of those deals as they land we're going to be.
Higher end deals.
For us we're optimistic they don't put in your model yet.
Alright.
We will stay tuned I appreciate it.
And ladies and gentlemen, with that we'll conclude today's question and answer session I would like to turn the conference call back over to Greg Daily for any closing remarks.
Again, thank you for your interest thanks for joining us this morning.
All of this have you need us.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. You may now disconnect your lines.
Okay.