Q3 2023 i3 Verticals Inc Earnings Call
Good day, everyone and welcome to the I three verticals third quarter 'twenty twenty-three earnings conference call.
Today's call is being recorded and repaid replay will be available starting today through August 16th.
The number for the replay is 87734475 to nine.
The code is five to 550 to four replay may also be accessed for 30 days at the company's website.
At this time for opening remarks, I would like to turn the call over to Jeff Smith SVP of Finance. Please go ahead Sir.
Good morning, and welcome to the third quarter 2023 conference call for I three verticals.
Joining me on this call are Greg Daily, our chairman and CEO Clay Whitson, our CFO , Rick Stanford our president.
And Paul <unk>, our CFO .
Did you sell 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.
Viewing yesterday's earnings release.
The company intends 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.
This purpose any statements made during this call that are not statements of historical fact may.
May be deemed to be forward looking statements.
You are hereby cautioned that these forward looking statements may be affected by the important factors among others set forth in the company's earnings release and in reports that are filed or furnished to the SEC.
Consequently, actual operations and results may differ materially from those discussed in the forward looking statements.
Finally, the information shared on this call is valid as of today's date and the company undertakes no obligation to update it except as may be required under applicable law.
I'd now like to turn the call over to the company's chairman and CEO Greg Daily.
Thanks Jack.
And good morning, everyone on the call.
We're excited to present, our third quarter results for the fiscal year.
This quarter, we set another record for revenue and adjusted EBITDA.
Which were up 17% and 26% over the same quarter last year.
Which reflected our improving margins.
We continue to focus on bringing excellent software to our vertical markets.
We monetize these solutions primarily through recurring sources of revenue through a variety of means.
Such as software as a service or SaaS.
Which grew 20% over the prior year or.
Our volume based payments.
<unk>, which grew at 14% over the prior year.
Depending on our needs of our customers, we can align incentives and.
And lock in a sustainable long term growth.
Overall software and related services revenue made up over 50% of total revenue.
Rick will elaborate in M&A later, but we continue to explore opportunities.
There are many in our market focus such as public sector.
Our standards are very high and we are patient and disciplined.
We want deals that fit our culture and offer us more tools to execute and our vertical strategy.
However.
Youre, saying that our team is staying busy despite the slower pace of M&A would be an understatement.
So you can see on the moment to accelerate internal optimization.
And are proud of the strides we have made.
We've always intentional on counter positioned ourself against private equity.
Our other strategic buyers, who would focus on quick wins short term a whole periods and aggressive synergies.
This has served us well and leading into into acquisitions of many great businesses and attractive financial profile.
We have retained an incredibly talented people.
We have accomplished this mostly through.
The primary pipeline of M&A.
The word is out that I have three can be trusted with your business, which might be your life's work.
However, when the deal closed there as much integration work that is necessary.
This is where our culture makes the difference.
Post close our sellers quickly see what can be accomplished together and I'm always amazed at the willingness to collaborate.
Embrace new business practices and the key players.
Some of the areas that our team is centralized and upgraded this year include our enterprise RFP response team.
And enterprise support team.
This consolidation of many of our professional services function.
He is joined many other shared services, such as marketing and accounting and legal they are always continuing to improve.
Okay.
These when half the business is clicking on all cylinders to illustrate that we are proud to announce two state level wins from our justice and transportation Division public sector.
We've never been better positioned to compete in many more similar processes and I'm excited about the additional detail Rick extra sure.
The first I will turn the call over to clay. He will give you more details on our third quarter financial performance.
While the place comments, Rick will provide more detail and update on the business.
Address M&A.
The call for <unk>.
Questions.
Good morning.
Following pertains to the third quarter of our fiscal year 2023, which is the quarter ended June 30th 2023.
Please refer to the slide presentation titled supplemental information on our website for reference with this discussion.
We had another great quarter with record record revenues and adjusted EBITDA revenues for the third quarter increased 17% to $93 9 million from $88 6 million for Q3 2022.
Reflecting organic growth and acquisitions.
Our revenue yield improved to 150 basis points for the quarter from 136 basis points for Q3 2022.
Organic revenue growth for this quarter was approximately 10%.
Fitting in from a reasonably strong quarter for sales of software licenses, which totaled $2 8 million.
Although its software license sales are not a part of annual recurring revenues, we keep highlighting this line because it has higher variability and recurring revenue streams and can help explain changes in organic growth from quarter to quarter.
<unk> totaled $311 4 million for Q3, 2023 compared to $266 7 million for Q3 2022.
Rate of 17%.
Over 80% of our revenues in the quarter continued to come from recurring sources.
Software and related services remains the largest portion of our revenues representing over 50% for Q3.
Payments represented 45% and other 5%.
Adjusted EBITDA increased 26% outpacing revenues to $25 3 million for Q3 2023 from $20 1 million for Q3 2022.
<unk> continued momentum in our software and services segment.
Adjusted EBITDA as a percentage of revenues increased to 26, 9% for Q3 2023 from 24.9% for Q3 2022.
Reflecting margin improvement in our software and services and merchant services segment.
Pro forma adjusted diluted earnings per share increased to 38 cents for Q3 2023 from 37 cents for Q3 2022.
Again, please refer to the press release for a full description and reconciliation.
Segment performance.
Revenues in our software and services segment increased 23% to $58 9 million for Q3 2023 from $47 8 million for Q3 'twenty to 'twenty two.
The broad based growth in our public sector vertical and the healthcare verticals.
Public sector represents over half of our consolidated business.
It includes the education vertical which deserves special mention revenues in our education vertical continued a strong rebound thanks to organic sales to new school districts and higher line churn activity fees at existing districts.
<unk> in its state subsidies have decreased significantly since the pandemic.
The segment's adjusted EBIT improved 33% to $20 8 million for Q3 2023 from $15 6 million for Q3 2022.
Pacing revenues.
Adjusted EBITDA as a percentage of revenues improved to 35, 4%.
For Q3, 2023 from 32, 7% for Q3, 2022, reflecting high margin software and services acquisitions, such as Celtic over the past year.
And a return to traditional high margins in education.
Yeah coupons acquisition effective January 1st was high margin as well.
Revenues for our merchant services segment increased 7% to 35 point.
<unk> million for Q3, 2023 from $32 7 million for Q3, 2022, reflecting growth in our b to B and ISO channels.
Adjusted EBITDA for our merchant services segment increased 16% to 10.2 million for Q3 2023 from $8 8 million for Q3, 2022 outpacing revenues.
Both our b to B and ISO channels improved their profit margins reflect a slightly better revenue yields and good cost management.
Our balance sheet remains strong and well positioned for 2024 on June 30, we had $272 4 million borrowed under our revolver net of cash.
Face value of our convertible notes of 117 million.
As of June 30th our total leverage ratio remains approximately 4.0 at times.
The current constraint is five times under our new $450 million revolving credit led by J P. Morgan Chase.
The interest rate for the convertible notes is 1% while the interest rate for the revolver is currently around eight 5%.
Over time, we expect to convert roughly two thirds of adjusted EBITDA into free cash flow, which can be used for debt repayment acquisitions and earn outs.
We define free cash flow as adjusted EBITDA minus capital expenditures internally capitalized software development cost.
Cash interest and cash taxes.
Yeah.
Outlook, we reaffirm the guidance, we gave when reporting our fiscal Q2.
Fiscal Q3 was in line with our expectations and we have not closed an acquisition.
With only one quarter to go we could have narrowed guidance ranges, but the mid points remain the same which are our own best estimates of where we think things will shake out.
For revenues, we do not expect quite as large a step up from Q3 to Q4 as we saw last year.
And the free lunch in education last year represented a $2 million sequential step up from Q3 to Q4.
We also had our largest historical quarter for software license sales of three and a half million in Q4 last year.
At $1.4 million sequential step up from Q3 last year.
On the flip side, our adjusted EBITDA margins.
Jen has trended well.
Running two percentage points ahead of last year, and we expect that to continue for Q4.
As in the past, we will give guidance for fiscal 2024, when reporting in our fiscal Q4 of 2023.
I'll now turn the call over to Rick for a company updates and pipeline.
Thank you clay good morning, everyone.
I'll start with updates on the business and then cover M&A.
When I sit down to prepare for this call each quarter I think about where we've been where we are today and where we want to be tomorrow.
11 years ago, when Greg spoke to me about his idea to create a software company comprised of a few different verticals with integrated payments side, maybe you can.
We work together on a strategic plan and began quickly execute again.
When I look back at that plan today Little has changed from the original design.
To date, we have completed 48 acquisitions since going public in June of 2018, both run rate revenue and EBITDA have more than tripled from $101 million in revenue and $28 million in EBITDA.
At this point in our evolution, we are devoting more effort to creating one team with one brand focused on driving results together.
Over the last six months, we've aligned many departments and sub companies in the public education and healthcare sectors under a common three verticals model.
The alignment augments infrastructure and development resources across both vertical and enterprise service delivery areas.
To ensure domain expertise many of the resources are being combined like rolls from sister vertical.
Adoption has been enthusiastic and increased infrastructure and development synergies are starting to lead sales product development operations implementations in Florida.
In addition, these internal customer facing markets are being bolstered our three teams focused on enterprise level infrastructure security cloud services development and project management.
Given the vertical alignment success, we are aligning the entire organization. So that we operate as one cohesive company.
As a result, we have adopted a refined our shared services model and broad individuals' subcompany departments to a coordinated and cohesive enterprise love the.
The enterprise level teams historically consisted of finance marketing HR and legal.
<unk> added an RFP response see professional services infrastructure and secured.
Resources are being deployed to meet organization wide operation and sales support while maintaining vertical and domain expertise.
Our marketing team is coordinating with vertical heads enterprise wide to position, our messaging and a strategic perspective.
The enterprise level marketing team coordinates with dedicated vertical market and product managers to ensure their money, bringing continuity as all entities are actively working to Brian This offer.
The enterprise solutions group comprised of 170 team members from across the organization, which includes enterprise support RFP response professional services client migration implementation and integration.
Have both vertical product and functional expertise and will serve all verticals companywide.
The group delivers a seamless consistent client focused experience throughout software implementations.
The unification of the RFP team project management and professional services is expected to increase services revenue and decrease the time between contract signature and client delivery.
Our enterprise RFP response team is comprised of domain experts from across the organization. The team is creating precise comprehensive unified proposals to rfps and <unk> and our most strategic markets, including public education health care and payment technology.
We were investing in those teams and the increasing demand from large utilities.
Carrier systems and statewide public entities argued.
Our unified approach to research and writing solution engineering negotiation in legal review.
Then effective thus far and we are winning new deals under this model.
We are committed to leveraging robust technological solutions. So we are accelerating our cloud cloud migration strategy for critical technology over the next two years.
Our cloud first approach to delivering technology includes a blend of both public and private cloud providers, we have strategic relationships with both AWS and Microsoft who are assisting us with this transformation.
Remaining cloud agnostic, we choose the best technology to deliver optimal solutions to our customers.
The cloud empowers us to adapt swiftly to evolving customer needs and ensuring that we can provide real time solutions seamless interactions and state of the art data securely.
We use Microsoft 365 to improve our abilities in the areas of identity and access management threat protection information protection and security management.
We are utilizing azure virtual desktops to manage global resources from a centralized platform, while integrating seamlessly with other Microsoft tools across the enterprise.
We're currently working on a single sign on solution based purely on the Azure cloud technology to allow our customers to log into our software applications and services using a single set of credentials.
Our payment technologies utilized AWS Fargo.
Deploy and manage <unk> containerized applications in a secure highly available redundant manner, allowing us to auto scale rack locations will needed to handle spikes in customer demand.
AWS allows for seamless integration with third party tools, such as cloud Theyre, giving us the ability where automatic fail over between AWS geographic regions, resulting in zero downtime during events such as software deployment.
We are also using instances of artificial intelligence and select customer service environments in all circumstances of knowledge bases in farnell.
And responsive to the specific product solutions, where there is market acceptance.
We are leveraging our India to enhance cost and speed to market in developing our jewelry vertical enterprise and payment technologies.
India gives us access to skilled talent, allowing for improved delivery utilization.
Our focus is on rapid development tools, such as low code to accelerate certainty of execution speed to market.
We've implemented an enterprise wide agile software development lifecycle, giving us flexibility to meet market demand enhanced quality for better user experience and a customer centric approach focused on collaboration continuous improvement and transparency.
The public sector continues to see positive market response to our wide range of solutions.
With the support of Hawaiian marketing enterprise solutions, and RFP team's republics.
Republic successfully sold and deploy enterprise level solutions.
Our Justice Division closed a five year contract with a state level judiciary Aoc to deploy our online dispute resolution product and our utility vision expanded its portfolio with a tier one utility with our digital customer engagement portal solution and our guidance. In addition.
<unk> the transportation Division, specifically, the formerly known Celtic part of that group one of the significant state level Dnb solution under the <unk> III, Brian in the Midwest.
Software suite being utilized by the state includes our EFTA International fuel tax agreement IOP International registration plan and you see our unified carrier registration integrated modules.
Third quarter sales and education sector are strong and contribute to a record year for our three education as a result of focusing on software sales and strategic partnerships, we were adding more than 100, new districts to our customer base across the spectrum of the <unk> three education software suite.
<unk> healthcare solutions and strengthening its market position by closing Airbus deals leveraging enterprise and vertical specific synergies.
Three healthcare expanded their reach in the state of Louisiana and Alabama.
They also formalized a new partnership with the state level respected health science system to deliver RCM services.
Adoption of the comment on three alignment model.
Health care has yielded improved profit margins for professional services and has produced record utilization rate for the quarter. This has allowed us to do more with fewer resources.
Health care software engineering team delivered an integrated solution between our EHR and medical billing platforms to facilitate the delivery of patient statements and payment portals to further monetize the process.
Our three health care is engaged in a highly focused business process strategy to optimize current business processes and look to new service delivery technology, leveraging artificial intelligence machine learning and robotic process automation.
It should also be noted that all of our vehicles and adopted a unified sales force to represent the entire product suite of the reflect respected Laura.
In addition, <unk> has enterprise software suite that spans all verticals and can be sold by the entire three salesforce.
Products include true sign to certify.
Our digital community portal.
And the answer is high tech products.
Market and vertical support implementation integration and deployment are provided by the <unk> III enterprise solutions growth.
I will now speak to M&A.
We looked at several companies this past quarter, but elected not to execute any term sheets.
Stems largely from our desire to bring the oil from rural multiples down and agreeing on price. We are remaining disciplined on what we will pay for a deal.
Also pre diligence must checkout, we can determine early for the company will be a good fit with the financials make sense. If we can grow and further monetize through the company if not we gracefully back away from the table.
Pipeline continues to be full of companies, both public sector and health care coming in and going out of the pie.
We expect that we will continue our normal pace of acquisitions that are not concerned about our ability to do deals in the future in the meantime, we will continue to focus on growing the company streamlining operations and paying down debt.
As usual, we continue to self source our acquisition targets.
This concludes my comments Megan at this time, we will open the call for Q&A. Please.
We will now begin the question and answer session.
You May ask your question.
To ask a question you May press Star then one on your telephone keypad could you are using a speaker phone. Please press star then two.
This time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
Okay.
Okay.
Yes.
Okay.
Yes.
The first question comes from.
That Val brand with BT Ice's. Please go ahead.
Yes. Good morning, Thanks for taking my questions.
I guess first as you look across the pipeline ahead.
How are you feeling about a number of large deals any specific verticals, where you feel like.
The pipeline is maybe even more robust than the rest of it.
As <unk> had some really recent good recent success here and how some of those reference customers are helping you.
Help us just kind of look towards the next few quarters on where you think youll see the most strength.
So public sector still dominates our pipeline.
Hi.
We are.
It's still a very.
Or how well it's performing.
<unk> care has.
Hey stop activity I would say.
Last quarter.
Public sector was probably 80% in health care was.
The balance of that it's more probably.
60, 40 in the pipeline.
With public sector is still leading the way.
As far as large deals concerned I think we are still sticking to our.
Sweet spot.
We would do one if it came along but it's not something that we.
In our pipeline.
I foresee us doing in the next year so.
Yes, $1 million to $5 million of EBITDA is still our sweet spot our multiples are probably.
Six to eight times now.
We.
Feel like is a fair price.
Along with an earn out stock options our normal plan.
Feel really good about.
The pipeline and.
It seems like it.
Load down six months ago that.
The activity in Alaska.
630.
<unk> 30, 60 days has been pretty amazing.
Okay very helpful. And then as you as you look at a number of the newer products you've rolled out and maybe more importantly is the shared services teams now over the overlaying a number of your vertical go to market teams.
How are you seeing overall deal sizes trend or are you seeing customers, maybe buying more than one module front or is this still.
A little bit more of a land and expand strategy.
Shared services teams are just helping everyone would be a little more informed on what the opportunities are after landing.
Yeah.
So.
Good morning, Matt.
Yes, so we hit our model typically sell one product and then go in with the second and third and fourth and so on over time.
The fact that we've got enterprise level teams working across the entire vertical our salespeople as well as our product teams are aware of the entire suite. So I think we're able to offer to improve more products at a time at this.
At this juncture.
Because we haven't expanded knowledge across the vertical as far as the proprietary software that we created in house at Sands, all verticals, we continue to push that.
And train our customers on the availability of those products.
Great. Thank you I appreciate the questions.
Our next question comes from Peter Heckmann with D. A Davidson. Please go ahead.
Good morning, gentlemen, thanks for taking the question.
When you think about the kind of the largest deals for.
From an RFP standpoint that you'd be willing to go after.
When you or whether you are talking about PCB or annual contract value are these deals is going to be.
One $2 million a year I mean do you see the potential for for winning deals that could be let's say $40 million over five years.
This is Paul Christian we are seeing.
We've got some our RSP team.
Depth in history.
Public sector and healthcare to a degree.
A more natural a little bit more of a natural movement to larger <unk>.
Reprise opportunity that are required.
Require.
Multi products for execution on those.
Thanks, Jeff we've been seeing that over the last several years.
Beginning to get a little bit more steam at this point given the recognition and the joining of golf's. It can be is.
So that whole transportation sector.
That's been useful for us and in our CT systems as well. So generally we see that those deals tend to be.
We don't see them as often as what we see counter year municipal level deals.
They tend to surface.
Without any consistent regularity, but we're very happy where we're positioned with them.
One of the key things.
Duration I mean these are yes.
And more and more seven year contracts.
I would say that.
We were talking.
$5 million to $10 million deals.
Wherever we never saw the others now we are responding to.
A couple of those per month.
Yes, correct the jewelry that it's early but we're optimistic about.
Winning a fair amount of those larger deals overall.
Five to seven.
Years.
We feel really good about our pipeline.
Great Great I mean, certainly we've seen it and I think you have statewide deals and I don't know 15 states.
Or five Canadian provinces, so clearly doing it but the potential is there.
And those type of deals provide some great visibility to recurring revenue in terms of ramping those up I mean, I know that each in many of the companies that you purchase had existing.
Software solutions.
But typically how do you think about that.
Either.
The implementation work on the professional services or kind of discretionary custom development that you might have to do for some of these deals as it.
As you move up does that get a little bit more significant or not.
I do believe it gets more significant.
But we also have more resources than we've historically had in an organization aligned to support that.
So the movement to enterprise level and the ability to.
Ramp domestically and advisory India.
For us a high degree of comfort to be able to continue to do that.
And enhance the certainty of delivery even over what we've done historically.
Their existing technology has got to be 20 years, maybe 30.
And so yes.
We are definitely bringing in how does the dark ages COVID-19 help this.
But.
It's quite dramatic what we are installing versus what theyre using today.
Right right, Okay, and if I could just squeeze just one more in in terms of <unk>.
Thinking about that.
The business, 10% organic growth in the quarter. That's great in terms of did you have a preliminary thought for fiscal 'twenty four I mean, we used to thinking high single digits is appropriate.
We are again high single digits.
This year education provided a tailwind as free lunch went away and we saw that in the fourth quarter of fiscal 'twenty two.
So.
But we're still thinking high single digit which is consistent with what we've guided since the IPO.
Great I appreciate it thanks.
Thank you.
Yes.
Our next question comes from John Davis with Raymond James. Please go ahead.
Hey, good morning, guys, Rick and Greg I appreciate all the comments on M&A, but Greg I wanted to dig in a little bit on your comment around valuations.
What are you seeing from a private market perspective, obviously public markets have reset, but it seems like there is still a little bit of a hang up so is that the biggest hurdle to doing deal today and then how do you think about it is your evaluation of what Youre willing to pay I assume thats impacted by the fact that you are kind of eight 8% on the debt. So the hurdle becomes higher but just curious like what the big Hangup is and how are you.
Guys thinking broadly about kind of paying down debt versus doing M&A.
Great question.
Yes.
Yes.
Valuations, we self source the deals J D and so.
They believe us they trust us.
Very rarely do we talked multiple.
We send them a term sheet that says.
Here's.
$15 million for your.
$3 million worth of EBITDA, we moved that up with an earn out based on growth, we give them stock options.
Okay.
If it's a deal that.
Is fantastic.
We've done a deal with milestone we've done along with Ssi.
And these companies are growing dramatically.
<unk> fits and so.
We probably paid.
Eight nine or 10 times.
And gave them a suite earn out.
But.
We don't those deals don't come across our desk very often.
Hi.
We're being conservative on valuations because I think we have.
A lot more to choose from and the things like we used to do.
Half of the deals we look at now we do.
Less than 10%.
We're picky here we've got.
We don't need more case management systems, we've got fiber.
And a.
A lot of it boils down to the person.
I'll walk back into the office after our meeting in Houston Lastly, Tiger.
Wait till you meet these guys to digest Matt.
And that's big.
Big.
We're looking for 40 year old fan.
<unk> software businesses.
<unk>.
I need upgraded the need shared services that need marketing legal.
It's all about timing.
Okay.
Okay.
Helpful and then.
Clay just.
<unk>.
Rick's comments about kind of moving to the cloud over the next two years you guys have historically guided to 50 to 100 basis points. So kind of organic margin expansion any reason why that move to the cloud would pressure that could that help margins. Eventually just curious you guys are making lots of investments on kind of streamlining the team going to market under one <unk>.
Also moving to the cloud just curious on how we should think about the margin.
And the impacts there.
Yes.
I do think we will achieve 50 to 100 basis points again in 2024.
Moving to the cloud.
Is temporarily a headwind for margins.
But we have other things going in our favor.
In the long run it will help margins significantly because.
Instead of updating.
All of these on Prem instances of software you can update once and it just ripples out to all your customers.
You noted in your note last night that our corporate expenses had gone up as a percentage of revenues.
And Thats true the big driver of that is we hired a new CTO last year.
A year ago, and he rightly recommended that we.
Beef up our security our project management, our development capabilities and so we've done so so that's been sort of a step up.
An investment for us.
I think we're seeing the benefits of that.
Okay. No. That's helpful. And then good to see the 10% organic growth relatively consistent I think if you normalize that line with the last several quarters, but if you look at the networks I know a lot of your businesses.
Not very cyclical and government and education and health care, but have you seen any sort of kind of slowdown as you pointed out to the midpoint of the guide for the full year any pockets any quarter to date update I'm, sorry, any pockets of weakness or any thoughts on trends in July and so far in August .
Well going from our Q2, which is the March quarter to our Q3, which is the June quarter.
We always have.
Have a little education, they closed schools in the middle of May and then they're closed and Jan So education is weak during that period.
Going into Q4.
Education came on like Gangbusters last year because.
They did away with free lunch.
So we will still have a.
Strong education quarter end September .
But it won't be that big.
Step up from the previous year's comparison that you saw in Q4 of last year.
Okay.
Okay sorry.
And then I think it's.
We should always keep our eye on our software license sales line item.
We had our biggest quarter ever in Q4 last year of that.
And we generally expect every quarter closer to $2 million.
And so I don't think the step up from Q3 to Q4.
Is it as big for those two reasons as they were last year.
Okay. That's super helpful. But no you are not seeing any sort of pockets of weakness, whether it's your kind of small restaurant business or.
Can you just kind of humming along as you had expected.
Yeah Everything's good health care has really picked up activity.
No I can't think of any pockets of weakness.
Okay I appreciate all the color guys. Thanks.
J D.
Our next question comes from Mark Palmer with Aaron Berg. Please go ahead.
Yes, good morning.
Just wanted to ask about the opportunity to introduce payments to your healthcare vertical what your current thinking is with regard to that opportunity.
<unk>.
Timing of a rollout could look like and what that would involve.
Yeah.
We are actively involved in that today.
It's important given the software delivery and in their respective service being delivered that we have that we see.
Seamless to our customers.
And we're doing that today and actively.
In our initial harvesting and and.
Investing in additional sales personnel to accelerate that.
Across the spectrum.
It seems like healthcare is probably 20% of our business.
Somewhat of a role.
We penetrated payments.
Single digit.
Yes, 6% estimate.
So it's a great question.
<unk>.
A big project.
Hi.
Priority.
Okay.
And the second or third inning.
Where do we need to be.
Okay.
And how should we think about.
The improvement to <unk>.
Associated with the attachment of payments to health care.
We didn't understand.
The improvement of one.
Two <unk>.
Incremental revenue per customer that would result from attaching payments to health care.
Oh.
Well.
I don't think its as large as.
Some of our verticals like Education for example, where you know this is a field where insurance pays the majority of the bill and so it's a lot of co pays on the front end.
And so.
While it's significant it's not what you might see in education for example, it could be as high as 20%.
Very good thank you very much.
Our next question comes from James Faucette with Morgan Stanley . Please go ahead.
Thank you very much wanted to ask really quickly a follow up on on margins and growth is that you.
You mentioned kind of the.
Alright, and CTO and increased expenses associated with that and certainly your qualitative commentary seems to indicate that you're.
<unk> focused a bit more on <unk>.
Integrations and advancing the capabilities of of your solutions I'm wondering how we should think about like the what that does for.
<unk> margins, you indicated would be a little bit of a headwind, but what's the long term potential there and I guess tied into that how much of your your growth right now is coming if any at all from <unk>.
Being able to put through.
Pricing changes, perhaps related to CPI conditions and contracts et cetera.
Thanks.
Well on margins I do think our long term guidance is still 50 to 100 basis points a year.
Some of the streamlining.
We have done.
Not only delivers a better product to the market, but as a result in some cost savings because we've just had duplicate functions internally and a lot of areas.
Resulting from some of our acquisitions.
We are trying to keep pace with inflation.
If you look at our revenue yield and merchant services for example, we.
Increased a basis point this quarter, which is <unk>.
Not big but we're staying even with increases from visa Mastercard are our costs.
We're passing through.
So we're doing that we're doing modest increases.
And software as well just trying to keep pace with inflation.
Everybody has some wage inflation.
So we're able to keep pace.
Our style has never been to raise prices and so in some cases, when we do we haven't raised them in 10 years and our customers understand.
So we do have the ability.
And the resolve to pass through cost increases.
But.
Long term it it'll be a net when getting to the cloud.
In the near term, it's a little bit of a headwind, but we have other.
Things such as streamlining keeping us ahead on the margin front.
Okay.
Great. Thank you.
Yeah.
Again, if you have a question. Please press Star then one.
Our next question comes from Charles Nabhan with Stephens. Please go ahead.
Hi, Good morning, and thank you for taking my question as we think ahead to next year.
On the top line.
It seems like things are going to be pretty clean from a comp perspective.
Celtic went in on October 1st and Youre distancing yourself from some of the Covid related.
Boot recovery, but I guess my question is if we think about the cadence of revenue growth throughout the year is there anything notable to call out in terms of.
Large go lives or license renewals that could.
Swing one quarter or another.
Higher or lower.
No really is as you point out it is a pretty clean comp.
We acquired <unk> on October one and the year before that we acquired Acs or health care company on October one.
<unk> was a small acquisition January 1st.
But.
So that would just leave us in the absence of more acquisitions, which I think we will make more acquisitions, but until we do.
So that would just leave us in the absence of more acquisitions, which I think we will make more acquisitions, but until we do.
I think it's just our normal seasonality and.
Q4 is always a good which is the September quarter is always a good quarter back to school is good there.
December weakens a little bit for payments.
Our public sector Q1 is strong for payments on our public sector.
Q2 is weak and education because of school closures, but.
All of those are just normal seasonal patterns.
Would make a difference between quarters and I'm sure. If there was a spike.
It'd be very explainable.
Thank you Ryan.
So this is exactly what health professionals.
Yes, the one time software sales line.
It does vary every quarter and it usually explains the difference.
But as you're modeling.
I think just a little bit of organic growth throughout the quarter as every quarter also.
You know what explained the distribution next year.
Got it.
Just as a follow up I noticed in your M&A commentary that the lower end of your EBITDA target guide.
A little lower at $1 million that it's been in the past I think in the past, you've said, 2% to $5 million or $2 6 million and I know, we're focused on the larger deals but.
Does that reduction indicate a willingness to do smaller deals or is there any specific area.
Your product mix that you think might be filled like such as an <unk>.
With a smaller acquisition on the smaller side.
Yes.
<unk> is a perfect example of why I said one.
They were a smaller deal and they've been fantastic.
Beyond.
Our expectations.
Yes.
It's there is some small deals if we could find another deal like Jack you've done with the management and the software and.
There's a whole that maybe we have in our offering we would do that.
John .
We we'd really aren't crazy about the small ones that they really have to be perfect.
Got it thank you.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Greg Daily for any closing remarks.
Thanks, everybody I am going to ask Jeff Smith to talk about something just briefly and I know that John Davis ask about M&A.
Paying down debt.
Once you walk through kind of our thoughts on.
Paying down debt over the next.
18 months sure.
So I think something that Youll see when you look at like the last nine months as we stepped up our leverage to Celtic do a deal that we thought was a really good value for us and since then we've been staying very disciplined bringing down our leverage.
Turning to our credit facility refinancing was a really big win.
We also had a number of our announced this last year so is that.
Rate at which the velocity, which we are paying down debt coupled with higher interest.
Bit lower as we kind of turned through some of those earn outs and you can see that on our balance sheet. The position. We're in with those has come down I think that over the next the visibility we have through the next fiscal year the rate at which we pay down debt will be a little bit higher than we've previously spoken to the market.
We can do north of $100 million a year of M&A.
Assuming 10 times multiples and in this current environment as Greg alluded to earlier, we hope to do much better than that right.
We can do significant amounts of M&A just off of our free cash flow. So we're really happy with where we are in terms of scale Pratt.
Our ability to grow organic.
With M&A just grow with our cash flow I think the word the kind of.
Hang on this would be we plan to be very disciplined on this.
Find the right opportunities.
Craig was just speaking about our ability to do deals that are larger or smaller it's a smaller deal in it and it's a strategic fit that takes sometimes as much effort as a larger deal.
We can do that and we're willing to do the work to get something thats going to be a great asset for us and it's going to grow.
And so we think we're in a really good position in M&A opportunities that are out there remain really exciting, but we're staying disciplined to make sure we get the right deals at the right value great. Great. So again, thanks, everybody for joining us a special shout out to our team.
Yes.
Marketable.
I love it so.
Have a good day thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.