Q4 2023 i3 Verticals Inc Earnings Call
Okay.
Good day, everyone and welcome to the I three verticals fourth quarter 2023 earnings conference call.
Today's call is being recorded and a replay will be available starting today through November 27.
The number for the replay is 87734475 to nine.
The code is 727.
Two five or zero.
The replay may also be accessed for 30 days at the 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, welcome to the fourth quarter 2023 conference call for <unk> verticals. Joining me on this call are Greg Daily, our chairman and CEO Clay Whitson, our CFO, Rick Stanford, our President and Paul Christians, Our CFO.
To the extent any non-GAAP financial measure is discussed in today's call. You will 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.
This 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.
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.
It may be required under applicable law.
And now I'll turn the call over to the company's chairman and CEO Greg Daily.
Thanks Jess.
And good morning, everyone on the call.
I am pleased to report a strong finish to fiscal year 'twenty three.
And we're excited about what's coming in fiscal year 'twenty four.
We've been on a great run.
Setting record revenue and adjusted EBITDA every quarter for the last three years.
Revenue was up 13% in Q4.
And adjusted EBITDA was up 23% over the same quarter last year.
This resulted in our best adjusted EBITDA margin in the last four years.
We're on a mission to use software to solve problems for our customers and our targeted vertical markets.
Our software and related services revenue was up 19% over the same quarter last year.
We are at our best bringing customers scalable cloud based platforms with continuing updated features and security improvements a.
A subset of software revenue SaaS.
Revenue grew at 23% over the same quarter last year.
Overall software and related services revenue made up over 50% of total revenue for fiscal year 'twenty three.
Clay will address the balance sheet later.
But we're pleased to have de levered to below three eight times.
Our cash flow provides us ample room to execute on opportunities.
But our standards remain high and we're very selective with our M&A targets.
And a year of less M&A.
I want to reemphasize my remarks of Q3.
This year, we've made tremendous strides in integrating and improving our businesses.
I am proud of the efforts of all of our employees led.
Led by Rick Stanford and Clay and Paul Christians.
Who have helped us collaborate and build such a strong foundation.
We have realigned our business and public sector health care merchant services.
<unk> organized best of class in shared enterprise solutions and marketing functions.
The guiding principles and all of this is our whole is greater than the sum of our parts.
And we have a great internal culture.
Our employees are bought in.
Our focus next year will be growth. We're excited about all the opportunities in front of us and I am confident in our team's execution.
I'll now turn the call over to clay and he'll provide you more details on our fourth quarter financial performance. Following Clay's comments, Rick will provide more detailed update on the business and address M&A and then we'll open up the call for questions.
Thanks, Greg.
The following pertains to the fourth quarter of our fiscal year 2023, which is the quarter ended September 32023.
Please refer to the slide presentation titled supplemental information on our website for reference with this discussion.
We had another solid quarter with record revenues and adjusted EBITDA revenues for the fourth quarter increased 13% to $96 4 million the midpoint of our guidance from $85 3 million for Q4 22.
Reflecting organic growth and acquisitions.
Our revenue yield improved to 153 basis points for the quarter.
From 140 basis points for Q4 22.
Organic revenue growth for this quarter was a little above 7%.
As mentioned on the Q3 earnings call at the end of free federally funded lunch and our education vertical anniversaried in Q4, and certain states that are subsidized lunches for this school year.
Consequently, the 2 million step up in revenues from Q3 to Q4 of fiscal year 'twenty two did not repeat in fiscal year 'twenty three.
And growth was slowed by newly subsidized lunches.
A R. R totaled 313 million for Q4 23 compared to 281 million for Q4 22.
SaaS revenues increased 23% from Q4 'twenty to Q4 'twenty three.
Over 80% of our revenues in the quarter continues to come from recurring sources.
Software and related services remain the largest portion of our revenues representing 50% for Q4.
Payments represented 44% another 6%.
Adjusted EBITDA increased 23% outpacing revenues to $26 8 million for Q4 of 23 from $21 7 million for Q4 22.
Collecting continued momentum in our software and services segment.
Adjusted EBITDA as a percentage of revenues increased to 27, 8% for Q4 of 23 from 25, 5% for Q4, 'twenty to refract, reflecting margin improvement in our software and services and merchant services segments.
Pro forma.
Adjusted diluted earnings per share increased to <unk> 40 for Q4 23 from <unk> 39 for Q4 22.
Again, please refer to the press release for a full description and reconciliation.
Yeah.
Segment performance.
Revenues on our software and services segment increased 16% to $60 1 million for Q4, 'twenty three from $51 8 million for Q4 22, reflecting.
Principally reflecting growth in our public sector vertical.
Public sector, including education represents over half of our consolidated business.
Both acquisitions during fiscal year 'twenty three we're in the public sector vertical.
The segment's adjusted EBITDA improved 24% to $21 2 million for Q4, 'twenty three from $17 1 million for Q4, 'twenty two outpacing revenues.
Adjusted EBITDA as a percentage of revenue improved to 35, 3% for the for Q4 'twenty three from 33% for Q4 22, reflecting high margin public sector acquisitions during the year and cost efficiencies gained from an internal realignment within verticals.
On which Rick will elaborate.
We expect these efficiencies to carryover into 2020 for performance as well.
Revenues for our merchant services segment increased 9% to $36 4 million for Q4, 'twenty three from $33 4 million for Q4 22.
Simply reflecting growth in our b to B and ISO channels.
Adjusted EBITDA for our merchant services segment increased 18% to $10 8 million for Q4.
23 from $9 1 million for Q4, 'twenty two outpacing revenues.
Our revenue yield moved up a few basis points with continued expense control.
Balance sheet.
Our balance sheet remains strong and well positioned for 24 on September 30, we had 269 million borrowed under our revolver net of cash the face value of our convertible notes for $117 million.
As of September 30, our total leverage ratio was less than three eight times.
Current constraint is five times under our $450 million revolving credit.
The interest rate for the convertible notes just 1% while the interest rate for the revolver is currently around eight 5%.
We have remained disciplined in our approach to growth and acquisitions for fiscal 2024, we expect to convert over half of adjusted EBITDA into free cash flow.
We define free cash flow as adjusted EBITDA minus capex internally capitalized software cash interest and cash taxes.
Free cash flow can be used for debt repayment acquisitions and earn outs.
Turning to fiscal 'twenty, three we paid approximately $26 million in earn outs.
Round from $43 million in fiscal 'twenty two.
Summit for earn out payments in fiscal 'twenty. Four is currently just $7 million.
In the absence of acquisitions, we currently expect to finish fiscal 'twenty four with a leverage ratio of less than three times.
Outlook.
Looking forward the solid finish to our fiscal year gives us confidence in the following guidance for fiscal year 'twenty four.
It excludes acquisitions that have not yet closed and transit transaction related costs.
Revenues of $385 million to $410 million.
Adjusted EBITDA of $109 million to $119 million.
Depreciation and internally developed software amortization of $11 million to $13 million.
Cash interest expense 22 to 25 million.
And pro forma adjusted diluted EPS of $1 60 to $1 78.
From a seasonal standpoint, we currently expect the quarters of fiscal year 'twenty four follow a similar pattern to the fiscal year 'twenty three.
As we become more software centric quarters may 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 company updates and pipeline.
Thank you clay good morning, everyone I'll begin with the updates on the business and then cover in a minute or.
Our 2023 fiscal year ended on a high note as we continued to see the positive results of realigning our organizational structure to better support our large and complex customers. If you remember we started this realignment process with public sector and then we move to health care, we started by examining the advantages and disadvantages.
Each of our vertical businesses, we then device programs to spread enterprise wide strengths and strengthen weaker areas across the company.
During Q4, three health care solutions continued down the path of realignment with the establishment of four core sub verticals. These sub verticals include care delivery, which encompasses EHR practice management patient engagement and patient payments RCM services featuring revenue cycle.
Management services Advisory services and practice services.
Payer solutions, consisting of appeals and grievances and our provider management platform and business solutions, which focuses on supporting business functions, such as finance accounting HR and legal.
Payer solutions continued to thrive with a significant investment from one of the nation's largest health care payers with increased adoption of the <unk> Universal Appeals agreements since platform <unk>.
Extending its reach to an expanded user group underscores the platform's value and significance in the health care landscape.
The RCM services segment reported positive momentum securing six new clients during the quarter. Additionally, this segment maintained growth with some of its largest academic medical institutions, highlighting the industry's recognition and trust and our three health care solutions.
Overall, the quarter showcase our three health care solutions is a robust and throbbing entity with strategic realignment and continued success across its diversified sub verticals.
Not surprisingly our people have adjusted to the new structure and are attacking new opportunities that are now available to them.
Great example of this happened this past quarter as we realigned areas of our merchant services business to create the commerce technology solutions team. Our Comtech. This team includes development support implementation integration and product evolution, which more efficiently allows us to provide our payment enabler.
Software solutions sales and marketing support to customers and the integrated P. O S property management nonprofit and OSB markets.
The Comtech team is fully engaged and invested in providing our payment technologies throughout our enterprise.
Our shared services model has been successful across all three and example of this is the strides that our marketing team has made and unifying all entities under the three verticals one company one brand initiative.
Three marketing coordinates with vertical leadership to position, our messaging and our strategic effective manner. The enterprise level marketing team coordinates with dedicated vertical market and product managers to ensure brand continuity as all entities are actively working to brand is at three.
By structuring the teams so that key decisions are made in conjunction with team members, who are closest to the customers, we solidified domain expertise and customer loyalty.
Another example of our shared services model is our enterprise solutions group.
Of this group the implementations team is currently integrating two statewide transportation solutions and in Justice Tag Digital evidence management was launched in a large Midwestern state in our E. Filing solution was successfully launched with a first round of quartz in Georgia in the second round is scheduled for December.
I mentioned, our enterprise RFP response team last quarter. This teams ability to create compelling proposals as a result of a unified approach to writing research and solution engineering.
The quantity and quality of RFP responses has increased by closely tracking each stage of the process. We can see a trend in initial responses evolving to solution demonstrations and following demonstrations we were winning more deals with this model.
We are boosting our cloud migration strategy for vital technologies over the coming year as part of our commitment to utilizing strong technical solutions. We have successfully migrated the vast majority of our historic vendor co location providers to the public cloud.
Our business is functioning more efficiently and effectively since the realignment we continue to see the market respond positively to our adjustments customers are choosing to partner with us and trust us with more and more of their business with that in mind. We recently won a large software project with a multistate utility that provides services to several.
Millions of customers.
While the revenue primarily related to our fiscal year 2025, and beyond this contract is indicative of the high quality deals. We can source go forward.
This contract further expands our footprint in the Midwest and southwest.
Additionally, in public sector, we closed sizeable deals and our justice Tech utility in the ERP sub verticals we.
We signed a deal with a global leader in software and solutions for project based businesses. Two integrations are complete and two more integrations for the professional service industry our schedule in the next few months.
The pipeline with current and future integrations continues to grow our enterprise solutions group is currently working on several hundred implementations as we speak.
All in all we couldnt be more excited with our realignment is across the board and our people, we're creating an environment, where entrepreneurship is rewarded well almost completed our vision of one company. One brand is coming to fruition. This rebranding effort will be 100% complete by the end of December.
I'll now speak to M&A.
This past quarter produced several opportunities to look at and evaluate potential targets for acquisition. Most of them were in public sector with a few in health care and education.
While we have continuing interest in some of these targets and conversations are ongoing the timing and other things unique to each of them will dictate when and if we get to a term sheet.
Regardless, our pipeline continues to be full of companies largely in both public sector and health care.
Despite a few months without closing a deal our philosophy regarding acquisitions has not changed and we will continue to be opportunistic with select acquisitions 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 Jamie at this time, we'll open the call for Q&A. Please.
Ladies and gentlemen at this time, we'll begin the question and answer session.
Can I ask a question you May press Star and then one using a touchtone telephone.
Withdraw your question you May press Star two.
If you are using a speakerphone please pick up the handset before pressing the numbers to ensure the best sound quality.
Once again that is star and then one to join the question queue, we'll pause momentarily to assemble the roster.
Yes.
Our first question today comes from John Davis from Raymond James. Please go ahead with your question.
Hey, guys. This is taylor on for J D.
It's good to see pretty significant margin expansion embedded in the outlook for next year I think it implies over 150 basis points of expansion, which is above what you usually targeted so just curious what's driving that for next year.
Oh, we mentioned and Rick elaborated on some internal alignments, we did within our verticals.
Those just really gathered steam in our fourth quarter and so you'll see the full effect of them in 2024.
Got you. Thanks, and then just some quarter to date trends just curious what youre seeing throughout the Coker in November.
If there's any pockets of weakness or areas that have surprised the upside. Thanks.
Hospitality has.
It seems like it was the last thing to kind of come back from Covid.
Restaurants were open but not fully staffed for a while and.
So that year over year comparison is has flattened out or leveled out over the past few months.
Thanks, guys.
And our next question comes from Matt Van Vliet from BTG. Please go ahead with your question.
Yes. Good morning, Thanks for taking my questions.
As you look towards.
At the end of the calendar year here.
First what you're seeing from sales cycles.
I guess demand from customers in terms of greater diligence or anything like that that might be.
Creating a little more friction in the system.
And what if anything would you attribute any additional friction that you are seeing too.
This is Paul Christians, we are we can't see any measurable adjustment in that.
It seems as if our activity levels in public sector and healthcare on both a commercial and RFP basis are up and.
Our commerce technology solutions.
We're also getting a high degree of activity.
I think some of that may be with because of the realignment.
Also invested in and expanded sales force and that's beginning to manifest itself in several ways and the ability for all of our sales people to sell all products across their respective vertical also is enhancing.
The average number of opportunities we're seeing.
Alright, very helpful. And then as you think about some of the other.
Shared services, you've put in place I know earlier in the year you highlighted the sort of centralized RFP team are you seeing.
I guess, how would you characterize the level of sales activity.
Heading into fiscal 'twenty, four and where should we expect or where are you targeting sort of the mix of software to end up.
In sort of the deal mix as you look out towards next year.
Well I think we're probably in the fourth or fifth inning of.
Realizing the gains that we are going to see in our sales marketing <unk>.
Integration with the realignment.
It's going very well I mean, it's it's definitely better than it was.
A year ago.
I think it will be a lot better.
A year from now.
What was the other part of the question.
And then just software.
No.
It's that is gradually going to move that.
The quality of our earnings I believe has gotten much better with more software.
SaaS growing dramatically.
60%, 65% would be a goal that I think is attainable in the next.
Yeah.
253 years.
Just nice and steady.
Alright wonderful thank you for answering the questions.
Thanks, Matt.
Once again, if he would like to ask a question. Please press star and one our next question comes from Alex Mark Scraps.
Please go ahead with your question.
Hey, Thanks for taking my questions. This morning, just first to follow up on the comment around sales head count just curious.
Is this scenario you continue to hire or do you feel like the team isn't it gets about head count wise heading into the fiscal 'twenty four.
I think we will we feel like we're in a good spot and can deploy what we have hired but as.
As we continue to gain momentum on that we will also continue to re hire and maintain the focus on.
Vertical execution with the product mix that we have.
Great. Thank you and then Greg.
Greg I think in your prepared comments mentioned kind of a focus on growth in.
In fiscal 'twenty four if I heard you correctly, you just kind of curious if you could square that with.
The guy at the full year guide just.
7% at the midpoint.
Just any sort of additional thoughts there in screen growth comment with the guide and just.
Additional thoughts on inorganic opportunities would be helpful. That's part of it.
Yes loves the activity loved the pipeline.
How we've come together.
I believe we go to some 150 conferences as a combined company now.
There's probably 456 different companies.
Represented at these conferences so that.
When we sell a product I believe that we're probably.
Instead of seven.
$75000 project.
It's 100000 dollar type of thing but.
But.
Optimistic about 24.
We're being careful with.
With the guide.
But.
It.
I feel very comfortable with.
What I'm seeing in the pipeline the deals that we've already.
Signed we just havent installed yet.
So.
I am optimistic about our guide.
Great. Thank you.
And our next question comes from James Faucette from Morgan Stanley. Please go with your question.
Hi, Robin it's Michael <unk> on for James Thanks for taking my question.
Just wanted to ask a quick question on take rates, obviously strong for the overall combined business, but can you just unpack some of the drivers within both merchant services and software and payments it looks like.
There were some different sequential take rate trends in each that maybe were a little bit more outsized than prior year seasonality. So I just wanted to make sure I understood some of the drivers there.
<unk>.
Well.
And software and services.
Well, let me start with merchant services, we ticked up about four basis points in yield.
And.
We had some you know we always try to sort of keep fees, but even with visa Mastercard and they had a price increase in April.
Of ours didn't filter through until August.
And so.
You know we had a four basis point increase there.
<unk>.
In software and services.
The take rate came down a little bit.
And we've added some payment.
Payment streams and the utilities business recently and that that has very healthy margins, but I mean.
Very healthy volumes, but.
It's a lower disc.
Discount than you'd see in traffic tickets for example.
But overall it improved as software and services grow it's just so much higher in software and services the mix improves pretty easily over time.
Yeah that makes sense I appreciate it.
And ladies and gentlemen, with that we'll be concluding today's question and answer session.
Like to turn the floor back over to Greg for any closing remarks.
Thank you.
To our team to our investors. Thank you for your support.
And I hope everyone has a nice holiday. Thank you.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining you.
You may now disconnect your lines.
There are several other people.