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Q1 2025 I3 Verticals Inc Earnings Call

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Q1 2025 I3 Verticals Inc Earnings Call

Thanks Clay and good morning to all of you on the call.

We're excited with our start to fiscal year 2025 allow me to share some highlights revenue was up 12% over prior years. Q1 and adjusted to die was up 17%.

That revenue grew 16%.

We are pleased to see the fruit of our emphasis on Sass.

We expect that to continue to drive arr growth.

Paul will share more details on what's driving revenue growth later. But I want to highlight one of the most promising long term opportunities.

We continue to uncover new opportunities to integrate payments within our vertical market software base.

This has been a longstanding strength and by retaining our proprietary payment facilitating platform, we have ensured we are well positioned to capitalize on opportunities in key markets such as utilities and permitting.

I will now turn the call over to Clay to Jeff and he will provide more detail on financial performance.

When he's finished, Bradley Thomas will add commentary on M&A and finally, Paul will discuss revenue and then we'll open up the call for questions.

Thanks Greg. The following pertains to the first quarter of fiscal year 2025 as the quarter ended December 31st 2024.

We refer to the slide presentation titled supplemental information our website for reference with this discussion following the sale of our merchant services business, we have changed our presentation of other costs of services to include an allocation for people costs which we had previously been included in SG and A.

We believe this presentation more closely aligns with our software peers and gives a better view of variable costs such as installation training, data conversion, customer support and other services provided directly to customers.

We've also changed the presentation of certain hosting and related software costs for directly supporting our customers. Page 6 of The supplemental information shows Q2 through Q4 of fiscal 2024 in this format. So you have a trailing 12 month period.

As a reminder after the sale of the merchant services business, all the numbers I will discuss are remainco only and exclude discontinued operations revenues. For the first quarter of fiscal 2025 increased 12% to 61.7 million from 55.1 million for Q1 2024 reflecting organic growth of 10% and approximately 1 million of revenue from our most recent acquisition. A permitting and lic acquisition in the public sector, annual recurring revenues increased 7.6% to 193.3 million for Q1 2025 compared to 179.6 million for Q1 2024 78% of our revenues in the quarter came from recurring sources driven by SASS revenue growth of 16%.

Payments revenue increased 7%. We expect SAS and payments revenues to outpace other forms of revenue. For the remainder of the year.

The recurring sales of software licenses increased to 2.7 million for Q1 2025 from just 0.4 million for Q1 2024.

The timing of these sales was earlier than expected but does not change our expectation of software of sales of software licenses for fiscal 2025 to be similar in total. To fiscal 2024.

When we first introduced guidance for fiscal 2025 we expected more license revenue to land in Q2 but some moved up to Q1 software related services represented 74% of total revenues for Q1 2025 with payments 22% and other 4% adjusted EBITA increased 17% outpacing revenues to 16.4 million for Q1 2025 from 14 million for Q1 2024 adjusted EBITA as a percentage of revenues was 26.5%. An increase from 25.4% for Q1 2024 reflecting higher software sales which carry high margins and lower corporate expenses as a percentage of revenues, corporate expenses as a percentage of revenues improved down to 10.7% for Q1 2025 from 11.2% for Q1 2024.

Pro forma adjusted diluted earnings per share from continuing operations was $0.31 for Q1 2025. Again, please refer to the press release for a full description and reconciliation.

Following the sale of our merchant services business. We have segmented Remainco by vertical public sector which includes education and health care.

Other consists of corporate expenses and eliminations between segments revenues in our public sector. Vertical increased 12% to 48.8 million for Q1 2025 from 43.5 million for Q1 2024 and represented 79% of total revenues during the quarter.

The increase was driven by recurring revenue streams such as sass transaction based revenues and maintenance which all grew double digits along with a double digit increase in professional services.

The segment suggested EBITA increased 11% to 19.2 million for Q1 2025 from 17.4 million for Q1 2024 adjusted EBITA as a percentage of revenues declined slightly to 39.4% for Q1 2025. From 39.9% for Q1 2024.

As a result of higher professional services revenues which carries lower margins revenues for our health care segment increased 14% to 13.2 million for Q1 2025 from 16.6 million for Q1 2024 driven principally by recurring software services and nonrecurring sales of software licenses adjusted EBITA increased 34% in Q1 2025 compared to Q1 2024 benefiting from the sale of high margin software licenses just as a percentage of revenues improved to 28.5% for Q1 2025 from 24.1% for Q1 2024.

Regarding the balance sheet following the sale of merchant services business during September, our balance sheet is strong and well positioned for the future.

At quarter end debt stood at mad 26.2 million up of the remainder of our convertible notes which matured this month.

We still have 450 million in borrowing capacity on our revolving credit with a five X leverage constraint. Our cash balance was 85.6 million December 31st, but we have subsequently made tax or tax related payments of approximately 60 million as a result of the sale on our merchant services business.

The following reaffirms guidance for continuing operations for Fy 2025 set forth in our fiscal 2024 press release dated November 25, 2024.

It does not include acquisitions that have not been announced or transaction related costs.

Revenue 243 to 263 million adjusted EBITA non gap 63 to 71.5 million depreciation and internally developed software amortization 12 to 14 million cash interest expense, net 1 to 2 million pro forma adjusted diluted earnings per share. Non gap $1.05 to a $0.25.

We continue to expect high single digit organic revenue growth with adjusted EBITA margin improvement of 50 to 100 basis points per year from a seasonality standpoint. We currently expect our revenue distribution for the remaining three quarters to approximate the following 24.4 in Q1 25.3 in Q2, 24.6 in Q3 25.7 in Q4.

Although software license sales are less of a factor than in years past, they still represent the most variable line item to forecast and can distort seasonality in any given quarter.

I will now turn the call over to Bradley Thomas for comments on M&A.

Thank you, Jeff. Good morning everyone. I'll get straight to M&A and then I'll turn the call over to Paul for revenue and product updates. I'm happy to report that our most recent acquisition in the fourth quarter is exceeding our expectations and Paul will touch more on that in a few minutes. Historically, we've not given a lot of detail around our M&A process and we thought it might be helpful to give a little insight into that process. M&A continues to be an important part of our DNA. We often have discussions around buying or building the long and short is building, takes time and valuable resources. However, it does exist on a consistent basis within our engineering team. Buying. On the other hand, provides a valuable speed to market. In addition, we acquire external expertise, talent and mitigate any execution risk. Last we gain immediate access to established processes, products, distribution and an existing customer base for cross sell opportunities.

Our acquisition pipeline continues to be strong with a primary focus on acquisitions in our public sector vertical.

This past quarter, we saw several deals come in and go out of the pine.

There has been no noticeable increase or decrease in the number of deals. We look at quarter to quarter, we are constantly looking for targets that can complement our long term goals. Obviously, the opportunity to penetrate new markets with new or enhanced technologies is important to us. We are looking for both market and product expansion in potential deals combined with cost savings and revenue enhancements.

We continue to self source our deals as we've done historically, our sourcing is a combination of deep research, cold calls and referrals that facilitate warm introductions. As I've said before, we remain disciplined in our parameters of any acquisition. We've defined a strategic objectives depending on the vertical and subvertical. We assess several things prior to making an offer first and foremost, growth, profitability and is the deal a strategic fit. We review market position, product offerings and customer base to determine compatibility and potential synergies.

Next does a historical and forecasted financial performance align with our goal set.

We then review management and the cultural aspects of the deal. We want to eliminate early postclose friction. Clear communication is key for us pre and post close.

We also consider any operational complexities we may need to deal with post close.

We then look at key personnel, we want to ensure continuity of expertise.

There's also an extensive review of technology integration required. We focus on compatibility and security within our existing products.

Lastly, we consider post close value recognition. We establish metrics that align with our overall strategic objectives. We will continue to have detailed conversations with targets and hopes of creating a term sheet and ultimately closure. I'll now turn the call over to Paul for final comments.

Thank you, Rick the SASS evolution of our product portfolio combined with our focus on intra and intra vertical bundling continues to drive meaningful gains in productivity.

The systems needed to facilitate this growth are in place and sale. Synergies are evident. Our ability to integrate solutions across multiple verticals has proven to be a significant differentiator in the product and pricing arena. Legacy contracts are being transitioned to a SASS model subject to client prac, client funding practices and contractual commitments. New contracts are presented in a SASS model format also subject to funding practices and contractual contractual commitments.

The I three verticals development and product teams are upgrading our product to meet current market demands as we sunset products and sell our upgraded products. I three brings additional value to each customer.

To that end, we have introduced new technology models, modules for public safety and jury management in our justice tech subvertical and government fund accounting and licensing in our P subvertical. Each updated module replaces a legacy system in a reasoned and orderly fashion. You transition to a to a SASS model with attendant services support pricing and integrated payments.

I three verticals is breaking into new geographic markets and expanding share in markets where we already have a strong presence.

The justice tech tech subvertical is a great example of the strength of our reputation and solutions in a given market. In Michigan, 18 new courts went live this quarter for a total of 81 courts online with my file I file is the statewide E filing platform powered by for Michigan, powered by I three verticals, True filing and I three integrated payments.

True File with integrated payments has also been received well received in Georgia as the state prepares for its e filing mandate.

44 probate courts have adopted this innovative technology including Clayton County which is the fifth largest in the state leveraging our current customer base is also a key to our success. The impact of our intra vertical sales strategies is exemplified in Opal Issa, Louisiana where the city is optimizing its municipal operations through our P solutions. Opal ISSA is deploying I three fund accounting, municipal licensing and utility building solutions with I three integrated payments and licensing and utility billing.

Rick previously mentioned an acquisition that we recently closed that we're very excited about this. This firm is focused on the state board level in permitting and licensing space.

It should be noted that they have been highly effective in California, which is notable given the size and regulatory environment.

The team has created a cloud native, highly configurable customer responsive offering.

This sits in our P subvertical and is enjoying the benefits of expanding sales sales support RFP integrated payment resources, evidenced by the creation of a sign of a highly significant pipeline.

We are seeing notable success as well with our I three customer engagement E portal. The I three portal is an, is an end user customer engagement technology which spans all market areas. The enterprise utility use case application for the I three portal was recognized by JD Power in its recent rankings. We secured the number one spot in the West for large utilities with Seattle and the number two spot in the northeast for large utilities with Aqua.

We have recently been awarded contracts for five new portal customers that we won through competitive RFPS. Successfully displacing historic tier one portal providers or internal systems.

I three proprietary payment technology opportunities are also possible. Downstream, our product and marketing teams are leveraging the success we've had in enterprise utility subsegment to configure the technology for domain specific use cases across the remainder of our markets with a heavier focus in the public sector.

It should also be noted that the I three portal and all I three proprietary software are seamlessly integrated with our proprietary payment technology as the use case requires.

This concludes my comments. Drew. At this time, we will open the call for Q&A please.

Thank you. We will now begin the question-and-answer session to ask a question. You may press star then one on your telephone keypad.

Operator

If you're using a speakerphone, please pick up your handset before pressing the keys if at any time, your question has been addressed, and you would like to withdraw your question. Please press star and two at this time, we will pause momentarily to assemble our roster.

The first question comes from John Davis with Raymond James. Please go ahead.

Hey, good morning.

Guys. Nice to see the improvement in health care. Accelerated to 14%. I think it was down 3% last quarter. So anything to call out and won't be this, how should we think about that for the rest of the year?

Most of the onetime software license sales were in the health care segment. JD. We still expect low single digit growth for health care this year.

Okay. No, perfect. So that leads me to the next question, based off of the change in kind of revenue cadence for the year that Jeff laid out, it looks like maybe about $1.8 million was the license pull board from 22 to 12. Is that fair?

Yeah, that's, yeah, that's, that's, that's pretty close.

Okay, great. And then Jeff maybe I appreciate the help on the revenue cases throughout the year. Good to see margins up about 110 basis points year over year in the first quarter. Anything to call out as far as margin expansion and the, and the balance of the year, any particular quarter that should be stronger or weaker. You think the full year call for about 100 and 20 basis points of improvement.

Yeah, the full year guidance kind of holds on the margin. If you're looking at like cadence within that Q3 has historically kind of been our low point for margin. I think you'd see that last year and I would anticipate similar this year, barring any one time revenue kind of tweaking. That primary reason for that is schools being out of session and that hits us hardest in that quarter.

And the last one for me, any update on the large utility costs around how that project is progressing.

Large utility customer. That's progressing. Well, we kind of guided that revenue on that would stair step up from approximately 3 million to five ish million this year and that would, continue to track in terms of kind of what's going on under the hood there. We've gone live on the payments with that customer. So that's a big piece of the payments growth we're really excited about and it's a great kind of proof of concept and what kind of we can do or what size scale the revenues from the rest of the implementation of the software will be steady, but they'll accelerate significantly in 2026 and 2027. So it, it's helpful this year. It's on track, but it gets a lot more exciting as you go further out.

The next question comes from Peter Heckmann with D A Davidson. Please go ahead.

Hey, good morning. Thanks for taking the question. Just wanted to follow on the last, can you talk a little bit about what, what you see in terms of the longer term opportunity with larger utilities? You know, what is the competitive landscape look like? And in terms of like, when you think you'll be in a good position to, to just start participating in some RFP for for work there.

The landscape is generally quite positive there. It's really driven by software but need need to continue to evolve and upgrade legacy software that's been in place. And in some cases for, 10 or 20 years, we see that accelerating. And we touch upon that with a number of products and services particularly like as I mentioned on the portal component. We're very actively involved in that today. We see the demand continuing to get higher.

It's you know, very new responsive technology and we see that improving how that manifests itself down through other technologies that we can bring to bear within the utility to aid in customer service and billing components also is gaining a high degree of interest. So I think you'll see a steady ramp up in that arena and we're actively engaged into it in it today and really not constrained at this point.

I agree. I mean, I think the momentum is still building.

We are getting inbound calls from people that weren't in our pipeline, but obviously now they are, but it's definitely the most exciting thing that we've got probably have a handful of great spaces. But, utilities is either number one or number.

Two. It's been very consistent and improving and compared to.

How would you characterize the tier one universe there? Are we talking about, a couple of 100 tier one utilities in the US or I'm just trying to think about like how many potential prospects there?

Yeah, we I wouldn't say it would be quite that high. It becomes much more robust when you get to tiers low 23 and four. I think if you look down through tiers 1 to 4 just in gas and water, that's, in the 500 range.

And we have offerings that serve that area and we also have offerings that serve below in the tier 56 and seven area. So, the total exposure in that space, if you looked at all of it, measures in a couple of 1,000 but like in many markets, it's relatively heavily weighted to tier four and up.

. Okay. And then just lastly you mentioned some recognition by GD powers. Was that for the specific I three portal product or is that for the municipal customer?

It's, it was for the portal. Both of those examples were for the portable the portal product.

The next question comes from Charles Nabhan with Stevens. Please go ahead.

Good morning. Appreciate all the color around the M&A environment and your strategy there. But curious if you're seeing any differences between larger and smaller opportunities within your pipeline. And if you could touch on your willingness to do maybe more smaller deals versus larger deals, if you have any preference or just generally what you're seeing, what you're seeing in the market.

So, let me define small and large historically, we've looked, our sweet spot has been between two and 5 million in EBITDA.

We do look at deals a little larger than five.

We tend to not look at deals or pass on deals below 1 million in EBITDA.

That really hasn't changed that dynamic. We're seeing both our sweet spot and a little larger.

There's been no uptick in a competitive environment and we're looking at the same number of deals every quarter that we were a year ago.

Got it. Okay. And just as a quick follow up, I know a lot of moving pieces and, and uncertainty with the change in administration. But you know, from the conversations you've had and as you think about the outlook for the next few years. I'm interested in your thoughts on any changes, potential changes in spending trends on, you know, the state or city level, you know, from the change in administration over the next few years.

Yeah, this is a hot topic right now. It's early days and we're all trying to figure that out, but we haven't seen any, any kind of, any kind of pullback in that arena. One of the things that we do particularly well in the public sector is monetize the cost of software with transaction revenue that is end user based. And so in some, in some cases that the cost to government entity to deploy that is, is nothing.

So we would see that continuing to increase if there are constraints, we don't do. We haven't historically done a ton of business with our RPA or federal grants of many types. So we don't really see a threat in that arena because it has not been our focus in terms of where we are and what's going on. At this point, we don't see it.

We do think there will be some noise around it and we are trying to be creative in terms of giving government agencies optionality in terms of how they can deploy systems and what the, what the with the cash flow requirements for them to cover that are are transitioning some of those costs to a constituent base for use fees.

The next question comes from Alex Markgraff with Keyban capital markets. Please go ahead.

Hi, everyone. Thanks for taking my questions. First, maybe for Greg or Paul, just Greg. I think at the outside of the call, you made some comments on opportunities to, to further integrate payments product. Can you just sort of expand on that? And what that's in reference to, if it's more around the existing customer base or just as you look at the pipeline.

It's we typically, this is Paul, we typically present payments where the use case demands it where there's, some type of a transaction that has to, to facilitate it with some type of a fee or, or some mechanism that, that they need to complete that cycle that's integrated into virtually all of our software where that, that is the case. We do find that that government agencies in particular are happy to take a look at that because it provides a very high level of certainty of execution and continuity.

And if they're doing it in conjunction with our software, then the reconciliation processes are superior versus exterior programs that they have to find. So we are do we are, we are, if it's applicable, we are including those opportunities in our presentations and we are, we do have an active effort to go back and assess our existing product portfolio where we do not software portfolio where we do not have payments yet covered and approach customers to see if they would like to pursue a deeper integration in that.

Okay. So just to clarify where there is opportunity to go back, that that's mostly in the government vertical. Is that, did I hear that correctly?

Yeah, that's correct.

Okay, thank you. Okay. And then maybe one for Bradley Thomas just on the M&A process, I appreciate the comments there. Could you maybe just remind us on some of the growth and probability sort of thresholds that you look at or looking for at the time of signing. And then, you know, in the event that they're sort of diluted to the company average at the time of signing the timeline at which you'd expect to bring those up to up or above I three verticals average.

Well, we typically look at, we expect a 10% revenue growth rate. We like margins to not pull down our corporate average. So we prefer margins being in the low 30s, certainly high 20s. We've generally not paid more than 10 times EBITDA and then we can blend that lower with a combination of earnouts with lower multiples assigned to them by adding payments as Paul spent some time on this morning.

So they're generally not dilutive if they were we would want to correct that within the first two years.

Again, if you have a question, please press star, then one, the next question comes from James Fawcett with Morgan Stanley. Please go ahead.

Hi, this is Chabas Mascar on for James. Thank you for taking my question.

So, just a quick one on the high single digit organic growth guide. So just wondering if you could provide a little bit more of a detailed picture of the drivers and makeup of this high single digit organic growth this year. How much is new versus existing projects? And for the new ones, how much visibility do you have into those new projects in that pipeline?

Sure. We published a net dollar retention number last quarter and we'll do that annually, but it was 100%. It does not include payments when we are able to include payments in that number. We think it'll be two or 3% higher.

Inflation has not historically contributed to that 100%. In other words, price increases, but in the future, we expect it might contribute a point or two and then that would leave the remainder for new logos. So that's kind of a general algorithm but big elephant customers can swing that one way or the other. And we've seen that in the last couple of years.

I got it. That's helpful. And then on M&A should we generally continue to expect about 3 to 5 acquisitions this year.

Yeah, that's about right. I think we digest them. Well, it'd be perfect if we could do it one quarter, but it is lumpy, very, but, you know, we didn't do that many last year, but we're optimistic about this year.

Got it. Thank you again. If you have a question, please press star, then one, this concludes our question and answer session. I would like to turn the conference back over to Greg Daly for any closing remarks.

And we're very excited as a company about the next two or three years. Thank you.

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

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