i3 Verticals, Inc. (NASDAQ:IIIV) Q2 2024 Earnings Call Transcript May 10, 2024
i3 Verticals, Inc. misses on earnings expectations. Reported EPS is $0.07918 EPS, expectations were $0.36. IIIV isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the i3 Verticals Second Quarter 2024 Earnings Conference Call. Today, all participants will be in a listen-only mode. Today’s call is being recorded, and a replay will be available starting today, May 17 – or starting today through May 17. The number for the replay is (877) 344-7529, and the code is 685-4757. The replay also may be accessed for 30 days at the company’s website. At this time, I would like to turn the conference call over to Mr. Geoff Smith, SVP of Finance. Please go ahead, sir.
Geoff Smith: Good morning, and welcome to the second quarter 2024 conference call for i3 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 COO. 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 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. 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 furnished with 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 will now turn the call over to the company’s Chairman and CEO, Greg Daily.
Greg Daily: Thanks, Geoff, and good morning to everyone on the call. Before getting in the results of second quarter of fiscal year ’24, I’d like to provide a brief update on what we announced last quarter, namely the exploration of the sale of the Merchant Services business. As previously announced in February, the company’s Board of Directors have directed i3s management to explore a sale of certain discrete assets related to our Merchant Services business. This process for considering – the process for considering this transaction is ongoing. We would intend to use the proceeds from the sale of this business to pay down debt. Any decision by the Board to engage in any transaction involving the Merchant Services business will be aligned with the Board’s objective to maximize long-term shareholders’ value.
I don’t have any further updates on the process at this time. With that addressed, I’m pleased to share with you some of our results from the second quarter of fiscal year ’24. In a minute, Rick will elaborate on the realignment that we began last year and how that has better positioned us for sustainable growth. Before he does, I’d like to reemphasize our commitment to highly recurring revenue streams. This quarter, several of our nonrecurring lines are lower than last year, especially professional services and software licenses. Some of our revenue here has been impacted by delayed projects in our backlog, such as the Manitoba drivers license project we’ve discussed with you or the very large and exciting new utilities opportunity. The utilities opportunity has required us to build a complex new project.
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Q&A Session
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It is going great. However, we have not been able to recognize any revenue related to it. That’s fine with us because we believe that in the long term, this project is going to open up new markets and be highly accretive to our shareholders. In the interim, as we go through a period of lower professional services and license revenue, we benefit greatly from our excellent financial profile. ARR is well north of 80%. Our margins grew over 100 basis points despite lower higher-margin license revenue. We think that’s fantastic results which we are proud of. Our future is very bright, and we are excited about the second half of our fiscal year. I’ll now turn the call over to Clay, and he’ll provide you more details on our financial performance when he has finished Rick will add commentary on the business and then we’ll open up the call for questions.
Clay Whitson: Thanks, Greg. The following pertains to the second quarter of our fiscal year 2024, which is the quarter ended March 31, 2024. Please refer to the slide presentation titled supplemental information on our website for reference with this discussion. Revenues for the second quarter of fiscal 2024 increased 1% to $94.5 million from $93.9 million for Q2 ’23, reflecting organic growth from recurring sources, partially offset by declines in nonrecurring sources. SaaS and transaction-based revenue – software revenues each grew 10%, while recurring software services grew 6%. Payments revenues also grew 6%. Nonrecurring sales of software licenses declined by over $2 million as expected, reflecting the ongoing shift to SaaS.
Professional services revenues declined by $1.3 million, principally a result of the delay in Celtics implementation with Manitoba caused by the public workers’ strike. We will discuss the outlook for both line items in our outlook section. ARR increased 6% to $322.5 million for Q2 ’24, a new record compared to $305.7 million for Q2 ’23. Over 80% of our revenues in the quarter continued to come from recurring sources. Software and related services represented 48% of total revenues for Q2 with payments 47% and other 5%. Payments revenues as a percentage of payments volume improved slightly to 71 basis points for Q2 ’24 from 70 basis points for Q2 ’23. Adjusted EBITDA increased 4% to $25.8 million for Q2 ’24 from $24.7 million for Q2 ’23. Adjusted EBITDA as a percentage of revenues improved to 27.3% from 26.3% for Q2 ’23, reflecting an improvement in our Merchant Services margin, along with lower corporate expenses.
Both improvements resulted from the internal realignment discussed on previous quarterly calls. Pro forma adjusted diluted earnings per share was $0.34 for Q2 ’24 compared to $0.38 for Q2 ’23. The decline was driven by higher interest expense following the repurchase of our exchangeable notes in January. Again, please refer to the press release for a full description and reconciliation. Segment performance. Revenues in our Software & Services segment declined 2% to $59.5 million for Q2 ’24 from $60.8 million for Q2 ’23, principally reflecting lower onetime sales of software licenses and professional services, as previously discussed. Payment revenues represented 25% of the Software and Services segment’s revenues. The segment’s adjusted EBITDA declined 5% to $20.9 million for Q2 ’24 from $22.1 million for Q2 ’23.
Adjusted EBITDA as a percentage of revenues declined to 35.2% for Q2 ’24 from 36.3% for Q2 ’23. The biggest factor for the declines were lower onetime software license sales, which fall straight to the bottom line in the quarters they land. Revenues for our Merchant Services segment increased 6% to $35.1 million for Q2 ’24 from $33.1 million for Q2 ’23, reflecting broad-based growth in our ISO ISV, B2B and POS channels. Adjusted EBITDA for our Merchant Services segment increased 18% to $10.1 million for Q2 ’24 from $8.6 million for Q2 ’23, outpacing revenues. Our revenue yield increased slightly with continued expense control. Balance sheet. Our balance sheet remains strong and well positioned for ’24. Following our repurchase of convertible notes in January, we have $26.2 million remaining.
At quarter end, borrowings under the revolver, net of cash approximated $343.1 million. Our total leverage ratio was 3.5 times. The current constraint is 5 times under our $450 million revolving credit. The interest rate for the convertible notes is 1%, while the interest rate for the revolver is currently around 8.5%. We have remained disciplined in our approach to growth and acquisitions. We have approximately $4 million in earn-out payments remaining from past acquisitions. In the event we sell our Merchant Services business, we would have very little, if any, remaining debt. This would free up even more resources to deploy towards the public sector, education and health care verticals. Outlook. This is potentially a transitionary year, so I will first outline our revised outlook for fiscal year ’24, assuming no divestitures or acquisitions, then I will touch on the financial profile for what could be called RemainCo [ph] in the event we sell the Merchant Services business.
For fiscal year ’24, our revised outlook follows, revenues, $380 million to $394 million, adjusted EBITDA of $107 million to $113 million, depreciation and internally developed software amortization, $11 million to $13 million; cash interest expense, $27 million to $29 million; pro forma adjusted diluted EPS, $1.49 to $1.57. From a seasonal standpoint, historically, we have not had large step-ups from Q2 to Q3 organically. Although actual results on the onetime software line can vary significantly, our current expectations for software license sales remain $1 million for Q3 and $3 million for Q4. The bulk of the Q4 amount is an implementation for a large utility customer we have discussed on previous calls. In the event we sell our Merchant Services business, we currently expect RemainCo [ph] would resume high single-digit revenue growth beginning in fiscal year ’25.
Some tailwinds that we have identified include the Manitoba project returning to a normal cadence, continued momentum in the utilities market and the SaaS transition becoming less of a short-term drag. The education business will also lap the introduction of certain state subsidies for lunch [ph] which began during the back-to-school season in ’23. We would expect adjusted EBITDA as a percentage of revenues for RemainCo [ph] to improve annually by 50 to 100 basis points per year. We would also expect to resume acquisitions in the public sector, education and health care verticals after using the proceeds from the sale to pay down debt. I will now turn the call over to Rick for company updates and M&A pipeline.
