i3 Verticals Q2 2025 Earnings Call Transcript

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Provided by Quartr
May 9, 2025

There are 9 speakers on the call.

Operator

Good day, everyone, and welcome to the i3 Vertical Second Quarter twenty twenty five Earnings Conference Call. Today's call is being recorded and a replay will be available starting today through May 16. The number for today's for the replay is (877) 344-7529 and the code is 500000899364. The replay may also be accessed for thirty days at the company's website. At this time, for opening remarks, I would like to turn the call over to Clay Whitson, Chief Strategy Officer.

Operator

Please go ahead, sir.

Speaker 1

Good morning and welcome to the second quarter twenty twenty five conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO Rick Stanford, our President Jeff Smith, our CFO and Paul Christians, our Chief Revenue Officer. 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.

Speaker 1

This conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others regarding the company's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements. You are hereby cautioned that these forward looking statements may be affected by important factors among others set forth in the company's earnings release and 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.

Speaker 1

I will now turn the call over to the company's Chairman and CEO, Greg Daily.

Speaker 2

Thanks, Clay, and good morning to everyone on the call. We have some exciting things to discuss on the call today. I'd like to start by saying thank you to everyone in our Healthcare Revenue Cycle Management or RCM business. Been a pleasure to have you on the team and I know you're going do great things together with Athenex. We're proud of your performance and wish you the very best.

Speaker 2

After the divestiture of our RCM business, we're excited to be streamlined and focused on public sector vertical market. That business had a second quarter revenue growth of 12% and SaaS revenue growth grew at 23 It's an exciting time to be building in the public sector. There's been a lot of focus on efficiency and cost savings, particularly at the federal level. While we're focused at the state and local level, we embrace this national conversation. We believe that better software is one of the best ways for government, better ways that government can become more efficient while improving their services to their citizens.

Speaker 2

That is what we're committed to helping government deliver on their promises with excellence. Something that excites me is that there are many small public sector focused software businesses that share that perspective. One such business joined us on April 1. Rick's going to share more later, but we're excited about the management team and the increased market presence in utilities. I will now turn the call over to Clay or to Jeff and he'll provide us more details on the financial performance.

Speaker 2

When he's finished, Rick will address our most recent deal and finally Paul will discuss revenue then we'll open up the call for questions.

Speaker 3

Thanks Greg. The following pertains to the second quarter of fiscal year twenty twenty five, which is the quarter ended 03/31/2025. Please refer to the slide presentation titled supplemental information on our website and provided with our Form eight ks for reference with this discussion. On Tuesday, we announced the sale of our Healthcare RCM business. The business we sold had approximately $39,000,000 of revenues and approximately $8,000,000 of adjusted EBITDA in our guidance for fiscal twenty twenty five.

Speaker 3

The sale will reduce our headcount by over 400 employees. This sale follows the sale of our merchant services business last September and we need to start by clarifying some labels and classifications. The sale of our healthcare RCM business did not qualify as assets held for sale or discontinued operations as of March 31, our current reporting period. As such for financial reporting purposes, when you look at our earnings release or later our 10 Q, continuing operations refers to our results exclusive of the merchant services business, but including the healthcare RCM business. The healthcare RCM business will then become discontinued operations as part of our Q3 reporting cycle, our June.

Speaker 3

And we will be able to give more complete historical financial information related to the divested business then. For now, when we remove the impact of the divested Healthcare RCM business, we will call that RemainCo. And our discussion on our quarterly results in the outlook section will be focused there. RemainCo revenues for the second quarter of fiscal twenty twenty five increased 11.6% to $54,100,000 from $48,500,000 for Q2 twenty twenty four, reflecting $4,400,000 of organic growth or nine percent and $1,200,000 of revenue from the permitting and licensing acquisition we made last year in the public sector. Growth for education revenues were in line with organic growth for RemainCo as a whole.

Speaker 3

Annual recurring revenues for RemainCo increased 9.2% to $164,500,000 for Q2 twenty twenty five compared to $150,600,000 for Q2 twenty twenty four. '70 '6 percent of our revenues from the quarter came from recurring sources driven by SaaS revenue growth of 23%, transaction based revenue growth of 8% and recurring software services growth of 12%. Non recurring sales of software licenses for RemainCo increased to $2,800,000 for Q2 twenty twenty five and just $1,000,000 for Q2 twenty twenty four. We expect software license sales to be lower for the second half of the fiscal year relative to the first half. RemainCo software and related services represented 70% of RemainCo revenues for Q2 with payments 26% and other 4%.

Speaker 3

Adjusted EBITDA for RemainCo increased 17% outpacing revenues to $15,800,000 for Q2 twenty twenty five from $13,500,000 for Q2 twenty twenty four. Adjusted EBITDA as a percentage of revenues was 29.3%, an increase from 27.9% for Q2 twenty twenty four, reflecting higher software sales, which carry high margins. Regarding the balance sheet, following the sale of our merchant services business last September and the sale of our RCM Healthcare business this week, our balance sheet is strong and well positioned for the future. As of March 31, net debt stood at $4,000,000 We repaid the balance of our convertible notes at maturity during February. Following quarter end, we purchased the utility billing software company for $9,000,000 which we will profile.

Speaker 3

We also paid an earn out of 1,500,000 associated with the divested healthcare RCM business and we sold the RCM healthcare business for $96,000,000 plus transaction costs and taxes of almost 18,000,000 So we currently have a cash position of approximately $64,000,000 We still have $400,000,000 of borrowing capacity under our revolving credit facility with a 5x leverage constraint. We intend to use the cash and any borrowings for acquisitions and potential stock repurchases. The following introduces guidance for RemainCo for fiscal twenty twenty five. The outlook does not include acquisitions or dispositions that have not been announced or transaction related costs. The utility billing software acquisition is a high margin business and the price of $9,000,000 was on the high end of our normal multiple range.

Speaker 3

The effective date was April 1. Revenues $2.00 7,000,000 to $217,000,000 adjusted EBITDA 56,000,000 to $61,000,000 depreciation and internally developed software amortization 11,000,000 to $12,000,000 cash interest expense 0 to 7 hundred and 50 thousand pro form a adjusted diluted earnings per share $0.96 to $1.06 In view of recent trade friction between The U. S. And Canada and ongoing delays with our Manitoba contract, we've removed about $2,500,000 of revenues which were previously included in our outlook for fiscal twenty twenty five, principally in the second half of the fiscal year. We still continue to expect high single digit organic revenue growth for RemainCo in the absence of the healthcare RCM business and we continue to expect adjusted EBITDA margin improvement of 50 to 100 basis points per year.

Speaker 3

From a seasonality standpoint, we currently expect our revenue distribution for the remaining two quarters to approximate the following: Q3, '40 '8 percent Q4, '50 '2 percent. Public sector payments and software services revenues declined seasonally during Q3 along with education revenues while school is out. Although software license sales are less a factor than in years past, they still represent the most variable line item to forecast and distort seasonality in any given quarter. I will now turn the call over to Rick for comments on M and N.

Speaker 4

Thank you, Jeff. Good morning, everyone. I'll speak about our most recent acquisition and then I'll turn the call over to Paul for updates. In last night's earning release, we announced that we have closed another public sector acquisition in the utility billing space. This acquisition expands our business in various states, but also creates a new footprint in many states where we do not operate today.

Speaker 4

With this acquisition, we feel this will give us ample room to run-in those new states in the future from a sales perspective. The company we acquired serves small to medium sized municipal utilities providing utility billing and inventory solutions such as inventory cost tracking and supply management that supports purchase orders, project management and work order integration. Their software is cloud based and mobile compatible. Utility billing platform allows users to import meter reads and supports both AMI, Advanced Metering Infrastructure or two way communication and AMR, Automated Meter Reading via walk by or drive by reading integration. This helps streamline the billing process and seamlessly integrates into various accounting systems.

Speaker 4

The software also offers email and text alerts for automated billing reminders. The company has recurring payments and print and mail revenue streams, both of which are outsourced today. This acquisition should enhance i3's offerings in the utilities market overall. For example, being able to track and build multiple meters per account is a feature that we needed to supply with current and new potential customers. In addition, there are areas of our business model that offer us opportunities for growth.

Speaker 4

For example, they have historically not licensed their software on a SaaS basis, which is already in the process of changing. In addition, we feel that i3's internal payment processing platform should improve the economics of that portion of their business. They currently outsource that function. We are encouraged by our integration of prior acquisitions and the ability of our engineering group to build full payments integration into new products and our time to market with our software and payments as a combined solution. To that end, this acquisitions engineering team has already begun the process of coding to our current API, so that payments can be made in house versus using a third party vendor.

Speaker 4

Beyond printing and payments, i3 has several other products in the utility market, including a best in class EIVR, enhanced interactive voice response and customer portal. While these products generally are sold to larger utilities, we expect over time to find cross sell opportunities to acquisitions existing customer base. Our acquisition pipeline continues to be strong with our primary focus on acquisitions in the public sector vertical and the markets they serve. We look forward to sharing more information on M and A activity as it becomes available. I'll now turn the call over to Paul for final comments.

Speaker 5

Thank you, Rick. At i3 Verticals, we remain committed to a domain specific approach across our targeted markets. By offering tailored solutions and deep domain expertise, we create meaningful adoption and barriers to entry. Our customers know that with i3 there is certainty of deliverables and execution which fosters trust and long term relationship. This is evident in select enterprise markets that interface with consultants or selection companies that are domain specific.

Speaker 5

That has been positive for as the broader market understands our branding, market focus, domain expertise and responsive software solutions. We are monitoring the geopolitical landscape and see opportunity for i3. We do not currently have any direct business with the federal government. However, we have seen opportunities emerge at the state and local levels which appear to be tied to evolving Doge style efficiency requirements. While those developments are encouraging, it is too early to determine whether they represent a trend.

Speaker 5

Our ability to monetize software systems by offering perpetual licensing SaaS, user fee plus payment models to our customers drives significant advantages for i3. This structure lowers barrier to entry by reducing upfront financial hurdles. In turn, it accelerates implementation timelines, enhances speed to market for our customers and helps them protect their operating budget. And it insulates us from volatility associated with shifts in government priorities or funding cycles. Cross selling activities across our public sector markets of VRP, public safety, justice tech, public education, utility and transportation remain robust.

Speaker 5

By concentrating on these markets, we deliver highly integrated solutions that address a wide range of customer needs. Our continued execution in these areas will remain a significant driver of organic growth over time. This has resulted in a healthy balance of contracts across the spectrum of our markets with the number of contracts and bookings revenue up double digits on a sequential quarter basis. The public education market has been particularly productive with contracts in five new markets including Idaho, Texas, Oklahoma, North Carolina and Delaware. We are also in the process of finalizing contract for a statewide court system in our Justice Tech market.

Speaker 5

We anticipating having more to share on this on next quarter's call. I am also pleased to share the status of our artificial intelligence applications and initial market acceptance. We have created an i3 infrastructure group leveraging common infrastructure, security and development platforms in support of our public sector market efforts. Our focus mirrors our domain specific product sales and deployment model initially looking to solve client pain points while enhancing client efficiency. This includes a release of an AI service agent in our transportation market that is deployed across the state in each of the 95 counties.

Speaker 5

In our ERP market, we are just releasing a module in our land records application focused on automated indexing. The module provides clients with significant improvement in accuracy and efficiency. On our last call, I discussed the success of our i3 Customer Engagement ePortal, particularly in enterprise utilities markets. We have continued our product evolution by enhancing our AI market offerings that we introduced this week. The initial release focuses on i3 generative AI bots capable of handling complex end to end transactions that integrate with an i3 agent assist dashboard that summarizes account history, generate recommended actions and automated communications, improving customer satisfaction.

Speaker 5

This is accomplished via a secure i3AI knowledge layer integrated into billing systems and accessible across i3's ePortal, EIVR and CSR interfaces. This concludes my comments, Rocco. At this time, we will open the call for Q and A please.

Operator

Absolutely, sir. Today's first question comes from John Davis at Raymond James. Please go ahead.

Speaker 6

Hey, good morning guys. Jeff, appreciate the color on the go forward kind of growth algo more or less unchanged. Good to see 9% organic growth in the quarter. Our math suggests that the HCM divestiture is probably about 100 basis points accretive to revenue growth and overall margins. As we go into next year, how should we think about or even this year, the run rate of what's left of the healthcare business?

Speaker 6

So if you've annualized the first half of the year, it would be $10,000,000 business. If you annualize the second quarter, it's more like 7,000,000 So just curious how big that remaining healthcare business is?

Speaker 3

So the remaining healthcare business is this piece of the healthcare setting that was focused on workflow software for providers specifically. We'll re segment this coming quarter and it will probably not be large enough to stand on its own as a segment go forward. This growth profile should be fairly consistent with the rest of the remaining public sector business and the education business. Its revenue approximately $8,000,000 for the fiscal year roughly.

Speaker 6

Okay. And margin profile look more like public sector or look more like healthcare?

Speaker 3

Margin profile, fairly consistent with public sector. And then the low-forty percent range.

Speaker 6

Yes. No, that's great. And then just as we think about free cash flow conversion of RemainCo, obviously this quarter free cash flow muddied by a bunch of different stuff. But historically you guys have talked about two thirds of EBITDA from a free cash flow conversion perspective. Is that something similar we should expect for RemainCo or any kind of puts and takes there?

Speaker 3

Yes. We'll it will remain kind of a little bit muddy because of taxes from these divestitures. But the go forward free cash flow conversion in kind of a steady state right where we are right now should be well in excess of two thirds. And that's partially driven by the fact that not only will we not have interest expense the remainder of this year assuming no M and A activity above interest income. Even though we're kind of increasing investment in the rate of CapEx and what we're developing on the software side, there's things kind of cutting the other direction on that too between AI, offshoring, we're kind of increasing our output without having to increase our cost substantially.

Speaker 3

And then, yes, obviously our balance sheet puts us in a position where our free cash flow conversion is just excellent right now.

Speaker 6

Okay. And then last one for me Jeff, just any help on cadence 3Q, 4Q revs and margins. We had lot of moving pieces here, over MainCo. So obviously lots detail on the updated guide and the moving pieces there, but just curious if you can help us any with the 3Q, 4Q cadence for revenue and or margins?

Speaker 3

Yes. So we noted that the Q3 revenue, that will be our low point, should be about 48% of the remaining revenue and Q4 should be we expect about 52%. There's a little bit that could kind of move in or out of those depending on when some of the onetime revenues hit. But given the drop in revenue in Q3 that we kind of expect seasonally, that will also kind of be the low point from a margin perspective, dip down into the mid-20s for that quarter before back up into the high 20s in Q4.

Speaker 6

Okay. Appreciate all the color. Thanks guys.

Operator

Thank you. And our next question today comes from Peter Heckmann with D. A. Davidson. Please go ahead.

Speaker 7

Hey, good morning. Thanks for taking the questions and congrats on the sale of the RCM business. Looks like a nice deal and the remainco certainly is much more of a focused pure play. Just a couple of questions on fine tuning, the $64,000,000 in cash at the end of this week, do you anticipate any additional taxes on either divestiture that still need to be paid or is that a good net number?

Speaker 3

Yes, that's a net number I think

Speaker 7

you keep coming up with. Okay, great. And then is the small utility billing acquisition included in updated guidance?

Speaker 3

It is, yes.

Speaker 7

Okay. Okay, great. And then go ahead.

Speaker 3

I mean, when you're kind of modeling that, expect high end of our range and a high margin business.

Speaker 7

Got it. Got it. Okay. That's helpful. So really as John said, divestiture really should be enhancing to organic growth rate and to margins and really create almost a pure play on the public sector and give you some good some really good dry powder to go after M and A.

Speaker 7

I guess in terms of that pipeline, you said it was quite strong. I guess are you seeing deals actually we expect deals kind of consistent with your historical practice with most of the deals being kind of relatively smaller tuck in deals and then potentially from time to time something that's more on the mid size, more of a mid size deal?

Speaker 2

Yes, we've looked at some larger ones, but that's really not our specialty. I think you'll see us do smaller tuck ins, very fragmented. Our focus has become very, very focused. Mean, just more rifle shot now, public sector, utilities, education. I'd to say we'd do a larger one here or there, but I think you can count on more regular small deals in the next couple of years.

Speaker 7

That makes sense. That makes sense. Okay. And then just last question on Manitoba, I guess, that taking I think you said $2,500,000 but taking some future revenue out of the guidance. Is that something that you feel like that's a formal decision?

Speaker 7

Or is that conservatism just based on some of the discussions you have with the customer at this time?

Speaker 3

Definitely conservatism based on discussions with the customer.

Speaker 7

Okay.

Speaker 3

That's something that has repeatedly been delayed and there now appears to be a sequencing issue with the customer in terms of they have some other large enterprise projects including an ERP one that they think needs to sequentially happen before we can kind of keep progressing on our end. Some of the discussions are exciting in the long run. So I we're still really happy and grateful to have that relationship with that customer. We obviously wish that we could go faster, but we are in client service and we have to kind of fall in line with what they think. And so the picture at the we thought we had kind of adequate conservatism when we were guiding last fall and everything was kind of moving in that direction from a momentum perspective.

Speaker 3

And the picture just kind of changed right now unfortunately. So that's why we've made the choice we have.

Speaker 7

Okay. That's helpful. I appreciate it.

Operator

Thank you. And our next question today comes from Alex Markraff with KeyBanc Capital Markets. Go ahead.

Speaker 8

Thanks. Hey, Jeff. Just curious on the remainco ARR growth number that you gave, I think it was 9.6%. Any sort of compare you can give for us sequentially or otherwise just to understand how that has trended?

Speaker 3

Yes. So, I think sequentially it's down versus just slightly. Main culprit of that being the payments revenue. I have a much more optimistic view of payments revenue in the back half of this fiscal year. There's a few situations where we're on a pricing structure that is convenience fee and we're enduring some higher interchange rates before our price increases went into effect.

Speaker 3

And so we expect the margin to kind of tick up a little bit and that's kind of leads a little bit better growth on the back half of the year on payments growth. So expect that to be it was only 4% year over year this quarter and expect that to be back in line with kind of the broader company growth rate by the end of this fiscal year. And we still think that most quarters, the ARR growth is going to lead our normal organic growth. It's a little bit out of sync this quarter because we had such a great license quarter. But normally that would be the leader.

Speaker 3

And you can see that especially as the SaaS momentum kind of continues to grow and launch forward, that's just really going to keep carrying us and carry further outsized kind of a pull on the overall picture.

Speaker 8

Thanks. And then maybe one, for maybe Greg or Paul, just on the AI products that are being introduced. Could you just speak to sort of the readiness for AI at your customer segment?

Speaker 7

Thank you.

Speaker 5

Yes. I can take that one, Greg. The interest level has been really high. I think part of the reason that the interest level has been so high is that our focus is on solving pain points and doing that in a very specific focused fashion. And so it's tangible for customers in the sense that they've struggled with something for a period of time and they're having a hard time being responsive to it.

Speaker 5

And by having the company organize its domain expertise and the deliverables the way they do, we can get to market quicker on those and solve those pain points. So the interest level has been high and the adoption indicators of adoption on that continue also to be high. And it's evident that there's a need there and they're a little bit lost in the sense of really large enterprise things about how to that and we developed platforms internally to support it but the application of it's really more of an applied AI technology which makes it more tangible and easier for them to pull the trigger on which is being well received.

Speaker 8

Great. Thank you. Appreciate the comments.

Operator

Thank you. And ladies and gentlemen, this concludes our question and answer session. At this time, I'd like to turn the conference back over to Greg Daily for any closing remarks.

Speaker 2

Again, thank you for your interest and support. We're excited about what our next couple of years. So stay tuned and reach out to us if you have any questions. Thank you.

Operator

Thank you. And this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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i3 Verticals Q2 2025
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