Good day, everyone, and welcome to the i3 Verticals First Quarter 2019 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through February 21. The number for the replay is 719-457-0820, and the code is 3699962. The 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 Scott Meriwether, Senior Vice President, Finance. Please go ahead, sir.

Good morning, and welcome to the first quarter 2019 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Clay Whitson, our CFO; and Rick Stanford, our President. To the extent any non-GAAP financial measure is discussed in today's call, you will also find the reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by reviewing yesterday's earnings release. It is the company's intent to provide non-GAAP financial information to enhance understanding of its consolidated financial information as presented in accordance with GAAP. This non-GAAP information should be considered by each individual in addition to, but not instead of, the financial statements prepared in accordance with GAAP. 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. And consequently, actual operations and results may differ materially from the results 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'll now turn the call over to the company's Chairman and CEO, Greg Daily.

Thanks, Scott, and good morning to all of you for joining us today. We are very pleased with the performance of our first fiscal quarter of '19, and we look forward to delivering strong performance throughout the year. We had a solid quarter. Net revenue increased - sorry, net revenue increased to $29.6 million from $25 million in Q1 of '18. Fueled by organic growth and several acquisitions, pro forma adjusted EBITDA increased to $8.6 million in Q1 '19 from $6.8 million in Q1 '18. Clay will cover these numbers in more detail in his section. We continue to achieve above-market growth rates by delivering seamless integrated payments and software solutions to SMBs and organizations in strategic markets. We currently own software in three of these verticals: education, public sector, property management. And we've partnered with ISVs in other verticals. We will continue to focus on verticals we consider strategic and make selective acquisitions in these verticals. Rick Stanford, our President, has been very busy. The acquisition pipeline is healthy. We currently have three signed term sheets for additional acquisitions. After the financial section, Rick will spend some time discussing the acquisition pipeline. During the first quarter, we also focused on integrating into i3 the three acquisitions we announced on our previous call. We are hosting our national sales conference next week and look forward to presenting our recently completed acquisitions to more of our sales team. We know many of the attendees are listening to this call and look forward to seeing you next week. We anticipate the conference will aid in accelerating the growth of these recent acquisitions. We remain committed to the same type of acquisition strategy we've executed in the past. We have plenty of debt capacity to support this strategy. Our leverage ratio on a pro forma basis for our recently completed acquisitions, as defined by our credit agreement, remains less than 2x as of December 31. Integrated payments and proprietary software-embedded payments remain our focus. 46% of our payment volume was integrated in Q1, up from 42% in Q1 during fiscal year '18. Integrated payments results in lower attrition, higher margin and greater market growth potential. The increase in the proportion of our business coming from integrated payments give us confidence to achieve long-term margin improvement. We believe our focus on organic growth, long-term margin improvement and strategic acquisitions position us well for success. Clay, could you give a financial overview?

Sure. Good morning. The following pertains to the first quarter of fiscal year 2019, which is the three month period ending December 31, 2018. Net revenues increased 18% to $29.6 million for Q1 '19 from $25.0 million for Q1 2018, driven by internal growth and acquisitions. Excluding acquisitions and the Purchased Portfolios, net revenues increased 5% organically. Acquisitions contributed an increase of $4.4 million in net revenues for Q1 '19. Net revenues from Purchased Portfolios declined to $2 million from - for Q1 '19 from $2.8 million for Q1 '18, a 28% decline. That's an improvement from the 34% decline last quarter but still higher than the 25% decline for all of fiscal '18. Adjusted EBITDA grew 25%, outpacing net revenues, increasing to $8.6 million for Q1 2019 from $6.8 million for Q1 2018. Please see the press release for a reconciliation between net income and adjusted EBITDA. It is essentially income from operations plus depreciation and amortization, with the following exclusions: changes in earn-out estimates, equity-based compensation, acquisition-related expenses, state and local taxes not included in income taxes and deferred revenue write-downs associated with acquisitions of software companies. Adjusted EBITDA as a percentage of net revenues improved to 29% for Q1 '19, despite a 6% increase in corporate expenses associated with public company costs. The improvement in margin was driven by ongoing growth and profitability in our Proprietary Software and Payments segment. Pro forma diluted earnings per share were $0.20 for the quarter, as we expected. This measure starts with adjusted EBITDA, deducts depreciation and amortization of internally developed capitalized software, but not amortization of purchased intangibles, and deducts cash interest, but not the noncash amortization of deferred financing costs. We apply a tax rate of 25%, which is an estimate of our go-forward blended federal, state and local…

Thank you, Clay. Good morning, everyone. As you know, acquisitions are an important part of our overall growth strategy, and we are constantly looking for acquisition partners that help us tell our story. We've been very busy on this front. We are seeing many opportunities. Because many of our deals our self-sourced, there is less competition around the assets we are looking to purchase. As Greg mentioned earlier, we currently have three signed term sheets, two of which fall in the public sector vertical and one that is an integrated technology play we believe will fall in the public sector as well. Each of these term sheets is nonbinding, but all three are in varying stages of standard due diligence process. We remain optimistic about closing each of these deals, but of course, there's no guarantee that these or other acquisitions will close. We are encouraged about our integration of prior acquisitions and the ability of our sales, IT and other teams to quickly combine their efforts to deploy new and existing products and services. For example, in our two recent public sector acquisitions, we have built full payments integration into their product suite and have begun rolling this integration out to our customers over time. Regarding our recent technology acquisition tuck in, we released many of the new products to our salespeople across the U.S. These products include cutting-edge solutions from EMV-certified devices to validated point-to-point encryption. As always, we will continue to focus on finding acquisition partners with an emphasis on deals that would accelerate our vertical strategy. One final note. Our ISV team is ramping up nicely and has signed seven ISV partners in the last six months. These new partners are in construction, B2B, transportation, club management and point of sale. This concludes my comments. Espie, at this point, we'll open the call up for Q&A, please.

[Operator Instructions]. And we'll take our first question from George Mihalos with Cowen.

So just wanted to start. Rick, you talked about the three term sheet deals. Anything you can say in terms of size from an EBITDA contribution standpoint, if and when they do close? And maybe just sort of the outlook for the pipeline beyond that.

Yes. George, I'll tell you that all three deals are in our sweet spot from an EBITDA perspective that we have talked about before. Timing of the deals, typically, deals close between 45 and 60 days on the outside. And our pipeline is as big as it's ever been today.

Okay. Great. And it sounds like the purchase price of the assets is in line with your expectations, right. Nothing has really changed.

That's correct.

Okay. That's very helpful. Clay, just two questions, if I may. If we look at the proprietary software vertical, the yield there shot up. I'm assuming that has to do with more of the volume coming from public sector and the like, but there was also an adjustment there. Can you just kind of talk about that a little bit?

Well, yes. The yield itself, I'll speak to it, and then Scott will talk about the adjustment. But some of our revenues now are pure software revenues. And in the quarter, that jumped from, historically, maybe 5% of our net revenues to 12% of our net revenues this quarter, because it's just pure software sales. So that has no volume associated with it, so that will drive the yield up. Scott, do you want to speak about that?

On the revenue adjustment, we acquired two companies this quarter that had deferred revenue from software annual maintenance billing. And purchase accounting standards require us to fair value that, and there's a deferred revenue write-down for GAAP purposes. That adjustment is to add that back throughout the year. Absent future acquisitions, that adjustment is going to decrease as our annual maintenance billing annualizes. And so that's what that is. It's to normalize that deferred revenue write-down for fair value purposes.

And we'll take our next question from Josh Beck with KeyBanc.

I just wanted to ask a little bit about the public sector. Obviously, you've made a big push, and it seems like something that you're pretty excited about. So maybe if you could just give us a little bit of color or background on kind of what's attractive in that sector. And what's driving you to mix up there?

Yes, the public sector vertical is very attractive to us, mainly because of margins. We've typically stayed within the small municipality-type space. We do have in our pipeline things that are larger, such as state-type government organizations. It's a very fragmented market. Typically, by state, you see 2 to 3 vendors in that state. So we're going to have to acquire away to grow larger in that space, similar to the education vertical.

And then on the organic growth front, I know there was a modest step-down there, at least sequentially if you think of year-over-year growth. So anything to call out there? And then probably related to that, just how should we be thinking about your macro exposure? Obviously, that's a topic that's come up more and more recently. And I would love to understand maybe your nondiscretionary-discretionary mix or however you would like to characterize that.

On the organic growth front, this was the first quarter we had three months of our Fairway acquisition in both quarters. We had trouble growing that book of business. We've had technological challenges with the gateway we use from our processor. And some of the leading-edge features, which health care and nonprofits require, are not - our processor has not been able to deliver them for over a year now. We do think that our technology acquisition we completed in the fourth quarter gives us those features, and we're in the process of integrating those in. And we believe we'll be able to start winning new business again, but that's probably what to call-out with organic growth. I'm not sure I understood the discretionary versus the macro question.

Just we've heard a lot of commentary from other either processors or networks talking about, I think, a really modest slowdown in consumer spending for 2019. And they're factoring that into their outlooks to some degree. I'm just wondering, when you think about your macro exposure, I would imagine it's a lot more specialized in terms of where you're actually getting your business from. So if there were a big slowdown in the consumer spending environment, how would that kind of trend relate to your business?

Well, our proprietary software area is recession-resistant or insulated. When you think about education, government, rent payments, people need to continue those. So we feel good about that side of the business. When it comes to retail restaurant, which is a diminishing part of our company, we have the same exposure as everybody else, I think.

And we'll take our next question from John Davis with Raymond James.

I just want to follow up on Josh's organic growth question. Clay, what's the assumption you guys have baked in guidance for the full year? And do you kind of have any improvement in that organic growth kind of stepping up throughout the rest of the year?

Well, there's a range of guidance we've given for growth for this year, and our guidance generally has been high single digit. And as a long-term goal and our aspiration would be to get to double digit over time. But I think the range in our guidance would incorporate range in that internal growth number.

Okay. And then any update on the hardware business? Obviously, that was an issue last quarter. It seems like you kind of took that out of the guide for this year. Any further weakening? Any bounce back? Any commentary there?

There was further weakening, and I say that you and George both surmised that's what it was. From our fiscal Q3 to our fiscal Q4, our equipment revenues in the hospitality area declined $1 million. From Q4 to Q1, it declined another $600,000. So that's one of our challenges currently.

Okay. And then either Rick or Greg. Just wanted to touch on like seven new ISV partners, fairly impressive. Are these new wins, competitive takeaways? Maybe just talk a little bit about the process and the momentum you have there in the ISV channel.

Our pipeline is really good in the ISV area as well. I can't speak to new wins versus brand-new. My assumption would be based on the number of total addressable market with each partner that they've been around for a while, so I would tend to believe these were takeaways. But I'll get some more information on that and follow up with you, John.

Okay. Great. And then last one, maybe for Greg. Big picture here. Global yesterday on their call announced a partnership with Tyler Technology. Just remind us the competitive landscape within public sector. Obviously, you guys are making a big push there. It's very lucrative. From a regional perspective, how do you compete with Tyler? Where or maybe you don't because you're different regions. And maybe just help level set kind of where you guys are focused from a geographic standpoint in public sector.

Sure. We were thinking Tyler as being in communities, towns, municipalities of 250,000 people and above. And our public sector vertical is about 75,000 people and smaller. And so there's - we do see them once in a while. We have won against them but rare - I mean, that's unusual. So they're in a good-sized city, and we're typically in the smaller, outlying communities. We feel like we'll be able to compete long-term well with them. It's not a concern. We have this pipeline that Rick has described that's probably a third public sector. And we talk about that with each of our targets, and it puts a smile on their face. They like competing with Tyler. We're less expensive. Our contracts are shorter versus they have very long-term, expensive contracts. So we feel like we're well positioned against Tyler.

[Operator Instructions]. We'll take our next question from Peter Heckmann with Davidson.

I wanted to get a little bit more detail on the education vertical, some of the strategies to grow that business. Can you talk about investments in sales? And then as you think about that business, is the primary growth there going to be organic? Or are there other opportunities to do some additional M&A in education?

Great question. It's our favorite vertical. We probably have our biggest, deepest technology software. We have 9,000 schools, and we maybe have 30%, 35% of our parents using our technology. We're striving to get to 50%, which will be a huge game changer and drive same-store sales organic growth. We have tried hard for the last couple of years to buy other education players and just haven't been able to do it yet. There's not as any of them as there was maybe in the public sector vertical. We do have a couple in our pipeline, but it's at least six months away, if we were able to get one of these particular deals. We're excited about education. I mean, it's working. Our schools are broke. Our solution is very reasonably priced. Our parents like it. We're constantly adding additional products and additional modules. But further acquisitions, nothing coming soon, but maybe something within the next year.

Got it. That's helpful. And then, Scott, as regards to the deferred revenue write-down, do you think that number will be substantially larger in the second quarter? And then I assumed, I mean, in terms of the accounting function here, that we'll soon pick up those pieces of the run rate revenue next year, correct?

Correct. Yes, we had two months of the quarter there, so we'll have that adjustment. And we'll have the full weight - full quarter next quarter and then begin to decrease as the billing begins to be annualized in that adjustment, yes. Assuming no further acquisitions that would have that adjustment, that adjustment will begin to tail off as - through the first year and go away.

[Operator Instructions]. And there are no questions at this time. So I'd like to turn the call back to Mr. Greg Daily for any additional or closing remarks.

Well, thanks again, everyone, for joining us on our first quarter of '19. Still early. So have a good day. Happy Valentine's Day, and look forward to hearing from you. Thank you.

And that concludes today's presentation. We thank you for your participation. You may now disconnect.