Good day, everyone, and welcome to the i3 Verticals Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Today’s call is being recorded, and a replay will be available starting today through May 17. The number for the replay is 877-344-7529, and the code is 1617435. 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 Geoff Smith, SVP of Finance. Please go ahead, sir.

Good morning and welcome to the second quarter 2023 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 measures 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. 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 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. I’ll now turn the call over to the company’s Chairman and CEO, Greg Daily.

Thanks, Geoff, and good morning to everyone on the call. We’re excited to present our results for the second quarter of fiscal year ‘23. This quarter, we set another record for revenue and adjusted EBITDA, which were up 20% and 27% over the same quarter last year, which reflected our improving margins. We have been highlighting our transformation to the vertical market software business that uses payments to optimize the great businesses we acquire, unlocking improved recurring revenue growth. This quarter’s software and related services revenue overtook all other sources and accounted for more than 50% of total revenue. Annualized recurring revenue grew over 20% compared to the same period last year, driven by strong SaaS, software maintenance and payments revenue growth. This quarter includes the first results of operation for AccuFund. Their integration into the rest of our public sector has been seamless, and we continue to be excited about the cross-sell opportunities they unlock. The last time when we refreshed our senior secured credit facility was 4 years ago in May of 2019. Since that time, we have grown tremendously, and the quality of our credit has never been better. Thanks to that and the excellent service from our bank group that we are pleased to announce the closing of our new senior secured credit facility. It has been interesting times in the credit markets to say the least. But against that backdrop, we were able to achieve a fantastic result. First, we upsized our revolving line of credit capacity to $450 million, which sets the table for future M&A over the next 5 years. Next, we added flexibility in our financial covenants about our confidence on our credit and execution from our bank group. And finally, improved pricing in our interest rate spread by 0.25 point. We are grateful to all of our banks who participated in the facilities, including JPMorgan Chase, Fifth Third, Regions, TD Bank, KeyBanc, Pinnacle, First Bank, Raymond James, First Horizon and Bank of America. Now I’ll turn the call over to Clay, and he will provide you more details on our second quarter financial performance. Following Clay’s comments, Rick will provide an update on some business-related items and address M&A and then we’ll open up the call for questions.

Good morning. The following pertains to the second quarter of our fiscal year 2023, which is the quarter ended March 31, 2023. Please refer to the slide presentation titled supplemental information on our website for reference with this discussion. We had another great quarter with record revenues and adjusted EBITDA. Revenues for the second quarter increased 20% to $93.9 million from $78.1 million for Q2 ‘22, reflecting organic growth and acquisitions. Our revenue yield improved to 158 basis points for the quarter from 146 basis points for Q2 ‘22. Organic growth for this quarter was approximately 12%, benefiting from a strong quarter for sales of software licenses, which totaled $3.5 million. Although small in the scheme of things, we keep highlighting this line because it’s an outlier from our otherwise highly predictable revenue and explains many of the variations between quarters. Annual recurring revenues totaled $305.7 million for Q2 ‘23 compared to $254.5 million for Q2 ‘22, a growth rate of 20%. Organic ARR growth generally runs a few percentage points above our total organic revenue growth. Over 80% of our revenues in the quarter continued to come from recurring sources. Software and related services remains the largest portion of our revenues, representing 50% for Q2. Payments represented 45%, other 5%. Adjusted EBITDA increased 27%, outpacing revenues to $24.7 million for Q2 ‘23 from $19.5 million for Q2 ‘22, reflecting continued momentum in our Software & Services segment. Adjusted EBITDA as a percentage of revenues increased to 26.3% for Q2 ‘23 from 25% for Q2 ‘22, reflecting margin improvement in our Software and Services segment. Pro forma adjusted diluted earnings per share increased to $0.38 for Q2 ‘23 from $0.37 for Q2 ‘22. Again, please refer to the press release for a full description and reconciliation. Segment performance. Revenues in…

Thank you, Clay. Good morning, everyone. Before I discuss M&A, I want to comment on a few developments within the business. A couple of quarters ago, we announced the promotions of Paul Christians to Chief Operating Officer; and Chris Laisure to President of Public sector. They have been doing an amazing job in these new roles and are far exceeding our expectations. We now have another important promotion I’d like to share. Tom DeBord, formerly the CEO of our B2B business, Infintech, has been promoted to President of Merchant Solutions for i3. Tom is a veteran in the payment space and is highly respected by his peers. His long and successful history and his significant contributions to the success of i3 Merchant Solutions, making him a natural fit for this job. The i3 Merchant Solutions division develops and implements enterprise payment technology for the i3 Verticals family of companies and the broader financial technology market. We are looking forward to seeing Tom’s many successes across the enterprise with Merchant Solutions. As a result of the unified product offering success in public sector, we are replicating similar processes and structure across all primary verticals at i3. One example of this structure is a unified enterprise level RFP team, which includes RFP management, technical writers, product personnel, finance, and cloud team members. Benefits of the new team include improved response time, enhanced response quality, industry prowess and command of the RFP technology and process. These teams are comprised of individuals across the organization to maintain market sensitivity and domain expertise. The next generation of UPO discipline is being deployed in public education and healthcare sectors with enhanced infrastructure and development resources being pulled from within the vertical sub-companies to strengthen sales, product development, operations, implementations and deployment. These internal customer-facing market services…

Thank you. [Operator Instructions] Our first question comes from John Davis with Raymond James.

Hey, good morning, guys. Clay, I just wanted to start off. I apologies if I missed it, but did you disclose organic growth in the second quarter?

Yes, it was 12%. And the $3.5 million of software license sales contributed to that. That’s sort of the x factor every quarter, whether we’re above or below the 10% mark.

Okay. That’s great to hear. And then, Rick, I just wanted to follow-up on your last comment about pursuing the larger deals. I mean historically, you guys have kind of been under $5 million of EBITDA paying 8x to 10x. So just curious what you guys would define as larger deals? And could we see a $100 million plus deal? Just curious kind of what you’re thinking there.

Yes. So historically, JD, we’ve been between the $2 million and $3 million, maybe $4 million or $5 million here and there, but we’re looking at deals as high as $10 million or $12 million in EBITDA. So I think that’s possible. Whether we get there this year or this quarter, I don’t know yet. But the pipeline is healthy. We’ve got a lot of businesses that we’re talking to. It’s just getting them to that place where we can generate a term sheet and have a deal.

Okay. Then two quick follow-ups for Clay. One is just the revenue yield improvement, up 12 basis points year-over-year. Anything specific to call out there? And then one last clarification, Clay. When you said 3Q raise in EBITDA similar to 2Q, I’m assuming you meant on a dollar basis, but I just wanted to confirm.

Yes. On a dollar basis, both revenues and EBITDA looked very similar to Q2 right now. But on the revenue yield, payments have come back, particularly in the education area. And so that’s helped a lot with the yield. And then just the greater share of Software and Services going above 50%, and that gradually improves our yield every quarter.

Okay. Appreciate all the color. Thanks, guys.

Thanks, Davis.

The next question comes from James Faucette with Morgan Stanley. Please go ahead.

Great. Thank you very much. I just want to follow-up on the question around acquisitions, etcetera. I mean, I know that your targets typically aren’t in the same kind of realm or domain as VC-funded privates. But wondering what you’re seeing from a valuation perspective, and it sounds like you’re pretty optimistic about being able to do larger deals. But how is the change in interest rate environment impacting? How you think about where valuation should be and kind of funding mix or if there needs to be a bigger equity component, etcetera?

Well, on the higher interest rates, it obviously makes us more sensitive to acquisition multiples. And so during COVID, we were generally paying 10x for businesses. We’re now trying to pay closer to 8x for businesses. Rick, do you want to handle the other part?

Yes. As far as valuations, we’re self-sourcing our deals. So there’s not somebody in these companies’ ears telling them how valuable they are. At the same time, we’re running into some prospects that have had valuations done and the third party that did the valuation has done exactly what they were paid to do, make them happy and tell them how valuable they are. That’s – we hate to run into those kind of deals. But we haven’t seen any change. These smaller guys under $10 million in EBITDA, they don’t recognize that the value has changed in the market, and the trickle down takes a lot longer to affect. But again, we’re going to be disciplined. We’re going to not pay over 10x million, hopefully, pay closer to 8x and do a fair deal for us and the seller.

We walk at fine line. These guys have worked 30 years. They’ve built this baby. They’re 60 years old. They never thought they would sell their business. We self-source it and tell them our story about what we’re building, and they agreed to join the company. And so they like that story. Timing is everything. So, we’ve had some deals fall in our lap over the last 5 years that were – M&A is a part of our DNA. So you’ll see a lot more of it.

The last thing I’ll add to that is these guys, they all want you to pay them for all the hard work they’ve put in over the last 30 years. And that’s not what we’re paying for. We’re paying for the strategic potential value being combined into our enterprise go forward. So there’s that dichotomy we have to address all the time.

That’s great color. And then I wanted to follow-up on the software portion of the business. We’ve kind of been through this extended period of normalization on the payment side. And you mentioned just this quarter that you’re starting to see the education come back as things like subsidized lunch from during COVID, etcetera, expire in different states. So how should we be thinking about that software piece of the business? Is it growing faster or at least more durably than the payments portion? I guess outside of M&A, how should we think about the pace of software transition perhaps on a more organic basis?

Well, our ARR grows a few percentage points above our organic growth rate. And that is – we do expect more of that to come from Software and Services than from payments. Payments has been through a normalization now. And so it will be pretty steady. However, we haven’t started adding payments to our healthcare vertical in a meaningful way yet. And we will continue to penetrate more of the public sector. But over time, we do expect the software and services percentage to grow from 50% to 60% and maybe 65% over the next couple of years.

Got it. Got it. Thanks really helpful. Thank you.

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

Good morning, and thank you for taking my question. I wanted to get – I had a follow-up on Rick’s comments around some of the internal initiatives you guys have pertaining to the RFP process. As we think about that going forward, should we anticipate any sort of impact on either OpEx or CapEx as a result of some of those projects you have ongoing?

No, not meaningfully. We’re mainly reshuffling internal resources into a uniform team so that all of our responses are tailor-made and consistent. We do make some efficiencies from time to time, but we’re also always investing. So I wouldn’t expect so now.

Yes. The biggest point is sharing the wells. We’re going from a decentralized system to more centralized. So we’re plucking people out of our sub companies to form enterprise-level teams that will assist all companies enterprise-wide.

Got it. And just as a quick follow-up. I know the post-COVID rebound in – the post-COVID rebound in education has provided a bit of a tailwind and should continue to do so over the next few quarters, it sounds like. But as we think about ‘24 and the lapping of some of those rebounds, should we anticipate any sort of a step down in growth as a result of lapping those comps? Or is it fair to think that some of the new business wins could provide an offset going forward on that – in that business?

Well, I do think the payments piece will level out because we’ve sort of had a return to what we consider fully normal in the education group. But we are always adding software and services products. So that education, we’re always planning the year ahead as opposed to the year we’re in. That’s how the selling cycle works. We’ve got an old experienced hand in that business who’s always full of ideas and understands the product really well. And so, no, I don’t expect a slowdown, but I do expect it to shift less from payments and more from software and services.

I feel like we got 7x or 8x. We’ll sell some of our existing customers. 15,000 schools. Another product into next year.

Yes. Greg makes a good point. When we’ve studied our first customers in their first year generally buy one product, and that’s historically for us been the lunch product. And then on average, every year, they add one more software module. And so there is a lot of cross-selling to expense.

Got it. And if I could sneak one more in. If I caught your comments correctly, the increase to the EBITDA guide, which is roughly $2 million at the bottom end. If I heard you correctly, you said that was attributable to AccuFund. Is that correct? Largely attributable to AccuFund?

So we’ve added $2 million this year. $1 million we added last quarter, and that was attributable to AccuFund. We added another $1 million this quarter, and that is more attributable to the general demand environment we’re seeing, mainly in public sector. And Paul, I don’t know if you want to elaborate on that a little bit.

Sure, Clay. As Clay indicated, generally, we’re seeing increased demand in public sector. And as we look at that, we believe it’s really tied to positive budget levels and trends with property tax revenue for our client sales tax revenue and still some American rescue plan deployment that had been delayed a bit. In addition to those drivers, we’re also seeing, like in the healthcare industry, public sector is also struggling with staffing and – staffing shortages and increased awareness on aging infrastructure and security. So given that, we’re seeing activity as a result that are all – that is positive across the board with RFIs, RFPs, product upgrades and to Greg’s point, product line module expansions.

Got it. Thank you for the color. Appreciate it.

[Operator Instructions] Our next question comes from Matt VanVliet with BTIG. Please go ahead. Matt, is your line on mute? Matt, as a reminder, is your line on mute? We’re not able to hear you. Can I move on to the next question? I can’t hear him.

Yes.

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

Hey, good morning everybody. In terms of revenue cycle management, can you talk a little bit about that sub niche. It appears that it’s a fairly fragmented industry, kind of what type of companies you’re competing with there? And in terms of winning the consulting and software deal with the top five health care payer. I mean, that has to have a significant amount of due diligence on the part of the customer. How do you go about winning something like that? And are there other of those type of relationships? Or is that relationship – periodically, you win one of those and it cycles 3? Or does this represent maybe a move off in terms of capabilities and size of contract?

Well I don’t know if you want to...

Sure. I can touch on that. We are seeing increased demand on RCM, and it’s the primary point of monetization for our clients. And the more we can do to augment that better. Now we are finding that in our software companies that are in the healthcare space, who had RCM operations, it’s outpacing all the trends of adoption by our client base. And given that we have an exceptional team in our Louisiana facility with ACS, who has fabulous expertise in Medicare and Medicaid and the ability to process those on scale. So it allows us to focus our activities, invest in technology and invest in the team there to do that and bring – that brings additional acceptance in the market. So we see that as a bright spot for us going forward.

On the diligence, you had a – part of your question was diligence. I do think it helps to be – to have a bigger balance sheet to be a public company, they can readily look up on the Internet. And I think that’s one reason they were amenable in selling to us was to have a bigger balance sheet going into RFPs.

We’re gradually going away from subcompany names and formal names in healthcare, for example, i3 Healthcare Solutions. So we’re looking and feeling and acting like a bigger organization than we are based on our parts.

Did that answer what you were looking for on healthcare?

Yes, thanks. I’m sorry. That is helpful. I’ll look at the website. I want to dig in a little bit more there and look at some of the capabilities. But I also had one little housekeeping question for you, Clay. And just as regards to the – I don’t see that you mentioned it, but pro forma tax rate seemed like it was a little higher the last two quarters, and maybe talk a little bit about that and maybe your expectations for the full year.

Well, in our pro forma diluted EPS calculation, we have always used a 25% tax rate. And that since the IPO, and we continue to use that. If you’re talking about taxes paid, we paid very little taxes since going public, and I don’t believe anything is different this quarter. Geoff, do you have a comment on?

So we would expect we’re still going to have a very efficient low cash tax situation for the next couple of years. And as the company moves to more pretax income, that will change slightly over time. But we have a really efficient tax structure. We have a lot of deferred tax assets. The FC structure over the coming 5 years will become more and more maybe a talking point, if that’s all.

Okay. I’ll have to refresh that and look at how I’m modeling it. But then – so the change in the non-GAAP EPS guidance would then almost entirely be attributable to higher level of interest expense due to the – a little bit higher cost on the unused facility and other fees.

That’s right. It’s about $2 million at the midpoint.

Okay, that’s helpful. Thanks.

The next question comes from Matt VanVliet with BTIG. Please go ahead.

Alright. Hopefully, I’ve figured out the technical issues. Can you hear me alright?

Yes. Yes, we can.

Alright. Sorry about that. Sorry about that. Thanks for taking the questions. I wanted to follow-up on the answer around stronger public sector budgets. Obviously, a few factors there. But one, I guess, first part is, how sustainable do you feel like that is going forward? And maybe more importantly, to how important is the integrated software and payment solutions that you’ve now put together in a number of subverticals there, helping win deals over competitors that maybe only offer one or the other?

So I’ll take the first part, and then I’ll let Paul chime in on the second part. We’re continuing to see local governments strive for more monetization – for modernization and digitization of products. Staffing is an issue. So they’re looking for better technology ways to serve their constituents. The American rescue plan dollars, I think they run out at the end of 2024 or they have to be used by them. So it’s kind of a false positive. We may see an influx because of those resources. But then after that, it’s – who knows. But we’re definitely seeing an upbeat in local governments striving for more technology to get the jobs done versus arms and legs. Paul, do you want to talk about...

Yes, I think that’s – I agree with all that. And the other thing which I see on a regular basis is the demand component is up universally across all departments. So there’s a need with all of government to upgrade and expand and in certain sectors like transportation and the court systems, there’s more of a movement to move – to augment that with statewide activities, which we’re qualified to do and do today, and that’s actively part of our business. And e-filing always becomes a component there that we speak to. But there are elements of that with remote access for permits and licensing and GFA for customer stand remote workers that are augmenting the demand component of what we do.

When we did the BIS acquisition, that was a good deal for us. The contact that they have at the state level is the same contact that Celtic has. So having those two companies under one umbrella has allowed us to offer a more complete solution at the state level. So as we combine these products or plug them out of the individual subs, we’re always coming up with a more full suite of solutions for RFPs and can respond better.

And there is a distinct appreciation for seamless payment interface. Well, that’s working into the – embedded into the software systems and that delivery is seamless and to facilitate their efforts to recognize revenue and reconcile.

Matt, this vertical is so far behind the times. As our original story, and we wanted to get into verticals that were underpenetrated behind, as everyone on the call knows, dealing with your local government, you see it every day. But I feel like we’re maybe in the bottom of the second inning. It’s just how much more there is to be done. It’s – to me, it gets bigger every day.

Very helpful there. And then just a follow-up on the new unified RFP team that you’re putting in there and bringing a more structural maybe workflow inside the company. How quickly do you expect that to maybe translate into new bookings wins or even into revenue? And then maybe secondarily, how often are you kind of finding out about an RFP after the fact that maybe your team kind of missed that you feel like you very easily could have won given your product set or maybe overlap in a local jurisdiction. So I guess not only what – how soon can the opportunity come, but maybe how big is the opportunity sort of immediately?

We have had occasions in the past where an RFP has surprised us, and that’s always a disappointing day. We do use sources to surface RFPs, and we also use sources to facilitate budgets being approved and the potential of an RFP coming with that to get ahead of those curves. And we like to be ahead of them as much as possible to craft what software solutions makes sense for that. In terms of the timing related to that, that’s a much tougher question because the time and the nature of the RFP is so divergent, a statewide motor carrier program could be an 8 to 12-month process and then a longer delivery time and an ERP program could be a 3 to 6-month process.

So I think it’s one of the most powerful decisions we’ve made. And it’s got the most – it’s going to create the most value. I think it’s very powerful.

There’s work to be done. Everybody had their own template for responding to an RFP, and we’re taking that and let’s just say the About Us section, it will now represent i3 at the enterprise level. So there is work to be done. We had technical writers in some of our sub companies and not another. So the CEO was responding to RFPs. We want technical writers to do that work going forward. So we think our response time, the way we respond, what we appreciated. And these are resources that we can use across many verticals, not just one vertical.

The demand from the company since we started this has been high. So everybody is trying to understand it, and we’ve been able to respond and it will take a little more time to build out, but it’s having impact already.

Alright. It sounds like your good development. Thanks for taking the questions.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Greg Daily for any closing remarks.

Well, it’s nice to have another quarter behind us. We’re excited about the second half of ‘23 and into ‘24. So I appreciate everybody being on the call this morning. Thank you.

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