Good day everyone and welcome to the i3 Verticals First Quarter 2023 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through February 16th. The number for the replay is 877-344-7529 and the code is 3132661. 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 first quarter 2023 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 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 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 all of you. We are excited to present to you our results for the first quarter of fiscal year '23. To kick things off, we set new records in revenue and adjusted EBITDA, and you will be pleased with our results and our focus on recurring revenue and adjusted EBITDA margin. Year-to-date, adjusted EBITDA grew 29% from Q1 fiscal year '22 to Q1 of fiscal year '23. The last several quarters you have heard me discuss recurring revenue, which has been above 80%. It was 84% this quarter and you will notice that we had a lighter quarter of software license deliveries as multiple projects pushed into Q2. The backlog of software sales has never been deeper, in license revenue, which does not recur and fluctuates. In a quarter like this one, the power of our model is reinforced. SaaS, software transaction-based revenue, payments and other recurring revenue helped us to achieve consistent quality earnings. This quarter includes our first results of the operation of Celtic. We're pleased with our results, but even more excited about what is to come. Celtic is already going to market with our 2021 acquisition, DIS, which has a much more robust sales function than Celtic could ever avail itself of. Celtic and DIS have complementary, best-of-class products for transportation departments at the state level. And we can't wait to expand our already significant footprint across the United States and Canada. When we talk about acquisition targets with untapped recurring revenue opportunities, Celtic is a fantastic example. Earlier this quarter, we announced an acquisition of AccuFund, a strategic product for the public sector. We hosted an internal sales conference in Nashville this week and our sales team was ecstatic about how this product can be cross-sold in the public sector and the education verticals. Our teams are off to a great start. Now, I'll turn the call over to Clay and he will provide you more details on our first quarter financial performance. Following Clay's comments, Rick will provide an update on some role changes and address M&A, and then we will open up the call for questions.

Thanks, Greg. The following pertains to the first quarter of our fiscal year 2023, which is the quarter ended December 31, 2022. 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 first quarter increased 16% in line with the seasonality comments we gave on the last call, $86 million from $73.9 million for Q1 2022, reflecting organic growth and acquisitions. Our revenue yield improved to 146 basis points for the quarter from 139 basis points for Q1 2022. Organic growth for this quarter was approximately 8%. Annual recurring revenues totaled $290.2 million for Q1 2023, compared to $240.4 million for Q1 2022, a growth rate of 21%. 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 remained the largest portion of our revenues representing 48% for Q1. Payments represented 47% and other 5%. Adjusted EBITDA increased 29% in line with expectations to $23.6 million for Q1 2023 from $18.3 million for Q1 2022 reflecting continued momentum in our software and services segment. Adjusted EBITDA as a percentage of revenues increased to 27.4% for Q1 2023 from 24.7% for Q1 2022, principally reflecting margin improvement in our software and services segment. Proforma adjusted diluted earnings per share increased to $0.37 for Q1 2023 from $0.35 for Q1 2022. Again, please refer to the press release for full description and reconciliation. Segment performance, revenues in our software and services segment increased 19% to $53.2 million for Q1 2023 from $44.8 million for Q1 2022, principally reflecting growth in our flagship public sector vertical, which includes education. Revenues in our education vertical continued a strong rebound, thanks to organic sales to new school districts and higher lunch and activity fees at existing districts. Federal and state subsidies for lunch have decreased significantly since the pandemic. Software license revenues were light for the first quarter at $1.2 million, down from a big Q4 of $3.5 million. This is the most variable and difficult line item for us to forecast. Installations depend on our customers' schedules, which can be a moving target, particularly in the public sector. Greg mentioned some software license deliveries that pushed from Q1 to Q2. If those had landed in this quarter, Q1 2023 would have approximated our Q1 2022 number of $2.1 million. While we are focused on SaaS and other recurring sources of revenue, license sales carry 90% gross margins, so they favorably impact quarterly results as we saw in Q4. Despite license sales, the segment's adjusted EBITDA improved 38% to $18.9 million for Q1 2023 from $13.6 million for Q1 2022 outpacing revenues. The growth was principally driven by our public sector vertical, including education. Public sector represents over half of our consolidated business. Adjusted EBITDA as a percentage of revenues improved to 35.4% for Q1 2023 from 30.5% for Q1 2022, reflecting high-margin software and services acquisitions such as Celtic over the past year, and a return to traditional high margins in education. The AccuFund acquisition effective January 1 is high-margin as well. Revenues for our merchant services segment increased 13% to $32.8 million for Q1 2023 from $29.2 million for Q1 2022, principally reflecting growth in our ISO, ISV and B2B channels. Adjusted EBITDA for our merchant services segment increased 8% to $9.4 million for Q1 2023 from $8.7 million for Q1 2022 with higher revenues partially offset by higher residual expenses. In keeping with our strategy since the IPO, we have steadily redirected acquisition and internal resources from traditional merchant services into higher growth and higher margin software and services, coupled with integrated payments. Our strong balance sheet has allowed us to continue to execute our acquisition strategy. On December 31, we had $259.6 million borrowed under our revolver net of cash under a $375 million facility. The face value of our convertible notes is $117 million. As of December 30th, our total leverage ratio, or December 31, our total leverage ratio was approximately four times while the current constraint is 5.25 times. The AccuFund purchase effective January 1 was $12.5 million cash plus $2 million in stock for total consideration of $14.5 million at closing. We paid roughly 10 times for AccuFund the high end of our range because it is a strategic asset integral to our unified public offering. The interest rate for the convertible notes is 1%, while the interest rate for the revolver is currently around 8%, but will increase as the Fed continues to raise rates. Over time we expect to convert roughly two-thirds of adjusted EBITDA into free cash flow, which can be used for debt repayment, acquisitions, and earnouts. We define free cash flow as adjusted EBITDA minus CapEx, internally capitalized software, cash interest, and cash taxes. Looking forward, the strong start to our fiscal year gives us confidence in the following guidance for fiscal year 2023, it excludes acquisitions that have not yet closed and transaction-related costs. Revenues $360 million to $380 million, no change. Adjusted EBITDA $95 million to $103 million. We increased $1 million to account for the AccuFund acquisition. Proforma adjusted diluted EPS, a $1.50 to a $1.62, no change. From a seasonal standpoint acquisition activity could prove different this year, but we still expect the quarters of fiscal year 2023 to follow a similar pattern to those of fiscal year 2022. As we become more software centric, quarters might vary based upon perpetual license sales, even though our trend is generally toward more recurring revenue streams. I'll now turn the call over to Rick for company updates and M&A activity.

Thank you, Clay. Good morning, everyone. Before I discuss M&A, I want to comment on a few developments within our business. The public sector vertical continues to show exponential growth as we further develop our existing products and add new products both from the ground up and via acquisition. As a result, we have seen enhanced levels of adoption. The combination of our motor carrier, title registration and drivers licensing offerings into the i3 transportation sector has been well received by the market. The i3 justice technology offering now effectively serves public safety as well as court offerings, spanning all levels of courts for a state. Financial ERP solutions are performing well, especially with the addition of the online general fund accounting company to our sector. In early January, we acquired AccuFund to lead our online general fund accounting (GFA) product suite. As a result of the architecture and configurable nature of the technology, we will deploy the AccuFund family of solutions to counties, municipalities, special districts, and select tribal nations. In addition, our modular solutions support a range of non-profits including social services, education, endowments, and faith-based organizations. We continue to expand our cross-vertical pollination; our public education healthcare verticals will offer the enterprise AccuFund solution. As i3 education looks to the future, we continue to see the normalization of school activities post-pandemic. In addition to launches, there is an increase in broad-based student spending, inclusive of athletics, ticket sales, and club activities. Our core objective is to provide our customer base with a seamless software experience across multiple departments. We are experiencing increased revenue as a result of high levels of adoption. i3 healthcare continues to refine and expand our product solutions through the application of i3's unified product offering or UPO disciplines. The depth and breadth of our healthcare offering coupled with the responsiveness to our customer needs is resulting in multiple i3 healthcare subsidiaries participating in new contracts. We just signed three large-scale agreements with providers in Louisiana, Mississippi, and Texas. All three healthcare, the public, and education verticals are seeing growth with a reduction of friction, an increase of synergies, and cross-vertical collaboration. I'll now speak to M&A. We continue to pursue growth by performing acquisitions of companies with our strategy with an emphasis on companies in our Public Sector and Healthcare Verticals. On January 6, we announced our latest acquisition. The acquired business AccuFund is a provider of fund accounting solutions for government entities, including education and nonprofits in the United States. The addition of this talented team will fuel growth in many of our verticals. We are very proud to have the AccuFund deal done and look forward to exciting things to come with this product and team. I would like to note that this deal fell within our normal range of multiples. Our pipeline remains healthy with opportunities for acquisitions in public sector and healthcare that are similar in size to many of our acquisitions today. This concludes my comments, Jamie. At this time, we will open the call for Q&A please.

Our first question today comes from John Davis from Raymond James. Please go ahead with your question.

Good morning, guys. First, I just wanted to touch on Clay's comments about the push-out in license revenue; just want to make sure I got it right. It was about $900,000 difference. I think it was 1.2 versus you said it would have been closer to 2.1. I sort of just wanted to clarify that.

That's correct.

Okay. And then on the margins, I think those were better than expected. And you obviously raised margins for the full year despite some of the software mix in Q1. So, have you guys taken any cost actions maybe that weren't planned three months ago to help offset it? Or is it just business mix and things performing better?

It's mainly the business mix, and the recovery in education has returned it to its historical margin.

And then maybe Greg, big picture changes in macro versus where we were three months ago. Maybe comment on January trends versus kind of your first quarter. You know, any changes in your view for the full year from a macro perspective for your verticals?

Good question. Last three months, obviously we've been talking about a recession for nine months. We're not seeing it in our verticals. It seems like we're in for a soft landing. We're kind of protected in government and our verticals. But no real changes. Just kind of feel like our timing is good. We're kind of in a sweet spot and I think we'll finish the year strong.

Okay. Thanks. And then any commentary on January, how January looked? I know we're lapping some Omicron from a year ago, so some of your peers have seen some acceleration in January. Just curious, how your January looked relative to the December quarter?

You know, we never read much into January or February for that matter. They're the two weakest months of the year. You get a lot of returns from Christmas spending. I don't know that we've seen anything notable in January or February so far.

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

This is Sandy Beatty for James. First, a question on M&A. It feels like your team continues to execute here. What would slow or stop the pace of deal closures for your team? Just mindful of a potential slowdown in growth, an increase in interest rates, or even the balance sheet. Is there anything on the horizon that would challenge the cadence that your team has generally been pretty consistent with?

I don't see us slowing down. We are more selective because we've completed 46 deals and have a clear product range defined by verticals. The recent deal with AccuFund was exactly what we needed, and we've successfully brought them on board and generated excitement. We don't have concerns about capital; for a substantial deal, we would likely consider an offering, explaining that it was a great opportunity. However, I believe handling four to five deals a year is what we can manage comfortably. While I would prefer larger deals, our focus remains on those with an EBITDA of $2 million to $5 million.

Got it. That's helpful. And then just one follow-up, looking at ARR and ARR growth, it looks like it's slowed a little bit on a sequential basis, so the year-on-year growth numbers, but also just versus 4Q, and I wanted to ask if there was anything to piece out just with regards to seasonality, any correlation with the comments on license sales, given the organic growth profile, anything that we should keep in mind within that ARR piece?

Yeah, well ARR does not include the license sales, but from an organic standpoint, each million dollars of license sales is 1.4% of organic growth. So, if Q1 this year had been like Q1 last year, we would have been at 9.4% organic instead of 8%. So that is a, and then in Q4 of course we jumped up to 12% because we had $3.5 million on that line. So that is a pretty good line to look at if you're looking at small variations in organic growth. That's really been the difference in the last several quarters; it jumped from 10% to 12% in Q4 and the reason was that line and this quarter it's 8% and the reason is that line. So that seems to be the big variable for us.

Got it. Thank you for the questions.

Thank you.

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

Hi, good morning and thank you for taking my question. Just a quick follow-up on M&A. I wanted to get the sense for if you're seeing anything different in terms of seller expectations on valuation? I know in the past you've commented that valuations were at the low, you were seeing valuations at the lower end of your target range and wanted to just get a sense for the environment right now.

Yeah, great question. We're not seeing any changes right now. Keep in mind that we're kind of in the smaller sweet spot and the trickle-down of that kind of activity takes a while to get there. We feel like we're in a good position to negotiate at the lower end of our range on most of our deals. If it's a high-growth company and it's a great fit in our product suite, we may pay at the higher end of our range, but we're not seeing any changes right now.

I think the key thing you do is you self-source your deals. So yeah, these aren't guys that are getting called four and five times a week. We're typically the only ones talking to them and these are referrals from one of our existing companies. So, we're in a good position going in, and our model's drastically different than some of the guys out there with a lot of cash. We don't expect to lay off half the staff post-acquisition to justify the price and they like that.

Got it. And just as a quick follow-up, I know you touched on the spend environment in the public sector being favorable. And in the past, you have commented on federal funding providing a bit of tailwind to spend. But I wanted to drill into that a little further. And just get a sense for any particular areas of strength, whether from a geographic standpoint or a sector standpoint that you are seeing areas of strength and weakness? And any general comments you might have on public sector spending, I think would be helpful as well.

I will discuss the spending, and perhaps Greg can provide insights on any strengths or weaknesses. The ARP was around $2.1 trillion, and government entities have until 2024 to utilize those funds. Our observation is that many governments have not fully exhausted their allocations. We are still working on educating them about the available funds and their potential uses. However, I don't perceive any weakness; rather, I see people taking their time. Many projects were delayed during the pandemic and are now the priority, while new sales are gradually coming in. We are responding to a growing number of RFPs, and the collaboration of our multiple subsidiaries on these RFPs is leading to successful outcomes. I believe that the education and utilities sectors are thriving. Despite the limitations of the education sector, there is investment in technology, especially since costs are rising due to inflation, which has benefited us. In the utilities sector, we have a particular company, Milestone, that has an impressive pipeline. We are quite optimistic about our prospects in the coming years.

Geographically, I think it follows our acquisitions, but we are strong in the Southeast, Texas, the Midwest. We have got a smattering out West, but that's our current geographic strength.

Got it, thank you.

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

Good morning, everyone. Just on healthcare, wanted to talk a little bit about where you got it, which solutions you'd lead with and how are you in terms of kind of bundling solutions focused on individual niches within healthcare? And where do you think you are strongest in terms of solution set and niche market within healthcare?

Our top product is our RCM, and we do a significant amount of coding work. Currently, we have a patient portal that we are enhancing with new features and capabilities, which we believe will be strong in the future. The addition of AccuFund and other products in development will significantly improve our product suite. Last quarter, we announced Paul Christians' promotion to COO, and one of his primary initiatives is to create a unified healthcare product offering similar to what we achieved in the public sector. We are very pleased with the progress made in healthcare within a short time. We expect to share more exciting developments in healthcare in the upcoming quarter. In terms of payments, I believe we have only just begun to explore the potential, and while it will take several quarters or even years to fully implement, we are still in the early stages. I'm enthusiastic about our payments strategy.

And then just back to public sector on the statewide deals. I think between a number of your deals, you have easily a dozen states, maybe close to two dozen on a statewide deal, but as you continue to grow that business and get more reference ability, do you expect that we could see some deal sizes that get quite a bit larger and could be notable on a quarter-to-quarter basis?

Yeah, the combination of Celtic and DIS is strong in the market. Celtic, as you know, is in 18 different states and a couple provinces of Canada. We think all of those deals that they land are going to be higher-end deals for us.

We're optimistic. But don't put it in your model yet.

And ladies and gentlemen, with that, we’ll conclude today's question and answer session. I'd like to turn the conference call back over to Greg Daily for any closing remarks.

Again, thank you for your interest. Thanks for joining us this morning. Call us if you need us.

And ladies and gentlemen, with that we'll conclude today's conference call and presentation. You may now disconnect your lines.