Good day, everyone, and welcome to the i3 Verticals First Quarter 2024 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through February 16. The number of the replay is 877-344-7529, and the code is 418-4683. The replay may also be accessed for 30 days at the company's website. At this time for opening remarks, I'd like to turn the floor over to Jeff Smith, Senior Vice President of Finance. Please go ahead, sir.

Good morning, and welcome to the First Quarter 2024 Conference Call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO, Clay Whitson, our CFO, Rick Stanford, our President, and Paul Christian, our COO. If 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. The company's intent to provide non-GAAP financial information is 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 regarding the company’s expected financial and operating performance. Consequently, actual operations and results may differ materially from those discussed in the forward-looking statements. The information shared on this call is valid as of today's date, and the company undertakes no obligation to update it, except as may be required under applicable law. I will now turn the call over to the Company's Chairman and CEO, Greg Daily.

Thanks, Jeff, and good morning to all of you on the call. We have some big and exciting things to discuss with you this morning. But first, I'd like to highlight the results of our first quarter of fiscal year 2024 for revenue and EBITDA, which were both 7% higher in Q1 over the same quarter last year, and ARR grew at 9%. We're laser-focused on nurturing recurring revenue streams such as SaaS and transaction-based revenue. Sometimes these comments come at the expense of license revenue, which you will notice is much lower this quarter. I'm sure many of you saw our disclosure yesterday as we are well along in the process to sell certain assets related to our merchant services business. Rick is going to give you a full rundown of the process, but first, I want to make a few points. First, our roots are deep in merchant services. We started this company, and we know this business well. We understand the power of consistent recurring revenue that can be unlocked when we add value to our customers and take care of them. We have built and acquired best-in-class technologies, attracted amazing customers, and most importantly, assembled an incredible team. I'm extremely proud of the i3 merchant services business and what we've accomplished together. Second, our merchant services capabilities have set the stage for us to build something very special in vertical market software. We have always believed that our scale and expertise in payments give us an edge. We're not just looking for any buyer of our merchant services business, but a long-term partner who wants to help us continue to unlock payment opportunities within our current software businesses. Third, we see the opportunity of the sale as beneficial to our customers, employees, and shareholders. By narrowing our focus to our core markets of public sector, healthcare, and education, we will be better poised to capitalize on the expansive opportunities within those areas. Now I'll turn the call over to Rick, and he'll provide you more details on the ongoing process, and then when he finishes, Clay will discuss our financial performance, and then we'll open up the call for questions.

Thank you, Greg. Good morning, everyone. I'll start by talking briefly about the process mentioned in last night's press release and then cover M&A as previously announced. The Company's Board of Directors has directed management to explore the sale of certain assets related to our merchant services business. This decision was made after careful consideration by our Board with input from management and the company's financial adviser and aligns with the Company's strategic focus on vertical market software. The Board believes that the sale of this discrete portion of our business and no other part of the business or the company as a whole is in the best interest of the Company and its shareholders. The merchant services business includes all payment-related assets not tethered to proprietary vertical market software, including the associated payments technology. This is a leader in the market and we believe it has tremendous potential with increased attention and resources from external ownership, led by highly respected industry veterans with decades of experience. Their sales and technology teams are formidable and top-notch. This business has the appropriate leadership, sales, and support to operate on a stand-alone basis, and we are confident that it will be attractive to many potential buyers. The sale of the merchant services business would generate capital that the Company would expect to deploy to pay down debt and can be used with additional strategic application towards M&A in our three target verticals. Our focus will continue to be on growing our industry-leading software businesses in the public sector, healthcare, and education, which we believe are the optimal platforms to deliver enhanced shareholder value over the long term. Each of these verticals includes a large addressable market, a decentralized competitive landscape, and is underserved by technology. We believe these businesses have significant opportunities for growth. Our Board has the benefit of input from management and our financial advisor has directed us to initiate this process solely to explore the sale of our merchant services business as the best path to create value for our shareholders. While we explore the potential sale of the merchant services business, we will continue to fully support current payments clients and the payments technology platforms. Our clients should not be affected by this decision. If the sale transaction does occur, it would be a seamless transition for them. Furthermore, as part of any transaction, we would expect to execute an agreement for ongoing payment partnership with the potential buyer so that we can continue to offer this value-added integrated payment service that our customers expect from us. After this call, management does not intend to make any further disclosures concerning these matters unless or until a definitive transaction agreement is reached or unless we determine that additional disclosure is appropriate and warranted. All inquiries from potential third-party purchasers concerning our merchant services business should be directed to our financial advisor. Concerning M&A, we continue to look at opportunities over the last quarter for potential targets for acquisition. Most of these were in the public sector, with a few in healthcare and education. Our pipeline continues to be robust with target companies largely in the public sector and healthcare verticals.

Thanks, Rick. The following pertains to the first quarter of our fiscal year 2024, which is the quarter ended December 31, 2023. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion. Revenues for the first quarter of fiscal '24 increased 7% to $92 million from $86 million for Q1 in 2023, reflecting organic growth and acquisitions. Organic revenue growth for this quarter was a little above 5%. Revenues from software licenses fell to just $0.7 million for Q1 2024 from $1.2 million for Q1 2023, and an average of $2.7 million per quarter in fiscal '23. As we have communicated in the past, software license sales are the most variable and difficult revenue stream for us to forecast. It can be feast or famine depending on customer schedules, particularly in the public sector. We have been deliberately replacing one-time software sales with recurring revenues such as SaaS and currently expect one-time software sales to be $5 million lower in fiscal '24 compared with fiscal '23. The transition is happening a little faster than expected. SaaS grew 13% for Q1 '24 versus Q1 '23. ARR increased 9% to $317 million for Q1 '24, a new record compared to $290 million for Q1 '23. Over 80% of our revenues in the quarter continued to come from recurring sources. Our revenue yield improved modestly to 148 basis points for the quarter from 145 basis points for Q1 '23. Software and related services represented 47% of total revenues for Q1 with payments at 48% and other at 5%. Adjusted EBITDA increased 7% to $25.2 million for Q1 '24 from $23.6 million for Q1 '23. Adjusted EBITDA as a percentage of revenues remains steady at 27.4% for Q1 '24 and 2023. The adjusted EBITDA margins in both the software and services segment and the merchant services segment improved but were offset by an increase in our corporate expenses, principally healthcare insurance costs and duplicative hosting costs as we transition from our private cloud with Rackspace to AWS and Microsoft Azure. Pro forma adjusted diluted earnings per share was $0.36 for Q1 '24 compared to $0.37 for Q1 '23. Again, please refer to the press release for the full description and reconciliation. Regarding segment performance, revenues in our software and services segment increased 6% to $56.6 million for Q1 '24 from $53.2 million for Q1 '23, reflecting growth in healthcare and the public sector, including education. The Celtic acquisition anniversary this quarter also declined by $1 million from Q1 to Q1, reflecting the strike in Manitoba, which we discussed on our Q4 conference call. While the strike has ended, our projects have not yet resumed. Payment revenues represented 25% of the software and services segment's revenues. The segment's adjusted EBITDA improved 7% to $20.2 million for Q1 2024 from $18.9 million for Q1 2023. Adjusted EBITDA as a percentage of revenues improved to 35.6% for Q1 '24 from 35.4% for Q1 '23, reflecting cost efficiencies gained from an internal realignment within verticals we discussed on the Q4 call. Revenues for our merchant services segment increased 8% to $35.4 million for Q1 '24 from $32.8 million for Q1 '23, reflecting broad-based growth in our ISOISV, B-to-B, and POS channels. Adjusted EBITDA for our merchant services segment increased 14% to $10.7 million for Q1 '24 from $9.4 million for Q1 '23, outpacing revenues. Our revenue yield moved up a few basis points with continued expense control. Our balance sheet remains strong and well-positioned for '24. During January, we repurchased $90.8 million face value of convertible notes using the revolver for a discounted amount of approximately $86.6 million. There are $26.2 million of notes remaining, 19% of the original $138 million issued, which addresses a springing maturity clause in our revolving credit agreement. We currently expect to allow the remaining notes to remain outstanding until maturity. While we saved roughly $4 million from the repurchase, we will have a similar amount of additional interest expense for fiscal '24 associated with the higher interest rate from the revolver. As of December 31, borrowings under the revolver, net of cash and pro forma for the repurchases in January, approximated $348 million. Our total leverage ratio pro forma for the note repurchase was 3.6 times. The current constraint is five times under our $450 million revolving credit. The interest rate for the convertible notes is 1%, while the interest rate for the revolver is currently around 8.5%. We have remained disciplined on our approach to growth and acquisitions. Our estimate for earn-out payments for the remainder of fiscal 2024 is approximately $5 million in the absence of acquisitions. We currently expect to finish fiscal '24 with the leverage ratio around 3 times. We want to be clear on our rationale for the proposed merchant services sale. Once the sale is completed, we should have very little, if any, remaining debt. This will free up even more resources to deploy towards the public sector, education, and healthcare verticals. We believe that the remaining public company should trade at a higher EBITDA multiple as a pure play software and services company. Looking forward, our Q1 results give us confidence in the following guidance for fiscal year '24. It excludes acquisitions that have not yet closed, transaction-related costs, and the potential asset sale discussed on this call. Revenues are expected to be between $385 million to $400 million, adjusted EBITDA between $109 million to $115 million, depreciation and internally developed software amortization between $11 million to $13 million, cash interest expense between $26 million to $29 million, and pro forma adjusted diluted EPS between $1.52 to $1.64. From a seasonal standpoint, we currently expect the quarters of fiscal year '24 to follow a similar pattern to those of fiscal year '23. Although actual results on this one-time software line can vary significantly, our current expectations for software license sales are $800,000 for Q2, $1 million for Q3, and $3 million for Q4. We currently expect to resume high single-digit organic revenue growth in fiscal '25 as Manitoba gets back to a normal cadence, our opportunities in the utilities market progress, and the SaaS transition becomes less of a short-term drag. This concludes my comments. At this time, we will open the call for Q&A, please.

Our first question comes from John Davis from Raymond James.

Hey, morning, guys. Maybe first, Clay, just on the lower revenue outlook. It sounds like it's just $5 million less of license revenue this year. Anything else to call out on the kind of the reduced outlook for the top line?

No, I think that's the correct point. Just to do some math around that, what would have been $5 million of one-time license revenue might turn into $800,000 of SaaS revenue because let's assume a three-year contract and maybe it comes in halfway through the year. So it's quite a short-term headwind, although in the long term, it's a much better model.

No, that's helpful. And then as we think about the margin guide, I think it's about for about 150 basis points of expansion year over year. Margins were roughly flat in the first quarter. So how should we think about kind of the cadence of the margin expansion throughout the rest of the year and kind of what gives you confidence and what's driving the higher margins in the back three quarters here in 2024?

Well, onetime revenues are a big factor when looking at a quarter's margin; approximately 90% of that revenue drops to the bottom line. So in a quarter with onetime revenues, it's remarkable we could keep the margin flat, and the internal realignment is ongoing and continues. We will get the full effect of that as the quarters progress in 2024.

And then last one from me quickly, just on the EPS guide. It looks like the majority of that is just higher interest expense, your $0.08 or $0.09 and a few pennies for slightly lower EBITDA. Just curious if that's the right way to think about everything else that's going on on the EPS side?

That's correct. It's about $4 million more than $4 million of interest expense for the 8.5 months from mid-January. We did get a $4 million discount on our bond repurchase, which hits the balance sheet and the other hits the P&L.

Our next question comes from Peter Heckmann from D.A. Davidson. Peter, please go ahead.

A very early morning this morning. He wanted to see if you could maybe provide a little bit finer detail in terms of the portion of the merchant services business that is being considered for divestiture, if I heard correctly, it's those portions that either are not integrated with software or are not integrated with i-Series proprietary software. Can you confirm that? And then just maybe give a little bit better idea of what we're talking about in terms of percent of revenue and potentially percent of EBITDA for us for 2023 or 2024.

It corresponds pretty closely to the merchant services segment, and we don't know exactly what assets will be included depending on a buyer. For example, they might not want the PayFac platform if they already have one, and we'd love to keep the PayFac platform. So there's a little bit of play, but for planning purposes, I would just use the segment's revenues and EBITDA.

Okay, great. And then in terms of the determination of whether or not you proceed, I certainly valuation is a part of that. But how do you think about the long-term partnership and how that might work in terms of servicing current clients? Is that significant parallel decision-making process?

Yes.

I mean, our customers still want bundled payments and integrated software, and we intend to continue to provide that. Our Software and Services segment, 25% of our revenues are payment revenues. We just don't feel like we have to own the payments capabilities. So we would like to partner with whoever we sell the business to continue to provide that to our customers.

Got it. And so just to confirm, you believe this divestiture could eliminate the majority or all of the company's debt, probably modestly dilutive or somewhat dilutive to earnings, but eliminating the debt could really provide the company with a lot of flexibility going forward, primarily for M&A, right?

Yes.

I mean, our number one goal is to be a software business. Number two, we want to fix our balance sheet, to your point, and that’s freeing up resources to deploy towards public sector, education, and healthcare verticals. We believe that the remaining public company should trade at a higher EBITDA multiple as a pure play software and services company. Outlook and strategy strongly support what we've discussed.

Great.

Thanks for the additional color.

And now we will proceed with the question from Matt Van Fleet from BTIG. Matt, you may proceed.

Yes, thanks for taking my question. I guess when you look at the public sector software market out there, and given the backdrop of the quarter's performance, how are you assessing the demand environment? Which areas or some verticals of public sector are still driving the results here? And maybe where are you seeing either elongated sales cycles or just sort of indecisiveness on behalf of customers? There’s a lot of exciting stuff going on in utilities and education.

Healthcare is great, but the public sector dealing with counties, municipalities, and states seems to be a slower process. We've got a huge pipeline. There have been a lot of delays it seems like things have pushed back, mostly at the state or county level.

And I think courts are a big opportunity on top of utilities going forward.

And yes, that can be huge.

Okay.

Very helpful. And then maybe just one more on the potential sale of the merchant services. I guess it seems like over the last couple of years being able to go in with a combination offering of powerful software with embedded payments would run counter to looking to sell off the business. So I guess what type of stipulations or contractual obligations might you include in terms of keeping the payments side of the business? If it’s sold to a third party, how does that come into play in the growth pipeline ahead? And how does that change your go-to-market strategy if it's not an internally owned merchant service attached to the software?

Got it.

Great question. I'm glad you asked. Let's make it clear. We're still in the payments business. We're still selling payments every day through our software in public sector government on utilities, education, and healthcare. We are selling everything else. So we’re keeping payments in our own software within public sector.

But if there’s business that’s not in those verticals, that’s what we're selling. A good way to think about it is we're going to continue to sell the payments in our primary verticals once the sale is complete, and then we'll flip it over the fence for onboarding and support thereafter with the volume.

Okay.

But you're right, we think our plans are prepared. Our plan is to go to market by acquiring software companies and then cream on top is being able to sell payments into their installed base and new customers.

Okay.

Thank you.

And now we have a question from Charles Nabhan from Steven Charles. Please go ahead.

Good morning and thank you for taking my question.

I wanted to follow up on Pete's earlier question around a potential deal, and could appreciate that there's a range of possible outcomes. I'm curious how we should think about the breakout of corporate expenses across the and across the segments, as you know, corporate annual corporate expenses in the low 20 millions. We think 20% of that might be reduced with the sale of the merchant services segment roughly.

And that's what we've identified so far; that number will likely increase in guidance over time as we examine it a little more closely.

Got it. Okay, Bob, and good to see the strike in Manitoba has been resolved, but curious if you could quantify the impact that's had on the financials thus far this year, speak to your expectations in terms of getting things up and running again there as well as what that could mean for growth?

Yes, this is Jeff. So while the strike is over, the project has continued to push out as they had to ramp back up and get people back to the table. The second phase will go live later this year. There are meaningful revenues that have been pushed back out of this year from when we guided back in the fall. This is a meaningful amount of revenue that has pushed back out of this year from when we guided back in the fall.

So there's three phases to it.

The second phase will go live later this year and has been delayed for about the last year, but the strike delayed all of that. The requirements for the third phase will begin the build-out later this year. There won't be a lot of revenue from that until the following year, and they'll trail out from there.

Okay. And if I could sneak in one more on any comments you could make on the vertical or channel exposure within Merchant Services? I know a chunk of it is restaurant, but any color you could provide based on previous disclosures would be helpful.

Well, we think of our partners, ISOs, and ISVs. POS is a good portion of the business. We are a reseller of Aloha and we have our own proprietary POS system. I see that the is a good category, but those would be the biggest portions of it.

And our next question comes from Alex Mark Graf from KeyBank Capital Markets. Alex, you may proceed.

Thank you, and thanks for taking my questions here. Greg, just wanted to follow up on your earlier comment on the go-to-market thought process in the event of the sale of the merchant services business. It sounds like the bottom line is little to no change. I'm just curious, categorically, are there any dissynergies associated with that potential sale? I mean, it again sounds like no, but just wanted to put a finer point on that topic of synergies.

There's not. I mean, obviously, 100% of our focus is on public sector, education, and healthcare. And I think this will lead to a better balance sheet. I'm 100% focused on our software businesses. The merchant service has been a great business; steady and strong team, and they've always kind of been separate from our software business.

Okay.

That's great. And then just one more quick one on the exploration and the sale. I mean, it sounds like you have shared this morning. I'm just narrowing and focused on certain aspects of software. I guess is there any way that your MO around M&A might change in the event of a sale? I mean, or is it simply just kind of accelerating and pushing further into the pipeline than you maybe could have with the merchant services business onboard?

Yes. I mean, since going public, we've always focused on software businesses, and that will continue. Most of them will be in the public sector, but we do have some things in our pipeline for education and healthcare.

I don't think any change now, so nothing that I mean, I guess it's not addressable today having the merchant services business model its margins now pushing further into that pipeline. Is that a fair characterization?

Yes, that's correct.

Okay.

Let me remind you that if you still have a question to please press star one. And we will proceed with a question from Rob Stone from BMO Capital Markets. Please go ahead.

Hey, guys, good morning. Thanks for the question. Just two quick ones. You mentioned using the proceeds of any sale mostly going to pay down debt. I don't know if you could give us a sense of the leverage ratio you're potentially going to be targeting as a pure software and services business. And then the second question is really around the size of target acquisitions you're expecting to complete this year? I know in the past you've talked about sort of $1 million to $5 million of EBITDA being your sweet spot to see if there's any update to that.

Thanks. Well, our leverage will start off at near zero. I think we haven't put a number on it, but I don't think we will run quite as high in the future, and that's a big driver for doing this. As far as acquisition size, I don't think much changes. It's still our sweet spot of $1 million to $5 million, but we've done larger deals. We've done $10 million. I really don't think that changes in the future.

And we have a follow-up question from Peter Heckmann from D.A. Davidson. Peter, you may go ahead.

Thank you. So just to put a little bit of a finer point on it, I know that any sale is going to be contingent on the buyer and what assets they want. But if we look at fiscal 2023 under your alternative revenue breakdown, rent payments was 45% of revenue last year and then merchant services was 37%. So if you consider divesting the majority of Merchant Services, then on a pro forma basis, payments would go from being 45% of the revenue stream to maybe like 15% to 20% with the vast majority of the rest being software, either maintenance or SaaS? Is that the way to think about it?

Well, that's very close. In the last quarter, payments were at 25% of the software and services segment. So that's probably a better number to use.

Okay, great. And do you have any timeline for this type of transaction? Should we expect to hear something in the next three to four months, or could it take longer?

Hopefully, it's sooner.

Right.

We'll look forward to hearing more details.

Thank you, Pete.

And we have a question now from James Faucette from Morgan Stanley. James, please go ahead.

Hey, good morning. Thanks a lot. I'm just wanted to ask just from an A perspective. You've highlighted multiple times that you've been focused on building out the software part of your business. And given the strategic focus, especially the direction you'd like to go on, I think that's consistent. I'm just wondering how you're thinking about the proceeds and capital allocation and if you're able to execute a sale. Do you expect that pace of acquisition can accelerate? Or are you feeling like this is something that makes sense given what you're seeing in terms of valuation perspective in the market? Just wondering if there's pricing and capital-related considerations regarding the timing or if this truly is just a stage of mix and strategic focus that now is the right time trying to tease out that nuance.

So I think our timing is good. We do plan to spend around $100 million a year; that feels about right, and that’s what we're able to digest. We're not going to do stock buybacks to maximize our capital. It’s going to be applied to M&A in our software verticals.

Got it. Got it.

All right. That's really helpful.

Thanks, Jim.

And this concludes our question and answer session. I would like to turn the conference back over to Greg Daily for some closing remarks.

Well, thanks, everyone. This has been a very interesting three or four months to be able to get to this point. We're excited about the next couple of months, and I appreciate everybody's time this morning. Paul, is the genius. Thank you.

And the conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect and have a great day.