Earnings Call Transcript - IIIV Q2 2025

Operator, Operator

Good day, everyone, and welcome to the i3 Verticals Second Quarter 2025 Earnings Conference Call. Today's call is being recorded and a replay will be available starting today through May 16. The number for today's replay is 877-344-7529 and the code is 5899364. 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 Clay Whitson, Chief Strategy Officer. Please go ahead, sir.

Clay Whitson, Chief Strategy Officer

Good morning, and welcome to the second quarter 2025 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Rick Stanford, President; Geoff Smith, our CFO; and Paul Christians, our Chief Revenue Officer. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation to the most directly comparable GAAP financial measure by reviewing yesterday's earnings release. It is the company's intent to provide non-GAAP financial information to enhance understanding of its consolidated GAAP financial information. This non-GAAP financial information should be considered by each individual in addition to, but not instead of, the GAAP financial statements. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. You are hereby cautioned that these forward-looking statements may be affected by important factors, among others, set forth in the company's earnings release and in reports that are filed or furnished to the SEC. Consequently, actual operations and results may differ materially from those discussed in the forward-looking statements. Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it, except as may be required under applicable law. I will now turn the call over to the company's Chairman and CEO, Greg Daily.

Greg Daily, Chairman and CEO

Thanks, Clay, and good morning to everyone on the call. We have some exciting things to discuss on the call today. I'd like to start by saying thank you to everyone in our Healthcare Revenue Cycle Management, or RCM business. It's been a pleasure to have you on the team and I know you're going to do great things together with Infinx. We're proud of your performance and wish you the very best. After the divestiture of our RCM business, we're excited to be streamlined and focused on the public sector vertical market. That business had a second quarter revenue growth of 12% and SaaS revenue grew at 23%. It’s an exciting time to be building in the public sector. There has been a lot of focus on efficiency and cost savings, particularly at the federal level, while we're focused at the state and local level; we embrace this national conversation. We believe that better software is one of the best ways for government to become more efficient while improving their services to their citizens. That is what we're committed to, helping government deliver on their promises with excellence. Something that excites me is that there are many small public sector focused software businesses that share that perspective. One such business joined us on April 1. Rick is going to share more later, but we're excited about the management team and the increased market presence in utilities. I will now turn the call over to Geoff and he'll provide us more details on the financial performance.

Geoff Smith, CFO

Thanks, Greg. The following pertains to the second quarter of fiscal year 2025, which is the quarter ended March 31, 2025. Please refer to the slide presentation titled Supplemental Information on our website and provided with our Form 8-K for reference with this discussion. On Tuesday, we announced the sale of our Healthcare RCM Business. The business we sold had approximately $39 million of revenues and approximately $8 million of adjusted EBITDA in our guidance for fiscal 2025. The sale will reduce our headcount by over 400 employees. This sale follows the sale of our Merchant Services Business last September, and we need to start by clarifying some labels and classifications. The sale of our Healthcare RCM Business did not qualify as assets held for sale or discontinued operations as of March 31, our current reporting period. As such, for financial reporting purposes, when you look at our earnings release or later our 10-Q, continuing operations refers to our results exclusive of the Merchant Services Business but including the Healthcare RCM business. The Healthcare RCM business will then become discontinued operations as part of our Q3 reporting cycle, our June quarter, and we will be able to give more complete historical financial information related to the divested business then. For now, when we remove the impact of the divested Healthcare RCM Business, we will call that RemainCo and our discussion on our quarterly results in the outlook section will be focused there. RemainCo revenues for the second quarter of fiscal 2025 increased 11.6% to $54.1 million from $48.5 million for Q2 2024, reflecting $4.4 million of organic growth, or 9%, and $1.2 million of revenue from the permitting and licensing acquisition we made last year in the public sector. Growth for education revenues was in line with organic growth for RemainCo as a whole. Annual recurring revenues for RemainCo increased 9.2% to $164.5 million for Q2 2025 compared to $150.6 million for Q2 2024. 76% of our revenues for the quarter came from recurring sources driven by SaaS revenue growth of 23%, transaction-based revenue growth of 8%, and recurring software services growth of 12%. Non-recurring sales of software licenses for RemainCo increased to $2.8 million for Q2 2025 and just $1 million for Q2 2024. We expect software license sales to be lower for the second half of the fiscal year relative to the first half. RemainCo software and related services represented 70% of RemainCo revenues for Q2 with payments at 26% and other at 4%. Adjusted EBITDA for RemainCo increased 17%, outpacing revenues to $15.8 million for Q2 2025 from $13.5 million for Q2 2024. Adjusted EBITDA as a percentage of revenues was 29.3%, an increase from 27.9% for Q2 2024, reflecting higher software sales, which carry high margins. Regarding the balance sheet following the sale of our Merchant Services Business last September and the sale of our RCM Healthcare Business this week, our balance sheet is strong and well-positioned for the future. As of March 31, net debt stood at $4 million. We repaid the balance of our convertible notes at maturity during February. Following the quarter-end, we purchased the Utility Billing Software Company for $9 million, which Rick will profile. We also paid an earn-out of $1.5 million associated with the divested Healthcare RCM Business and we sold the RCM Healthcare Business for $96 million plus transaction costs and taxes of almost $18 million. So we currently have a cash position of approximately $64 million. We still have $400 million of borrowing capacity under our revolving credit facility with a 5x leverage constraint. We intend to use the cash at any borrowings for acquisitions and potential stock repurchases. The following introduces guidance for RemainCo for fiscal 2025. The outlook does not include acquisitions or dispositions that have not been announced or transaction-related costs. The Utility Billing Software acquisition is a high-margin business and the price of $9 million was on the high end of our normal multiple range. The effective date was April 1st. Revenues are expected to range from $207 million to $217 million, adjusted EBITDA from $56 million to $61 million, depreciation and internally developed software amortization from $11 million to $12 million, cash interest expense from $0 to $750,000, and pro forma adjusted diluted earnings per share is estimated at $0.96 to $1.06. In view of recent trade friction between the U.S. and Canada and ongoing delays with our Manitoba contract, we have removed about $2.5 million of revenues, which were previously included in our outlook for fiscal 2025, principally in the second half of the fiscal year. We still continue to expect high single-digit organic revenue growth for RemainCo in the absence of the Healthcare RCM Business, and we continue to expect adjusted EBITDA margin improvement of 50 to 100 basis points per year. From a seasonality standpoint, we currently expect our revenue distribution for the remaining two quarters to approximate the following: Q3 48%, Q4 52%. Public sector payments and software services revenues declined seasonally during Q3 along with education revenues while school is out. Although software license sales are less of a factor than in years past, they still represent the most variable line item to forecast and can distort seasonality in any given quarter.

Rick Stanford, President

Thank you, Geoff. Good morning everyone. I'll speak about our most recent acquisition and then I'll turn the call over to Paul for updates. In last night's earnings release, we announced that we have closed another public sector acquisition in the Utility Billing space. This acquisition expands our business in various states, but also creates a new footprint in many states where we do not operate today. With this acquisition, we feel this will give us ample room to run in those new states in the future from a sales perspective. The company we acquired serves small to medium-sized municipal utilities providing Utility Billing and inventory solutions such as inventory cost tracking and supply management that supports purchase orders, project management, and work order integration. Their software is cloud-based and mobile compatible. The Utility Billing platform allows users to import meter reads and supports both AMI (advanced metering infrastructure) or two-way communication, and AMR (automated meter reading) via walk-by or drive-by reading integration. This helps streamline the billing process and seamlessly integrate into various accounting systems. The software also offers email and text alerts for automated billing reminders. The company has recurring payments and print and mail revenue streams, both of which are outsourced today. This acquisition should enhance i3's offerings in the utilities market overall. For example, being able to track and bill multiple meters per account is a feature that we needed to supply to current and new potential customers. In addition, there are areas of our business model that offer us opportunities for growth. For example, they have historically not licensed their software on a SaaS basis, which is already in the process of changing. In addition, we feel that i3's internal payment processing platform should improve the economics of that portion of their business as they currently outsource that function. We are encouraged by our integration of prior acquisitions and the ability of our engineering group to build full payments integration into new products and our time to market with our software and payments as a combined solution. To that end, this acquisition's engineering team has already begun the process of coding to our current API, so that payments can be made in-house versus using a third-party vendor. Beyond printing and payments, i3 has several other products in the utility market, including a best-in-class EIVR (enhanced interactive voice response) and customer portal. While these products generally are sold to larger utilities, we expect over time to find cross-sell opportunities with acquisitions in our existing customer base. Our acquisition pipeline continues to be strong with our primary focus on acquisitions in the public sector vertical and the markets they serve. We look forward to sharing more information on M&A activity as it becomes available. I'll now turn the call over to Paul for final comments.

Paul Christians, Chief Revenue Officer

Thank you, Rick. At i3 Verticals, we remain committed to a domain-specific approach across our targeted markets. By offering tailored solutions and deep domain expertise, we create meaningful adoption and barriers to entry. Our customers know that with i3, there is certainty of deliverables and execution, which fosters trust and long-term relationships. This is evident in select enterprise markets that interface with consultants or selection companies that are domain-specific. That has been positive for i3 as the broader market understands our branding, market focus, domain expertise, and responsive software solutions. We are monitoring the geopolitical landscape and see opportunity for i3. We do not currently have any direct business with the federal government. However, we have seen opportunities emerge at the state and local levels that appear to be tied to evolving efficiency requirements. While those developments are encouraging, it is too early to determine whether they represent a trend. Our ability to monetize software systems by offering perpetual licensing, SaaS, user fee plus payment models to our customers drives significant advantages for i3. This structure lowers barriers to entry by reducing upfront financial hurdles. In turn, it accelerates implementation timelines, enhances speed to market for our customers, and helps them protect their operating budget. It also insulates us from volatility associated with shifts in government priorities or funding cycles. Cross-selling activities across our public sector markets such as ERP, public safety, JusticeTech, public education, utility, and transportation remain robust. By concentrating on these markets, we deliver highly integrated solutions that address a wide range of customer needs. Our continued execution in these areas will remain a significant driver of organic growth over time. This has resulted in a healthy balance of contracts across the spectrum of our markets, with the number of contracts and bookings revenue up double digits on a sequential quarter basis. The public education market has been particularly productive, with new contracts in five new states, including Idaho, Texas, Oklahoma, North Carolina, and Delaware. We are also in the process of finalizing contracts for a statewide court system in our JusticeTech market. We anticipate having more to share on this in next quarter's call. I am also pleased to share the status of our artificial intelligence applications and initial market acceptance. We have created an i3 Infrastructure Group leveraging common infrastructure, security, and development platforms in support of our public sector market efforts. Our focus mirrors our domain-specific product sales and deployment model, initially looking to solve client pain points while enhancing client efficiency. This includes the release of an AI service agent in our transportation market that is deployed across the state in each of the 95 counties. In our ERP market, we are just releasing a module in our land records application focused on automated indexing. The module provides clients with significant improvement in accuracy and efficiency. On our last call, I discussed the success of our i3 customer engagement e-portal, particularly in enterprise utilities markets. We have continued our product evolution by enhancing our AI market offerings that we introduced this week. The initial release focuses on i3 generative AI bots capable of handling complex end-to-end transactions that integrate with an i3 agent assist dashboard that summarizes account history, generates recommended actions, and automates communications, improving customer satisfaction. This is accomplished via a secure i3 AI knowledge layer integrated into billing systems and accessible across i3's e-portal, EIVR, and CSR interfaces. This concludes my comments. At this time, we will open the call for Q&A please.

Operator, Operator

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

John Davis, Analyst

Hi, good morning guys. Geoff, appreciate the color on the go forward growth algorithm, more or less unchanged. Good to see 9% organic growth in the quarter. Our math suggests that the HCM divestiture is probably about 100 basis points accretive to revenue growth and overall margins. As we go into next year, how should we think about or even this year the run rate of what's left of the healthcare business? If you've annualized the first half of the year, it would be a $10 million business. If you've annualized the second quarter, it's more like a $7 million. So just curious how big that remaining healthcare business is?

Geoff Smith, CFO

So the remaining healthcare business is this piece of the healthcare statement that was focused on workflow software for providers. Specifically, we will resegment this coming quarter and it will probably not be large enough to stand on its own as a segment going forward. This growth profile should be fairly consistent with the rest of the remaining public sector business and the education business, its revenue is approximately $8 million for the fiscal year, roughly.

John Davis, Analyst

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

Geoff Smith, CFO

The margin profile is fairly consistent with public sector, in the low 40% range.

John Davis, Analyst

Yes, that's great. And then just as we think about free cash flow conversion of RemainCo, obviously, this quarter free cash flow was muddied by a bunch of different stuff. But historically, you guys have talked about two-thirds of EBITDA from a free cash flow conversion perspective. Is that something similar we should expect for RemainCo? Or any kind of puts and takes there?

Geoff Smith, CFO

Yes, it will remain a little bit muddy because of taxes from these divestitures. But the go-forward free cash flow conversion in kind of a steady state right where we are right now should be well in excess of two-thirds. And that's partially driven by the fact that not only will we not have interest expense for the remainder of this year, semi-no M&A activity, but a lot of interest income. So even though we're kind of increasing investment in the rate of CapEx and what we're developing on the software side, there are things cutting in the other direction as well between AI offshoring. We're kind of increasing our output without having to increase our cost substantially. And then yes, obviously, our balance sheet puts us in a position where our free cash flow conversion is just excellent right now.

John Davis, Analyst

Okay. And then last one for me, Geoff, just any help on cadence Q3, Q4 revs and margins? We had a lot of moving pieces here over RemainCo. So, obviously, there are lots of detail on the updated guidance and the moving pieces there. But just curious if you can help us with the 3Q and 4Q cadence for revenue and/or margins.

Geoff Smith, CFO

Yes, we anticipate that the revenue for the third quarter will represent our lowest point, around 48% of the projected remaining revenue, while we expect about 52% thereafter. Some fluctuations may occur based on the timing of one-time revenues, but given the expected seasonal decline in revenue for Q3, this quarter will also mark the low point for our margins. We expect margins to fall into the mid-20s for that quarter before rebounding to the high 20s in Q4.

John Davis, Analyst

Okay, appreciate all the color. Thanks guys.

Operator, Operator

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

Peter Heckmann, Analyst

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

Geoff Smith, CFO

Yes, that's a net number I think you could come up with.

Peter Heckmann, Analyst

Okay, great. And then is the small Utility Billing acquisition included in updated guidance?

Geoff Smith, CFO

It is, yes.

Peter Heckmann, Analyst

Okay, great. Go ahead.

Geoff Smith, CFO

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

Peter Heckmann, Analyst

Got it, got it. Okay, that's helpful. So really, as John said, the divestiture really should be enhancing to organic growth rate and to margins and create almost a pure play on the public sector and give you some really good dry powder to go after M&A. I guess in terms of that pipeline, you said it was quite strong. Are you seeing deals? Actually, we expect deals to be consistent with your historical practice, with most of the deals being relatively smaller tuck-in deals and then potentially from time to time something that's more on the mid-sized side?

Geoff Smith, CFO

Yes, we've looked at some larger ones, but that's really not our specialty. I think you'll see us do smaller tuck-ins and be more fragmented. Our focus has become very, very more rifle shot now: public sector, utilities, education.

Peter Heckmann, Analyst

Yes, got it. Okay.

Geoff Smith, CFO

I'd like to say we'd do a larger one here or there, but I think you can count on more regular small deals in the next couple of years.

Peter Heckmann, Analyst

That makes sense. Okay, last question regarding Manitoba. I understand you're removing $2.5 million from the guidance, but is this a formal decision or is it more of a conservative approach based on your current discussions with the customer?

Geoff Smith, CFO

There is definitely a conservative outlook based on our conversations with the customer. This situation has been delayed multiple times, and it seems there is now a sequencing challenge for them due to other significant enterprise projects, including an ERP initiative, that they believe must be completed before we can continue making progress. While some of the discussions are promising for the long term, we are grateful for our relationship with this customer. We wish we could move faster, but we are in client service and must align with their priorities. Our previous guidance last fall reflected what we thought was a reasonable level of conservatism, as we were seeing momentum in that direction. Unfortunately, the situation has changed, which is why we made the decisions we did.

Peter Heckmann, Analyst

Okay, that's helpful. I appreciate it.

Operator, Operator

Thank you. And our next question today comes from Alex Markgraff with KeyBanc Capital Markets. Please go ahead.

Alex Markgraff, Analyst

Thanks. Hi, Geoff, just curious about the RemainCo ARR growth number that you gave. I think it was 9.6%. Any sort of comparison you can provide for us sequentially or otherwise, just to understand how that has trended?

Geoff Smith, CFO

Yes. I think, compared to the previous quarter, it has decreased slightly, primarily due to the payments revenue. I am more optimistic about the payments revenue in the second half of this fiscal year. There are some scenarios where we're on a pricing model that includes a convenience fee, and we are currently facing higher interchange rates until our price increases take effect. We anticipate that margins will improve a bit, which should lead to better growth in the second half of the year for payments. This quarter, it was only a 4% increase year-over-year, but we expect it to align more closely with the overall company growth rate by the end of this fiscal year. We still believe that, in most quarters, the ARR growth will lead our typical organic growth. This quarter is somewhat of an outlier due to our strong licensing performance, but typically, ARR growth would be at the forefront. You can particularly see this as the momentum in our SaaS offerings continues to advance, which will further drive our overall performance.

Alex Markgraff, Analyst

Thanks. Could you discuss the readiness for AI among your customer segment? Thank you.

Paul Christians, Chief Revenue Officer

Yes, I can address that, Greg. There has been a very high level of interest. I believe one reason for this strong interest is our commitment to addressing specific pain points in a focused manner. Customers find it tangible because they have faced challenges for an extended period and are struggling to respond effectively. By organizing our company's domain expertise and deliverables this way, we can bring solutions to market faster and resolve these issues. The interest remains high, and the signs of adoption are consistently strong. It is clear that there is a necessity, and customers often feel overwhelmed by significant enterprise challenges related to implementation. We have developed internal platforms to assist, but the application is primarily focused on applied AI technology, which makes it more relatable and easier for customers to proceed, leading to positive feedback.

Alex Markgraff, Analyst

Great, thank you. Appreciate the comments.

Operator, Operator

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

Greg Daily, Chairman and CEO

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

Operator, Operator

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