8-K: i3 Verticals Explores Sale of Merchant Services Business Amidst Solid Q1 2024 Results

i3 Verticals reported a 6.9% increase in revenue and a significant rise in net income for Q1 2024, while also announcing the exploration of a potential sale of its merchant services business.

Summary

• i3 Verticals announced its financial results for the first quarter of fiscal year 2024, ending December 31, 2023.
• The company's revenue reached $92.0 million, a 6.9% increase compared to the same quarter last year.
• Net income was $1.5 million, a substantial improvement from $0.2 million in the prior year's first quarter.
• Net income attributable to i3 Verticals, Inc. was $1.1 million, compared to a net loss of $0.2 million in the same period last year.
• Adjusted EBITDA was $25.2 million, a 6.6% increase year-over-year, with an Adjusted EBITDA margin of 27.4%, consistent with the prior year.
• Diluted net income per share was $0.04, compared to a diluted net loss per share of $0.01 in the prior year's first quarter.
• Pro forma adjusted diluted earnings per share was $0.36, slightly down from $0.37 in the prior year.
• Annualized Recurring Revenue (ARR) grew by 9.2% to $316.9 million.
• Software and related services revenue accounted for 47.4% of total revenue.
• The company's consolidated interest coverage ratio was 4.40x, and the total leverage ratio was 3.60x.
• i3 Verticals is exploring the potential sale of its merchant services business and has engaged Raymond James & Associates, Inc. as its financial advisor.
• The company has revised its fiscal year 2024 revenue outlook to $385 million $400 million and adjusted EBITDA to $109 million $115 million.
• Cash interest expense is now projected to be $26 million $29 million, and pro forma adjusted diluted earnings per share is expected to be $1.52 $1.64.

Sentiment

Score: 7

Explanation: The sentiment is positive due to strong revenue growth, a significant increase in net income, and strategic moves to focus on core software businesses. However, the revised outlook and potential risks associated with the sale of the merchant services business temper the overall sentiment.

Positives

• The company experienced a solid increase in revenue, growing by 6.9% year-over-year.
• Net income improved significantly, moving from $0.2 million to $1.5 million.
• Adjusted EBITDA also saw a healthy increase of 6.6%.
• Annualized Recurring Revenue (ARR) grew by 9.2%, indicating a strong recurring revenue base.
• The company's interest coverage ratio is healthy at 4.40x.
• The company is strategically exploring the sale of its merchant services business to focus on its vertical software businesses.

Negatives

• Pro forma adjusted diluted earnings per share decreased slightly from $0.37 to $0.36.
• The company has revised its fiscal year 2024 revenue outlook to a lower range of $385 million $400 million.
• The company has revised its fiscal year 2024 adjusted EBITDA outlook to a lower range of $109 million $115 million.
• Cash interest expense is now projected to be higher at $26 million $29 million.
• Pro forma adjusted diluted earnings per share is expected to be lower at $1.52 $1.64.

Risks

• There is no guarantee that the exploration of the sale of the merchant services business will result in a transaction.
• The timing and terms of any potential transaction are uncertain.
• The company's revised outlook for fiscal year 2024 reflects a slight decrease in revenue and adjusted EBITDA expectations.
• Increased cash interest expense could impact profitability.
• The company's forward-looking statements are subject to various risks and uncertainties, including economic and geopolitical conditions, competition, and regulatory developments.

Future Outlook

The company has revised its fiscal year 2024 outlook, projecting revenue between $385 million and $400 million, adjusted EBITDA between $109 million and $115 million, cash interest expense between $26 million and $29 million, and pro forma adjusted diluted earnings per share between $1.52 and $1.64. This guidance excludes the impact of any potential sale of the merchant services business.

Management Comments

• Greg Daily, Chairman and CEO, stated that the decision to explore a sale of the Merchant Services Business reflects the next evolution in i3's long-term strategy to focus on vertical software businesses.
• Management expects that a substantial portion of the proceeds from the sale of the Merchant Services Business will be used to pay down outstanding debt.
• Management believes the Merchant Services Business has significant growth potential and will only sell if they reach an agreement on acceptable terms.

Industry Context

The move to explore the sale of the merchant services business aligns with a broader industry trend of companies focusing on core software offerings and recurring revenue streams. This strategic shift could position i3 Verticals to better compete in the vertical software market.

Comparison to Industry Standards

• i3 Verticals' revenue growth of 6.9% is moderate compared to some high-growth SaaS companies, but is solid for a company with a mix of software and payment processing.
• The adjusted EBITDA margin of 27.4% is competitive within the software and payments industry.
• The company's focus on ARR growth of 9.2% is a positive indicator of its recurring revenue strength, which is a key metric for SaaS businesses.
• Companies like Global Payments (GPN) and Fiserv (FI) are major players in the payment processing space, and i3 Verticals' potential divestiture of its merchant services business could be seen as a move to focus on higher-margin software offerings, similar to the strategies of companies like Constellation Software (CSU) which focus on vertical market software.

Stakeholder Impact

• Shareholders may see a positive impact from the potential sale of the merchant services business and the company's focus on higher-margin software offerings.
• Employees in the merchant services division may be affected by the potential sale.
• Customers may experience changes in service if the merchant services business is sold.
• Creditors may benefit from the company's plan to use proceeds from the sale to pay down debt.

Next Steps

• The company will host a conference call on February 9, 2024, to discuss the financial results and the exploration of the sale of the merchant services business.
• The company will continue to explore the potential sale of its merchant services business.
• The company will focus on growing its vertical software businesses through organic growth and targeted M&A activity.

Key Dates

Keywords

i3 Verticals, Merchant Services, Software, SaaS, Payments, Recurring Revenue, EBITDA, Financial Results, Acquisition, Divestiture