8-K: i3 Verticals Reports Mixed Q3 Results, Announces $50 Million Share Repurchase Program and Public Sector Acquisition

i3 Verticals reported a 2% decrease in third-quarter revenue and a net loss, while also announcing a $50 million share repurchase program and the acquisition of a permitting and licensing business.

Summary

• i3 Verticals announced its financial results for the third quarter of 2024, which ended June 30, 2024.
• The company's revenue from continuing operations was $56.0 million, a 2% decrease compared to the same quarter last year.
• For the nine months ended June 30, 2024, revenue from continuing operations was $169.1 million, a 1% increase year-over-year.
• The net loss from continuing operations for the third quarter was $13.8 million, compared to a $10.9 million loss in the prior year's third quarter.
• The net loss from continuing operations attributable to i3 Verticals, Inc. was $11.4 million for the third quarter, compared to a loss of $8.5 million in the prior year.
• Adjusted EBITDA from continuing operations was $12.9 million, an 11% decrease compared to the prior year's third quarter.
• Adjusted EBITDA from continuing operations for the nine months ended June 30, 2024, was $42.1 million, a 4% decrease year-over-year.
• The company's Annualized Recurring Revenue (ARR) from continuing operations was $181.3 million, a 4% increase year-over-year.
• i3 Verticals also announced a new share repurchase program of up to $50 million.
• The company acquired a permitting and licensing business on August 1, 2024, for $18 million in cash, 311,634 shares of Class A common stock, and contingent consideration not to exceed $22 million.
• The company expects to close the sale of its Merchant Services Business during the three months ending September 30, 2024, for $440 million.
• The company has provided an outlook for continuing operations, projecting revenue between $228 million and $234 million for fiscal year 2024 and between $243 million and $263 million for fiscal year 2025.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company is making strategic moves like the sale of the Merchant Services Business and a share repurchase program, the current financial results show a decline in revenue and profitability. The future outlook is positive, but the current performance is concerning.

Positives

• Annualized Recurring Revenue (ARR) from continuing operations increased by 4% year-over-year, indicating growth in recurring revenue streams.
• The company authorized a $50 million share repurchase program, which could boost shareholder value.
• The acquisition of a permitting and licensing business is expected to drive future revenue growth.
• The sale of the Merchant Services Business for $440 million will provide a significant cash infusion and allow the company to pay off its revolving credit facility.
• The company expects to grow revenue in the high-single digits in fiscal year 2025.

Negatives

• Third quarter revenue from continuing operations decreased by 2% year-over-year.
• The company reported a net loss from continuing operations of $13.8 million for the third quarter, which is worse than the $10.9 million loss in the prior year's third quarter.
• Adjusted EBITDA from continuing operations decreased by 11% year-over-year.
• Pro forma adjusted diluted earnings per share from continuing operations decreased from $0.15 to $0.07 for the third quarter.
• Margins are expected to initially decrease after the Merchant Services transaction.

Risks

• The sale of the Merchant Services Business is subject to closing conditions and may not be completed in a timely manner or at all.
• The company faces risks related to the transition services agreement, processing services agreement, and other ancillary agreements related to the sale of the Merchant Services Business.
• The company's future performance is subject to economic and geopolitical conditions, including inflation and elevated interest rates.
• The company faces competition in its industry and must compete effectively.
• The company's ability to integrate acquired businesses successfully is a risk factor.

Future Outlook

The company expects revenue from continuing operations to be between $228 million and $234 million for fiscal year 2024 and between $243 million and $263 million for fiscal year 2025. They also expect to grow revenue in the high-single digits in fiscal 2025.

Management Comments

• Greg Daily, Chairman and CEO of i3 Verticals, stated that the company will be a pure vertical market software business focused entirely on the Public Sector, Education and Healthcare markets after the sale of the Merchant Services Business.
• He expressed confidence in the remaining business's future and noted a deep pipeline.
• He mentioned that margins will initially take a step back after the Merchant Services transaction but are expected to improve as revenue scales.
• He also stated that the company plans to pay off its revolving credit facility and is looking for additional vertical market software M&A opportunities.

Industry Context

The company's strategic shift to focus on vertical market software, particularly in the Public Sector, Education, and Healthcare markets, aligns with the trend of specialization and verticalization in the software industry. The sale of the Merchant Services Business indicates a move away from commoditized payment processing towards higher-margin software solutions. This is a common strategy for companies looking to increase profitability and focus on core competencies.

Comparison to Industry Standards

• Comparing i3 Verticals to similar vertical market software companies, such as Tyler Technologies (TYL) in the public sector and Veeva Systems (VEEV) in healthcare, reveals that i3 Verticals' revenue growth is currently lower. Tyler Technologies has shown consistent revenue growth in the high single digits, while Veeva has demonstrated growth in the mid-teens.
• i3 Verticals' adjusted EBITDA margin of 23% in the third quarter is lower than the industry average for established software companies, which often see margins above 30%. Companies like Paylocity (PCTY) and Workday (WDAY) typically have higher EBITDA margins.
• The company's ARR growth of 4% is also lower than some of its peers, which are seeing ARR growth in the double digits. For example, companies like nCino (NCNO) and Blackbaud (BLKB) have shown stronger ARR growth in their respective sectors.
• The planned sale of the Merchant Services Business is a strategic move to focus on higher-margin software, similar to how other companies have divested non-core assets to improve profitability and focus on core competencies. For example, FIS (FIS) divested its majority stake in Worldpay to focus on its core banking and capital markets businesses.

Stakeholder Impact

• Shareholders may see a positive impact from the share repurchase program, but the current financial results may cause concern.
• Employees may experience changes due to the sale of the Merchant Services Business and the focus on vertical market software.
• Customers will likely see a continued focus on software solutions in the Public Sector, Education, and Healthcare markets.
• Suppliers may be affected by the company's strategic shift and focus on specific markets.
• Creditors will see a reduction in debt with the payoff of the revolving credit facility.

Next Steps

• The company will close the sale of its Merchant Services Business.
• The company will execute its share repurchase program.
• The company will integrate the newly acquired permitting and licensing business.
• The company will focus on growing its vertical market software business in the Public Sector, Education, and Healthcare markets.
• The company will host a conference call on August 9, 2024, to discuss financial results and operations.

Key Dates

Keywords

i3 Verticals, Financial Results, Share Repurchase, Acquisition, Merchant Services, Software, Recurring Revenue, EBITDA, Public Sector, Payments