10-Q: i3 Verticals Reports Q1 2024 Results, Revenue Up 6.9% Year-Over-Year

i3 Verticals, Inc. announced its first quarter 2024 results, showing a 6.9% increase in revenue compared to the same period last year.

Summary

• i3 Verticals, Inc. reported a revenue of $92.0 million for the quarter ended December 31, 2023, a 6.9% increase from $86.0 million in the same quarter of 2022.
• The company's net income was $1.5 million, a significant improvement from $0.2 million in the prior year's quarter.
• Software and Services revenue grew by 6.3% to $56.6 million, while Merchant Services revenue increased by 7.9% to $35.4 million.
• Payment volume reached $6.2 billion, a 5.4% increase year-over-year.
• The company's annualized recurring revenue (ARR) was $316.9 million, a 9.2% increase from the previous year.
• Operating expenses totaled $83.5 million, a 4.1% increase compared to the same period last year.
• Interest expense, net, increased by 22.2% to $6.7 million due to higher average interest rates and outstanding debt.
• The company's effective tax rate was 10.6% for the quarter.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with strong revenue growth and improved profitability. However, the exploration of a potential sale of the Merchant Services business and the increase in interest expense introduce some uncertainty, preventing a higher score.

Positives

• The company experienced strong revenue growth across both its Software and Services and Merchant Services segments.
• Net income showed a substantial improvement compared to the same quarter last year.
• The company's recurring revenue base continues to expand, as evidenced by the growth in ARR.
• Payment volume increased, indicating a healthy level of activity within the customer base.

Negatives

• Interest expense increased due to higher average interest rates and outstanding debt.
• Operating expenses increased, although at a slower rate than revenue growth.
• Cash flow from operating activities decreased due to changes in operating assets and liabilities and non-cash contingent consideration.

Risks

• The company is exposed to interest rate risk due to its variable-rate debt.
• The company is exploring a potential sale of certain assets related to its Merchant Services business, which may not be successful and could have adverse impacts.
• Economic uncertainty, including inflation and geopolitical issues, could impact the company's financial results.
• The company's growth strategy includes acquisitions, which may not be successful or may not be integrated effectively.
• The company is subject to various legal proceedings, including the S&S litigation, which could have a material impact on the company's financial results.

Future Outlook

The company expects that its cash flow from operations, current cash and cash equivalents, and available borrowing capacity under the 2023 Senior Secured Credit Facility will be sufficient to fund its operations, planned capital expenditures, and debt obligations for at least the next twelve months and foreseeable future. The company is also exploring a potential sale of certain assets related to its Merchant Services business.

Management Comments

• The company's management believes that the current liquidity position is strong.
• Management expects to fund acquisitions through a combination of net cash from operating activities, borrowings under the 2023 Senior Secured Credit Facility, and through the issuance of equity and debt securities.

Industry Context

The company operates in the competitive software and payment processing industry, where consolidation and technological advancements are common. The company's focus on strategic vertical markets and recurring revenue streams aligns with industry trends. The exploration of a potential sale of the Merchant Services business could indicate a strategic shift towards a more software-focused business model.

Comparison to Industry Standards

• i3 Verticals' revenue growth of 6.9% is comparable to other mid-sized payment and software companies, but may lag behind high-growth SaaS companies.
• The company's focus on recurring revenue through SaaS and embedded payments is a common strategy in the industry, similar to companies like Paylocity and Tyler Technologies.
• The company's payment volume growth of 5.4% is in line with the overall growth of electronic payments, but may be lower than some pure-play payment processors like Global Payments or Fiserv.
• The company's interest expense increase reflects the broader trend of rising interest rates, impacting many companies with variable-rate debt.
• The company's exploration of a potential sale of its Merchant Services business is a strategic move that could be compared to other companies divesting non-core assets to focus on higher-growth areas.

Legal Proceedings

• The company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business.
• The company is involved in the S&S litigation, which seeks monetary damages for the cost of network remediation, return of purchase prices, potential additional expenses related to remediation and any obligation to notify parties of an alleged data breach.

Related Party Transactions

• The company has a Tax Receivable Agreement with i3 Verticals, LLC and the Continuing Equity Owners, which provides for the payment by the company to the Continuing Equity Owners of 85% of the amount of certain tax benefits.

Stakeholder Impact

• Shareholders may be impacted by the potential sale of the Merchant Services business and any related changes in the company's strategy.
• Employees may be impacted by the potential sale of the Merchant Services business and any related changes in the company's structure.
• Customers may be impacted by any changes in the company's products and services resulting from the potential sale of the Merchant Services business.
• Creditors may be impacted by the company's debt obligations and interest rate risk.

Next Steps

• The company will continue to execute its growth strategy, including potential acquisitions.
• The company will continue to explore a potential sale of certain assets related to its Merchant Services business.
• The company will continue to monitor and manage its debt obligations and interest rate risk.

Key Dates

Keywords

Software and Services, Merchant Services, Payment Processing, Recurring Revenue, SaaS, Financial Results, Acquisitions, Debt, ARR, Payment Volume