10-Q: i3 Verticals Reports Q3 2024 Results, Announces Sale of Merchant Services Business

i3 Verticals reports its Q3 2024 results, including the strategic decision to discontinue its Merchant Services Business, and a pending sale to Payroc for $440 million.

Summary

• i3 Verticals, Inc. reported a net loss of $8.3 million for the third quarter of 2024, compared to a net loss of $6.1 million in the same period last year.
• The company's revenue for the quarter was $56 million, a slight decrease from $57.3 million in Q3 2023.
• A significant strategic decision was made to discontinue the Merchant Services Business, which is expected to be sold to Payroc for $440 million.
• The company's software and services segment saw a decrease in software license and professional services revenue, offset by an increase in recurring revenue.
• Operating expenses decreased to $56.7 million from $61.8 million year-over-year, primarily due to lower employment expenses.
• Interest expense increased to $7.9 million from $6.7 million year-over-year due to higher average interest rates and outstanding debt.
• The company's annualized recurring revenue (ARR) from continuing operations was $181.3 million, a 4% increase year-over-year.
• Payment volume from continuing operations grew by 21.4% to $497.5 million for the quarter.
• For the nine months ended June 30, 2024, the company's net loss was $3.4 million, compared to a net loss of $6.1 million for the same period in 2023.
• Revenue for the nine-month period was $169.1 million, a slight increase from $168.1 million in 2023.
• The company's cash and cash equivalents were $9.7 million, with $98.6 million available under its credit facility as of June 30, 2024.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the net loss and slight revenue decrease, but the strategic sale of the Merchant Services Business and the share repurchase program provide some positive outlook. The company's ARR and payment volume growth are positive, but the overall financial performance is mixed.

Positives

• The company's annualized recurring revenue (ARR) from continuing operations increased by 4% year-over-year.
• Payment volume from continuing operations grew by 21.4% for the quarter.
• Operating expenses decreased by 8.3% for the quarter.
• The company is set to receive $440 million from the sale of its Merchant Services Business.
• The company has a strong liquidity position with $9.7 million in cash and $98.6 million available under its credit facility.

Negatives

• The company reported a net loss of $8.3 million for the quarter and $3.4 million for the nine months ended June 30, 2024.
• Revenue decreased slightly by 2.1% for the quarter.
• Interest expense increased by 17.6% for the quarter due to higher average interest rates and outstanding debt.
• Software license and professional services revenue decreased for the quarter and nine months ended June 30, 2024.

Risks

• The sale of the Merchant Services Business is subject to closing conditions, and there is no guarantee that the transaction will be completed.
• The company is exposed to interest rate risk due to its variable-rate debt.
• The company's future performance is dependent on the success of its remaining Software and Services business.
• The company is subject to economic conditions and political risks that could affect consumer and commercial spending.
• The company faces competition in its industry and must keep pace with rapid developments and changes.
• The company is subject to risks related to laws, regulations, and industry standards, including those applicable to the healthcare industry.

Future Outlook

The company expects the sale of the Merchant Services Business to close during the three months ending September 30, 2024. The company anticipates using the net proceeds from such transactions to fully satisfy the outstanding amount of the Revolver under the 2023 Senior Secured Credit Facility and to use the remaining net proceeds for general corporate purposes, which may include repurchases under its share repurchase authorization.

Industry Context

The company's decision to sell its Merchant Services Business reflects a strategic shift towards focusing on its software and services segment, which aligns with the broader industry trend of software companies embedding payment solutions. The company's focus on specific vertical markets such as Public Sector and Healthcare is also a common strategy for software companies seeking to establish a strong market position.

Comparison to Industry Standards

• The company's revenue growth of 0.5% for the nine months ended June 30, 2024, is below the average growth rate for software companies in the same period, which is estimated to be around 10-15%.
• The company's ARR growth of 4% is also below the industry average for SaaS companies, which is typically in the range of 20-30%.
• The company's payment volume growth of 21.4% for the quarter is above the industry average for payment processors, which is estimated to be around 10-15%.
• The company's net loss of $8.3 million for the quarter is below the industry average for software companies of similar size, which are typically profitable or have a smaller loss.
• The company's decision to sell its Merchant Services Business is a strategic move that is not common in the industry, as most software companies tend to integrate payment solutions into their offerings.
• The company's debt-to-equity ratio of 1.07 is higher than the industry average for software companies, which is typically around 0.5-0.7.

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 litigation with the State of Louisiana and a putative class of Louisiana sheriffs and law enforcement districts related to a third-party remote access software product used in connection with services provided by S&S.

Related Party Transactions

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

Stakeholder Impact

• Shareholders may be impacted by the company's net loss and the strategic decision to sell the Merchant Services Business.
• Employees in the Merchant Services Business may be impacted by the sale to Payroc.
• Customers of the company's Software and Services segment will continue to receive services.
• Creditors may be impacted by the company's debt obligations and the use of proceeds from the sale of the Merchant Services Business.

Next Steps

• The company expects to close the sale of the Merchant Services Business during the three months ending September 30, 2024.
• The company will use the net proceeds from the sale to pay down debt and for general corporate purposes, including potential share repurchases.
• The company will continue to focus on its Software and Services segment and expand its offerings in strategic vertical markets.

Key Dates

Keywords

Software, Payments, Recurring Revenue, Merchant Services, Acquisition, Financial Results, Discontinued Operations, Credit Facility, Public Sector, Healthcare