8-K: i3 Verticals Reports Modest Revenue Growth but Strong Profitability Gains in Q2 2024

i3 Verticals saw a slight increase in revenue but a significant improvement in net income and adjusted EBITDA for the second quarter of fiscal year 2024.

Summary

• i3 Verticals reported a 0.7% increase in revenue for the second quarter of 2024, reaching $94.5 million, and a 3.7% increase to $186.5 million for the first six months of the year.
• Net income for the quarter was $3.3 million, a significant improvement from a net loss of $0.2 million in the same quarter of the previous year.
• For the first six months, net income was $4.9 million, compared to a net loss of $23 thousand in the prior year.
• Adjusted EBITDA for the quarter increased by 4.4% to $25.8 million, and for the six months, it rose by 5.5% to $51.0 million.
• Adjusted EBITDA as a percentage of revenue was 27.3% for both the quarter and the six-month period, up from 26.3% and 26.9% respectively in the prior year.
• Diluted net income per share was $0.08 for the quarter and $0.13 for the six months, compared to diluted net losses per share in the prior year.
• Pro forma adjusted diluted earnings per share were $0.34 for the quarter and $0.70 for the six months, compared to $0.38 and $0.75 respectively in the prior year.
• Annualized Recurring Revenue (ARR) grew by 5.5% to $322.5 million.
• Software and related services revenue accounted for 48.3% of total revenue for the quarter.
• The company's consolidated interest coverage ratio was 4.1x and total leverage ratio was 3.5x as of March 31, 2024.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to improved profitability and recurring revenue growth, but tempered by the slightly reduced outlook and the uncertainty surrounding the potential sale of the Merchant Services Business.

Positives

• The company achieved a significant turnaround in profitability, moving from a net loss to a net income in both the second quarter and the first six months of the year.
• Adjusted EBITDA margins expanded by 100 basis points year-over-year, demonstrating improved operational efficiency.
• Recurring revenue sources, including SaaS, software transaction-based, and payments, showed strong growth.
• The company's interest coverage and leverage ratios indicate a healthy financial position.
• The company is making progress on its recurring revenue sources.

Negatives

• The company's pro forma adjusted diluted earnings per share decreased compared to the prior year for both the quarter and the six-month period.
• Certain non-recurring revenue sources, such as license and professional services, were temporarily lower.

Risks

• The company is exploring the potential sale of its Merchant Services Business, and there is no guarantee that a transaction will occur or what the terms might be.
• The revised 2024 outlook for revenue and adjusted EBITDA is slightly lower than the previous outlook.
• The company's forward-looking statements are subject to various risks and uncertainties, including economic and geopolitical conditions, competition, and regulatory developments.
• The company's inability to provide a reconciliation of adjusted EBITDA and pro forma adjusted diluted earnings per share guidance to the closest corresponding GAAP measure on a forward-looking basis due to the inherent difficulty in forecasting.

Future Outlook

The company has revised its fiscal year 2024 outlook, with revenue expected to be between $380 million and $394 million and adjusted EBITDA between $107 million and $113 million. This guidance excludes the impact of any potential sale of the Merchant Services Business.

Management Comments

• Greg Daily, Chairman and CEO, stated that the company continued to make progress on recurring revenue sources in the second quarter of fiscal year 2024.
• He noted that SaaS and software transaction-based revenue were both up 10%, while payments was up 6%.
• He also mentioned that despite lower non-recurring revenue, adjusted EBITDA margins expanded by 100 bps year-over-year.
• He expressed excitement about the company's pipeline of opportunities and market position in core vertical markets.

Industry Context

The company's focus on recurring revenue streams aligns with the broader trend in the software and payments industry towards subscription-based models and predictable revenue. The potential sale of the Merchant Services Business could indicate a strategic shift towards higher-margin software and services.

Comparison to Industry Standards

• i3 Verticals' adjusted EBITDA margin of 27.3% is relatively strong compared to some of its peers in the software and payments industry, although specific comparisons would require a deeper analysis of companies with similar business models.
• Companies like Global Payments Inc. and Fiserv Inc. also focus on payment processing and software solutions, but their scale and diversification may differ significantly from i3 Verticals.
• The 5.5% growth in ARR is a positive indicator, but it is important to compare this to the growth rates of other SaaS and payments companies to assess its relative performance.
• The company's leverage ratio of 3.5x is within a reasonable range for a company of its size, but it is important to monitor this metric in the context of its debt obligations and cash flow.

Stakeholder Impact

• Shareholders may be impacted by the potential sale of the Merchant Services Business and the revised 2024 outlook.
• Employees may be affected by any changes resulting from the potential sale of the Merchant Services Business.
• Customers may experience changes in service offerings depending on the outcome of the potential sale of the Merchant Services Business.
• Suppliers and creditors may be impacted by any changes in the company's financial position or strategic direction.

Next Steps

• The company will host a conference call on May 10, 2024, to discuss the financial results and operations.
• The company will continue to explore the potential sale of its Merchant Services Business.
• The company will focus on executing its revised 2024 outlook.

Key Dates

Keywords

financial results, EBITDA, recurring revenue, SaaS, software, payments, net income, ARR, merchant services, earnings per share