Business context and reporting period
i3 Verticals, Inc. provides integrated vertical-market software and payment solutions, primarily in Public Sector (including Education) and Healthcare. This Form 10-Q covers the first quarter of fiscal 2024, the three months ended December 31, 2023, and compares results with the quarter ended December 31, 2022. Financial amounts below are in U.S. dollars; millions are rounded.
The company reports Software and Services and Merchant Services segments. On February 8, 2024, after quarter-end, the board announced it was exploring a potential sale of certain Merchant Services assets; no transaction is assured.
Key financial results
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $92.0 million | $86.0 million | +6.9% |
| Income from operations | $8.5 million | $5.8 million | +46.1% |
| Net income | $1.5 million | $0.2 million | +$1.4 million |
| Net income (loss) attributable to i3 Verticals, Inc. | $1.1 million | $(0.2) million | +$1.3 million |
| Operating cash flow | $13.1 million | $18.2 million | Down $5.1 million |
| Cash used in investing activities | $7.2 million | $94.5 million | Down $87.4 million |
| Cash from (used in) financing activities | $(7.2) million | $76.9 million | Down $84.1 million |
Operating margin was approximately 9.3%, up from 6.8%; consolidated net margin was approximately 1.7%, versus 0.2%. Processing margin, the company’s segment performance measure, increased to $82.6 million from $77.3 million. The filing does not provide a conventional gross margin figure.
Revenue and operating indicators
- Software and Services revenue was $56.6 million, up 6.3%; Merchant Services revenue was $35.4 million, up 7.9%.
- Software and related services revenue was $43.6 million, versus $41.1 million; it represented 47.4% of revenue, compared with 47.8%.
- Annualized recurring revenue was $316.9 million, up 9.2% from $290.2 million. Payment volume was $6.2 billion, up 5.4% from $5.9 billion.
- Management attributed revenue growth to software and related services, increased payment volume, and $1.5 million of incremental revenue from an acquisition.
Liquidity, debt and cash flows
- At December 31, 2023, cash and cash equivalents were $4.2 million; available revolver capacity was $184.5 million, subject to covenants. Cash, cash equivalents and restricted cash, including settlement assets, totaled $11.1 million.
- Debt, net of issuance costs, was $378.5 million: $265.5 million drawn under the senior secured revolver and $117.0 million principal on 1.0% exchangeable notes due 2025. The company reclassified $90.8 million of notes as current because it had agreed to repurchase that portion.
- On January 18, 2024, the company completed the repurchase for approximately $87.4 million, including accrued interest, and reported $26.2 million principal remaining. It recorded a $2.4 million gain on retirement of debt. These are subsequent events, not quarter-end transactions.
- At quarter-end, covenant ratios were 4.40x interest coverage and 3.60x total leverage, within required thresholds of at least 3.0x and no more than 5.0x. The revolver is floating-rate; management estimated a 1 percentage-point rate change would affect results by $2.7 million.
- Operating cash flow declined despite higher net income, principally due to working-capital timing and lower non-cash contingent-consideration adjustments. Investing outflows were much lower mainly because the prior-year quarter included a large acquisition. Free cash flow is not presented as a defined measure in the filing.
Material changes, outlook and risks
- Operating income improved as revenue growth and a $0.2 million benefit from contingent-consideration remeasurement contrasted with a $1.4 million charge in the prior-year quarter. SG&A rose 5.0%, and depreciation and amortization rose 12.3%, primarily reflecting prior acquisitions. Net interest expense increased 22.2% to $6.7 million, reflecting higher average rates and debt.
- The company completed one software business acquisition for $1.3 million of consideration and purchased residuals for $3.4 million during the quarter. The acquisition’s preliminary allocation included approximately $1.0 million of goodwill.
- Management said cash flow from operations, cash and available borrowing capacity should fund operations, planned capital expenditures and debt service for at least the next 12 months. The filing gives no specific revenue, earnings or margin guidance.
- Management cited inflation, elevated interest rates, economic uncertainty, cybersecurity and third-party technology risks, customer retention, chargeback exposure, acquisition integration, and covenant and liquidity risks. A potential Merchant Services asset sale could be delayed, abandoned, fail to produce value, or disrupt operations and relationships.
- A Louisiana lawsuit alleges cybersecurity deficiencies related to a third-party remote-access product and seeks damages, including stated remediation costs. The case was remanded to state court; defendants’ rehearing petition was pending. The company cannot predict the outcome and cannot assure it will not affect results or cash flows when resolved.
- Other notable obligations include a $40.1 million Tax Receivable Agreement liability, expected to be paid over time, and $4.5 million of minimum processing commitments. Management said ordinary-course legal matters are not expected to have a material impact.
Most important facts for investors to verify
- Whether the proposed Merchant Services asset sale proceeds, and its potential terms, timing, costs and effect on remaining operations.
- Post-repurchase debt, cash use, interest expense and covenant headroom; the quarter-end debt and covenant figures predate the January 2024 note repurchase.
- Whether ARR, payment volume and processing-margin growth translate into sustained revenue and cash-flow growth, particularly given seasonal patterns.
- Developments and potential exposure in the Louisiana litigation, including whether the company can estimate any loss as the case progresses.
- Acquisition performance and integration, contingent consideration estimates, and the ongoing impact of amortization and equity-based compensation on earnings.