i3 Verticals, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended June 30, 2023; comparative periods ended June 30, 2022. The company provides integrated software and payment solutions, primarily in Public Sector, Education, and Healthcare markets. Amounts below are in millions unless noted.
Financial performance
| Metric | Three months 2023 | Three months 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $93.9 | $80.6 | $273.8 | $232.6 |
| Operating income (loss) | $2.6 | $(2.7) | $13.9 | $(9.7) |
| Net loss | $(6.1) | $(4.7) | $(6.1) | $(18.8) |
| Net loss attributable to i3 Verticals, Inc. | $(5.2) | $(3.7) | $(5.4) | $(13.6) |
| Net loss per Class A share | $(0.22) | $(0.17) | $(0.23) | $(0.62) |
| Interest expense, net | $6.7 | $3.8 | $18.4 | $10.3 |
- Quarterly revenue grew 16.6%; nine-month revenue grew 17.7%. Management attributed growth to acquisitions, existing software and related-services growth—particularly in Public Sector—and higher payment volume.
- Quarterly operating margin was approximately 2.8%, versus a loss from operations in the prior-year quarter. Nine-month operating margin was approximately 5.1%, versus an operating loss in the prior-year period.
- Quarterly processing margin, the company’s operating measure of revenue less other costs of services plus residuals expense, was $84.9 million, compared with $71.5 million. ARR was $311.4 million, up 16.8%; payment volume was $6.3 billion, up 5.8%.
- For the nine months, operating cash flow was $29.6 million, down from $35.8 million. Investing used $115.4 million, principally for $102.0 million of acquisitions; financing provided $82.2 million. Cash, cash equivalents, and restricted cash totaled $20.2 million at period-end, including $5.0 million of cash and cash equivalents.
Balance sheet, debt, and liquidity
- At June 30, 2023, total assets were $875.8 million, total liabilities $562.9 million, and total equity $312.9 million. Current assets were $96.7 million and current liabilities $97.0 million.
- Long-term debt, net of issuance costs, was $389.6 million. Principal outstanding comprised $277.4 million under the revolving facility and $117.0 million of 1.0% Exchangeable Notes due February 2025.
- A new $450 million senior secured revolving credit facility replaced the prior facility in May 2023. Available capacity was $172.6 million, subject to covenants. The company reported compliance, with a 4.31x interest coverage ratio and 4.00x total leverage ratio against required minimum coverage of 3.0x and maximum leverage of 5.0x.
- Interest on the revolver is variable-rate; management reported that a 1 percentage-point rate change would affect results by approximately $2.8 million. Nine-month cash interest paid was $14.5 million, versus $5.4 million.
Material changes and notable items
- Revenue growth outpaced increases in other costs of services and SG&A, supporting the return to operating income. SG&A rose 16.0% in the quarter and 14.5% for nine months, primarily due to employment costs, acquisitions, headcount, and stock compensation.
- Interest expense increased substantially, reflecting higher average debt and interest rates. Contingent-consideration remeasurement charges were $6.2 million for the quarter and $9.9 million for nine months, primarily because some acquired businesses performed above expectations; the nine-month charge was below the prior-year $24.7 million.
- Acquisitions included Celtic, acquired for $85.0 million in cash, and two other businesses with total consideration of $19.8 million. The 2023 acquisitions contributed $13.4 million of revenue and $3.7 million of net income during the nine-month period, according to the notes.
- The company adopted ASU 2020-06, changing presentation of its Exchangeable Notes as a single liability instrument. The adoption did not affect net income.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management said operating cash flow, cash on hand, and available revolver capacity were expected to fund operations, planned capital expenditures, and debt service for at least the next 12 months.
- Management cited uncertainty from inflation, elevated interest rates, monetary policy, geopolitics, and possible recession. Disclosed risks also include debt and covenant compliance, liquidity and refinancing, acquisition integration, customer retention, cybersecurity and service disruption, chargebacks, competition, and regulatory or litigation exposure.
- A Louisiana lawsuit alleges cybersecurity and data-remediation issues relating to a third-party remote-access product used by the acquired S&S business. Plaintiffs seek damages including reported remediation costs; the company said it cannot predict the outcome and cannot assure the matter will not affect results or cash flows when resolved.
- A conditional buyout of a third-party sales organization could be up to $29 million, plus up to $9 million of performance-based additional consideration. The amount was not estimable at filing. Existing contingent consideration liabilities were $17.9 million.
- The Tax Receivable Agreement liability was $40.9 million; payments tied to exchanges through June 30 were estimated at $0 to $3.3 million annually over the next 24 years. Ordinary-course litigation was not expected by management to have a material impact; the filing reports no material changes to previously disclosed risk factors.
Investor verification points
- Reconcile revenue growth and recurring-revenue measures with acquisition contributions, organic performance, and the company’s non-standardized ARR definition.
- Assess interest-rate exposure, revolver availability, covenant headroom, and the 2025 Exchangeable Notes maturity alongside acquisition and contingent-consideration cash needs.
- Review the Louisiana litigation’s procedural developments and potential exposure, as well as the unestimated sales-organization buyout and Tax Receivable Agreement obligations.
- Track whether operating cash generation can support acquisition spending, capitalized software investment, and debt service; operating cash flow declined despite a narrower net loss.