I3 Verticals, Inc. quarterly report, Q3 FY2022

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I3 Verticals, Inc. — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended June 30, 2022. The company provides integrated software and payment solutions, primarily in Public Sector and Healthcare markets. Financial amounts below are in U.S. dollars; “million” values are rounded.

Financial performance and key metrics

  • Third-quarter revenue: $80.6 million, up 27.6% from $63.1 million. Management attributed about $11.4 million of the increase to acquisitions, with additional growth from existing customers and software services.
  • Revenue by segment: Proprietary Software and Payments revenue rose 41.8% to $47.8 million; Merchant Services revenue rose 9.2% to $32.7 million.
  • Nine-month revenue: $232.6 million, up 48.2%. Acquisitions contributed about $52.1 million; growth in existing businesses also contributed.
  • Profitability: Third-quarter operating loss was $2.7 million, versus $0.8 million a year earlier; net loss attributable to i3 Verticals was $3.7 million, versus $3.3 million. Diluted loss per Class A share was $0.17, versus $0.15. For nine months, operating loss was $9.7 million and net loss attributable to i3 Verticals was $13.6 million, compared with $0.6 million and $4.0 million, respectively.
  • Processing margin: $71.5 million for the quarter, compared with $55.2 million; $207.4 million for nine months, compared with $136.3 million. As a share of revenue, this was approximately 88.7% and 89.2%, respectively, versus 87.4% and 86.9%. The filing defines processing margin as revenue less other costs of services plus residuals expense.
  • Costs and unusual expense: Third-quarter SG&A increased 28.1% to $47.8 million, including higher employment, acquisition-related headcount and stock compensation. Contingent-consideration fair-value expense was $8.3 million for the quarter and $24.7 million for nine months, primarily reflecting acquired businesses’ performance exceeding expectations.
  • Cash flow: Nine-month operating cash flow was $35.8 million, versus $34.0 million. Investing cash outflow was $109.4 million, including $100.7 million for acquisitions; financing cash inflow was $85.7 million. Capitalized software spending was $7.2 million.
  • Cash, debt and liquidity: At June 30, cash and cash equivalents were $9.0 million; the company also reported $14.7 million of restricted cash and $6.4 million of settlement assets. Revolver borrowings were $207.4 million, with $67.6 million of borrowing capacity available, subject to covenants. Exchangeable Notes had $117.0 million principal outstanding and mature in 2025; they bear 1.0% interest. Balance-sheet long-term debt, net of issuance costs, was $307.9 million.
  • Margins and interest: Operating loss was approximately 3.4% of quarterly revenue, versus 1.3% a year earlier. Net interest expense rose 39.3% to $3.8 million for the quarter and 45.2% to $10.3 million for nine months, reflecting higher average debt and interest rates.

Changes versus the prior comparable periods

  • Growth was strongest in Proprietary Software and Payments, supported by acquired businesses and software-related revenue; Merchant Services also grew alongside payment volume.
  • Despite higher revenue and processing margin, operating and net losses widened. SG&A, contingent-consideration remeasurement and interest expense rose materially.
  • For the quarter, annualized recurring revenue was $266.7 million, up 30.2%; payment volume was $5.9 billion, up 15.2%. Integrated transactions represented 62% of quarterly payment volume, versus 60%. Nine-month payment volume was $16.6 billion, up 25.5%, and integrated payments were 62%, versus 58%.
  • Average net payment-volume attrition remained below 2% per month during the nine months, according to management.
  • The prior-year comparison reflects the company’s early adoption of ASU 2021-08, which changed acquisition accounting for contract assets and liabilities and increased reported prior-period revenue. The filing also corrected prior-year cash-flow presentation for settlement assets classified as restricted cash.

Outlook, risks and contingencies

  • Management said operating cash flow, cash and available revolver capacity should be sufficient for operations, planned capital expenditures and debt service for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
  • The company reported compliance with its credit-facility covenants at June 30, 2022: interest coverage of 14.73x, total leverage of 4.00x and senior secured leverage of 2.51x. The facility matures in May 2024 and bears floating-rate interest; management estimated a 1-percentage-point rate change would affect annual interest expense by about $2.1 million.
  • Management cited uncertainty around COVID-19 and payment volumes, inflation and interest rates, competition, customer attrition, supply-chain disruption, cybersecurity and service interruptions, regulation, acquisition integration, and access to liquidity. It also noted seasonality, including education-sector patterns.
  • A Louisiana lawsuit alleges cybersecurity deficiencies involving third-party remote-access software used by the S&S business. Plaintiffs seek remediation costs, return of purchase prices and other damages. The company said it cannot predict the outcome; it did not believe the matter would materially affect business or financial condition, but could not rule out an effect on results in the period resolved.
  • Contingent consideration liabilities totaled $38.4 million, including $27.3 million classified as current. The company also disclosed a conditional third-party sales-organization buyout capped at $29 million, plus up to $9 million of additional performance-based consideration; the amount was not estimable.
  • The Tax Receivable Agreement liability was $39.9 million. Payments related to exchanges through June 30 were estimated at $0 to $3.2 million per year over 28 years; future exchanges could add to the obligation.

Important facts for investors to verify

  • How much of revenue and recurring-revenue growth is organic versus acquisition-driven, and whether acquired businesses sustain expected performance.
  • Whether operating expenses, stock compensation and contingent-consideration charges moderate as revenue scales.
  • Current borrowing availability, floating-rate exposure, covenant headroom and refinancing plans ahead of the May 2024 revolver maturity.
  • Developments and potential exposure in the Louisiana cybersecurity litigation, along with the status and cash timing of earnouts and the potential buyout.
  • The assumptions underlying company-defined ARR, payment-volume growth and management’s liquidity outlook; ARR is not a standardized measure or a forecast.