Participants

Clay Whitson; Chief Strategy Officer, Director; i3 Verticals, Inc.

Greg Daily; Chairman of the Board, Chief Executive Officer; I3 Verticals Inc

Geoffrey C. Smith; SVP of Finance; i3 Verticals, Inc.

Rick Stanford; President; I3 Verticals Inc

Paul Christians; Chief Revenue Officer; I3 Verticals Inc

John Davis; Analyst; Raymond James

Mark Palmer; Analyst; Benchmark Company

Shefali Tamaskar; Analyst; Morgan Stanley

Alex Markgraff; Analyst; KeyBanc Capital Markets Inc.

Peter Heckmann; Analyst; D.A. Davidson & Co.

Rufus Hone; Analyst; BMO Capital Markets

Presentation

Operator

Good day, everyone and welcome to the i3 Verticals fourth-quarter 2024 earnings conference call. Today's call is being recorded, and a replay will be available starting today through November 26. The number for the replay is 8773447529 and the code is 48 -- excuse me. The code is 4184020. The replay may also be accessed for 30 days at the company's website.
At this time for opening remarks, I would like to turn the call over to Clay Whitson, Chief Strategy Officer. Please go ahead, sir.

Clay Whitson

Good morning, and welcome to the fourth-quarter, 2024 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Rick Stanford, our President; Geoff Smith, our Chief Financial Officer and Paul Christians, our Chief Revenue Officer.
To the extent any non-GAAP financial measure is discussed in today's call. You will also find a reconciliation to the most directly comparable GAAP Financial measure by reviewing yesterday's earnings release. It is the company's intent to provide non-GAAP financial information to enhance understanding of its consolidated GAAP financial performance.
This non-GAAP financial information should be considered by each individual in addition to but not instead of the GAAP Financial statements.
This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements among others regarding the company's expected financial and operating performance for this purpose. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.
You are hereby cautioned that these forward-looking statements may be affected by the important factors among others set forth in the company's earnings release and in reports that are filed or furnished to the SEC, consequently, actual operations and results may differ materially from those discussed in the forward-looking statements.
Finally, the information shared on this call is valid as of today's date and the company undertakes no obligation to update it except as may be required under applicable law.
I will now turn the call over to the company's Chairman and CEO Greg Daily.

Greg Daily

Thanks, Clay. Good morning to everyone on the call each year that goes by. We look back and are amazed at all that has changed.
We've never been a company that stood still, outside of 50 acquisitions and as an example. However, I don't think we've ever had a year as transformational as fiscal year 2024, our team worked exceptionally hard this year to advance our transition to a pure play vertical market software business and set the table for our next stage of growth.
We exit the year as a streamline and scale vertical market software provider. As we look ahead at our opportunities in front of us for fiscal year '25 we're excited about our position.
We have great solutions that are mission critical to our customers in underserved markets. We're building great new products which we will discuss further.
We have infrastructure to do it efficiently. We have the best in class payment facilitation platform that helps us maximize revenue opportunities and we are delivered imposed to add more great businesses through M&A. We believe we have set the stage for a great fiscal year 2025 and beyond, our visibility, our sales funnel and products we have coming to market, give us confidence in our long term guidance of high single digit organic growth. We remain focused on growth and excellent investment choices.
I'll now turn the call over to Clay. I'm sorry to Geoff, and he will provide you more detail on our financial performance.
And when he's finished, Rick will add commentary on the business and finally, Paul will discuss revenue and then we'll open up the call for questions.

Geoffrey C. Smith

Thanks, Greg. The following pertains to the fourth-quarter of our fiscal year 2024, which the quarter ended September 30. Please refer to the slide presentation titled supplemental information on our website for reference with this discussion, due to the sale of our merchant services business. We have classified that portion of our company as discontinued operations. The actual results and outlook section which we will discuss pertain to continuing operations only which we also call Remain-co.
This is a transitional reporting period as we completed the sale during September, revenues for the fourth quarter of fiscal 2024 increased 4% to $60.9 million from $58.6 million for Q4 2023 reflecting organic growth of 2% and two months of revenue from our permitting and licensing acquisition in the public sector.
Anyways, recurring revenues increased 7.5% to $188.2 million as of Q4, 2024 compared to $175.1 million. As of Q4, 2023, 77% of our revenues in the quarter came from recurring sources. SaaS and payments revenue grew 8%. Transaction based revenues grew 11% while maintenance and recurring software services grew 6%.
Non-recurring sales of software licenses declined 8%, reflecting the ongoing shift to SaaS. We did receive a $2 million license fee from our mid-west utility customer as expected, professional services revenue declined 7% principally as a result of the delay in our implementation with Manitoba caused by the public workers union strike. Software related services represented 75% of total revenues for Q4 and payments 20% and other 5%.
We are introducing a new method for Remain-co net dollar retention, which we will disclose annually. This applies to all recurring revenue line items. With the exception of payments, net dollar retention for fiscal year 2024 was 100%, adjusted EBITDA increased 4% in line with revenues to $16.2 million for Q4 2024 from $15.7 million for Q4 2023 adjusted EBITDA as a percentage of revenues was 26.7%. A slight decline from 26.8% for Q4, 2023 reflecting higher corporate expenses of 520K for [ACO].
Now the divesture is behind us. We anticipate lower corporate expenses in fiscal year 2025 pro forma adjusted diluted earnings per share from continuing operations was $0.15 for Q4 2024.
This number excludes discontinued operations but notably includes consolidated cash net interest expense which discounted for pro forma taxes of 25% would come to $0.15, again, please refer to the press release for a full description and reconciliation segment performance. Following the sale of the merchant services business. We have segmented Remain-co by Verticals public sector which includes education and healthcare.
Other consists of corporate expenses and eliminations between segments revenues in our public sector. Vertical increased 6% to $49.6 million for Q4 2024 from $46.9 million for Q4, 2023 and represented 81% of total revenues during the quarter.
The increase was driven by recurring revenue streams such as SaaS transaction based revenue, maintenance and payments which offset declines in sales of software licenses and professional services.
The segment's adjusted EBITDA increased 6% to $20.2 million for Q4 2024 from $19 million for Q4, 2023 adjusted EBITDA as a percentage of revenues increased to 40.7% for Q4, 2024 and 40.6% for Q4 2023 reflecting growth and recurring revenue streams which often have higher gross margins revenue from our healthcare segment declined 3% to $11.4 million for Q4, 2024 from $11.7 million for Q4 2023.
Consolidation is prevalent in healthcare and sometimes we lose customers that have been acquired by other healthcare providers for the fiscal year. Healthcare grew 2% and we currently expect low single digit revenue growth for fiscal 2025 adjusted EBITDA declined 5% in Q4 2024 compared to the prior year, reflecting fixed costs that did not decline in proportion of revenues.
Accordingly, adjusted EBITDA as a percentage of revenues declined to 18.9% for Q4 2024 from 19.4% for Q4 2023. Regarding the balance sheet following the sale of our merchant services business. During September, our balance sheet is strong and well positioned for 2025 quarter end debt. So at $26.2 million, which is the remainder of our convertible notes which mature in February, we still have $450 million of borrowing capacity under our revolving credit facility with a 5x leverage constraint.
Our cash balance was $86.5 million on September 30. As a result of the sale of the merchant services business, we will need to make tax and tax related payments of approximately $65 million in the spring.
We also have approximately $8 million of non-tax costs related to the deal that have not been paid as of September 30. These accruals are included in accrued expenses on the balance sheet.
I was the following, reaffirmed guidance for continuing operations for FY 2025 which we set forth in our fiscal Q3 press release dated August 8, 2024 as a reminder, fiscal 2024 being a transitionary year with the sale of the merchant services businesses. We released guidance for fiscal 2025 a quarter. Earlier than usual.
[Alex] does not include acquisitions that have not been announced for transaction related costs, revenues $243 million to $263 million adjusted EBITDA, $63 million to $71.5 million depreciation and internally developed software amortization $12 million to $14 million cash interest expense, $1 million to $2 million pro forma adjusted diluted EPS a dollar $0.05 to a dollar $0.25.
We continue to expect high single digit organic revenue growth with annual just but a margin improvement of 50 basis points to 100 basis points. Manitoba project should return to a normal cadence and we expect continued momentum in the utilities market.
The reduction in license sales in favor of SaaS deals will be less of a drag on revenues. And the education business has lapped the introduction of certain state subsidies for lunch while acquisitions that have not yet closed are not included in the outlook. We do expect to resume acquisitions on a regular basis, from a seasonality standpoint. We expect we currently expect our revenue distribution to approximate the following Q1 23.5%, Q2 26%, Q3 25%, Q4 25.5%.
Although software license sales are led to a factor than last year, they will still represent the most variable line item in the forecast and can distort seasonality in any given quarter.
I will now turn the call over to Rick for company updates and M&A pipeline.

Rick Stanford

Thank you, Geoff. Good morning, everyone. Over the past year, we have transitioned to a software centric organization focused on our vertical markets. We've made significant advancements to achieve our vision. Long term, the divesture of the merchant services business closed on September 20, and the process of transitioning that business is going smoothly running parallel with that. We are committed to refining operations to optimize internal processes and increase our effectiveness and efficiency in many areas.
We're excited to announce progress in our technology transformation efforts as well. Achieving operational efficiency, cost savings and enhanced customer service capabilities through consolidation of contracts and cloud migration.
We have unified both customer facing and internal support technologies including our service desk and contact center platforms into scalable cost effective cloud solutions. We are now delivering even more responsive and streamlined experience for our customers and employees alike.
We are further centralizing cybersecurity measures using fully integrated Microsoft tools including endpoint detection and response, mobile device management and identity and access management solutions.
Our AWS cloud consolidation initiative is nearing successful completion with co located and on premise data centers successfully migrated to the cloud and unifying all subscriptions into an enterprise account. Unlocking enterprise level support to increase efficiency across departments. We have streamlined back office technologies including consolidating instant messaging file sharing and telephony solutions.
We have reduced dependency on multiple vendors while creating efficiency and reducing expenses to gather these initiatives support our commitment to operational efficiency and exceptional service delivery.
I mentioned last quarter, the intention to hire an enterprise level leader in product management. As Greg mentioned, we have hired Chad Fenner as our new Chief Product Officer. He will help us drive our ongoing investment in web, native configurable next generation applications.
He will be responsible for divining and delivering our product vision strategy and road map and for communicating this vision. The addition of Chad to our team underscores our evolution into a pure play software company.
We have begun to rewrite our [Camera] computer assisted mass appraisal platform and are looking forward to its release next year. We've also started work on our JusticeTech 3.0 platform which will allow us to take our court management software across the US and no longer be restrained by state lines. Given high demand in the utility market. We are adding to our portal software suite and related billing distribution models. Last we have added another seven products to our road map for SOC 2, Type 2 cybersecurity compliance framework.
Regarding M&A in general, our acquisition pipeline continues to be strong with deals in public sector. We looked at several deals again this quarter and continue to have conversations with some of those targets. Any of these targets are tuck ins of new products and services that complement our existing offerings or will help us expand geographically.
I'll now turn the call over to Paul for final comments.

Paul Christians

Thank you, Rick. As Rick has shared, we've been transitioning into a cloud first business model. This shift has involved thoughtful investment in human capital, organizational structure and technology. As a result, we are making tremendous strides in our goal to deliver a sophisticated and diverse platform of software and services tailored specifically to meet the needs of customers in our strategic verticals to accelerate revenue growth. We have integrated our sales efforts into a unified domain structure supported by dedicated resource group including elements of marketing, product development and service delivery.
As stated in previous calls, this alignment enables us to stay closer to our customers ensuring that we are not only responsive to their needs but also proactive in capturing additional share of wallet.
I am happy to report that sales activity and contracting are trending positively across the board, especially in enterprise utility, JusticeTech, public safety ERP and education subvertical.
We continue to see increased solution bundling on both an intra and inter-vertical basis. The addition of Chad Fenner as our CPO will accelerate cross vertical solution sales as we further integrate core enterprise solutions into our broader offering.
Examples of this include increased adoption of our digital customer engagement suite and 12 new bundled contracts for law enforcement and Corp management software solutions in Georgia.
In addition, we have fulfilled a significant software distribution solution for a multi-state tier one utility as well as payment facilitation as part of a multiyear project, sales funnel activity and productivity in our new unifying sales force instance, continue it instance, continue to trend positively given that we anticipate the rate of positive sales activity and contracting results to increase through 2025.
This concludes my comments. At this time, we will open the call for Q&A please.

Question and Answer Session

Operator

(Operator Instructions)
John Davis, Raymond James.

John Davis

Hey, good morning guys. If I look at fourth quarter revenue, it came in just the hair light of the midpoint of the guide. So just wondering, was there any kind of delayed limitations? Anything got pushed out? I heard you call out Manitoba but I wasn't sure if there was some expectation of revenue in the fourth quarter that didn't happen or just any other comments on the fourth quarter revenue performance.

Geoffrey C. Smith

Nothing in particular that pushed out. I mean, we always are, there's always a little bit of movement on the license line. We did get the big thing $2 million that we were expected. It was good.
And we're back to school and kind of getting a sense of how that's going to shake out, but there was nothing we saw in Q4 that changed what we're expecting for the 2025. So that's why.

John Davis

That's. Helpful. And then I appreciate the NRR the retention of 100% this year. Obviously, it was a transition year. So as we go into '25 and beyond, how should we think about kind of the growth IGO at i3 to get to that high single digit organic revenue growth number, you know, should we expect, you know, maybe 105 ish NRR plus a new logo growth. Just how are you guys thinking about the longer term NRR as it pertains to the growth? I'll go through.

Clay Whitson

Well, JD, we do want to improve the 100% but I think the growth algorithm with that 100% our organic for '25 is about 7.5% implied at the midpoint. And so that would imply 7.5% coming from new logos during the year. But we do have a goal of improving that 100% net revenue retention from our existing book every year.

Geoffrey C. Smith

One of the points to make on that. I want to make sure it was noted that the payments revenue is not included in that number. Two different data sets and different customer names. We'll see if we can get to that in the future.
I think if you lay it on the payments revenue that probably, you know, you pick up that growth you get from your existing customers growing in their volume.
So it probably pushed the net dollar retention a little bit higher. And you know, I think it also just reflects that we are not aggressive pursuers of price increases, you know, but to Clay's point, you know, as the crop sale story improves as we actually make choices on price increases, we do think that number is going to go higher.

John Davis

Okay. That's helpful and then just quickly on healthcare. You know, understand consolidation there is what's driving the revenue declines, you know, as you said, most single digit for '25 longer term. How do you think about growth of that business is a mid-single digit is a corporate average. And when do you lap the kind of some big customer losses as we think about modeling 0.5.

Clay Whitson

Our current expectation is for low single digit for healthcare over the medium term, high single digit for education and public sector, high single digit.

John Davis

Okay, thanks guys.

Operator

Mark Palmer, Benchmark Company.

Mark Palmer

Yes, thanks for taking my questions. Wanted to see if you could give us an update on your utility initiative. You made reference to it in the prepared remarks and when would the company be in a position to begin to roll out the technology it derived from its initial project to various other utilities across the country.

Paul Christians

Good morning, Mark, on the initial project, we are in the process on the portal side of rolling that out today and we see that accelerating and on the distribution side of the business, we would anticipate the sales activities to begin in that as well. Although that's a much more specific and measured particular module that is not as broadly used in the industry.

Mark Palmer

So are we then looking at that activity beginning in the first quarter of '25 and then accelerating through the year? You know, how should we think about the cadence?

Paul Christians

Yes, that's a fair assumption.

Mark Palmer

Very good. And one other question with regard to the M&A environment Rick, you had said on the last call that you were seeing more rationality in the market as it pertained to the kinds of multiples that sellers were demanding any update on that front in terms of what you're seeing in the market and how that would potentially contribute to M&A activity in the coming quarters.

Rick Stanford

And so obviously, there's still extremes on either end, but the people we're talking to seem to be more realistic as to their value and their future growth. I don't see that changing much this year, our pipeline is very strong.
We're still continuing to contact through initial conversations, a lot of public sector deals, we are looking at some education, but I think we're in a good place for '25 to generate somewhere between 3 to 5 acquisitions this year. And we're excited about the conversations we're having with our current pipeline targets.

Greg Daily

Seems like timing is more important. Than very important valuation. I mean, valuation is important. But it comes down to timing.

Rick Stanford

Yeah, exactly.

Mark Palmer

Very good. Thank you.

Operator

James Faucette, Morgan Stanley.

Shefali Tamaskar

Hi. Thank you for taking my question. This is Shefali Tamaskar on for James wanted to touch on the macro a bit just how you're thinking about it. In '25 the general health that you're getting from customers. I know you touched upon what's going on in healthcare and just anything to note in certain verticals in the public sector, that kind of informs your outlook.

Paul Christians

We are seeing in the public sector very, very consistent, increased demand to get to, you know, configurable web native applications.
It's really driven by their need to get to that technology set, but also people constraints in the public sector arena and the evolution of the software that we've developed over the last several years to support that is being very well received. And we now have enough examples in the market that it's providing additional comfort of certainty of execution.

Shefali Tamaskar

Okay. That's great to hear. And then just one on organic growth, what gives you confidence in that high single digit organic number? And is there any visibility you might have in terms of like those new logos that you're anticipating.

Clay Whitson

Well, I think we, on previous calls, we spoke to some of the headwinds that we faced in fiscal year '24. Manitoba was a big one of about $3 million we should have seen in '24 that can resume. Now, the fast transition was a $5 million headwind and that we believe this coming year, our software license sales will be about the same as they were in '24.
And then education, certain states stepped in this last year. But education actually grew 9% in the fourth quarter as we anniversary those states stepping in the last one is our large mid midwestern utility customer who we've talked a lot about. We anticipate that growing as well this year.

Shefali Tamaskar

Okay. Thank you.

Operator

Alex Markgraff, KeyBanc Capital Markets.

Alex Markgraff

Hey, everyone. Thanks for taking my question. Maybe just to quickly touch on margin expansion. I think in the press release, those noted 100 basis points or more. Geoff, I thought I heard you say 50basis points to 100 basis points. I apologize if I misheard you just clarification there and then maybe just walk through some of the sources of that 100 basis points-plus for '25.

Geoffrey C. Smith

Sure. So you correctly said 50basis points to 100 basis points. And this next year, I think we have a pretty easy lift to get to that point, a lot of our margin expansion, we've always kind of cited the fact that, you know, our corporate overheads should grow, inflationary rates and revenue should outpace that. So we should naturally get some margin expansion as that goes with that in mind.
We do see like long term margin expansion, not just kind of a one year thing, but this year in particular, you know, as we turn the page after the sales merchant services business, we've got kind of a because the corporate overhead has come down some but not corporate overhead, you know, the increase of revenue just makes a bigger impact on margin than it would have previously.
We're still transitioning out some costs and we're confident in that 50basis points to 100 basis points it should be a, you know, that should be a pretty fair target for us to hit in the long run, you know, still feel good about progression on that as well.

Clay Whitson

I might add that our deal didn't close until September 20. So we had a full complement of staff all the way through the quarter.

Alex Markgraff

Okay. Understood. Thank you both. And then just maybe one quick margin follow up at the segment level, just around healthcare margins. If you could just add some color on the nature of the delta versus public sector and what sort of margin upside there might be in the healthcare segment over time.

Geoffrey C. Smith

And So the healthcare segment, we have a couple of different services there. A piece of that is outsourced RCM services, which can be an arms and legs business. So there's a disproportionately high number of bodies in the healthcare segment compared to public sector.
And as a result that that is the profile on that revenue is just a lower margin profile. It's a big chunk of revenue, we love it because it is recurring, it's very stable and consistent. But it is a lower margin piece of the business.
The growth in healthcare is coming from more of the software pieces and so over time hopeful that we can upside that, that margin profile in healthcare. We also have some, you know, the RCM business is a space where there's a few things that are in our plans to, to work on the cost side of that. You know, technology outsourcing, things like that. Those are some of the, you know, those are some things that will kind of come further into the focus on healthcare over the next couple of years. So we would expect margin expansion over time.

Alex Markgraff

Okay. Thanks, Geoff.

Operator

Peter Heckmann, D.A. Davidson.

Peter Heckmann

Hey, good morning. Most of my questions have been asked. One thing I wanted to follow up on in terms of the seasonality commentary you provided. I appreciate that. But anything you would call out there in terms of the timing of a relatively larger software payments or milestone payments that we should be thinking about as we map out the 2025.

Clay Whitson

Well, that is the software license sales are by far the biggest variable. We currently have a disproportionate amount slated for Q2 the March quarter. And that's why we have 26% in that quarter that could come early, it could come late. So you'll just have to be patient with us when that happens. We'll tell you it came early or it came late or it came on time?

Peter Heckmann

Okay. And then I'm out of the office today, so I don't have access to my notes, but just can you refresh us on that on the project for the tier one utility in terms of, I'm not sure. I heard Rick's comment correctly in terms of the stage of development and rollout of that. But could you refresh us on that? And then, and then how do you expect, how would you characterize the, the revenue that you expect to get in 2025 in terms of, you know, milestone payments, software versus more recurring revenue streams.

Clay Whitson

Do you want to speak to revenues? That type of revenues?

Geoffrey C. Smith

Sure. Yeah. So that, that project is going to have a little bit of everything in terms of types of revenue. We have, you know, we obviously recognize the $2 million license amount this quarter. That is not the full amount of license, there will be more to come. Although probably early in fiscal year 2026 not 2025.
So there's nothing modelled in there for additional license this year, the bigger amounts will come in 2026. We're in implementation mode right now for the first phase of the project. And that's part of why we have, we have a good line of sight towards more revenue in 2025. There's a very healthy amount of professional services revenue attached to this project and that is ticking up this coming year, it will pick up even further the next year. And then payments is, you know, a big piece of the story in the in the utilities market. It's just a great space for attachment of our payment solutions and that's relevant here.
So we'll have recurring revenue from payments. We'll have recurring revenue from maintenance as well once that turns on and we're the professional services, while not necessarily explicitly recurring is going to be extremely consistent for years to come.
So you're kind of touching all things there. As it relates to 2025 basically expect the payments to turn on and expect a really healthy dose of professional services and then expect all of that to just increase the next year plus license revenue.

Peter Heckmann

Okay. That's helpful. And good to hear. I appreciate it.

Operator

(Operator Instructions)
Rufus Hone, BMO Capital Markets.

Rufus Hone

Hey guys, good morning. Thanks for the question. I wanted to come back on the organic growth. So you mentioned 7.5% organic growth implied for 2025. You just did 2% organic growth. This quarter is most of that acceleration you're expecting in 2025. Just the headwinds you mentioned reversing or is there some fundamental acceleration you're expecting? Thanks.

Clay Whitson

Well, our large midwestern utility customer that is just a customer that's growing. So that didn't have anything to do with '24. It's just an acceleration going forward.
Education I mentioned went back to what we consider a normal growth rate 9% in Q4. It was temporarily, it had a onetime setback in '24, the fast transition levels out. So it's not that it's, it's neither a headwind or a tailwind in '25. It's just, it will stop shrinking in '25. And then Manitoba is the resumption of again, you know, kind of a onetime setback?

Rufus Hone

Okay. Thanks, and wanted to ask on, on healthcare as well. You mentioned low single digit revenue growth in healthcare in '25. Is that mostly from the consolidation you referenced or is there anything else weighing on that segment?

Clay Whitson

Thanks. That's the headwind is consolidation. It's, it's been an ongoing thing in healthcare. We don't see it going away anytime soon.

Rufus Hone

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Greg daily for any closing remarks.

Greg Daily

Thank you, everyone. It's nice to have 2024 over. It was a dramatic transformational year of essentially a shout out to the merchant services team led by to the board.
You guys were awesome. You did what was best for the company, I thank you for that. We miss you and I'm sure you're going to thrive with our good friends at Payroc, but I've been impressed with the conversion. It seems to have gone well and anybody else on the call has anything of interest. I appreciate you dialling in today but call us if you need us. Thank you.

Operator

Thank you. The number for the replay is 8773447529 and the code is 4184020. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.