Release Date: May 10, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenues for Q2 2024 increased by 1% to $94.5 million from $93.9 million in Q2 2023, reflecting organic growth from recurring sources.
- Adjusted EBITDA increased by 4% to $25.8 million for Q2 2024 from $24.7 million for Q2 2023, with improvements in Merchant Services margin and lower corporate expenses.
- Over 80% of i3 Verticals Inc's revenues in Q2 2024 came from recurring sources, demonstrating a strong and stable revenue base.
- The company is exploring the sale of the merchant services business, which could significantly reduce debt and free up resources for growth in strategic verticals like public sector, education, and healthcare.
- i3 Verticals Inc has made significant progress in internal realignment, positioning the company for sustainable growth and improved operational efficiency.
Negative Points
- Nonrecurring sales of software licenses declined by over $2 million, reflecting the ongoing shift to SaaS and impacting immediate revenue.
- Professional services revenues declined by $1.3 million due to delays in project implementations, notably the Manitoba driver's license project.
- Pro forma adjusted diluted earnings per share decreased to $0.34 for Q2 2024 from $0.38 for Q2 2023, driven by higher interest expenses following the repurchase of exchangeable notes.
- The company lowered its full-year guidance, reflecting delays and uncertainties in project timelines and revenue recognition.
- Despite the strategic focus on recurring revenues, the transition has led to short-term revenue declines in nonrecurring high-margin areas, which could impact profitability if not managed effectively.
Q & A Highlights
Q: Can you provide an update on the timing for the transition from non-recurring revenue sources like licenses to recurring revenue sources like SaaS?
A: (Clay Whitson - CFO & Director) For fiscal year 23, total software license sales were $10.7 million, expected to decrease to $5 million this year, marking it as a transition year. We anticipate this will plateau around the $5 million mark, although future pleasant surprises could occur.
Q: What is the current competitive environment, and have there been any changes in competitive intensity?
A: (Paul Christians - COO) The competitive environment has been steady without significant changes. Some project delays are due to our customers' personnel constraints, which we are addressing by providing additional support to help them get back on track.
Q: How should we think about the cost controls that have been implemented and the staffing levels for RemainCo, especially for the software side of the business?
A: (Clay Whitson - CFO & Director) We are well-staffed, with about 300 people associated with the merchant services business out of a total of 1,700. We've completed the realignment for RemainCo, which should serve us well without needing further cuts.
Q: Can you discuss the attach rates on software businesses acquired over the last three years, particularly in healthcare and education?
A: (Clay Whitson - CFO & Director) In healthcare, the attach rate is still in the early stages and will be a slow process as we target thousands of small billing customers. Education has the best attach rate, followed by the public sector. We've also created a specific team to focus on selling into our three strategic verticals.
Q: Regarding the potential divestiture of the merchant services business, can you comment on the timing and valuation adjustments through this process?
A: (Clay Whitson - CFO & Director) We cannot comment on specific timings or pricing until a transaction is finalized. However, the business is solid and has been a steady performer, which should present a great opportunity for any potential buyer.
Q: Could you provide more details on product level improvements, such as speed to market and implementation timelines?
A: (Paul Christians - COO) We are focusing on developing highly scalable, configurable web-native applications, reducing the need for custom code and enhancing speed to market. This approach also lowers ongoing maintenance costs and is being implemented across various domains with significant domain expertise.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
