Business Overview

i3 Verticals, Inc. (NASDAQ:IIIV) is a leading provider of seamlessly integrated software and payment solutions to customers in strategic vertical markets. i3 Verticals has established a strong foothold in the public sector, healthcare, and education verticals, delivering innovative technology-driven solutions that cater to the unique needs of these industries.

i3 Verticals was founded in 2012 with the goal of becoming a premier provider of integrated software and payment solutions. i3 Verticals has since grown through a combination of organic initiatives and strategic acquisitions, expanding its reach and capabilities across its core verticals. i3 Verticals' software offerings include subscription-based SaaS solutions, transaction-based software, and professional services, while its payment solutions encompass volume-based discount fees, gateway fees, and other transaction-related services.

i3 Verticals' primary strategic verticals are Public Sector (including Education) and Healthcare, where i3 Verticals has developed deep domain expertise and strong customer relationships. i3 Verticals' software solutions are designed to address the unique operational and regulatory requirements of these industries, providing seamless integration with existing systems and workflows.

Financials

In the fiscal year ended September 30, 2023, i3 Verticals reported annual revenue of $370.2 million and a net loss of $811,000. i3 Verticals' annual operating cash flow was $34.5 million, while its annual free cash flow stood at $18.1 million. These financial results demonstrate i3 Verticals' ability to generate consistent cash flow, even in the face of macroeconomic headwinds and industry-specific challenges.

For the second quarter of fiscal year 2024, which ended on March 31, 2024, i3 Verticals reported revenue of $94.5 million, a 0.7% increase from the prior-year period. i3 Verticals' annualized recurring revenue (ARR) grew 5.5% year-over-year to $322.5 million, highlighting the strength of its software-driven business model.

Segment Performance

i3 Verticals operates through two reportable segments: Software and Services, and Merchant Services. The Software and Services segment, which accounted for 63% of total revenue in the second quarter of fiscal 2024, saw a 2% year-over-year decline in revenue to $59.5 million. This was primarily due to lower sales of software licenses and professional services, which were partially offset by growth in SaaS and transaction-based software revenues.

The Merchant Services segment, which contributed 37% of total revenue, experienced a 6% year-over-year increase in revenue to $35.1 million. This growth was driven by broad-based expansion across i3 Verticals' ISO, ISV, B2B, and POS channels, as well as improved revenue yield and expense control.

Liquidity

As of March 31, 2024, i3 Verticals had $3.1 million in cash and cash equivalents, and $103.8 million in available borrowing capacity under its $450 million revolving credit facility, subject to financial covenants. i3 Verticals' total leverage ratio stood at 3.5x, well within the 5.0x maximum allowed under the credit facility.

In January 2024, i3 Verticals repurchased $90.8 million in aggregate principal amount of its 1.0% Exchangeable Senior Notes due 2025, reducing the outstanding balance to $26.2 million. This transaction, along with i3 Verticals' disciplined approach to growth and acquisitions, has strengthened its balance sheet and financial flexibility.

Outlook

For the full fiscal year 2024, i3 Verticals has provided the following guidance: - Revenues: $380 million to $394 million - Adjusted EBITDA: $107 million to $113 million - Pro forma adjusted diluted EPS: $1.49 to $1.57

i3 Verticals' outlook reflects the impact of delayed projects and lower non-recurring revenue, particularly in the first half of the fiscal year. However, management expects these headwinds to subside in the second half, with the return of the Manitoba drivers license project and the ramp-up of a large utility customer implementation.

Looking ahead, i3 Verticals is well-positioned to resume high single-digit revenue growth in fiscal year 2025, assuming the successful completion of the potential sale of its Merchant Services business. i3 Verticals plans to focus its resources on expanding its presence in the public sector, healthcare, and education verticals, where it sees significant opportunities for long-term, sustainable growth.

Risks and Challenges

While i3 Verticals has demonstrated resilience in the face of industry and macroeconomic challenges, i3 Verticals faces several risks that investors should consider. These include the potential impact of ongoing supply chain disruptions, the ability to successfully integrate and realize the benefits of future acquisitions, and the potential for increased competition in its core verticals.

Additionally, i3 Verticals' exploration of a potential sale of its Merchant Services business introduces uncertainty and execution risk, which could impact i3 Verticals' financial performance and strategic direction in the near term. Investors should closely monitor the progress of this process and its implications for i3 Verticals' long-term growth and profitability.

Conclusion

i3 Verticals has established itself as a leading provider of integrated software and payment solutions, with a strong focus on the public sector, healthcare, and education verticals. i3 Verticals' financial performance, marked by consistent cash flow generation and a healthy balance sheet, positions it well to navigate industry challenges and capitalize on emerging opportunities.

While i3 Verticals faces near-term headwinds related to delayed projects and lower non-recurring revenue, i3 Verticals' long-term growth prospects remain promising. The potential sale of its Merchant Services business could further strengthen i3 Verticals' strategic focus and financial flexibility, enabling it to accelerate its expansion in its core verticals. As i3 Verticals continues to execute on its growth strategy, investors should closely monitor i3 Verticals' progress and its ability to deliver sustainable, profitable growth in the years ahead.