Good day, everyone, and welcome to the i3 Verticals First Quarter 2020 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through February 18. The number for the replay is 719-457-0820 and the code is 8962025. 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 Scott Meriwether, Chief Operating Officer. Please go ahead, sir.

Good morning, and welcome to the first quarter 2020 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Clay Whitson, our CFO; and Rick Stanford, our President. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by reviewing yesterday's earnings release. It is the company's intent to provide non-GAAP financial information to enhance understanding of its consolidated financial information as prepared in accordance with GAAP. This non-GAAP information should be considered by each individual in addition to, but not instead of, the financial statements prepared in accordance with GAAP. 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. And consequently, actual operations and results may differ materially from the results 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’ll now turn the call over to the company's Chairman and CEO, Greg Daily.

Thanks, Scott and good morning to all of you. We are pleased with our first fiscal quarter of 2020 and look forward to delivering strong performances throughout 2020. Our first quarter is a strong start to the fiscal year. Clay will cover the financial results a little more detail later. One highlight was at 41% increase in net revenue and net revenue increased to $41.6 million in Q1 of 2020 from $29.6 million in Q1 of 2019, primarily driven by our public sector vertical and strong internal growth throughout the company. Pro forma adjusted EBITDA increased to $11.9 million in Q1 of 2020 from $8.6 million in Q1 of 2019. We continue to achieve above market growth rates by delivering seamless integrated payment and software solutions to SMB’s in organizations and strategic vertical markets. Our integrated payments volume continues to grow. 55% of our payment volume was integrated during Q1 of 2020 up from 46% in Q1 of 2019. Integrated payments results in lower attrition, higher margins and greater market growth potential. We continue to focus on deploying new technology and streamlining our existing technology, particularly within public sector and education verticals, as well as our payment platform. Our sales teams are experiencing increased momentum from these technology offerings and we anticipate it will help drive our future growth. We believe we can continue to leverage our distribution channels for our software offering and we have further opportunities to leverage our payment platform within our technology assets. Rick will speak to M&A momentarily. But I will note that our pipeline is very strong. Our focus remains primarily on public sector and education verticals. In addition, we will continue to target strategic acquisitions and other verticals that have opportunities to provide software-driven payments. Clay, would you please provide the financial overview?

Sure. The following pertains to the first quarter of fiscal year 2020 which is the three-month period ended December 31, 2019. We started the year with a strong quarter. Net revenues increased 41% to $41.6 million for Q1 2020 from $29.6 million for Q1 2019, driven by strong organic growth and acquisitions principally in our public sector and education verticals. As discussed on the call last quarter, the face of the income statement shows a decline in revenue as a result of adopting ASC 606, Q1 2019 presents revenues growth of interchange and network fees of Q1 2020, presents revenues net of interchange and network fees. From an apples-to-apples comparison, please refer to the supplemental segment presentation contained in yesterday's 8-K filing. You can also access it on our website under Events & Presentations. Excluding the purchase portfolios and our IPOS business, net revenues grew 9% organically. We benefitted from strong growth in education, public sector, B2B and ISO. Acquisitions contributed $11.5 million to net revenue growth for the quarter. Adjusted EBITDA grew 38% to $11.9 million for Q1 2020 from $8.6 million for Q1 2019. Please see the press release for a reconciliation between net income and adjusted EBITDA. Adjusted EBITDA as a percentage of net revenues was 28.5% for Q1 2020, down from 29.0% for Q1 2019. The decline resulted from a lower margin and our proprietary software segment which I will unpack in the segment discussion, partially offsetting this decline corporate expenses as a percentage of net revenues improved to 6.2% for Q1 2020 from 7.2% for Q1 2019. The improvement was expected following the step-up in public company costs and the first year following our IPO. Adjusted diluted earnings per share were $0.24 for the quarter. Again please refer to the press release for a full…

Thank you, Clay. Good morning, everyone. Before I talk about our M&A outlook, I want to first quickly give you a few updates relative to the information provided on the last call. First, we are continuing to pursue a unified product offering in each of our public sector and education verticals. That process is going extremely well and we are moving rapidly towards offering our customers in those verticals, a more robust and comprehensive suite of products. Second, relative to the Pace acquisition, we have now completed the conversion of the integrated ISC business and we have begun the conversion process for the non-integrated business. We hope to have a non-integrated piece completed by the end of summer. We continue to be impressed with the people at Pace and the opportunities they bring to the table. The decision to merge both the i3 and the Pace ISV teams, is proving to be a winner for us at the enterprise level and allowing us to engage salespeople throughout the company and other acquisition subs and here today to have little to no access to this type of offer. Third, on the ISV front, our total number of fund in the integrated ISV at the end of our first fiscal quarter is 52. Lastly, regarding M&A, our team is hitting a stride. This team includes M&A, finance, operations, legal and IT functioning as one cohesive group, each having a part in our overall success from nurturing new potential deals to diligence, to closing and post-close support. I'm very pleased to say that the pipeline for potential acquisitions is stronger today than it's been since our half year. While the acquisition process has a natural ebb and flow, the last two quarters have been especially busy for us and we are optimistic with regard to M&A activity. To that point, we currently have four executed term sheets in process. To be clear, all of these term sheets are non-binding and we are in various stages of due diligence with each of them and there's no assurance that we will ultimately close these deals. Each of these deals is in our sweet spot, from public sector to education, with a sprinkling of ISVs and B2B and we like the opportunities that each of them presents. In addition to these potential deals, our general pipeline is populated with a heavy emphasis on public sector with a little education and some others mixed in. While we saw last year as an anomaly where we close nine acquisitions, we believe that we will remain successful in executing our M&A strategy and still believe we can generate five or more new deals this year. This concludes my comments, Rochelle. At this time, we'll open it up for Q&A, please.

[Operator Instructions] And our first question today we’ll hear from John Davis with Raymond James.

Clay, just wanted to start off on organic growth. Glad to hear 9% of your salary 200 basis points sequentially ex-IPOS. So anything to call out there, any specific business that performed well, just any commentary there and I assume you still have kind of a high single-digit number baked in the full year guide but just wanted to confirm that.

Well, I can't confirm. We expect high-single digits for the remainder of the year, maybe not in every single quarter but on average for the year. It was strong across the board really from B2B to government to education our ISP channel, even our ISO channel.

And then also the yield improved 8 basis points sequentially. I think the net revenue yield is under 108 basis points versus 100 a year ago. Is that more integrated? Is that more proprietary software? Just how should we think about that as we set to model out the rest of the year?

Well, the proprietary software segment has doubled in size. And with that come more software revenues. I think our software revenues as a percentage of our total revenues this quarter was in the range of 22%. That's up from maybe half of that at the IPO. So, as that blend happens, it takes our revenue yield higher. And what was the second part of your question?

No. Just how you think about it for the rest of your - any reason that that was specifically high in the first quarter and an anomaly, just kind of thinking about it the rest of the year.

No. I don't think there was no anomaly.

Okay. And then, Rick, anything you can give us in terms of combined size of the four deals, just anything to kind help us frame, I think, my math suggests you have nearly $100 million of capacity based of the leverage into the year. So, I think that's an issue, but I think we're very glad to hear four deals, but just trying to think about how to size those.

Yes, that's a fair question, John. Unfortunately, we're at various stages, but we're in the early stages, and we don't have enough definitive data to give us an accurate measurement on any of these deals yet to give you a good measurement of size. As far as timing, it's also too early. There's multiple factors that go into timing: Size, total lines of code that have to be reviewed, consents from third parties. So, I can't tell you at this point either when those deals are going to close. I think we have the capacity. So, hopefully, I'll be able to give you more detailed information sooner than later but right now, we don't know what we don't know.

Next, I’ll move to George Mihalos with Cowen.

Congrats on the accelerated growth. So, maybe just to kind of start off on that point, you’re starting the year off higher certainly than what we're looking for. I know you said in the past that the growth rates could be a little bit choppy going quarter-over-quarter and the like, but as we go through the remainder of the year and more of these faster growing inorganic revenue streams go to organic, is there the possibility where we could have a double-digit growth quarter based on the trends that you're seeing across the entire business?

A possibility is always there, but I think our expectation remains high single digit.

Okay. And that's what's embedded in the outlook, just to be clear?

Yes.

Was there any impact on the point of sale side in the first quarter, I know you had said, $6 million to $7 million of potential headwind for the year, was there any impact in the first quarter?

There was but it wasn't a huge impact. The Essentials product which is the SaaS-based products from MCR has - is in pretty full swing now. In January, 50% of our new deals were Essentials. And so that’s for - this took a lot longer to get started than we thought it would but now that it started, we're very pleased with how it fell in. We think it's a good competitive product and we're getting excited about it.

That's helpful. And just last question for me, as we look at the margins going forward is the right way to think about it that on a year-over-year basis, we could have some continued compression on the software side and there's a little bit of an offset, if you will, on the corporate expense line year-over-year?

I think it depends on where in the range of guidance we fall, George, but we do hope that we can continue to improve margins. AVR is a mix issue for us because they’re lower margin, but they have 40 people because they were a standalone company. And so, with double-digit growth, I think a lot of our public sector companies can grow into better margins over time.

Next, we move on to Peter Heckmann with D.A. Davidson.

This is Alexis on for Pete. Congratulations on a great quarter. So just touching back on the IPOS transition, could you quantify for us how that affected organic growth in the quarter?

Well, organic growth would have been, if we include it in the calculation, organic growth would have been smaller but not by a great amount. I think we gave $6 million to $7 million of revenue impact at the beginning of the year and that was assuming it all started October 1, which clearly has not happened. So that $6 million to $7 million original estimate is proving to be a conservative estimate, and we carry $2 million of revenue excess into the guidance. A good portion of that is from IPOS but not all of it.

Okay, thanks, Clay. That’s really helpful. And then, could you give us an update on how we should be thinking about any shift in seasonality on a quarter-to-quarter basis to this mix shift in public sectors?

Well, in Public Sector specifically this coming quarter is usually a good quarter for us. In Q3, education's quite weak because of the June-July shutdowns and that's a bigger impact now that we have school pay before it was just pay schools. But now it's also school pay but collections are strong in government in the coming quarter.

So if you had to combine together the impact on seasonality from Public Sector and Education, which quarters would you say are relatively stronger versus weaker with the new acquisitions?

You know I’d say all three of our quarters are relatively strong other than the third quarter. That impact on Education is the one we feel on a consolidated basis because we've still got all of the people and virtually no revenues for two months. But in the non-integrated business, January-February is weak. And that's always been the case from the other payments companies you know. So it helps to have a government counterbalancing that overall weakness in January-February.

Okay. Thank you. And then could you just give us an update in growth in direct sales force?

We’re consistent with between 120 and 125 today, hasn't changed much.

[Operator Instructions] Next, I’ll move to Josh Beck with KeyBanc.

I wanted to ask about Pace. It certainly seems like you've been pretty happy with the team there. Anything to call out in terms of synergy opportunities as you've had a little bit more time to work with them?

I feel like they’ve taught us a lot about ISPs, how to sell through them and how to harvest their accounts. They have been - really upgraded us when it comes to that. It’s crazy productive when it comes to being able to, for new sales and now, we're trying to roll that out in more of our distribution channels. So, we're very pleased. I think I made note when we did the deal that I was hoping by midyear 2020 to say it's the best deal we've ever done. And I think we're on track to say that but we're not - we're still learning a lot about each other.

I think Rick, you talked a little bit about the unified platform that you're building within education and public sector verticals. Maybe just to help us understand some of the changes that you're making behind-the-scenes and then, ultimately, what you are hoping for in terms of either a business benefit or customer benefit as those platforms are build out?

Yes. Good question, Josh. So, we brought together the CEOs, the salespeople, the IT folks from, let's take public sector for example. In an acquisitive business like ours, we have overlapping products. Some are good, some are not so good. We took that group, and we did a gap analysis on all products under a public sector vertical. And then we determined which products we wanted to move forward with and what is the total product suite that we need to bring to market. Once we decided on that product suite, we’re focused on the back-end. How did we get this in the sales people's hands? And how do we price it and how do we sell, and how do we communicate with each other? So all of those discussions are underway. We are seeing some cross-pollination of product sales and other subs now which is our ultimate goal. And we look at our competition. What do we need to provide that they're not providing? So this unified product offering is something that's got our people really excited. They're working as a team across multiple subs. So to go out with one best of breed products suite within public sector that people are excited about, I can’t imagine things being better than that for us.

That's great to hear. I noticed that you had called out B2B a couple of times. Maybe you could just remind us of your exposure there? And is that an area of maybe growing opportunity when you look out to the future when you either think about organic or M&A opportunities?

Organically, it's a strong grower. I think from an M&A standpoint, valuations are high in the B2B space, some private equity, the market are in love with B2B. And so I’m not all that hopeful about a B2B acquisition but we love the one we’ve got, and it continues to - it’s large. It might be order of magnitude 10% of our business and it continues to grow. So that helps our organic growth when a large company has good growth.

And, Josh, I’ll answer that and say that I mentioned this morning as one of the companies under the four term sheets. They started in a B2B mode and then moved into education and that's their core focus now. So I felt compelled to bring it up since it's a place that we operate today, but we weren't going after a B2B type acquisition when we found this group.

Okay. And that's helpful. Maybe just the industry question and I'm not sure if it's too early, but certainly there's some more coverage of Visa and some of the interchange changes that they plan to make. So I'm wondering if there's any read on - any early read on potential impacts from that or if it's one of those things that's just maybe too early to discuss?

We've looked at it company-wide and we think net, a slight positive to us. So it will be - it's not a negative, so it's not that big of a deal but it is positive.

And that will conclude the question-and-answer session. At this time, I would like to turn the call back over to Greg Daily for any additional or closing remarks.

Thank you, everybody. I feel like we had a great start to our 2020, love the growth. Thanks to the team, well they have come together amazing in the last year and I encourage all of you to stay tuned. We've got a lot of exciting things that we're working on and hopefully, we'll be able to update you very soon. Thank you.

And that will conclude today's call. We thank you for your participation.