Good day everyone, and welcome to the i3 Verticals Second Quarter 2020 Earnings Conference Call. Today's call is being recorded and a replay will be available starting today through May 15th. The number for the replay is 719-457-0820 and the code is 8694705. 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 second 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 and the expected and potential impact of the COVID-19 pandemic. 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 including risk and uncertainties associated with the COVID-19 pandemic. 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 delivered strong second fiscal quarter results despite the impact of COVID-19. As we start this call, I want to first address our employees, many of whom are listening to this call. I'm extremely proud of our employees' response to this crisis, they've been flexible and focused, and I'm inspired by their dedication in supporting our customers. One highlight in the past quarter was a 25% increase in net revenue, as revenue -- net revenue increased to $39.3 million in Q2 of fiscal year 2020 from 31.4 million in Q2 of fiscal year 2019, primarily from the growth and Public Sector vertical. Pro forma adjusted EBITDA increased to $10 million in Q2 of 2020 from 8.7 million in Q2 of 2019. Our integrated payments volume continues to grow, 55% of our payment volume was integrated during Q2 fiscal year 2020, up from 49% during Q1 of fiscal year 2019. The Company had great momentum throughout the quarter until the second half of March, when we began to see the economic impact of COVID-19. The common phrase to use to describe this current crisis is, in these unprecedented times. I do not think any of us imagine a time when there would be a government mandate business closures, stay at home orders, or K-12 schools shutting down for the remainder of the school year. We anticipate a greater impact of COVID-19 in our financials of our third fiscal quarter. Our education hospitality customers have had the greatest impact. From April 2019 to April 2020, our total run rate of net revenue in education was down 66%. The net revenue -- the run rate of net revenue and payments in education was down 90%. Our SaaS software model helped offset the sharp decline…

Sure. The following pertains to the second quarter of fiscal year 2020, which is the three month period ended March 31, 2020. Despite the COVID-19 downturn, we have a solid quarter with net revenues of $39.3 million and adjusted EBITDA of $10 million. Net revenues increased 25% for Q2 2020 from $31.4 million for Q2 2019, driven principally by acquisitions in our Public Sector and Education Verticals. Acquisitions contributed approximately $9 million in the quarter. Our net revenue yield defined as net revenues divided by payment volume improved to 110 basis points for Q2 2020 from 107 basis points for Q2 '19, reflecting increasing software revenues. 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. Q2 2019 presents gross revenues -- presents revenues gross of interchanges and network fees while Q2 2020 presents revenues net of interchange and network fees. For an apples-to-apples comparison, please refer to the supplemental segment presentation contained in yesterday's 8-K filing. Excluding the purchase portfolios and our IPOS business, organic growth was flat for the quarter. We entered March on a 9% pace for organic growth. But government mandated business closures, school closures, and stay at home orders took a toll on our organic growth, particularly during the last two weeks of March, and continued through April. We exited April with payment volumes for the same set of companies, down approximately 30% on a year-over-year consolidated basis. The first week of May has predictably improved as economic activity has begun to resume in several areas, and we expect further improvement as more and more sectors of the economy open up. Adjusted EBITDA grew 14% to 10 million for Q2 2020 from 8.7 million for Q2 2019. Please see the…

Thank you, Clay. Good morning everyone. Before I talked about our M&A status, I want to first quickly give you a few updates regarding information provided on the last call and some additional new information. First, we're continuing to pursue a unified product offering in our Public Sector vertical. We intend on offering our customers in this vertical a more robust and comprehensive suite of products that work together seamlessly. Second, relative to the Pace conversion, we set a goal for ourselves to have the non-integrated piece completed by the end of summer. It now looks as if we will be completed midsummer, the one caveat is that businesses start opening as planned. Third, on the ISV front, our total number of signed and integrated ISVs at the end of our second fiscal quarter is 53 with three more process of integration. Four, we've been discussing and implementing many new educational communications around products that are likely to be methods of choice with consumers like contactless, in-app payments and online payments with our existing verticals. COVID-19 is changing customer expectations in these areas, and we intend to meet those expectations. We are pleased with the products and methodologies that our business leaders are deploying on this front. Lastly, regarding M&A, we have continued to add to the pipeline during Q2 and are still preparing new term sheets for those deals that we were interested in having as part of the team. The pipeline is still very full at this time, and the recent downturn has not affected our pipeline. In fact, new opportunities have arisen over the past couple of months. Strong organic growth has always been a key driver in our decision making process about acquiring a business. We have now added an extra level of diligence and understanding around how the potential acquisition partner was affected by COVID-19 and whether, when or if the business is likely to grow in the new normal. We mentioned on the Q1 call, we have four executed term sheets in process of full diligence, seeing the potential impact of the pandemic and industry trends. Mid-March, we made a decision to go tensile stay on with all diligence and closing preparations for those deals. Without exception, each of these sellers understood the circumstances and stand ready to restart their acquisition process. Although there are no guarantees in a COVID-19 world, we hope to start ramping up towards completing these four acquisitions in an effort to accelerate our vertical strategy in the near future, particularly in the education and Public Sector. Our general pipeline is populated with an emphasis on Public Sector and Education with some nonprofit and healthcare mixed in. We believe that we will remain successful in executing our M&A strategy once we start closing deals again. This concludes my comments, Lauren. At this time, we'll open the call up for questions.

Thank you. [Operator Instructions] Our first question comes from George Mihalos with Cowen.

This is Allison on for George Thank you for taking my questions and really glad to hear from everyone. My first question is given you i3's unique strategy to diversify the business across key verticals, which we heard about, and your commentary around Public Sector and B2B, for example, being more insulated. What percentage of your revenue do you think will ultimately be impacted by COVID-19?

Well, I think all of it is impacted currently, and I -- we've seen different declines and different verticals. Long-term, we expect government education to bounce back 100% because those customers don't go out of business. Hospitality will see some attrition there, but we think we're well positioned on the other side to gain market share with our technologies

And then I'm curious, if you can talk a little bit about the cadence of the volumes you're seeing. Clay, I heard you mentioned that payment volume exited April down 30% and improved in the first week of May. I think I got that right. I'm just curious how that volume trended throughout the month of April. And if you've experienced peak declines in mid-April similar to commentary from some of your payments peers?

It improves sequentially all across April and continued to improve the first week of May. And the first week of May had a market improvement as the economy was opening back up in certain areas.

Okay, great. That's good to hear, and then just last one -- sorry, go ahead.

Well, the end of March was probably the worst, and then April improved and May has improved again.

And then just last one from me, with respect to M&A pipeline, do you think it would be feasible to close a transaction by the end of this fiscal year? And then also lastly, given the environment we are in, how have you seen multiple trending?

Yes, I definitely think that we'll be able to close some deals by year end. As far as multiples, we're very tuned in to the market and we'll respond appropriately.

Next question comes from John Davis with Raymond James.

So just maybe, Rick, appreciate the comments on M&A, but maybe we're following the last question. What sort of capacity do you have? And how should we think about leverage in the COVID world, kind of where I would be willing to take leverage on the other side of this or maybe close deals later this fiscal year?

Well, first of all, most of our deals are small and those would probably be the ones we would address first. And then, those that are trending well in April, in the current environment, we have a lot of capacity under our credit line, only 19 borrowed out of 275. And then we have strong cash flow. And so, between those things, we'll see how it goes, but we currently believe we have the ability to make some strategic acquisitions that are smaller size. Our leverage covenant is 5.0 and we're currently at 3.4.

Okay, I would assume in this environment, you're not going to push the upper limits to that. Is that fair?

That's fair.

And then maybe Clay or Greg maybe just talk a little bit about the geographic mix of the school education business, what states are biggest. And as we kind of think about reopened ease and who it was likely going back to school in the fall?

Ohio, Colorado, California are three, we do have a nice a group of businesses and New Jersey, I think they may be impacted a little bit more than Ohio and to California and California, but I mean a Colorado. We are, in tune with what's going on in each of the states, and we believe they will open on time and the fall.

And then remind me that I think, Clay, you had mentioned that the 2Q is seasonally the weakest. So as we think about the education mix for the full year. Maybe just help us think about the cadence, which quarter is strongest in education as we think about the model going forward into the back to school in the fall?

They're a little different for PaySchools and SchoolPay. SchoolPay have their strongest quarter in the September quarter. SchoolPay has very strongest quarter in the March quarter. Both fall off in the June quarter, because you get about a half a month in May and then zero in June. And so, if I had to pick a quarter for this to happen, this wouldn't be the quarter, but it's still very painful.

And then maybe last one for me. I really appreciate the breakout on the different verticals, the percentage of overall revenue there. But maybe comment on healthcare. Have you guys seen significant negative impacts there? I think we've heard some not horror stories, but some pretty bad healthcare numbers elsewhere. Just curious to know what you're seeing in your healthcare vertical?

No, our healthcare held up very nicely.

Our next question comes from Jason Kupferberg with Bank of America.

This is Cassy [ph] on for Jason, thanks for taking my question. My first one is just asked about sort of an update on trends maybe in states, where you've already seen stay-at-home orders being lifted versus states that haven't seen restrictions lifted. Have you seen sort of an increase in payment volume trends as people are searching more to online or mobile transactions? Thank you.

So I think everybody's mentioned, we have seen a nice uptick in the end of April. That has continued in May. I believe the state started opening around May 1 and we definitely saw the increase. But it's hard. I don't think I can tell you by state. How we've seen? But a lot of our business is online. So it's not like that makes us change. But it's improving on a daily basis.

Our card not present number tracks pretty closely with our integrated number that we report. So 55% of our traffic is card not present. That has been increasing overtime, as you know, and we think that'll continue industry wide to improve overtime. So we're well positioned there.

And as a follow-up to that, which verticals Have you seen bounce back the fastest sort of incrementally throughout April and into May now?

Not school, schools have been completely closed. Probably retail restaurant as states have opened up.

Thanks. And just one more question from me. I just wanted to get a little bit more detail about which areas of cost you're sort of focused on reducing. And obviously the payroll expenses will come back later as things ramp up again, but sort of how sustainable or maybe some of the other areas of long run cost cutting? Thank you.

Okay. Well, most of our -- we have bout a 70% gross margin, not quite a little less than that. But if whatever you're modeling for revenues, you could apply a percentage like that. And everything else is our operating expense, which ran about a little over $17 million this quarter. The cuts we've made will reduce that to $16 million of operating expenses. That's relatively fixed number, and that is mainly headcount, rent, insurance, et cetera, employee related costs. And so until we -- if we ever reduce again, it'll change that number and if our revenues pick back up that number could increase over time. But current run rate is about, is a little over $16 million a quarter. Does that help Cassy [ph]?

[Operator Instructions] Our next question comes from Josh Beck with KeyBanc.

Thanks everyone for doing the call, lot of helpful color and glad here everyone is staying well. I wanted to ask a little bit of a broader question. And it might be a little tough to discern, but I would ask. Just given you have a decent number of small businesses within your portfolio, have you seen any impacts or release as some of these PPP loans have been made over the last month? I know might be a little tough to discern, but just thought I'd ask.

We haven't seen a spike in merchant attrition. We anticipate there will be some, but we don't see -- we didn't see it at the end of, in our data at the end of March. I don't know that I have granular enough information to comment on the PPP impact, but we've definitely seen a rebound in May of volume.

And I'm not sure you've cut the business this way, but I think you mentioned the card-not-present mix is a good proxy for your integrated mix. If you were just to look at the card-not-present mix, is it have a pretty substantially different growth rate and any way to quantify that, but I'm not sure you really cut it that way?

Well, we've reported that number over every quarter, and it's been increasing as we have made more software acquisitions. But I don't know that we've seen a spike just because of the environment, it's been more as a result of business mix, I would say.

Okay. And I think there's been a couple of different ways, but if you look across your verticals, are there any ones that actually had positive year-over-year growth in the last couple of weeks, I was thinking about some of the ones that your highlighting is more defensive or even close to flat I guess in terms of the year-over-year trends and we still just not there may be within say, Public Sector or some of the more resilient ones?

Public Sector had a good March, the warrant roundup happens in March, and it was very good. It was a solid year, up until the last two weeks. But I don't know that I can comment on any -- rent share bounced a little bit, but it's so small, B2B was pretty good. I thought healthcare non-profit was above what we expected. And it's just the thing that's dragging us down is hospitality and education, and we know education is coming back.

So it seems like the visibility on the other side is quite reasonable for your book of business. And then just lastly, just to clarify. So Clay, I think you've mentioned 16 million. Is that a good -- is that number that you get to overtime over the next couple of quarters? Or is that a good run rate is when I think about April, just want to make sure I model that right?

Well, so the March quarter was 17.4 and then effective April 1st, we cut a million dollars. And so that would go to 16.4. So, it's not something that happens overtime. We got it done on April 1st.

Our next question comes from Peter Heckmann with D.A. Davidson.

In regards to Public Sector space, it seems as if some of the pressure that will probably see on state and local budgets, municipal budgets really should played pretty well for an integrated payment solution that includes convenience fees that's effectively self-funded. Have you seen an uptick in interest there? Or is it still a little early? And if it's early, do you agree with that thesis?

Well, there are a lot of pushes to get more automated or digitized in the exchange of money. And we've seen that, we're going to willing to see more of that in schools and in government. We have a different business mix in education and government, we're 60%, only 40% of revenues are payments. And so that's helped cushion this downturn. Education on the other hand is 70% payments. And so, they have little with different dynamics there. Our software revenues have increased overtime. This quarter software represented 24% and payments represented 67%. So that number continues to go up. And software is generally more insulated than payments, as you know. So, we think we're very well positioned. Both schools and governments are probably not the leaders, technology wise, they're slow to adopt until they really need to, but now they really need to, and so we think that'll help us.

And then another question just in regards to the ISPs, any change there in terms of kind of the terms relative number of partners that some of these ISVs are getting? And is there any thoughts about revenue share or any other terms that are notable in terms of changing?

We haven't seen any changes. We're continuing to sign ISVs, revenue shares range anywhere from 20% to 35%. They're looking for technology solutions. Ease is important to them. But we haven't seen any movement in revenue share or the number of ISVs, that we're able to secure that are looking for payment integration.

Okay. And as regards that, you see more ISVs, I mean, what would be the average number of partners that an ISV might have? Might they have 2 or 3? Or are there some champion-challenger type relationships?

I can't speak to the numbers. But I can tell you that we are seeing an increased number of ISV opportunities with the Pace acquisition. When that went down, we combined our internal ISV team with Pace and they've proven to be a market force. We've expanded our reach to all of our subsidiaries, and we've got salespeople across the country that are referring ISVs into the Pace organization now. So, we're seeing an uptick there. I think most of it was education, but we brought on some really talented people with Pace that know the ISV space, and that's helped as well.

And at this time, there are no further questions. I'd like to turn the conference back to Greg Daily for any additional or closing remarks.

Thank you, everyone. So, this is an interesting time. I think you'll see us talk more about the increase from check and cash to electronic payments in our future calls because it is coming. We're prepared for the rebound. I think it's already started. The numbers that we're seeing from May are very positive. And so anyway, thanks everybody for being on our call. Thank you.

That does conclude today's conference. We thank you for your participation. You may now disconnect.