Good day, everyone, and welcome to i3 Verticals First Quarter 2022 Earnings Conference Call. Today’s call is being recorded, and a replay will be available starting today through February 16. The number for the replay is 877-344-7529 and the code is 6617684. The replay may also be accessed for 30 days at the company’s website. At this time, for opening remarks, I’d like to turn the conference call over to Geoff Smith, VP of Finance. Please go ahead.

Good morning, and welcome to the first quarter 2022 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 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 information. 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 reports that are filed or furnished to the SEC. 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, Geoff. And good morning to all of you. We're pleased with our first quarter 2022 results. And we are confident in our ability to produce strong results for the rest of the year. We exited fiscal year 2021 with a great momentum, and this momentum is continued today driven by our continued growth in proprietary software and payment segments. We set quarterly records in revenue, software and related services revenue and adjusted EBITDA. We are a software led company and we are delivering on that strategy. To that end, our first quarter revenue increased 66% over prior year and adjusted EBITDA increased 72%. Our software and related services revenue increased 116% in the first quarter of fiscal year from the first quarter of fiscal year 2022. Our software and related services revenue grew 49% of our federal revenue in the quarter, up from 38% in the first quarter of fiscal year 2021, and surpassed our payment revenue for the first time. To further emphasize our continued software transformation, I want to highlight that our annualized recurring revenue grew 53% year-over-year, and our ARR is $240 million. The first quarter of fiscal year 2022 included a full quarter results from our October 1 healthcare acquisition. We're excited about this acquisition, what this acquisition is brought to the table and healthcare revenue cycle management. We've already seen multiple cross sell opportunities and look forward to the future of this business. We announced the public sector deal acquisition on January 4; this acquisition did not contribute to the past quarter from a revenue or adjusted EBITDA perspective. It operates in the southeast and the Mid-Atlantic regions, and brings additional state level contracts in our public sector vertical. We're excited about this new acquisitions fit within our team and our strategy. Beyond this recent acquisition, we saw several new state markets open in our public sector teams. These acquisitions -- these expansion opportunities include the state level engagements, local municipality and state court level customers. Many of our software applications are capable of crossing state borders and we're seeing that trend continue. Recall and describe this expansion in greater detail later. On a general market note, we have noticed an increase in RFP activity within the public sector in fiscal year 2022. This is a positive trend and we like our win rates. Our capabilities within public sector market continues to accelerate. And this vertical will continue to drive the growth at i3 as we move forward. Now I'll turn the call over to Clay and he will provide you more details on our first quarter financial performance. And then following Clay’s comments Rick will give us an M&A update and then we'll open the call up for questions.

Following pertains to the first quarter of our fiscal year 2022, which is the quarter ended December 31, 2021. Please refer to the slide presentation titled supplemental information on our website for reference with this discussion. We had a great quarter with record revenues adjusted EBITDA and pro forma adjusted diluted earnings per share. Revenues for the first quarter ended in December increased 66% to $73.9 million from $44.6 million for Q1 2021, reflecting continued double digit organic growth and acquisitions. Almost all of the metrics we track are headed in the right direction. Our integrated payments percentage improved to 61% for Q1 2022 from 56% for Q1 2021, which helped the revenue yield improved to 139 basis points for the quarter from 117 basis points for Q1 2021. Acquisitions owned less than 12 months exclusively in our proprietary software segments contributed $22.2 million of revenues during the quarter. Software and related services revenue continued strong growth representing a record 49% of revenues for the quarter compared to 38% for the first quarter of fiscal year 2021, reflecting the continued focus of our acquisition strategy. For the first quarter in our history, software and related services revenues exceeded payments revenues. With the public sector acquisition effective December 31, we have crossed the 50% mark for software and related services revenues, an important milestone in our evolution. Accordingly, we have started giving more granular data on the composition of our revenue streams on page two of the supplemental presentation, including an annual recurring revenue metric, which totaled $248.4 million in Q1 22 compared to $157.5 million for Q1 2021, a growth rate of 53%. Adjusted EBITDA increased 72% outpacing revenues to $18.3 million for Q1 2022 from $10.6 million for Q1 2021. We showed strength across the board with continued momentum…

Thank you, Clay. Good morning, everyone. I want to give an update on a few things and then I'll discuss M&A. Our public sector unified product offering software solutions continued to have strong results with success in local municipal, county and state markets. Over the last quarter, we've expanded our geographic and product reach by adding new territory and entity software solution sales in South Carolina, Louisiana, Texas, Colorado, and Massachusetts. Our software solutions opened five new states with contribution from six i3 public sector entities. Additionally, we expanded market share in several existing footprints in multiple states. The breadth of our expansion includes additional instances of our utility billing, public safety, courts, payment processing, digital signature and certification, finance, records management and kiosk software solutions. Lastly, we are realizing significant adoption of our recently announced LCRAA, Louisiana Clerks Remote Access Authority Software Contract. Our success of the UPO and public sector in both cross pollination of products and share wins over the last six months validates the work we've done over the last couple of years. We have a tried and true template to be used in other verticals now, namely healthcare. The unified product offering for healthcare is moving along nicely, and we're extremely pleased to see the collaboration amongst the team. We are hopeful very soon we will see lifts and sales activity around combining resources and the introduction of new product suites designed specifically around the healthcare vertical. From an ISV partner perspective, our total of signed and integrated ISVs at the end of the first fiscal quarter was 90, with eight more in the process of integration. Our ISV business continues to expand. I'll shift gears now and speak to M&A. On January 4, we announced the completion of our latest acquisition and public sector.…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Peter Heckmann with D.A. Davidson. You may now go ahead.

How are doing guys? It’s John on for Pete. Just a quick one. What was the approximate growth rate in the second quarter? Organic growth rate?

16%.

Got it. Got it. And then what's the organic rate embedded in that full year guide?

Embedded in what?

In the full year guide.

Of the full year guide. Oh, we've said that we said on the last quarter when we release guidance that we do expect double digit organic growth for fiscal 2022.

Perfect. I’ll just squeeze one last one in, is it fair to assume that as January public sector acquisition generates around 8 to 12 in annual revenue.

So we paid 35 million for it. And if you use a 10x multiple, that will give you an idea of EBITDA. It does have quite a high margin close to 50%.

Perfect, thank you so much. Appreciate it.

Thank you.

Our next question comes from Jason Kupferberg with Bank of America. You may now go ahead.

Thank you guys. So maybe just to start a little bit of a follow up on that on that last question. Just if we look at the rays and the guidance for fiscal year 2022, is that more or less coming from the recent public sector acquisition or would you characterize some of the rays as organic?

The lion's share is the acquisition, but we did beat our expectation for Q1 slightly and so we've passed that race through to the remainder of the year.

Okay. Understood and then thank you for the new disclosures on the ARR. That slide is helpful. I think you said ARR grew 53% year-over-year in the quarter. So I was wondering on a full year basis where you see that metric coming in?

I don't think we're to forecast individual line items on this page, but we will report it every quarter.

Okay, okay. All right. No. Understood. Understood.

Jason, if you want to use an estimate, 80% of our revenues in this quarter or ARR are recurring. And so you could take our full year guide and, and use that as a proxy.

Make sense. Okay. Well, I appreciate the color. Thank you, guys.

Thank you.

Our next question comes from George Mihalos with Cowen. You may now go ahead.

Hey guys, good morning, and thanks for taking my questions. And nice, nice results here. Wanted to start off with sort of a high level question. And that's just as we sort of look at inflation, and is that making its way through the markets. You talked a little bit about rising rates? And, and but how do you think about that, from both a top line and bottom line perspective? I mean, you're mostly software now, fair number of convenience fees, is inflation itself into the top line? And how are you sort of managing it? We're thinking about it from an expense standpoint.

Well from top line, you'll know that with all the payment processors that higher tickets are generally good for payment processors. From an expense standpoint, we have raises going in or that did go in January 1. And they were 6% to 7%. While last year, we did not have raises during the COVID period. And so that is a an impact on our expense structure. And so we have some 34 offices, but in certain offices, Nashville being one of them we are feeling pressure on compensation, like all companies are.

Okay, that's helpful. Appreciate that commentary and what you've embedded in the guidance. Wanted to also ask you guys have really a beat again, on public sector, obviously, I think you're talking about more fees or record RFPs. Are you seeing that across the board, state, municipal, or is it skewed more to one category? And I'm wondering if the nature of the competitor that you're seeing now, as you move upstream? If that's if that's starting to change, if you're seeing different logos, if you will, in some of these RFPs?

Yes, George a good question. It is across the board, part of it is pent up demand. The other part is confidence. With the American rescue plan and the dollars that are available. We're our marketing teams and sales teams continue to educate our customers on what's available to them. I believe only half of that packages is available this year and a half next year. And I guess they need to use that money by the end of 2024. But we haven't been able to succinctly tie the increase in RFPs to the money that's available. Again, I think its confidence. And there's a demand for change in the technology that many of the municipalities are using today. I don't know if I answered all your question.

Yes, no, that's, that's perfect. Appreciate it. Just one last one, if I can sneak in. Any sort of notable Omicron impact as you went through December and maybe sort of the early days of January, and thanks again, guys.

We really didn't notice any change from Omicron. From prior to Omicron we were in a Delta environment. Having said that, I don't feel like the economy is come all the way back from COVID. I feel like there's still 10% of a headwind from it, everything from supply shortages to short staffing. There's just some kind of sand in the gears of the economy. It seems like.

Thank you.

Our next question comes from Matt Schwarz with Raymond James. You may now go ahead.

Hey, guys, this is Matt on for JD. Thanks for taking my questions and congrats on another deal. So appreciate the color on organic growth. Quick question is there any reason post COVID that 10% can't be higher as software revenue becomes a larger part of your mix. So is low teens even a possibility post COVID?

It is a possibility and it is our target or our goal. Our guidance for 2022 is double digit. For 2023, I think we'll address that when we come over the hill and have better visibility. But it's definitely our goal to get there. It's not yet our long term guidance.

Okay, great. And then just one more on Merchant Services margin. On an organic basis, like what is the normalized level of margin expansion there? Like, are we looking at 25 to 50 basis points a year ballpark? And I know there's going to be M&A. And that's going to come at different margin profiles. But is it possible you can get back to 33%, 34% EBITDA margin [Indiscernible] Thanks guys.

Our target with our guidance with our current mix of company’s long term is to expand margins 50 basis points to 100 basis points a year. And where we expect to get that leverage is on the corporate expense line, which should grow at an inflationary rate, while the top line, as you see is growing at a much higher rate. So over some time period, I do think it's possible to get into the 30s.

Okay, great. Thanks, guys. That's going to end the quarter.

Thanks, Matt.

Our next question comes from James Faucette with Morgan Stanley. You may now go ahead.

Great, thank you very much. Wanted to ask quickly on acquisitions, obviously, you guys have had a different and acquisition strategy than a lot of people and they're seeing good success and it's obviously contributing to the growth. What are you thinking about the current environment? Especially given the volatility in valuations and how should we think about or what would you like to see in terms of cadence of acquisitions as we go through 2022 compared to the last one or two years?

We've generally, well to answer the first part of your question, private company valuations, at least for the population, we look at where it's found or owned, maybe it's been owned for 30 years, 40 years. It's somewhat disconnected from public valuations. So I don't anticipate a large impact from volatility and public valuations crossing over into the world we work in. As far as pace of acquisitions, we've generally guided to four to five a year, generally one acquisition per quarter. And, sometimes it works out a little differently than that, just luck or opportunity. But that's how we go into each year planning. And so as you know, M&A is kind of a there's a lot of factors that go into it. And it's hard to hard by nature to predict.

Sure, but it sounds like from your perspective, is that the types of companies that you're looking at and having conversations with etcetera, they haven't been subjected to that to the massive moves and in the overall valuations, etcetera. And so it sounds like that, from what you're saying is that those conversations and I guess negotiations are pretty similar to what they have been historically then.

They are. We go out and tell our story of now becoming part of something larger, taking care of key employees, given them a lot of autonomy and taking care of the customers. And, they're not always looking for top dollar. We are looking for people that have built something they're proud of, and they want to stick around and be part of something for another 5 years or 10 years.

Got it. And then I think you address this a little bit, but I wanted to kind of re ask, maybe because I didn't understand it the your answer in the first place. But, when we think about the increasing contribution of software, and as we go through the integration period, and kind of inorganic growth becomes organic growth, just with the passage of time, how should we think about, like the leverage and the margin impact? I mean, obviously, you're putting up good, top line growth numbers, etcetera. But should there be incremental margin and margin expansion over time? Or what's our kind of what's the framework that we should be using on to as we think about the integration of these acquisitions?

I do. I think so. For one thing, everything we've purchased post IPO, has been software related. And those companies generally carry higher margins. The payments that get attached to those companies over time also have higher margins than non-integrated payments. So I do think there's a general shift over time to improving margins. An example of a company we just bought 50% margins, that's probably about as good as it gets. But so yes, over time, I think so. But it will depend on the mix of companies we purchase.

Got it, makes sense. Appreciate your time this morning.

Thank you, Jim.

[Operator Instructions] Our next question comes from Chris Donat with Piper Sandler. You may now go ahead.

Good morning, gentlemen. I wanted to just revisit one element of guidance. And then also if anything's changed as far as the education business goes, what's embedded in your 2022 outlook? And then are you seeing any changes that can affect anything within the guidance barriers. Is it more of a 2023 event at this point, if there is a change?

Well, I think on the last call, we gave some rough numbers for revenues and EBITDA for education. It was a little less than 4 million revenues, and EBITDA of around 1.5 million. We were only slightly down from that in the December quarter. And that's a normal seasonal thing. So that gives you an idea of the run rate going forward. As far as lunch goes, which would be a catalyst for setting higher on revenues and EBITDA. That will depend on politics and local jurisdictions. We think it'll probably happen someday, because it's very hard on district budgets, free lunch for everybody. But I don't have a, I don't know of a timetable yet. But I feel like it's there at some point in the future. I just, we're not privy to that. We don't have that knowledge right now.

So okay, so I was just wondering if anything and sort of changed in the last couple months, but doesn't sound like it has. And then just digging into this supplemental disclosure. As we look at the, at the top of the page two and the recurring software services, the increase in the quarter to 10.3 million from 3.2 million Clay, is that all acquisition related or is there some other business that's kind of bouncing around quarter-on-quarter there?

That is mainly the health care acquisition we did on October 1, as the lion's share event.

Okay. And just thinking about the -- I think I heard you correctly, Greg, that you hadn't really seen any, any change related to Omicron because you went from Delta to Omicron. but just to double check within the hospitality businesses it's been steady state in the last couple of quarters just specifically for that one because we're hearing other things and some other places but just didn't sound like there was any change in hospitality but I wanted to double check.

We have seen a slight dip. In hospitality, especially on the West Coast, we have a large presence, that it's thinner margin business. So it really hasn't, it didn't affect our EBITDA, to speak of that, the restaurants are open, there's new ones opening. Their volume may be down a little bit but it's, its not measurable.

Okay, thanks for that additional detail.

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

I want to thank everybody for their attendance and interest. And stay tuned, we've got -- things are rolling along really well. The team's doing awesome. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.