I3 Verticals Inc

NASDAQ:IIIV

Earnings Call Transcript 2023-Q3

[Operator]

Good day, everyone, and welcome to the i3 Verticals Third Quarter 2023 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through August 16. The number for the replay is [phone] and the code is 5255024. 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 Geoff Smith, SVP of Finance. Please go ahead, sir.

[Geoffrey Smith, executive]

Good morning, and welcome to the third quarter 2023 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Clay Whitson, our CFO; Rick Stanford, our President; and Paul Christians, our COO.

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 in reports that are filed or furnished to the SEC. Consequently, actual operations and results may differ materially from those 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'd now like to turn the call over to the company's Chairman and CEO, Greg Daily.

[Gregory Daily, executive]

Thanks, Geoff, and good morning, everyone on the call. We're excited to present our third quarter results for the fiscal year. This quarter, we set another record for our revenue and adjusted EBITDA, which were up 17% and 26% over the same quarter last year, which reflect our improving margins.

We continue to focus on bringing excellent software to our Vertical markets. We monetize these solutions primarily through recurring sources of revenue through a variety of means, such as Software-as-a-Service or SaaS, which grew 20% over the prior year or volume-based payments fees, which grew at 14% over the prior year.

Depending on our needs of our customers, we can align incentives and lock in sustainable long-term growth. Overall, software and related services revenue made up over 50% of total revenue. Rick will elaborate on M&A later, but we continue to explore opportunities. There are many in our markets of focus such as public sector. Our standards are very high, and we are patient and disciplined.

We want deals that fit our culture and offer us more tools to execute in our vertical strategy. However, to say that our team is staying busy despite the slower pace of M&A would be an understatement. We have seized on the moment to accelerate internal optimization and are proud of the strides we have made. We've always intentionally counter positioned ourselves against private equity or other strategic buyers who would focus on quick wins, short-term home periods and aggressive synergies.

This has served us well and leading into acquisitions of many great businesses at attractive financial profiles. We've retained incredibly talented people and have accomplished this mostly through a proprietary pipeline of M&A. The word is out that i3 can be trusted with your business, which might be your life's work.

However, when the deal is closed, there is much integration work that is necessary. This is where our culture makes the difference. Post close our sellers quickly see what can be accomplished together, and I'm always amazed at the willingness to collaborate, embrace new business practices and be team players.

Some of the areas that our team has centralized and upgraded this year include our enterprise RFP response team and enterprise support team, in consolidation of many of our professional services functions. These joined many other shared services such as marketing, accounting and legal that are always continuing to improve. These wins have the business clicking on all cylinders.

To illustrate that, we are proud to announce 2 state level wins from our Justice Tech and Transportation divisions of public sector. We've never been better positioned to compete in many more similar processes, and I'm excited about the additional detail Rick has to share.

But first, I'll turn the call over to Clay, and he will give you more details on our third quarter financial performance. While in Clay's comments, Rick will provide more detail and update on the business and address M&A. Then we'll open up the call for questions.

[Clay Whitson, executive]

Good morning. The following pertains to the third quarter of our fiscal year 2023, which is the quarter ended June 30, 2023. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion.

We had another great quarter with record revenues and adjusted EBITDA. Revenues for the third quarter increased 17% and to $93.9 million from $80.6 million for Q3 2022, reflecting organic growth and acquisitions. Our revenue yield improved to 150 basis points for the quarter from 136 basis points for Q3 2022. Organic revenue growth for this quarter was approximately 10%, benefiting from a reasonably strong quarter for sales of software licenses, which totaled $2.8 million.

Although software license sales are not a part of annual recurring revenues, we keep highlighting this line because it has higher variability in recurring revenue streams and can help explain changes in organic growth from quarter-to-quarter. ARR totaled $311.4 million for Q3 2023, compared to $266.7 million for Q3 2022, a growth rate of 17%. Over 80% of our revenues in the quarter continued to come from recurring sources.

Software and related services remain the largest portion of our revenues, representing over 50% for Q3. Payments represented 45% and other 5%. Adjusted EBITDA increased 26%, outpacing revenues to $25.3 million for Q3 2023 from $20.1 million for Q3 2022, reflecting continued momentum in our Software and Services segment.

Adjusted EBITDA as a percentage of revenues increased to 26.9% for Q3 2023 from 24.9% for Q3 2022, reflecting margin improvement in our Software and Services and Merchant Services segments. Pro forma adjusted diluted earnings per share increased to $0.38 for Q3 2023 from $0.37 for Q3 2022. Again, please refer to the press release for a full description and reconciliation.

Segment performance. Revenues in our Software & Services segment increased 23% to $58.9 million for Q3 2023 from $47.8 million for Q3 2022, reflecting broad-based growth in our public sector vertical and health care verticals. Public sector represents over half of our consolidated business. It includes the education subvertical, which deserves special mention. Revenues in our education subvertical continued a strong rebound, thanks to organic sales to new school districts and higher lunch and activity fees at existing districts.

Federal and state lunch subsidies have decreased significantly since the pandemic. The segment's adjusted EBITDA improved 33% to $20.8 million for Q3 2023, from $15.6 million for Q3 2022, outpacing revenues. Adjusted EBITDA as a percentage of revenues improved to 35.4% for Q3 2023 from 32.7% for Q3 2022, reflecting high-margin software and services acquisitions such as Celtic over the past year and a return to traditional high margins in education.

The AccuFund acquisition effective January 1 was high margin as well. Revenues for our Merchant Services segment increased 7% to $35.0 million for Q3 2023 from $32.7 million for Q3 2022, reflecting growth in our B2B and ISO channels. Adjusted EBITDA for our Merchant Services segment increased 16% to $10.2 million for Q3 2023 from $8.8 million for Q3 2022, outpacing revenues. Both our B2B and ISO channels improved their profit margins, reflecting slightly better revenue yields and good cost management.

Our balance sheet remains strong and well positioned for 2024. On June 30, we had $272.4 million borrowed under our revolver, net of cash. The face value of our convertible notes are $117 million. As of June 30, our total leverage ratio remained approximately 4.0x. The current constraint is 5x under our new $450 million revolving credit led by JPMorgan Chase. The interest rate for the convertible notes is 1%, while the interest rate for the revolver is currently around 8.5%. Over time, we expect to convert roughly 2/3 of adjusted EBITDA into free cash flow, which can be used for debt repayment, acquisitions and earn-outs.

We define free cash flow as adjusted EBITDA minus capital expenditures, internally capitalized software development, cash interest and cash taxes.

Outlook. We reaffirm the guidance we gave when reporting our fiscal Q2. Fiscal Q3 was in line with our expectations, and we have not closed an acquisition. With only one quarter to go, we could have narrowed the guidance ranges, but the midpoints remain the same, which are our own best estimates of where we think things will shake out.

For revenues, we do not expect quite as large a step-up from Q3 to Q4 as we saw last year. The end of free lunch in education last year represented a $2 million sequential step-up from Q3 to Q4. We also had our largest historical quarter for software license sales of $3.5 million in Q4 last year, a $1.4 million sequential step-up from Q3 last year.

On the flip side, our adjusted EBITDA margin has trended well, running 2 percentage points ahead of last year, and we expect that to continue for Q4. As in the past, we will give guidance for fiscal 2024 when reporting in our fiscal Q4 of 2023. I'll now turn the call over to Rick for company updates and pipeline.

[Rick Stanford, executive]

Thank you, Clay. Good morning, everyone. I'll start with updates on the business and then cover M&A. When I sit down to prepare for this call each quarter, I think about where we have been, where we are today and where we want to be tomorrow. 11 years ago, when Greg spoke to me about his idea to create a software company comprised of a few different verticals with integrated payments on maybe [indiscernible]. We work together on a strategic plan and began quickly executing it. When I look back at that plan today, little has changed from the original design.

To date, we have completed 48 acquisitions. Since going public in June of 2018, both run rate revenue and EBITDA have more than tripled from $101 million in revenue and $28 million in EBITDA.

At this point in our evolution, we are devoting more effort to creating one team with one brand focused on driving results together. Over the last 6 months, we've aligned many departments and sub companies in the public, education and healthcare sectors under a common i3 verticals model. The alignment augments infrastructure and development resources across both vertical and enterprise service delivery areas. To ensure domain expertise we need the resources of being combined with like roles from sister vertical sub companies.

Adoption has been enthusiastic and increased infrastructure and development synergies are strengthening sales, product development, operations, implementation and deployment. In addition, these internal customer-facing markets are being bolstered by i3 teams focused on enterprise level infrastructure, security, cloud services, development and project management. Given the vertical alignment success, we are aligning the entire organization so that we operate as one cohesive company.

As a result, we have adopted and refined our shared services model and brought individual subcompany departments to a coordinated and cohesive enterprise level. The enterprise level teams historically consisted of finance, marketing, HR and legal. We have added an RFP response team, professional services, infrastructure and security. Resources are being deployed to meet organization-wide operation and sales support while maintaining vertical and domain expertise.

Our marketing team is coordinating with vertical heads enterprise wide to position our messaging in a strategic effective manner. The enterprise level marketing team coordinates with dedicated vertical market and product managers to ensure domain and brand continuity as all entities are actively working to brand as i3.

The Enterprise Solutions group comprised of 170 team members from across the organization, which includes enterprise support RFP response, professional services, client migration, implementation and integration who have both vertical product and functional expertise and will serve all verticals company wide. The group delivers a seamless, consistent client-focused experience throughout software implementations.

The unification of the RFP team, project management and professional services is expected to increase services revenue and decrease the time between contract signature and client delivery. Our enterprise RFP response team is comprised of domain experts from across the organization. The team is creating precise, comprehensive and unified proposals to RFPs and RFIs in our most strategic markets, including public, education, health care and payment technology.

We are investing in this team to meet increasing demand from large utilities, health care systems and statewide public entities. Our unified approach to research and writing, solution engineering, negotiation and legal review has been affected thus far, and we are winning new deals under this model. We are committed to leveraging robust technological solutions, so we are accelerating our cloud migration strategy for critical technology over the next 2 years.

Our cloud-first approach to delivering technology includes a blend of both public and private cloud providers. We have strategic relationships with both AWS and Microsoft who are assisting us with this transformation. Our remaining cloud-agnostic, we choose the best technology to deliver optimal solutions to our customers. The cloud empowers us to adapt swiftly to evolving customer needs ensuring that we can provide real-time solutions, seamless interactions and state-of-the-art data security.

We use Microsoft 365 to improve our abilities in the areas of identity and access management, threat protection, information protection and security management. We are utilizing Azure virtual desktops to manage global resources from a centralized platform while integrating seamlessly with other Microsoft tools across the enterprise. We are currently working on a single sign-on solution based purely on Azure cloud technology to allow our customers to log into our software applications and services using a single set of credentials.

Our Payment technologies utilized AWS Fargate to deploy and manage serverless, containerized applications in a secure, highly available, redundant manner, allowing us to auto scale our applications when needed to handle sites and customer demand. AWS allows for seamless integration with third-party tools such as Cloudflare giving us the ability for automatic failover between AWS geographic regions, resulting in zero downtime during events such as software deployments. We are also using instances of artificial intelligence and select customer service environments in all circumstances, the knowledge bases internal to i3 and responsive to the specific product solutions where there is market acceptance.

We are leveraging i3 India to enhance cost and speed to market in developing our proprietary vertical, enterprise and payment technologies. i3 India gives us access to skilled talent allowing for improved delivery utilization. Our focus is on rapid development tools such as low code to accelerate certainty of execution and speed to market. We have implemented an enterprise-wide agile software development life cycle, giving us flexibility to meet market demand, enhance quality for better user experience and a customer-centric approach focused on collaboration, continuous improvement and transparency.

The public sector continues to see positive market response to our wide range of solutions. With the support of Align marketing enterprise solutions and RFP teams, i3 public successfully sold and deployed enterprise-level solutions. Our Justice Tech division closed a 5-year contract with a state level judiciary AOC to deploy our online dispute resolution product, and our utility vision expanded its portfolio with a Tier 1 utility with our digital customer engagement portal solution and our payments.

In addition, the Transportation division, specifically the formerly known Celtic part of that group, won a significant state-level DMD solution under the i3 brand in the Midwest. The software suite being utilized by the state includes our; IFTA, International Fuel Tax Agreement; IRP, International Registration Plan and UCR, Unified Carrier Registration of integrated modules.

Third quarter sales in education sector are strong and contribute to a record year for i3 Education. As a result of focusing on software sales and strategic partnerships, we are adding more than 100 new districts to our customer base across the spectrum of the i3 Education software suite. i3 Healthcare Solutions is strengthening its market position by closing enterprise deals, leveraging enterprise and vertical-specific synergies. i3 Healthcare expanded their reach in the state of Louisiana and Alabama. They also formalized a new partnership with a state-level respected health science system to deliver RCM services.

Adoption of the Common i3 alignment model with i3 Healthcare has yielded improved profit margins for professional services and has produced record utilization rate for the quarter. This has allowed us to do more with fewer resources. i3 Healthcare software engineering team delivered an integrated solution between our EHR and medical billing platforms to facilitate the delivery of patient statements and payment portals to further monetize the process. i3 Healthcare is engaged in a highly focused business process strategy to optimize current business processes and look to new service delivery technology, leveraging artificial intelligence, machine learning and robotic process automation.

It should also be noted that all verticals have adopted a unified sales force to represent the entire product suite of respective vertical. In addition, i3 has enterprise software suite that spans all verticals and can be sold by the entire i3 sales force. Products include TrueSign, TrueCertify, IVR,I Digital community portal, EOS and the i3 PayTech product suite.

Market and vertical support, implementation, integration and deployment are provided by the i3 Enterprise Solutions Group. I'll now speak to M&A. We looked at several companies this past quarter but elected not to execute any term sheets. This stems largely from our desire to bring the offer multiples down and agreeing on price. We are remaining disciplined on what we will pay for a deal.

Also, pre-diligence must check out. We can determine early if the company will be a good fit, if the financials make sense and if we can grow and further monetize through the company. If not, we gracefully back away from the table. Our pipeline continues to be full of companies in both public sector and health care coming in and going out of the pie. We expect that we will continue our normal pace of acquisitions and are not concerned about our ability to do deals in the future.

In the meantime, we will continue to focus on growing the company, streamlining operations and paying down debt. As usual, we continue to self-source our acquisition targets. This concludes my comments, Megan, at this time, we'll open the call for Q&A, please.

[Operator]

[Operator Instructions] The first question comes from Matt VanVliet with BTIG.

[Matthew VanVliet, analyst]

I guess, first, as you look across the pipeline ahead, how are you feeling about a number of large deals? Any specific verticals where you feel like the pipeline is maybe even more robust than the rest of it as you've had some really recent -- good recent success here? And how some of those reference customers are helping you, help us just kind of look towards the next few quarters on where you think you'll see the most strength?

[Gregory Daily, executive]

So public sector still dominates our pipeline. We're still very fickle, how well it's performing. Healthcare has though picked up activity. I would say, last quarter, Public sector was probably 80% and Healthcare was in the balance of that. It's more probably 60-40 in the pipeline with Public sector still leading the way.

As far as large deals are concerned, I think we're still sticking to our sweet spot. We would do one if it came along, but it's not something that we have in our pipeline that I foresee us doing in the next year. So $1 million to $5 million of EBITDA is still our sweet spot. Our multiples are probably in the 6 to 8x now that we feel like it's a fair price, along with an earn-out stock options, our normal plan, but I still feel really good about the pipeline. And it seems like it has slowed down 6 months ago that the activity in the last in 60 -- in 30, 60 days has been pretty amazing.

[Matthew VanVliet, analyst]

Okay. Very helpful. And then as you look at a number of the newer products you've rolled out and maybe more importantly, the shared services teams now overlaying a number of your vertical go-to-market teams. How are you seeing overall deal sizes trend? Are you seeing customers maybe buying more than one module up front? Or is this still a little bit more of a land and expand strategy and the shared services teams are just helping everyone be a little more informed on what the opportunities are after landing?

[Rick Stanford, executive]

Matt. Yes. So we chip our model typically to sell one product and then go in with the second and third and fourth and so on over time. The fact that we've got enterprise-level teams working across the entire vertical, our salespeople as well as our product teams are aware of the entire suite. So I think we're able to offer 2 and 3 more products at a time at this juncture because we have an expanded knowledge across the vertical as far as the proprietary software that we've created in-house expands all verticals. We continue to push that and train our customers on the availability of those products.

[Operator]

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

[Peter Heckmann, analyst]

When you think about the kind of the largest deals from an RFP standpoint that you'd be willing to go after, when you're -- whether you're talking about TCV or annual contract value. Are these deals going to be $1 million, $2 million a year? I mean do you see the potential for winning deals that could be, let's say, $40 million over 5 years?

[Paul Christians, executive]

This is Paul Christians. We are seeing in our -- because of our RFP team and that's in history in the public sector and healthcare to a degree. A more natural -- a little bit more of a natural movement to larger enterprise opportunities that require multiproducts for execution on those. As we've been seeing that over the last several years, it's beginning to get a little bit more steam at this point given the recognition and the joining of Celtic and BIS for that whole Transportation sector that's been useful for us and in our court systems as well.

So generally, we see that those deals tend to be -- we don't see them as often as what we see county or municipal level deals. So they tend to surface without any consistent regularity, but we're very happy where we're positioned with them.

[Gregory Daily, executive]

I think one of the key things is the duration. I mean, things are 5 and more and more 7-year contracts. I would say that -- and we're talking $5 million to $10 million deals where we never saw those, and now we are responding to a couple of those per month. And the deal is out. It's early, but we're optimistic about winning a fair amount of those larger deals over 5 to 7 years. We feel really good about our pipeline.

[Peter Heckmann, analyst]

Great. Great. I mean certainly, we've seen it. I think you have statewide deals in, I don't know, 15 states, 4 or 5 Canadian provinces. So clearly doing it, but the potential is there and those type of deals provide some great visibility to recurring revenue. In terms of ramping those up, I mean, I know that each -- many of the companies that you purchased had existing software solutions. But typically, how do you think about the -- any either implementation work on professional services? Or kind of discretionary custom development that you might have to do for some of these deals is? As you move up, does that get a little bit more significant or not?

[Rick Stanford, executive]

I do believe it gets more significant, but we also have more resources than we've historically had in an organization aligned to support that. So the movement to enterprise level and the ability to ramp domestically and with i3 India gives us a high degree of comfort to be able to continue to do that in and enhance the certainty of delivery even over what we've done historically.

[Gregory Daily, executive]

Their existing technologies got to be 20 years old and maybe 30. And so we are definitely bringing them out of the dark ages, COVID helped us. But it's quite dramatic. What we are installing versus what they're using today.

[Peter Heckmann, analyst]

Right, right. Okay. And if I could just squeeze just one more in, in terms of thinking about the business, 10% organic growth in the quarter, that's great. In terms of -- do you have a preliminary thought for fiscal '24? I mean would we be thinking high single digits is appropriate?

[Clay Whitson, executive]

We are thinking high single digits. This year, education provided a tailwind as free lunch went away, and we saw that in the fourth quarter of fiscal '22. So -- but we're still thinking high single digit, which is consistent with what we've guided since the IPO.

[Operator]

Our next question comes from John Davis with Raymond James.

[John Davis, analyst]

Rick and Greg, I appreciate all the comments on M&A. But Greg, I want to dig in a little bit on your comment around valuations. What are you seeing from a private market perspective? Obviously, public markets have reset, but it seems like there's still a little bit of a hang up. So is that the biggest hurdle to doing deals today? And then how do you think about your valuation and what you're willing to pay I assume it's impacted by the fact that you're kind of paying 8% on the debt?

So the hurdle becomes higher. But just curious like what the big hang up is and how you guys think broadly about kind of paying down debt versus doing M&A?

[Gregory Daily, executive]

Great question. Valuations, we self-source the deals JD. So they believe as they trust us, very rarely do we talk multiple. We send them a term sheet that says, here's $15 million for your $3 million worth of EBITDA. We moved that up with an earn-out based on growth. We give them stock options if it's a deal that is fantastic. We've done a deal with Milestone. We've done one with SSI. And these companies are growing dramatically, perfect fits. And then so we probably paid 8, 9 or 10x and gave them a sweet earnout.

But we don't -- those deals don't come across our desk very often. But we're being conservative on valuations because I think we have a lot more to choose from. I mean it seems like we used to do half of the deals we look at. Now we do less than 10%. We're pickier, we've got -- we don't need more case management systems. We've got 5 of them and a lot of it boils down to the person.

I mean, I walked back in the office after a meeting in Houston last week. I do -- wait till you meet these guys, that I just meant, and that's big. We're looking for a 40-year-old family owned software businesses. They need upgrade. They need shared services, they need marketing, legal -- it's all about timing.

[John Davis, analyst]

Okay. That's helpful. And then, Clay, just -- I heard Rick's comments about kind of moving to the cloud over the next 2 years. You guys have historically guided to 50 to 100 basis points of kind of organic margin expansion. Any reason why that move to the cloud would pressure that? Could that help margins eventually? Just curious, you guys are making a lot of investments in kind of streamlining the team going to market under one brand. Also moving to the cloud. Just curious on how we should think about the margin and the impacts there?

[Clay Whitson, executive]

Yes. I do think we will achieve 50 to 100 basis points again in 2024. Moving to the cloud is temporarily a headwind for margins, but we have other things going in our favor. In the long run, it will help margins significantly because instead of updating all these on-prem instances of software you can update once and it just ripples out to all your customers.

You noted in your note last night that our corporate expenses had gone up as a percentage of revenues, and that's true. The big driver of that is we hired a new CTO last year about a year ago, and he rightly recommended that we beef up our security, our project management, our development capabilities. And so we've done so. So that's been sort of a step-up, an investment for us. And I think we're seeing the benefits of that.

[John Davis, analyst]

Okay. That's helpful. And then good to see the 10% organic growth relatively consistent. I think if you normalize that line with the last several quarters. But if you look at the networks, I know a lot of your businesses, not very cyclical in government and education and health care.

But have you seen any sort of kind of slowdown? You pointed to the midpoint of the guide for the full year? Any pockets, any quarter-to-date updates -- sorry, any pockets of weakness or any thoughts on trends in July and so far in August?

[Clay Whitson, executive]

Well, going from our Q2, which is the March quarter to our Q3, which is the June quarter, we always have a little education. They close schools in the middle of May and then they're closed in June. So education is weak during that period.

Going into Q4, education came on like gangbusters last year because they did away with free lunch. And so we'll still have a strong education quarter in September, but it won't be the big step-up from the previous year's comparison that you saw in Q4 last year. And then I think it's -- we should always keep our eye on our software license sales line item. We had our biggest quarter ever in Q4 last year of that. And we generally expect every quarter closer to $2 million and so I don't think the step-up from Q3 to Q4 is as big for those 2 reasons as they were last year.

[John Davis, analyst]

Okay. That's super helpful. But no, you're not seeing any sort of pockets of weakness, whether it's your kind of small restaurant business or everything is just kind of humming along as you had expected?

[Clay Whitson, executive]

Yes. Everything is good. Healthcare has really picked up activity. No, I can't think of any pockets of weakness.

[Operator]

Our next question comes from Mark Palmer with Berenberg.

[Mark Palmer, analyst]

Yes. Just wanted to ask about the opportunity to introduce payments to your health care vertical, what your current thinking is with regard to that opportunity what the timing of a rollout could look like and what that would evolve?

[Clay Whitson, executive]

We're actively involved in that today. It's important to give the software delivery and the respective service being delivered that we have that be seamless to our customers. And we're doing that today and actively in our initial harvesting and investing in additional sales personnel to accelerate that across the spectrum.

[Gregory Daily, executive]

It seems like Healthcare is probably 20% of our business is somewhat on a role that we penetrated payments single digit, I mean 5% to 6% at best pace And so it's a great question. It's a big project priority in the second or third inning of where we need to be.

[Mark Palmer, analyst]

And how should we think about the improvement to ARPU associated with the attachment of payments to Healthcare?

[Rick Stanford, executive]

We didn't understand. We didn't .

[Clay Whitson, executive]

The improvement of what?

[Mark Palmer, analyst]

To ARPU, the incremental revenue per customer that would result from attaching payments to healthcare?

[Clay Whitson, executive]

Well, I don't think it's as large as some of our verticals like education, for example, we're -- this is a field where insurance pays the majority of the bill. And so it's a lot of co-pays on the front end. And so -- well, it's significant. It's not what you might see in education, for example.

[Gregory Daily, executive]

It could be as high as 20%.

[Operator]

Our next question comes from James Faucette with Morgan Stanley.

[James Faucette, analyst]

I wanted to ask really quickly a follow-up on margins and growth. Is that you mentioned kind of the hiring CTO and that there have been some increased expenses associated with that. And certainly, your qualitative commentary seems to indicate that you're focused a bit more on integrations and advancing the capabilities of your solutions.

I'm wondering how we should think about like the -- what that does for margins, you indicated to be a little bit of a headwind. But what's the long-term potential there? And I guess tied into that, how much of your growth right now is coming, if any at all, from being able to put through pricing changes perhaps related to CPI conditions and contracts, et cetera.

[Clay Whitson, executive]

Well, on margins, I do think our long-term guidance is still 50 to 100 basis points a year. Some of the streamlining we have done not only delivers a better product to the market, but does result in some cost savings because we've just had duplicate functions internally in a lot of areas resulting from some of our acquisitions.

We are trying to keep pace with inflation. If you look at our revenue yield in Merchant Services, for example, we increased a basis point this quarter, which is not big, but we're staying even with increases from Visa Mastercard our costs that we're passing through. So we're doing that. We're doing modest increases in software as well, just trying to keep pace with inflation. It's no secret, everybody has some wage inflation. So we're able to keep pace.

Our style has never been to raise prices. And so in some cases, when we do, we haven't raised them in 10 years and our customers understand. So we do have the ability and the resolve to pass through cost increases. But IT, long term, it will be a net win getting to the cloud. In the near term, it's a little bit of a headwind, but we have other things such as streamlining keeping us ahead on the margin front.

[Operator]

[Operator Instructions] Our next question comes from Charles Nabhan with Stephens.

[Charles Nabhan, analyst]

As we think ahead to next year, on the top line, it seems like things are going to be pretty clean from a comp perspective. Celtic went in on October 1 and you're distancing yourself from some of the COVID-related boot recovery. But I guess my question is, if we think about the cadence of revenue growth throughout the year. Is there anything notable to call out in terms of large go-lives or license renewals that could swing 1 quarter or another higher or lower?

[Clay Whitson, executive]

No. Really, as you point out, it is a pretty clean comp. We acquired Celtic on October 1 and the year before that, we acquired ACS, our health care company on October 1. AccuFund was a small acquisition January 1. So that would just leave us in the absence of more acquisitions, which I think we will make more acquisitions. But until we do, I think it's just our normal seasonality. And Q4 is always a good -- which is the September quarter is always a good quarter back to school is good there.

December weakens a little bit for payments in our public sector. Q1 is strong for payments in our public sector. Q2 is weak in education because of school closures. But all of those are just normal seasonal patterns that would make a difference between quarters next year.

[Gregory Daily, executive]

If there was a spike, we would be very explainable. I mean we could put a finger on it and say this is exactly what [ health ] professional services...

[Clay Whitson, executive]

Yes. The onetime software sales line does vary every quarter, and it usually explains the difference. But as you're modeling, I think just a little bit of organic growth throughout the quarters every quarter also would explain the distribution next year.

[Charles Nabhan, analyst]

Got it. And just as a follow-up, I noticed in your M&A commentary that the lower end of your EBITDA target guide is a little lower at $1 million than it's been in the past. So I think in the past, you said $2 million to $5 million or $2 million to $6 million. And I know we're focused on the larger deals, but does that reduction indicate a willingness to do smaller deals? Or is there any specific area in your product mix that you think might be filled like such as an AccuFund with a smaller -- an acquisition on the smaller side?

[Gregory Daily, executive]

Yes. AccuFund is a perfect example of why I said one. They were a smaller deal, and they've been fantastic beyond our expectations. It's -- there is some small deals if we could find another deal like AccuFund with the management and the software and the whole that maybe we have in our offering, we would do that. We really aren't crazy about the small ones, but they really have to be perfect.

[Operator]

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

[Gregory Daily, executive]

Thanks, everybody. I'm going to ask Geoff Smith to talk about something just briefly. I know that John Davis asked about M&A and paying down debt. Why don't you walk through kind of our thoughts on paying down debt over the next 18 months.

[Geoffrey Smith, executive]

Sure. So I think something that you'll see when you look at like the last 9 months as we stepped up our leverage to do Celtic, do a deal that we thought was a really good value for us. And since then, we've been staying very disciplined in bringing down our leverage into our credit facility, refinancing was a really big win. We also had a number of earnouts this last year. So the rate at which the velocity, which we're paying down debt, coupled with higher interest, a little bit lower. As we kind of turn through some of those earnouts and you can see that on our balance sheet, the position we're in with those has come down.

I think that over the next -- the visibility we have through the next fiscal year, the rate at which we pay down debt will be a little bit higher. And we've previously spoken to the market that -- and we can do north of $100 million a year of M&A assuming 10x multiples. And in this current environment, as Greg alluded to earlier, we hope to do much better than that, right. We can do significant amounts of M&A just off our free cash flow. So we're really happy with where we are in terms of the scale is at and our ability to grow organic -- grow with M&A, but just grow with our cash flow.

I think the word to kind of hang on this would be -- we plan to be very disciplined on this. I'll find the right opportunities. Greg was just speaking about our ability to do deals that are larger or smaller. If it's a smaller deal and it's a strategic fit that takes sometimes as much effort as a larger deal, but we can do that, and we're willing to do the work to get something that's going to be a great asset for us, and it's going to grow. And so we think we're in a really good position in M&A. The opportunities that are out there remain really exciting, but we're staying disciplined to make sure we get the right deals at the right value.

[Gregory Daily, executive]

Great. Great. Well, again, thanks, everybody, for joining us. A special shout out to our team. They are just remarkable, and I love it. So anyway, have a good day. Thanks, everybody.

[Operator]

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