IIIV - i3 Verticals: Multiple Strategies To Drive Growth

Summary

• The world of payments and software are converging and IIIV stands to benefit from this.
• SMB is a very large market which means there are plenty of whitespaces available for IIIV to grow.
• I expect IIIV to double down on growth strategies to drive growth.

Thesis highlight

I think that i3 Verticals ( IIIV ) has 19% upside. I believe IIIV will increase its focus on the growth strategies I mention below, particularly its emphasis on partnering with and acquiring additional ISVs to increase its reach among a wider variety of merchants. As IIIV partners with or acquires more ISVs, its up- and cross-selling opportunities increase and its growth runway lengthens.

Company overview

The embedded payment capabilities of IIIV's software and payment solutions are crafted to meet the unique requirements of customers operating in strategic vertical markets. All of its clients' third-party business management systems can be easily integrated with its payment technology solutions, which also offer security and comprehensive reporting tools.

Payments and software are coming together

Recent technological developments, such as the widespread use of application programming interfaces [APIs], which enable integration with both software and payment technology, are causing a shift in the electronic payments sector. Companies can now take advantage of the time savings afforded by built-in payment processing. Merchants are increasingly building in payment processing capabilities into the platforms that power their businesses.

Businesses of all sizes are increasingly looking for all-in-one software and payment packages. Independent software vendors [ISVs] and payment processing companies are forming partnerships to address this gap, and the two parties often enter into revenue-sharing agreements related to payment processing. In order to maximize the potential for profit from payment processing, some ISVs have begun including their own proprietary payment capabilities in their software packages.

SMBs represent a large market

Many established merchant acquirers offer their payment processing services to businesses of varying sizes, ranging from small one-person operations to large multinational corporations. My opinion is that there are many reasons why large corporations might want to do business with SMBs.

SMBs usually don't have the financial resources that larger corporations have, which makes it difficult for them to make substantial investments in technology. As a result, they tend to rely more on service providers like merchant acquirers to handle important tasks such as accepting payments and providing other necessary support service. SMBs have complex technology needs as well.

In an ever-growing omni-channel world, organizations need much more capabilities to serve customers as the share of total purchases made via electronic and mobile channels continues to rise. Furthermore, SMBs are looking for software to help them with a wide range of internal operations, such as marketing, inventory management, invoicing, and others. By collaborating with ISVs or providing their own proprietary software, merchant acquirers can better serve SMBs and better meet their needs. The SMB market includes a wide range of businesses and organizations. With a wider variety of customers, the possibility of a narrow market share is diminished. While the total addressable market is sizable, I believe providers will fare best by catering their integrated payment solutions to the specific requirements of their target customer base.

IIIV targets market segments that are attractive

It is my opinion that IIIV stands out from the competition due to its ability to provide cutting-edge payment and software solutions to meet the unique requirements of key vertical markets. To begin, IIIV's gateway and PayFac model allow its integrated payment and software solutions to be used in a wide variety of channels and business domains. This allows IIIV to cater to the unique requirements of various vertical markets, making it an extremely useful feature. Examples of these sectors include universities, hospitals, government agencies, property management firms, and healthcare facilities.

The decision by IIIV to focus on verticals strikes me as particularly astute given the size and expansion rate of those markets, wherein businesses and other organizations frequently lack payment functionality. This bodes well for the widespread adoption of IIIV products and services. Moreover, the market for IIIV solutions has a fragmented competitive landscape. With the help of its extensive distribution partner network, IIIV has established a formidable foothold in these industries by integrating and cross-selling solutions to businesses in these sectors. I think IIIV's keen understanding of the needs of its customers is made possible by the company's extensive experience in each of these strategic vertical markets.

Strong network of ISV to target SMBs

In addition to a growing network of distribution partners, including ISVs, a direct sales force is a primary channel through which IIIV delivers its solutions to customers. The number of IIIV's ISV distribution partners has increased dramatically from 25 at IPO to more than 90 now. In my opinion, IIIV can speed up its market penetration with a more affordable one-to-many distribution model by utilizing the ISV partner strategy, which constitutes a significant distribution channel. The greatest advantage of such a strategy is the high retention and rapid expansion that it typically produces. The customers of IIIV's ISV partners are effectively a new market for IIIV's services.

Fundamental to this approach is my conviction that IIIV's proficiency in integrating payment processing solutions into the software of distribution partners represents a significant edge that has allowed the company to amass a large and varied customer base with a high percentage of repeat business. Moreover, IIIV has bought ISVs to gain a better foothold within the distribution channels. My guess is that this will help IIIV stand out from the crowd and boost its bottom line.

Future growth opportunities

In a simple equation, the way IIIV growth can be reduced to: # of ISV/Distribution partners * customers/ISV or partner * revenue/client = IIIV revenue. As such:

1. With the help of their current distribution partners, I believe IIIV will expand organically by offering their clients innovative payment technology and software solutions. Cross-selling services and promoting IIIV's omni-channel capabilities to existing clients is a great way to help customers and increase payment volume, in my opinion.
2. IIIV should keep working to expand its distribution partners' merchant base. It's safe to assume that many businesses operating in these spheres are not yet making use of IIIV solutions because no one has proactively reached out to them. There may be no compelling reasons to make the switch, such as the conclusion of a contract or a satisfactory resolution to a problem with customer service. Therefore, I believe IIIV should maintain its focus on this promising opportunity by strengthening its ties to relevant distribution channels.

As an additional option to organic expansion, M&A is always available. In order to grow its business organically, I believe IIIV will look to acquire platforms in emerging vertical markets, as well as complementary solutions. Already having completed over ten acquisitions since IIIV's IPO, the company's management has proven themselves to be adept at M&A in my view.

Valuation

My model suggests that IIIV is worth $34.41 in FY24. My estimates are guided by management FY23 guidance and their long-term guidance of growing high-single digits (as mentioned in the latest earnings call). Behind this confidence of IIIV able to hit its guidance is as mentioned above. I expect IIIV to double down on the growth strategies I mentioned, especially in partnering/acquiring more ISVs to deepen its penetration into a larger pool of the merchant base. The more ISVs IIIV partners with or acquires, the larger the potential for up/cross-selling, which would also further extend the growth runway of IIIV.

Risks

Competitive industry

There are few obstacles to entry in the payment processing services market, making it a highly competitive space.

Finding more ISVs to partner with may not be easy

ISVs have been around for some time. Because of this, many of these ISVs may have an established network of partners among solution providers and be actively overseeing a vast ecosystem of retailers. IIIV's ability to persuade such ISVs to sell its product may be more difficult than expected, thereby reducing expansion possibilities.

Conclusion

In conclusion, IIIV is poised for growth with its focus on strategic vertical markets and expanding network of ISVs. The company offers integrated payment and software solutions to meet the unique requirements of customers in these industries. The trend of payments and software coming together presents growth opportunities for IIIV as businesses seek all-in-one packages. The company also has a large target market in SMBs, who often lack financial resources to invest in technology and rely on service providers like IIIV. With a growing ISV network and direct sales force, IIIV has a strong foothold in these markets and is well-positioned for future growth.

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