Kingsway Financial Services Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Revenue Growth: Overall revenues were up 37% year-over-year. KSX segment was the majority revenue contributor for the first time, with stellar results. Extended Warranty segment had top-line growth of 2% with robust cash flow.
• Acquisitions: Made 4 acquisitions during the quarter, with 3 completed mid-quarter. Acquired Roundhouse, Advanced Plumbing, Drain, HR team, and Southside Plumbing. YTD, 6 high-quality asset-light services businesses acquired, exceeding target of 3 to 5 per year.
• Business Momentum: Roundhouse and Kingsway Skilled Trades performing well, ahead of underwriting case. Image Solutions and DDI exiting J-curves, with Image Solutions seeing EBITDA growth sequentially and DDI showing improvement in EBITDA. Extended Warranty segment cash sales accelerating, with GAAP earnings expected to recover over time.

Segment Performance

• KSX Segment: Revenue grew 104% year-over-year to $19 million in Q3 2025, with adjusted EBITDA growth of 90% to $2.7 million. It represented the majority of revenue for the first time. There were nonrecurring expenses in the quarter, and excluding these, KSX adjusted EBITDA would have been higher. For example, $325,000 noncash reserve from a bankrupt hospital client and $180,000 noncash expenses from converting acquisitions to accrual accounting.
• Extended Warranty Segment: Revenue increased 2% to $18.2 million in the quarter, with adjusted EBITDA at $800,000. Modified cash EBITDA was resilient, and cash sales accelerated. Cash sales in the segment went from up 9.2% YOY in Q2 to 14.2% YOY in Q3.

Guidance

• No specific numerical guidance on number of acquisitions, but mentioned focus on disciplined investments in quality opportunities. Pacing of skilled trades acquisitions may be faster due to experienced Operator-in-Residence (OIR) and strong industry opportunity. Organic growth potential of high single-digit expected at acquired businesses.

Risks

• Medicare/Reimbursements: Uncertainty in Medicare and reimbursements affecting SNS (nurse staffing) and DDI (digital diagnostics), particularly in hospitals with high Medicare/Medicaid patients.
• EBITDA Timing Differences: In Extended Warranty segment, timing differences in revenue and expense recognition cause gap between adjusted EBITDA and modified cash EBITDA.
• J-curve Risk: Businesses transitioning from cash to accrual accounting or needing professionalization (e.g., converting acquisitions to accrual accounting) may have temporary nonrecurring expenses affecting reported EBITDA.

Question and Answer

• Q: Impact of Medicare and reimbursements on SNS and DDI? A: SNS affected by hospital reimbursement pressure; focus on payer mix and geography of hospitals. DDI in outpatient rehab and long-term acute care hospitals, focused on customer selection and credit extension.
• Q: Organic growth in acquired businesses? A: Involves professionalizing systems, people, and investing in operating expenses to build platforms for growth. Businesses like DDI and Image Solutions exiting J-curves as they emerge from professionalization and start accelerating growth.
• Q: Skilled trades platform acquisitions? A: Faster pace expected due to experienced OIR (Operator-in-Residence) with deep industry experience and strong industry opportunity set.
• Q: Image Solutions growth potential? A: IT MSP industry is large, fragmented, and growing; potential for organic growth and tuck-in M&A to scale the business.
• Q: TIC sector Colter Hanson pursuing? A: TIC (testing, inspection, and certification) sector is large, fragmented, growing mid-to-high single digits; potential for platform development depending on target identified.