i3 Verticals - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue from continuing operations was $51.9M (+12% YoY), with SaaS +24% and payments +11%; adjusted EBITDA was $12.7M and adjusted diluted EPS was $0.23, while GAAP diluted EPS from continuing ops was -$0.03.
• Results beat Wall Street consensus on revenue ($51.9M vs $49.4M*) and EPS ($0.23 vs $0.206*); the company reaffirmed FY25 RemainCo guidance: revenue $207–$217M, adjusted EBITDA $55–$61M, adjusted diluted EPS $0.96–$1.06 [*S&P Global].
• Sequentially, margins compressed (adjusted EBITDA margin 24.5% vs 27.2% in Q2) due to seasonality and accelerated JusticeTech investments that begin to hit in Q4 (~$0.7M incremental OpEx).
• Strategic catalysts: a new $50M share repurchase authorization and single-segment reporting focused on public sector software; management highlighted strong ARR ($160.8M, +12% YoY) and ~77% recurring revenue mix in Q3.

What Went Well and What Went Wrong

What Went Well

• Strong top-line and mix: revenue +12% YoY with SaaS +24% and payments +11%, supporting higher-quality recurring streams (ARR $160.8M, +12% YoY).
• Non-GAAP profitability: adjusted EBITDA rose to $12.7M (+18% YoY) and adjusted EBITDA margin improved YoY to 24.5% (from 23.3%).
• Strategic focus and balance sheet: “We remain well capitalized, with over $50 million in cash on hand... [and] continue our investment in government technology” — Greg Daily, CEO. Management emphasized a single operating segment post divestitures, simplifying the story.

What Went Wrong

• GAAP loss in continuing ops: net loss of $1.0M and diluted EPS of -$0.03 in Q3, reflecting operating expense growth and seasonality.
• Sequential margin pressure: adjusted EBITDA margin fell to 24.5% from 27.2% in Q2, with Q4 guided to see ~$0.7M incremental JusticeTech personnel costs (Q4 compression).
• License revenue variability and seasonality: management flagged Q3/Q4 cadence shift (Q3 ~49%, Q4 ~51%) with nonrecurring software licenses pulling forward into Q3 and school-out effects lowering Q3 margins.

Transcript

Speaker 5

Good day, everyone, and welcome to i3 Verticals' third quarter 2025 earnings conference call. Today's call is being recorded, and a replay will be available starting today through August 15. The number of the replay is 877-344-7529, and the code is 4426770. 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 Clay Whitson, Chief Strategy Officer. Please go ahead.

Speaker 6

Good morning and welcome to the second quarter 2025 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO, Rick Stanford, our President, Geoff Smith, our CFO, and Paul Christians, our Chief Revenue Officer. 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. The 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 effect 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 will now turn the call over to the company's Chairman and CEO, Greg Daily.

Speaker 4

Thanks, Clay, and good morning to all of you on the call. Last quarter, we brought you some very big news: the divestiture of our healthcare revenue cycle management business. This means we have fully streamlined our company to fully focus on our public sector software business. First, I want to acknowledge all of those who worked hard to make the healthcare divestiture a reality and a smooth transition. Divesting businesses is complicated, and we now have completed two of them in the last 12 months. I'm proud to say both divestitures were well executed, and I appreciate all the people that have gone above and beyond to make these deals happen. i3 Verticals now is in a stronger position than ever. The mission in front of us is to enable state and local governments and related agencies to serve their constituents in an effective and efficient manner.

To that end, we boast a lineup of mission-critical enterprise software products. Our solution enables organizations within the public sector to modernize their systems and to handle significant transaction volume. Our growth rates, our growth profile continues to improve. In the third quarter, revenue grew 12%, and SaaS revenue grew at 24% compared to the prior year of the third quarter. Our balance sheet is strong, with a net cash positive of over $50 million and a revolving credit facility with capacity up to $400 million. We plan to continue our investment in government technology, but continue a strict discipline in our M&A process. Investment in new product development is equally critical, and we are currently scaling up some of our people costs in preparation for revenue opportunities on our horizon.

We will begin to feel those impacts of those costs in the fourth quarter, but we believe these investments will bring investors a great return. I now will turn the call over to Geoff, and he will provide more detail on our financial performance. When he is finished, Rick will address our strategic approach to AI, and finally, Paul will discuss revenue. We will open up the call for questions. Thanks, Greg. The following pertains to the third quarter of fiscal year 2025, which is the quarter ended June 30, 2025. Please refer to the slide presentation titled "Supplemental Information" on our website for reference with this discussion. As a recap, last quarter we announced the sale of our healthcare revenue cycle management business, and this sale followed the sale of our merchant services business last September.

We're now a pure-play software solutions provider for the public sector operating in a single segment. For financial reporting purposes, when you look at our earnings release, or later our 10-Q, Continuing Operations and RemainCo refer to our results exclusive of the merchant services and healthcare RCM businesses. RemainCo revenues for the third quarter of fiscal 2025 increased 12.4% to $51.9 million from $46.2 million for Q3 2024, reflecting organic growth of 8% and approximately $2 million of inorganic revenues from a permitting and licensing acquisition last August and a utility billing acquisition in April. Annual recurring revenues for RemainCo increased 12% to $160.8 million for Q3 2025, compared to $143.6 million for Q3 2024. 77% of our revenues in the quarter came from recurring sources, driven by SaaS revenue growth of 24%, payments revenue growth of 11%, and transaction-based revenue growth of 9%.

Non-recurring sales of software licenses for RemainCo increased to $1 million for Q3 2025 from just $400,000 in Q3 2024. RemainCo software and related services represented 70% of RemainCo revenues for Q3, with payments 25% and other 5%. Adjusted EBITDA for RemainCo increased 18%, outpacing revenues, $12.7 million for Q3 2025 and $10.8 million for Q3 2024. Adjusted EBITDA as a percentage of revenues was 24.5%, an increase from 23.3% for Q3 2024, principally reflecting lower corporate expenses. Adjusted diluted earnings per share from Continuing Operations for the quarter was $0.23. Our balance sheet is strong and well-positioned for the future. Following stock repurchases totaling $26 million during this quarter, we had $55 million of cash and no debt. We still have $400 million of borrowing capacity under our revolving credit facility with a 5X leverage constraint.

We intend to use the cash and any borrowings for future and opportunistic acquisitions and opportunistic stock repurchases. The following reaffirms the guidance for RemainCo for FY 2025, which was introduced as part of our March quarter earnings release. The outlook does not include acquisitions that have not been announced or transaction-related costs. Revenues: $207 to $217 million, adjusted EBITDA $55 to $61 million, adjusted diluted earnings per share from Continuing Operations $0.96 to $1.06. According to past practice, we will provide guidance for FY 2026 when we release our Q4 results. Last year was an exception to that practice. We provided FY 2025 guidance along with our Q3 results necessitated by the sale of our merchant services business. Over the next several years, we continue to expect high single-digit organic revenue growth for RemainCo.

We also continue to expect adjusted EBITDA margin improvement of 50 to 100 basis points per year. During Q3, we increased our investment in talent for our justice tech products in order to accelerate certain revenue opportunities. The increased costs will begin to be felt in Q4, while the revenue impact will likely appear in FY 2026. From a seasonality standpoint, we originally expected our revenue distribution for the second half of FY 2025 to be 48% and 52% for Q3 and Q4, respectively. Our current expectation is slightly different: 49% for Q3 and 51% for Q4. Non-recurring software license sales and professional services were stronger than anticipated in Q3, but some of this was pulled forward from Q4. Although software license sales are less of a factor than in years past, they still represent the most variable line item to forecast and can distort seasonality in any given quarter.

A good example was the September quarter of FY 2024, when software license sales were high at $2.5 million. We do not currently expect that to repeat in the September quarter this year. I'll now turn the call over to Rick for comments on our efforts in AI and M&A.

Speaker 7

Thank you, Geoff. Good morning, everyone. I want to take a few moments this morning to speak about our latest efforts around implementing AI within our organization, and then I'll turn the call over to Paul for updates. During this past year, our engineers have worked to meet our public customers' needs to better support their constituents relative to certain AI initiatives. Part of this work has been focused on using our expertise to solve domain-specific product needs where AI implementation and technology can rapidly improve user outcomes. This work has focused on areas that are impactful to our business and to our customers. We focused our initial efforts on four main areas: enhanced product features, more efficient service, streamlined product development, and comprehensive testing. Regarding product features, we've added enhancements to help our users with data.

Our Agentic AI tool, which leverages the retrieval augmented generation algorithm, uses natural language processing and generative AI to automatically analyze and extract data from documents. Traditionally, public entities have depended on individuals to manually review, categorize, and find data within documents. Our tool now performs these tasks for them so they can dedicate more time to customer service and crucial decision-making based on the extracted data. We have successfully implemented this tool in our land records products, resulting in significant user time savings and initial incremental revenue. We are now working on expanding its use to our transportation, justice tech, and ERP products. In support, we've recognized the value of guiding software users to quick answers for questions about using i3 technology or receiving product support. As such, we have started by implementing AI chatbots into ELI Clark and education solutions.

We will continue rolling these out in our transportation, ERP, and justice tech solutions to accelerate customer productivity and drive down support costs. Internally, we have begun using AI tools to streamline our product development and enhance our productivity. For development, we've integrated GitHub Copilot, BuilderIO, and Cursor into our work streams to speed up our development process. We then utilize CodeRabbit and Zapier for code review and testing to ensure quality of our solutions in the full product development lifecycle. While it depends on the team and the code, our engineering team has found 30% to 50% more efficiency in their dev process when incorporating AI. We will continue to integrate targeted AI solutions for our users to make our solutions more effective for our customers over time.

On the M&A front, we are continuing to speak with various parties relative to potential acquisitions, and our acquisition pipeline continues to be full with our focus on acquisitions in our public sector vertical. I'll now turn the call over to Paul for final comments.

Speaker 4

Thank you, Rick. i3 Verticals' alignment under a single brand and mission as an integrated software solutions provider has been achieved. With our focus in the public sector, we are seeing positive impacts in sales results in our strategic markets of transportation, justice tech, public safety, public administration, ERP, education, and utilities. Sales activity remains strong across markets. By maintaining a focused approach within these domains, we're able to deliver deeply integrated solutions that meet an array of customer needs and use cases. Market-specific strategy has produced a well-balanced mix of contracts across our portfolio, with contracts increasing as market conditions and pipeline remain strong. This is evidenced by our new win rates increasing and our sales team's ability to ensure margin expansion continues as new contracts have price escalation provisions. Our solutions in the justice tech and public safety market are resonating with clients.

On our Q2 call, I mentioned that we are pursuing a statewide court system. I'm pleased to report that we are now in the final contract negotiations for that statewide solution. We also opened Ohio as a target justice tech territory, and we are seeing enhanced adoption across the state with both core justice tech products as well as ancillary products and services. Our transportation group is currently rolling out motor vehicle registrations via our i3 kiosk solution for a large southern state where we have strong multi-market solution presence. In our public administration and ERP market, i3 is currently deploying a licensing and permitting solution for a large Western Fish and Wildlife Agency. Large state agency clients like Fish and Wildlife and Offices of Consumer Affairs are target markets for i3 licensing and permitting with our modern, highly configurable technology.

The Enterprise Utility Group continues to gain share with another i3 e-portal and e-IBR solution win with the recent addition of Honolulu Department of Environmental Services. Education continues to show strong growth as we open this school year in four new states: Idaho, North Carolina, South Carolina, and Delaware. We are also showing strong market share growth in Texas and Florida. Having successfully coalesced around our single vertical, we have advanced levels of engagement with national consulting firms and selection companies. Our focus is i3, our core markets, and associated product sets. This concludes my comments, Ranju. At this time, we will open the call for Q&A, please.

Speaker 5

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your questions, please press star then two. At this time, we will pause momentarily to assemble our roster. First question comes from the line of John Kimbrough Davis with Raymond James & Associates. Please go ahead.

Speaker 2

Hey, good morning, guys. Geoff, just to start out on the guide, obviously you didn't tighten the range, so a pretty wide range of outcomes for the fourth quarter. Is the midpoint the right way to think about the implied 4Q guide?

Speaker 1

Yeah, that's exactly right. Just keep focused on the midpoint, since that wasn't something we were trying to move up or down. We just went with reiterate.

Speaker 2

Okay, I think that would imply organic revenue growth will decelerate 300 basis points or so, but I think Clay mentioned on the call that there was some license comp in the fourth quarter. It looks like $2.5 million, you did $1 million. Essentially, the entire deceleration in organic growth is the lapping of that strong license quarter. Anything else to call out as we think about 4Q revenue?

Speaker 1

I think that's exactly right. It really comes down to that license in the past quarter. You remember $2 million of that was related to our utilities deal that we have underway. It was kind of the first slug of that. There's nothing like that that will recur this Q4 unless something shows up on our doorstep that we're not aware of right now, which can happen. I think it's maybe best when you're thinking about the long-term organic growth, dial in on the ARR, and you know that's been above 10% for the whole fiscal year. We expect to continue in that range in Q4.

Speaker 2

Okay, that's helpful. I wanted to talk about the justice tech incremental investments here. It looks like implied 4Q margins are still in kind of that high 20s range. I assume those investments were contemplated in the guide last quarter, but I really just want to dive in a little bit more. What's the opportunity you see? Maybe the size or give us kind of the magnitude of incremental investments and what the revenue opportunity that you see in 2026 and beyond from these investments?

Speaker 1

I think we want to call that out just because it is going to start compressing margin a little bit in Q4. In the long run, we don't see this as something that's going to drag margins significantly down because it is something we're doing with revenue in mind. As far as what that revenue is in 2026 and beyond, we're getting a lot of great traction. I think Paul mentioned this, just how well the justice tech space is, what we have in our products and our opportunities are resonating with customers. We're competing on some bigger deals, statewide things, and we'll get into more detail on that once we're to a point where we can share more. At the moment, I think it's worth it for the market to understand that the justice tech vertical is really doing well.

That's a place where our thesis is really playing out. As far as whether those were contemplated in the prior guide, I think it is worth pointing out that this choice to accelerate the investment is a more recent choice, in the last quarter or so. That is something that wasn't contemplated at the beginning of the year. It's responsive to opportunities that have come up during the year is the way I would put that.

Speaker 4

To quantify, JD, it might be about $700,000 in Q4 of incremental expense.

Speaker 2

Okay, no, that's super helpful. One last one, maybe for Greg. You know, we just take a step back. You've sold the merchant business, you sold the RCM business, you kind of have the business you want, pure play public sector software, you know, highlighted ARR growth, strong, you know, continue to expect high single-digit organic revenue growth. What pockets of the business are you really excited about? Is it justice tech with incremental investments there? Is it transportation? You know, what do you really think is going to drive that growth and where do you think the most opportunity is over the next 12 to 18 months?

Speaker 4

Great question. I think just about all of our sub-verticals are firing on all cylinders. Education's incredible, consistent. You know, people want our solution. Utilities could be a home run. We've had a lot of traction, a lot of success. We've got a fantastic leader. Transportation could be huge. I'm ready to start talking about 2026. You know, 2024 was a transition year. 2025's been okay. I think 2026 will be spectacular. I feel good about all of our verticals. None of them are lagging. The transition in the last year has been phenomenal. Our salespeople have kicked it into another gear, and we're seeing wins on a daily basis.

Speaker 2

Thanks. Appreciate it. Thanks, guys.

Speaker 5

Thank you. Next question comes from the line of Peter James Heckmann with D.A. Davidson & Co. Please go ahead.

Speaker 0

Hey, good morning, everyone. Thanks for taking the question. In terms of how you're going after some of these deals, I guess, how often are you going out in partnership with either a software integration firm, a professional services firm, or partnering with an independent software company to kind of get these deals? I mean, how much coordination does that require, especially as you go after the state-wide deals?

Speaker 4

That's a great question. We're pretty uniquely qualified that we can handle most aspects of deals in terms of the breadth of product we have as well as integration and implementation capabilities. Maybe one time out of five or one time out of six, we'll have an integration partner with us. Those tend to be on enterprise-level deals and a little bit more often in the transportation sector than in other arenas. It's not the norm for us.

Speaker 0

Okay. How about on the front end, are you seeing more procurement consultants kind of act as a gatekeeper for some of these deals, a gatekeeper or potentially a recommendation partner? Any uptick on that side?

Speaker 4

Not really. They tend to follow kind of historic patterns. That's a little more common in the utilities space where there's a more evolved group who focus in different arenas in utilities. That's staying steady there, and we have great historic relationships with those folks. We'll occasionally see an injustice on statewide programs. We don't see it in education at all. We don't see it in ERP. It's not uncommon, but it's not also the norm. Maybe instead of one of every five or six, we see that out of, you know, one out of four and a half or five.

Speaker 0

I think the key point is probably our relationship that our salespeople have with the state, the municipality, and you know we're constantly in touch with them. We see them at conferences. We visit the office.

Speaker 4

Yes. To Greg's point, we have in many cases multi-decade long-term relationships with folks, and we attend over 300 conferences a year across the spectrum of our engagement of what we do, which is certainly a nice touchpoint to get everybody together. There are a lot of incremental on-site, in-person visits that are happening. The evolving of kind of national consulting firms or selection companies, it's there. It's prevalent. Our engagement with that is really picking up because the world didn't understand us prior to i3 Verticals coming under one brand. As we coalesced under one brand and one comprehensive group of products organized by market, we felt an obligation to continue to inform that segment of the world as well as our market base, as well as our customer base.

Speaker 0

That's good to hear. All right, I appreciate it.

Speaker 5

Thank you. A reminder to all the participants that you may press star and one to ask a question. Next question comes from the line of Alex Markgraff with KeyBanc Capital Markets Inc. Please go ahead.

Speaker 3

Hey, everyone. Thanks for taking my question. Geoff, maybe just a follow-up on the scaling of people and the cost associated with that. I know we're not guiding to 2026, but just based on your comments on sort of annual margin expansion of 50 to 100 basis points, I mean, with the scaling, should we be orienting around the lower end of that range in the near term, or any color you could offer there just in terms of the magnitude in 2026?

Speaker 1

When we give our FY 2026 guide, we'll obviously have a little sharper pencil on that. At the moment, I wouldn't move you off the 50 to 100 basis points. The people investment should be offset by revenue growth.

Speaker 3

Is that the people investment, is it right to think those are sales folks, or is there something else to consider there?

Speaker 1

We are investing on the margins on sales, you know, on our sales team. We're always looking for to add good people there. The investment we're kind of referring to here is more in the, you know, development, QA, and what we need to, you know, bring great products to the market.

Speaker 3

Okay. Understood. Thank you.

Speaker 5

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

Speaker 4

Thank you for your interest. I'd like to thank our team. They're doing a great job, especially a shout-out to our salespeople. They're kind of rocking along. I love those guys. We'll talk to you next quarter. Thank you.

Speaker 5

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