i3 Verticals Q3 2025 Earnings Call Transcript

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Provided by Quartr
August 8, 2025

Key Takeaways

  • Positive Sentiment: After divesting its healthcare RCM and merchant services units, i3 Verticals is now a pure-play public sector software company focused on state and local government solutions.
  • Positive Sentiment: Third quarter revenue grew 12% year-over-year, SaaS revenue increased 24%, and annual recurring revenue rose 12% with recurring sources comprising 77% of total, while Adjusted EBITDA climbed 18% to $12.7 M and margin expanded to 24.5%.
  • Positive Sentiment: The balance sheet remains robust with $55 M cash, no debt, and a $400 M revolving credit facility, supporting opportunistic acquisitions and stock repurchases.
  • Positive Sentiment: i3 Verticals has rolled out AI initiatives—including the AgenTek tool and AI chatbots—achieving 30–50% development efficiency gains and initial incremental revenue in land records.
  • Negative Sentiment: Non-recurring software license sales of nearly $2.5 M were pulled into Q3, creating a lapping effect that may cause a modest organic growth deceleration in Q4.
AI Generated. May Contain Errors.
Earnings Conference Call
i3 Verticals Q3 2025
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day, everyone, and welcome to i3 Vertical's Third Quarter twenty twenty five 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 thirty days at the company's website. At this time, remarks, I would like to turn the call over to Clay Whitson, Chief Strategy Officer.

Operator

Please go ahead.

Speaker 1

Good morning and welcome to the second quarter twenty twenty five conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO Rick Stanford, our President Jeff 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.

Speaker 1

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 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.

Speaker 1

I will now turn the call over to the company's Chairman and CEO, Greg Daily.

Speaker 2

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 wanted 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 twelve months.

Speaker 2

But 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 now is in a stronger position than ever. The mission in front of us to enable state and local governments and related agencies to serve their constituents in an effective and efficient manner. To that end, we've dosed a lineup of mission critical enterprise software products. Our solution enables organizations within public sector to modernize their systems and to handle significant transaction volume.

Speaker 2

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 third quarter. Our balance sheet is strong with a net cash positive over $50,000,000 and revolving with capacity up to 400. We plan to continue our investment in government technology, but continue a strict discipline in our M and 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 horizon.

Speaker 2

We will begin to feel that those impact 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 Jeff 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. Then we'll open up the call for questions.

Speaker 3

Thanks, Greg. The following pertains to the 2025, which is the quarter ended 06/30/2025. 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 RCM 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.

Speaker 3

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 2025 increased 12.4 to $51,900,000 from $46,200,000 for Q3 twenty twenty four, reflecting organic growth of 8% and approximately $2,000,000 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 $160,800,000 for Q3 twenty twenty five compared to $143,600,000 for Q3 twenty twenty four. 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 $1,000,000 for Q3 twenty twenty five from just $400,000 in Q3 twenty twenty four.

Speaker 3

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 to $12,700,000 for Q3 twenty twenty five from $10,800,000 for Q3 twenty twenty four. Adjusted EBITDA as a percentage of revenues was 24.5%, an increase from 23.3% for Q3 twenty twenty four, 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 $26,000,000 during this quarter, we had $55,000,000 of cash and no debt.

Speaker 3

We still have $400,000,000 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 future acquisitions and opportunistic stock repurchases. The following reaffirms the guidance for RemainCo for FY 2025, which was introduced as part of our March earnings release. Yellowk does not include acquisitions that have not been announced or transaction related costs. Revenues $2.00 7,000,000 to $217,000,000 adjusted EBITDA 55,000,000 to 61,000,000 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.

Speaker 3

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 products in order to accelerate certain revenue opportunities.

Speaker 3

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 twenty twenty five to be 4852% 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.

Speaker 3

A good example was the September 2024 when software license sales were high at 2,500,000.0 We do not currently expect that to repeat in the September this year. I'll now turn the call over to Rick for comments on our efforts in AI and M and A.

Speaker 4

Thank you, Jeff. 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.

Speaker 4

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 user data. Our AgenTek 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.

Speaker 4

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 Helly Clark and Education Solutions.

Speaker 4

We'll 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, builder.io and Cursor into our work streams to speed up our development process. We then utilize CodeRabbit and Zephyr for code review and testing to ensure quality of our solutions in the full product development life cycle. While it depends on the team and the code, our engineering team have found 30% to 50% more efficiency in their dev process when incorporating AI.

Speaker 4

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 and 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

Speaker 5

to Paul for final comments. 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 and public safety, public administration, ERP, education and utilities. Sales activity remains strong across our markets.

Speaker 5

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 from 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.

Speaker 5

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 iFU licensing and permitting with our highly with our modern highly configurable technology.

Speaker 5

The enterprise utility group continues to gain share with another i3 ePortal and EIVR 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.

Speaker 5

This concludes my comments Renjoo. At this time, we will open the call for Q and A please.

Operator

Thank you. We will now begin the question and answer session. First question comes from the line of John Davis with Raymond James. Please go ahead.

Speaker 6

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

Speaker 3

Yes, 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 6

Okay. So 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 $2,500,000 you did $1,000,000 So essentially, the entire deceleration organic growth, the lapping of that strong license quarter, anything else to call out as we think about 4Q revenue?

Speaker 3

I think that's exactly right. It's really comes down to that license. In the past quarter, you remember $2,000,000 of that was related to our utilities deal that we have underway. It's kind of the first slug of that. So 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.

Speaker 3

I think it's maybe best when you're thinking about the long term organic growth, dial in on the ARR. And that's been above 10% for the whole fiscal year. We expect to continue in that range in Q4.

Speaker 6

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. So I assume those investments were contemplated in the guide last quarter.

Speaker 6

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 '26 and beyond from these investments?

Speaker 5

So I think we want to

Speaker 3

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 like 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 kind of to a point where we can share more.

Speaker 3

But at the moment, I think it's worth for the market can understand that the JusticeTech vertical is really doing well. That's a place where our thesis is really playing out. As far as like 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 and last quarter or so. So that is something that wasn't contemplated, I guess, the beginning of the year. It's responsive to opportunities that have come up during the year is the way I

Speaker 1

would put that. And to quantify, J. D, it might be about $700,000 in Q4 of incremental expense.

Speaker 6

Okay. No, that's super helpful. And then one last one, maybe for Greg. We just take a step back. You've sold the merchant business.

Speaker 6

You sold the RCM business. You kind of have the business you want, pure play public sector software, highlighted ARR growth, strong, continue to expect high single digit organic revenue growth. But what pockets of the business are you really excited about? Is it Justice Tech with incremental investments there? Is it Transportation?

Speaker 6

What do you really think is going to drive that growth? Where do you think the most opportunity is over the next twelve to eighteen months?

Speaker 2

Great question. I think just about all of our sub verticals are firing on all cylinders. Education is incredible, consistent, people want our solution. Utilities could be a home run. We've had a lot of traction, a lot of success.

Speaker 2

We've got a fantastic leader. Transportation could be huge. We are I'm ready to start talking about 'twenty six. 'twenty four was a transition year, 'twenty five has been okay. But I think 'twenty six will be spectacular.

Speaker 2

But I feel good about all of our verticals. None of them are lagging. The transition last year has been phenomenal and our sales people have kicked it into another gear and we're seeing wins on a daily basis.

Speaker 6

Okay. Appreciate. Thanks guys.

Operator

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

Speaker 7

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 software integration firm, professional services firm or partnering with independent software company to kind of get these deals? Mean, how much coordination does that require, especially as you go after the statewide deals?

Speaker 5

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. So it's maybe one times out of five or one time out of six, we'll have an integration partner with us. And those tend to be on enterprise level deals and a little bit more often in the transportation sector than in other arenas, but it's not the norm for us.

Speaker 7

Okay. And then 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 5

Not really. They tend to follow kind of historic patterns. That's a little more common in utility space where there's a more evolved group who focus in different arenas in utility. That's staying steady there and we have great historic relationships with those folks. We'll occasionally see it in justice on statewide programs.

Speaker 5

We don't see it in education at all. We don't see it in ERP. And again, it's kind of an it's not uncommon, but it's not also the norm. And maybe instead of one of every five or six, we see that out of one out of 4.5 or five.

Speaker 2

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

Speaker 5

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 touch point to get everybody together. But 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 ISRE coming under one brand.

Speaker 5

And 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 7

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

Operator

Thank you. Next question comes from the line of Alex Markkraft with KeyBanc Capital Markets. Please go ahead.

Speaker 8

Hey, everyone. Thanks for taking my question. Jeff, maybe just a follow-up on the scaling of people and the cost associated with that. I know we're not guiding to '26, 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 3

When we give our FY 2026 guide, we'll obviously have a little sharper pencil on that. But 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 8

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

Speaker 3

No. We are investing on the margins on sales on our sales team. We're always looking for to add good people there. But the

Speaker 1

investment we're kind

Speaker 3

of referring to here is more in the development of Q of A and what we need to bring great products to the market.

Speaker 2

Okay. Understood. Thank you.

Operator

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 2

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

Speaker 2

Thank you.

Operator

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

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