i3 Verticals NASDAQ: IIIV reported third-quarter fiscal 2026 results that fell short of its expectations, prompting the public-sector software and payments company to lower its full-year outlook. Management cited weaker-than-expected professional services revenue, particularly in utilities, and slower transaction revenue growth.
For the quarter ended June 30, revenue increased 2% year over year to $53.1 million. Organic revenue declined 2%, affected by a $1.8 million decrease in professional services revenue. Annual recurring revenue, however, increased 8% to $174.1 million, with SaaS revenue rising 38% and transaction-based revenue increasing 5%.
“Our third quarter results fell short of our expectations,” Chairman and CEO Greg Daily said. “The primary challenge continues to be slower than expected growth in certain areas of the business, particularly within revenue streams that tend to be less recurring in nature.”
Professional Services and Transaction Revenue Pressure
CFO Geoff Smith said the decline in professional services was concentrated in the utilities market and is expected to continue on a year-over-year basis in the fourth quarter. Overall, non-recurring revenue decreased 18% from the prior-year quarter.
During the analyst question-and-answer session, Smith said that roughly $4.5 million of the company’s $6.5 million reduction in revenue guidance was related to professional services. Of that amount, approximately $3 million was tied to utilities, including delays in a large customer information system project and other smaller projects.
Smith also cited roughly $500,000 each of delayed activity in justice and licensing and permitting, along with a delayed transportation project.
Transaction revenue growth also slowed during the quarter. Smith said more than $1 million of the reduction was related to net payment take rates, which were affected by elevated interchange costs associated with commercial card usage. The company is working with its processor on a data-related fix expected in the fourth quarter.
The company’s Resolve product also delivered less growth than expected, Smith said, due largely to case throughput among existing customers and short-term disruption related to a transition to a new version of the product. He said management expects Resolve to reaccelerate into the next fiscal year as new customer implementations begin.
Profitability Improved Despite Revenue Challenges
Adjusted EBITDA rose 5% year over year to $13.3 million, while adjusted EBITDA margin expanded to 25.4% from 24.5%. Adjusted diluted earnings per share from continuing operations increased 8.5% to $0.25.
Smith attributed margin progress to process improvements and adoption of artificial intelligence tools. The company expects adjusted EBITDA margin to improve in the fourth quarter and continue accelerating in fiscal 2027.
The company also reported a $9.9 million unrealized gain in other income related to a minority equity investment in a business launched by a former team member.
At quarter-end, i3 Verticals had $114.3 million in debt and $2.6 million in cash. The company had $285.7 million of borrowing capacity under its revolving credit facility, subject to a five-times leverage constraint. Smith said potential borrowing would be used for opportunistic acquisitions and stock repurchases. Share repurchases have reduced adjusted weighted average shares outstanding from more than 34 million to fewer than 28 million.
Full-Year Outlook Reduced; 2027 Growth View Moderates
i3 Verticals lowered its fiscal 2026 guidance for continuing operations to:
- Revenue of $216 million to $221 million
- Adjusted EBITDA of $57 million to $60 million
- Adjusted diluted earnings per share of $1.08 to $1.12
Smith said the new outlook was “meaningfully lower” than previous guidance, primarily because of lower-than-expected professional services revenue and slowing transaction revenue.
Management also reduced its current fiscal 2027 revenue growth expectation to the mid-single digits, from prior expectations for high-single-digit growth. Still, Smith outlined several contributors expected to support improved growth next year, including transportation software deployments, electronic insurance verification implementations, board licensing and permitting backlog, Resolve go-lives, and an expected improvement in utilities.
He said two transportation go-lives had begun in the fourth quarter and would provide a modest benefit initially before contributing more substantially in fiscal 2027 and 2028. Two additional implementations tied to the company’s electronic insurance verification software acquisition are expected to begin contributing to organic growth in the second quarter of fiscal 2027.
For fiscal 2027, Smith said the company expects adjusted EBITDA margin expansion of roughly 100 to 200 basis points, above its longer-term range of 50 to 100 basis points. He pointed to lower people-related costs, rent reductions and other actions already taken, as well as the absence of certain third-quarter receivables reserves.
AI Investments and Public-Sector Deployments
President Rick Stanford said i3 Verticals is deploying AI-enabled tools across product management, engineering, quality assurance, cloud operations, security and customer support. Internal sprint metrics show more than a 25% improvement in development velocity while engineering headcount has remained flat, he said.
Stanford described a recent court case management integration that was completed in about one-third of the historical development timeline. The company built a configurable framework rather than a one-time integration and expects to bring two additional clients live during the current quarter, with a third following.
The company holds eight contracts in Louisiana, Tennessee, North Carolina and South Carolina for AI-enabled document extraction, redaction and document separation services. Those implementations began going live during the third quarter, according to Stanford.
Chief Revenue Officer Paul Christians said the company continued to see demand from public-sector customers for broader software platforms, modernization initiatives and bundled software, payments and workflow products. In transportation, i3 launched a state electronic lien and title solution, supported insurance-verification system launches in two major Midwestern states, and said Georgia’s vehicle renewal kiosk program was fully operational following statewide approval and county agreements.
In education, Christians said nearly half of fiscal 2026 bookings came from net new customers. The company also began a proof of concept for AI-driven inventory optimization, menu planning and food cost management for school nutrition programs.
Daily said the company remains confident in its longer-term opportunity, citing government agencies’ continued focus on modernization, digital engagement and operating efficiency.
About i3 Verticals (NASDAQ:IIIV)
i3 Verticals, Inc is a provider of integrated software and merchant payment processing solutions tailored for specific vertical markets across the United States. Since its founding in 2001 and headquartered in Columbia, South Carolina, the company has focused on delivering SaaS-based applications and payment services to streamline revenue collection and management workflows for its clients.
The company's product portfolio includes electronic payment processing for credit and debit card transactions, automated clearing house (ACH) transfers, online and mobile payment portals, and related risk management and compliance tools.
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