i3 Verticals, Inc. (IIIV) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary and Q&A reveal mixed signals. The company is focusing on growth sectors like Justice Tech and maintaining high single-digit organic revenue growth. However, the lack of tightened guidance, deceleration in organic growth due to past license deals, and management's reluctance to provide specific future projections create uncertainty. The strategic focus on public sector verticals and AI Infrastructure is positive, but the market's reaction may be tempered by these uncertainties. Overall, the sentiment is neutral, with potential for both positive and negative stock price movements.

Key Financial Performance

Revenue Growth Revenue grew 12% year-over-year in Q3 2025. SaaS revenue grew at 24% compared to the prior year third quarter. The growth was attributed to organic growth of 8% and approximately $2 million of inorganic revenues from acquisitions in permitting, licensing, and utility billing.

Annual Recurring Revenues Annual recurring revenues increased 12% to $160.8 million for Q3 2025 compared to $143.6 million for Q3 2024. This was driven by SaaS revenue growth of 24%, payments revenue growth of 11%, and transaction-based revenue growth of 9%.

Nonrecurring Software License Sales Nonrecurring sales of software licenses increased to $1 million for Q3 2025 from $400,000 in Q3 2024. This increase was due to stronger-than-anticipated sales in Q3.

Adjusted EBITDA Adjusted EBITDA increased 18% to $12.7 million for Q3 2025 from $10.8 million for Q3 2024. Adjusted EBITDA as a percentage of revenues increased to 24.5% from 23.3%, primarily due to lower corporate expenses.

Adjusted Diluted Earnings Per Share Adjusted diluted earnings per share from continuing operations for Q3 2025 was $0.23. This reflects the company's strong financial performance and cost management.

Balance Sheet Strength The company had $55 million of cash and no debt as of Q3 2025, following stock repurchases totaling $26 million during the quarter. Additionally, the company has $400 million of borrowing capacity under its revolving credit facility.

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Operating Highlights

Agentch AI tool: Leverages retrieval augmented generation algorithm for natural language processing and generative AI to analyze and extract data from documents. Implemented in land records products, saving user time and generating incremental revenue. Plans to expand to transportation, Justice Tech, and ERP products.

AI chatbots: Implemented in education solutions to guide software users to quick answers and reduce support costs. Plans to expand to transportation, ERP, and Justice Tech solutions.

AI tools for development: Integrated tools like GitHub Copilot and Builder IO to streamline product development, achieving 30%-50% efficiency gains in development processes.

Justice Tech and public safety: Final contract negotiations for a statewide court system. Expanded adoption in Ohio with core Justice Tech products and ancillary services.

Transportation: Rolling out motor vehicle registrations via i3 kiosk solution in a large southern state.

Public administration and ERP: Deploying licensing and permitting solution for a large Western Fish and Wildlife agency.

Education: Expanded to 4 new states (Idaho, North Carolina, South Carolina, Delaware) and growing market share in Texas and Florida.

Utilities: Won a contract with Honolulu Department of Environmental Services for ePortal and eIVR solutions.

Revenue growth: Revenue grew 12% year-over-year to $51.9 million in Q3 2025. SaaS revenue grew 24%, payments revenue grew 11%, and transaction-based revenue grew 9%.

Recurring revenue: 77% of revenues were recurring, with annual recurring revenues increasing 12% to $160.8 million.

Adjusted EBITDA: Increased 18% to $12.7 million, with EBITDA margin improving to 24.5%.

Balance sheet: Net cash positive over $50 million, no debt, and $400 million borrowing capacity.

Divestiture of healthcare revenue cycle management business: Completed to focus on public sector software business.

M&A strategy: Focus on acquisitions in the public sector vertical, with a full acquisition pipeline.

Investment in talent: Increased investment in Justice products to accelerate revenue opportunities, with costs impacting Q4 and revenue expected in FY 2026.

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Risk or Challenges

Divestiture of Healthcare Revenue Cycle Management Business: The company has divested its healthcare revenue cycle management business, which could pose challenges in terms of revenue loss and operational adjustments as the company transitions to focus solely on public sector software.

Increased Investment in Talent and Product Development: The company is scaling up people costs and investing in new product development, which will increase expenses in the short term and may impact profitability if anticipated revenue opportunities do not materialize as expected.

Dependence on Nonrecurring Software License Sales: Nonrecurring software license sales remain a variable and unpredictable revenue source, which could distort financial performance and seasonality.

AI Implementation and Development Costs: The company is heavily investing in AI tools and solutions, which, while promising, carry risks of high development costs and uncertain returns if adoption or effectiveness does not meet expectations.

M&A Strategy Risks: The company is pursuing acquisitions in the public sector vertical, which carries risks related to integration challenges, overvaluation, or failure to achieve expected synergies.

Seasonality and Revenue Distribution: Revenue distribution is subject to seasonality and variability, particularly with nonrecurring software license sales, which could lead to uneven financial performance across quarters.

Market-Specific Risks in Public Sector: The company’s focus on public sector markets such as transportation, justice tech, and education exposes it to risks related to government budget constraints, regulatory changes, and competitive pressures.

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Guidance & Outlook

Revenue Guidance for FY 2025: The company reaffirms its revenue guidance for FY 2025, projecting revenues between $207 million and $217 million.

Adjusted EBITDA Guidance for FY 2025: The company expects adjusted EBITDA to range between $55 million and $61 million for FY 2025.

Adjusted Diluted EPS Guidance for FY 2025: The company projects adjusted diluted earnings per share from continuing operations to be between $0.96 and $1.06.

Organic Revenue Growth Expectation: Over the next several years, the company expects high single-digit organic revenue growth for its RemainCo operations.

Adjusted EBITDA Margin Improvement: The company anticipates adjusted EBITDA margin improvement of 50 to 100 basis points per year over the next several years.

Seasonality Expectation for FY 2025: The company expects revenue distribution for the second half of FY 2025 to be 49% for Q3 and 51% for Q4.

Investment in Talent and Revenue Opportunities: The company has increased investment in talent for its Justice products to accelerate revenue opportunities, with costs impacting Q4 FY 2025 and revenue impact expected in FY 2026.

AI Implementation and Product Enhancements: The company is expanding its AI tools, such as Agentch AI, to improve user outcomes and efficiency in areas like transportation, Justice Tech, and ERP products.

M&A Focus: The company continues to explore acquisitions in the public sector vertical, with a full acquisition pipeline.

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Shareholder Return Plan

Stock repurchases: During Q3, the company repurchased stocks totaling $26 million. Following these repurchases, the company had $55 million of cash and no debt. The company also has $400 million of borrowing capacity under its revolving credit facility with a 5x leverage constraint. The company intends to use the cash and any borrowings for future acquisitions and opportunistic stock repurchases.

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Key Q&A

Q: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?

A: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.

Q: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 $2.5 million, you did $1 million. So essentially, the entire deceleration in organic growth, the lapping of that strong license quarter. Anything else to call out as we think about 4Q revenue?

A:I think that's exactly right. It really comes down to that license in the past quarter. $2 million of that was related to our utilities deal. There's nothing like that, that will recur this Q4 unless something unexpected happens. For long-term organic growth, focus on ARR, which has been above 10% for the whole fiscal year and is expected to continue in that range in Q4.

Q: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. 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?

A:The investments will compress margin slightly in Q4 but are aimed at revenue growth. Justice Tech is performing well, with traction in bigger deals and statewide opportunities. More details will be shared later. The decision to accelerate investment was made recently and was not part of the initial year plan. Incremental expense in Q4 is about $700,000.

Q: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, 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? 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?

A:All subverticals are performing well. Education is consistent, utilities show strong traction, and transportation has significant potential. The transition year has been successful, and sales teams are achieving daily wins. The company is optimistic about 2026.

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

A:The company is well-equipped to handle most deals independently. Partnerships with integration firms occur in about 1 out of 5 or 6 cases, more often in the transportation sector for enterprise-level deals.

Q: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 recommendation partner? Any uptick on that side?

A:Procurement consultants are more common in the utility space and occasionally in justice for statewide programs. They are not seen in education or ERP. The company has strong relationships with states and municipalities, attending over 300 conferences annually and maintaining long-term connections.

Q:Geoff, maybe just a follow-up on the scaling of people and the costs 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 '26?

A:The guidance of 50 to 100 basis points for annual margin expansion remains unchanged. People investments should be offset by revenue growth.

Q:The people investment, is it right to think those are sales folks? Or is there something else to consider there?

A:The investment is primarily in development, QA, and bringing great products to market, with some marginal investment in the sales team.

Q:Review of Unclear Management Responses

A:Management avoided providing specific revenue projections for Justice Tech investments in 2026 and beyond, stating they would share more details later. Additionally, they did not provide a precise breakdown of the scaling costs or their exact impact on margins for FY '26.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

IIIV Transcript

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IIIV Slides

i3 Verticals Q3 2025 slides: revenue up 12%, adjusted EPS surges to $0.23

2025-08-07

IIIV Report

i3 Verticals, Inc. 10-Q

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i3 Verticals, Inc. 10-Q

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i3 Verticals, Inc. 10-K

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