i3 Verticals, Inc. (IIIV) Earnings Call Transcript & Summary

Thank you. Good day everyone and welcome to the I3 Vertical's third quarter 2026 earnings conference call. Today's call is being recorded and a replay will be available starting today through August 14th. The number for the replay is 855-669-9658 and the code is 946-6422. 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, sir.

Good morning and welcome to the third fiscal quarter 2026 conference call for I3 Verticals. Joining me on this call are Greg Daly, our Chairman and CEO, Rick Stanford, our President, Jeff Smith, our CFO, Paul Christians, our Chief Revenue Officer. To the extent any non-GAAP financial measures 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. This 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 important factors, among others, set forth in the company's earnings release and in reports that 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. now turn the call over to the company's chairman and CEO, Greg Daly. Thanks, Clay. Good morning to all of you on the call.

Our third quarter results fell short of our expectations and we're disappointed in the outcome. 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. Jeff will elaborate further. Despite the disappointing quarter, there are aspects of the business that continue to perform well. Annualized recurring revenue grew at 8% year-over-year, reflecting the ongoing value of our software solutions provided to our customers and the strength of the markets we serve. We have several material go-lives recently that Paul is excited to share with you later in the call. have laid the groundwork to realize margin expansion in the coming quarters. We remain confident in the long-term opportunity in front of us. Across our public sector and markets, agencies continue to prioritize modernization, digital engagement, and operational efficiencies. We believe our software platforms, transaction-based solutions, and deep domain expertise position us well to participate in these trends. With that, I'll turn it over to Jeff. He'll walk you through our financial results in more detail.

Thanks, Greg. The following pertains to the third quarter of fiscal year 2026, which is the quarter ended June 30th, 2026. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion. Revenues for the third quarter of fiscal 2026 increased 2% to $53.1 million from $51.9 million for Q3 2025. Organic revenue was down 2% in the quarter, hampered by a $1.8 million decrease in professional services. Ongoing weakness in professional services continues to be concentrated in our utilities market. We expect the year-over-year drawdown in professional services to persist in the fourth quarter. Overall, non-recurring revenue sources decreased 18% compared to the prior year. Annual recurring revenues increased 8% to $174.1 million for Q3 2026 compared to $160.8 million for Q3 2025. SaaS revenue grew 38% and transaction-based revenue grew 5%. We are experiencing increased interchange rates related to high commercial card usage, a situation we are addressing with our processor in the fourth quarter. In addition, we realized lower growth from our resolved product in the third quarter than expected. Anticipate reacceleration into the next fiscal year due to the slate of go lives. Maintenance revenue decreased 13%, which is steeper than normal due to the timing of certain material SAS conversions, but will be closer to 3.5% down go forward. Overall, 82% of our revenues in the quarter came from recurring sources. We do not expect material license revenue the remainder of the fiscal year. Adjusted EBITDA increased 5% to $13.3 million for Q3 2026, $12.7 million for Q3 2025. at EBITDA as a percentage of revenues was 25%, an increase from 24.5%. We continue to recognize efficiencies and savings due to process improvements and the adoption of AI. We expect the adjusted EBITDA as a percentage of revenue to improve in the fourth quarter and continue to accelerate into the next fiscal year. Corporate expenses as a percentage of revenues were 8.2% for Q3 2026. Adjust the diluted earnings per share from continuing operations for the third quarter of fiscal 2026 increased 8.5% to $0.25 from $0.23 for Q3 2025. Again, please refer to the press release for a full description and reconciliation. You will notice an item in other income this quarter, a $9.9 million unrealized gain on a minority equity investment. back, we made a small investment in a business a former team member launched. We are pleased with their rapid growth and grateful that our investors participate in that success. Regarding the balance sheet, at quarter end, debt stood at $114.3 million and our cash balance was $2.6 million. We still have $285.7 million of borrowing capacity under our revolving credit facility. 5X leverage constraint. The expectation remains that we will use any borrowings for opportunistic acquisitions and stock repurchases. share buybacks have reduced our total adjusted weighted average shares outstanding from over $34 million to under $28 million. Following updates are guidance for continuing operations for FY2026, which was last updated during our second quarter fiscal 2026 press release dated May 7, 2026. The Outlook does not include acquisitions that have not yet been announced or transaction-related costs. Revenue. $216 million to $221 million. Adjusted EBITDA, $57 million to $60 million. Adjusted diluted earnings per share, $1.08 to $1.12. We appreciate that this is meaningfully lower than our previous guidance, primarily due to lower than anticipated professional services and a deceleration of transaction revenues. Looking past 2026, we expect better growth on a go-forward basis. Last quarter, we elaborated on several reasons for that, which all hold true. However, for 2027, our current expectations is mid-single-digit revenue growth, which is lower than previously guided high single-digit growth.

I will now turn the call over to Rick for additional business related comments. Thank you, Jeff. Good morning, everyone. I wanna spend a few moments discussing AI and the impact it's having on our business. Obviously, AI continues to be one of the most significant technology trends shaping our industry. And we view it not only as a standalone initiative, but as a strategic capability that is increasingly embedded throughout our operations and our customer-facing solutions. Over the past year, we have systematically deployed AI-enabled tools across product management, engineering, quality assurance, cloud operations, security, and customer support. These capabilities are helping us increase productivity, improve service delivery, accelerate innovation, and maintain a high standard of quality while while operating efficiently. A good example is the integration we delivered this quarter connected to a client's court case management system. What was originally considered an aggressive development timeline was completed in approximately one-third the time that similar projects would have historically required. More importantly, we did not just build a one-time integration. Because of the efficiencies created through AI-assisted development, we built a configurable integration framework that can now be leveraged for future deployments. We expect to bring two new clients live this quarter using that infrastructure, with a third immediately behind them. AI is also allowing us to improve quality, security, and long-term maintainability. We've expanded our investments in automation engineering and security engineering, enabling testing and security reviews to occur earlier in the development lifecycle. Human oversight with specific domain expertise and established quality controls remain central to our process, but issues are now identified sooner, reducing downstream costs and improving reliability for systems our customers rely on every day. The results are tangible. Internal sprint metrics show that more than 25% improvement in development velocity, and we are releasing software more frequently while maintaining a flat engineering headcount. Just as importantly, these internal advances are translating directly into customer value and commercial opportunities. Customers increasingly want solutions that automate routine work, improve accuracy, extract meaningful insights from data, and create more efficient user experiences. We are seeing this firsthand in our markets where AI-powered document processing capabilities are becoming a meaningful growth driver. Today we hold eight contracts spanning Louisiana, Tennessee, North Carolina, and South Carolina for AI-enabled document extraction, redaction, and document separation services. These implementations began going live this quarter, and we are increasingly seeing extraction and redaction capabilities specified directly within customer procurement requirements rather than being viewed as optional enhancements. As we evaluate AI opportunities, our focus remains on solving real customer problems and generating tangible returns. We are applying AI in areas where we possess deep industry expertise, proprietary workflow knowledge, and trusted customer relationships. We believe this positions us to deliver different differentiated solutions while creating opportunities for both future revenue growth and operating leverage. It's no secret that AI vendors are changing the way they price their platforms from per seat to usage-based models. While AI-related infrastructure costs are increasing across the industry, as models become more capable and agentic workflows become more sophisticated, we are actively managing those investments. all embedded features require the most robust and pricier platforms, but instead some functions are basic and simply are a less costly solution. In fact, we are starting to see competitive situations where before it was a take it or leave it on the proposal side for AI platforms. We believe we are still in the early stages of long-term transformation in the software, and the momentum we are seeing today reinforces our confidence that AI will be an increasingly important component of our growth strategy. With that, let me turn it over to Paul for revenue updates.

Thank you, Rick. The third quarter remained active across our core markets with customers increasingly evaluating broader, more integrated platform solutions. strategic focus has translated this demand into a higher quality sales pipeline, more disciplined pursuits, stronger recurring revenue opportunities, and shorter paths from booking to revenue recognition. We have enhanced our approach to identifying, qualifying, and pursuing public sector opportunities. Governments continue to invest in modernization initiatives, and I3's focus is on delivering integrated software platforms that serve as operational backbone for mission-critical functions. We are expanding our presence in the justice tech market, securing multiple core agency conversions that demonstrate the strength of that platform and our ability to compete successfully in large established markets. At the same time, we continue to advance our SaaS and cloud strategy, creating ongoing opportunities to my viewers. customers to more scalable recurring software models. While selling remains a meaningful growth driver across our vertical markets, particularly where software platforms, payments, and adjacent workflow solutions can be bundled to increase customer value and deepen long-term relationships. We continue to make meaningful progress across our public sector portfolio, and our transportation business serves as a strong example of that momentum this quarter. I3 currently serves 34 jurisdictions across the United States and Canada. we launched a state electronic lane and title solution as part of a broader transportation platform. life traditional ELT providers that operate as single point solutions connecting to an existing state system. provides mission-critical software across the entire title and registration ecosystem, including dealers, county clerks, state motor vehicle agencies, and integration points for lender service providers. This comprehensive approach enables a seamless end-to-end digital workflow that improves data accuracy, reduces administrative costs, enhances security, increases operational efficiency, and accelerates user adoption. Demand for our motor vehicle insurance verification solutions remain strong. During the quarter, we supported the implementation and launch of insurance verification systems in two major Midwestern states, most recently, Kansas implemented the Kansas Insurance Verification System built platform designed to streamline compliance and strengthen enforcement statewide. The system enables immediate insurance verification for authorized agencies, connects with hundreds of participating insurers, and supports the state's effort to reduce uninsured motorists. In Georgia, following statewide approval and execution of agreements with all participating counties, the state's vehicle renewal EOSC program is now fully operational. This achievement further expands I3 Vertical's transportation footprint, establishes additional recurring transaction revenue stream, and provides a scalable foundation for future growth across the state. Education delivered another solid quarter, driven by new customer additions and continued expansion with our existing base. Nearly half of the fiscal 26 bookings were generated from net new customers, demonstrating the continued demand for our solutions. On the innovation front, we continue to advance AI initiatives in our education platform. This quarter, we initiated a proof of concept focused on AI-driven inventory optimization, menu planning, and food cost management for school nutrition programs. The initiative is designed to help educational institutions better optimize USDA meal program funding while improving efficiency, reducing waste, and providing actual operational insights. Looking ahead, we remain confident in the long-term fundamentals driving public sector technology investment. Government agencies continue to prioritize modernization, automation, enhance citizen experience, and greater operational efficiency. With our integrated software platform supporting critical government functions, we believe i3 Verticals is uniquely positioned to capitalize on these trends. We remain focused on disciplined execution, expanding our market presence, and delivering sustainable growth and long-term value to our customers and shareholders. This concludes my comments, Megan. At this time, we will open the call for Q&A, please.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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 question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Madison Sir with Raymond James.

Hey, good morning, guys. I appreciate you taking the questions here. I wanted to start just on the FY26 revenue guide here. Obviously, it was lowered by $6.5 million. Maybe just double-click on the composition of that. I know, obviously, it's driven by non-recurring revenue, but is it mainly one large customer? Is it multiple? Any color on vertical? And just to be clear, is this a customer-driven kind of push-out or lower, or is there any kind of implementation delays internally?.

Thanks for the question, Madison. To unpack it a little bit for you, of the 6.5 guide down are in about 4.5ish or so that I would attribute to professional services with Within that, about 3 million of that is utilities, and I would classify that as push out. It's just ongoing delays in our large CIS and a couple of other smaller projects, but the vast majority of that being ongoing push out there. about 500K justice, 500K licensing and permitting in our public administration. And a significant project in our transportation market, too, is delayed a little bit. That brings you up to about 4.5 there. In the transaction revenue, you see that kind of throttle down this quarter. I view that as temporary. A big chunk of that is payments. Probably, you know, one million plus of that is the net take rate on payments, and it's being driven by what we alluded to in the comments around elevated interchange, around commercial cards. And basically, that's a data fix that is going in in the fourth quarter. It's been hurting us for a while. It was particularly acute recently. this quarter and the fix has just been repeatedly delayed and there's been some dialogue with our processor that we've just kind of been working through and we just had to I bite the bullet here. And then our Resolve product, that is a product we've been up front about just how excellent the pipeline and the growth is for it. It had a really weak quarter. Um, It's subject to a number of forces that are kind of in the, you might call in the realm of things outside of our control. Mostly the throughput of cases through the existing customer base. There will be times that that's a really great kind of wind in our sales item as that throughput's rising in the existing customer base, and times when it's kind of dragged down a little bit. We also had some good long-term sales. implementation things but they were short run on disruption items within that product suite as we went on to a new version of the product this quarter but long run that's going to continue to be a really strong growth driver for us.