i3 Verticals, Inc. (IIIV)

Executive Summary / Key Takeaways

• i3 Verticals (NASDAQ:IIIV) has successfully completed a significant strategic transformation, divesting its Merchant Services and Healthcare RCM businesses to become a pure-play public sector software provider.
• The company is demonstrating strong organic growth, with Q3 2025 revenue up 12.4% and SaaS revenue growing 24%, driven by mission-critical enterprise software solutions and integrated payments.
• Technological differentiation, including AI-powered tools like Agentch AI and generative AI bots, is enhancing product features, service efficiency, and internal development, creating a competitive moat.
• IIIV maintains a robust balance sheet with $55.5 million cash and no debt, providing ample capacity for strategic tuck-in acquisitions and opportunistic share repurchases.
• Management reaffirms FY 2025 guidance for RemainCo, projecting high single-digit organic revenue growth and annual adjusted EBITDA margin improvement of 50-100 basis points, despite some near-term investment in Justice Tech.

The Reimagined IIIV: A Focused Public Sector Powerhouse

i3 Verticals has undergone a profound transformation, culminating in its emergence as a pure-play provider of mission-critical enterprise software solutions for the public sector. This strategic pivot, executed through the divestiture of its Merchant Services business in September 2024 and its Healthcare Revenue Cycle Management (RCM) business in May 2025, has streamlined the company's operations and sharpened its focus. The core mission now centers on enabling state and local governments and related agencies to serve their constituents more effectively and efficiently. This involves modernizing legacy systems and handling significant transaction volumes through comprehensive, cloud-native solutions.

The company's journey began in 2012 with i3 Verticals, LLC, built on integrating software with a proprietary payment facilitator platform. The 2018 IPO and subsequent reorganization established i3 Verticals, Inc. as a holding company, consolidating its diverse offerings. Key acquisitions, such as the SS business in 2018 for local government services and Eduloka Ltd. (inLumon) in 2024 for permitting and licensing, expanded its footprint and capabilities. The recent divestitures, particularly the $439.5 million sale of the Merchant Services business and the $96.4 million sale of the Healthcare RCM business, were transformational steps designed to unlock the full potential of its public sector vertical. This strategic clarity positions IIIV to capitalize on a significant industry trend: the increasing demand for efficiency and cost savings within government entities, which are actively seeking better software solutions to improve citizen services.

Technological Edge: Powering Public Sector Efficiency

IIIV's competitive advantage is deeply rooted in its differentiated technology, particularly its integrated software solutions seamlessly combined with a proprietary payment facilitator platform. This integration offers tangible benefits to public sector clients, providing end-to-end solutions that enhance customer loyalty and streamline reconciliation processes. The company's focus on domain-specific expertise ensures that its offerings are tailored to the unique needs of government functions, from courts to utilities.

Innovation, especially in Artificial Intelligence (AI), is a key driver of IIIV's technological roadmap. The company is actively implementing AI to improve user outcomes and operational efficiency across its public sector offerings:

• Agentch AI Tool: This proprietary tool leverages retrieval augmented generation (RAG) algorithms, natural language processing, and generative AI to automatically analyze and extract data from documents. Successfully implemented in land records products, it has delivered significant user time savings and generated initial incremental revenue. IIIV plans to expand its application to transportation, Justice Tech, and ERP products, promising further efficiency gains for customers.
• AI Chatbots: Deployed initially in education solutions, these chatbots guide users to quick answers and product support. The company is rolling them out to transportation, ERP, and Justice Tech solutions, aiming to accelerate customer productivity and reduce support costs.
• Internal Development Efficiency: IIIV utilizes AI tools like GitHub Copilot, Builder IO, and Cursor to streamline its product development. Its engineering team reports a notable 30% to 50% increase in efficiency when incorporating AI into their development processes, demonstrating a quantifiable internal benefit.
• i3 Generative AI Bots: Introduced for enterprise utilities, these bots handle complex, end-to-end transactions and integrate with an i3 agent assist dashboard. This dashboard summarizes account history, generates recommended actions, and automates communications, improving customer satisfaction through a secure AI knowledge layer integrated into billing systems and accessible across various interfaces.

For investors, these technological advancements are crucial. They not only create a robust competitive moat by offering superior, integrated solutions but also drive higher operational efficiency and better margins. The ability to deliver tailored, AI-enhanced software positions IIIV favorably in a market increasingly demanding digital transformation, contributing directly to its market positioning and long-term growth strategy.

Strategic Growth Pillars: Acquisitions and SaaS Transition

IIIV's growth strategy is underpinned by a disciplined approach to acquisitions and a deliberate transition to a Software-as-a-Service (SaaS) model. The company's M&A pipeline remains robust, with a clear focus on tuck-in acquisitions within the public sector vertical. These targets typically fall within a sweet spot of $2 million to $5 million in EBITDA, with preferred margins in the low-30s to high-20s, and are generally acquired at multiples below 10x EBITDA. This strategy aims to expand offerings and customer footprints while maintaining financial discipline.

A recent example is the April 1, 2025, acquisition of a Utility Billing Software Company for $10.3 million. This high-margin, cloud-based, and mobile-compatible business serves small to medium municipal utilities, providing inventory solutions and supporting advanced meter reading (AMI/AMR). This acquisition not only expanded IIIV's public sector utility billing offerings but also established new market footprints. Critically, the acquired company's historical non-SaaS licensing model is being transitioned, and its outsourced payment processing is being brought in-house, leveraging IIIV's proprietary platform to enhance economics.

The broader shift to a SaaS model is a fundamental strategic initiative. Legacy contracts are being transitioned, and new contracts are predominantly presented in a SaaS format, subject to client funding practices. This approach lowers barriers to entry for government entities, accelerates implementation timelines, and insulates IIIV from the volatility associated with shifts in government priorities or funding cycles. Furthermore, the company actively pursues cross-selling and bundling opportunities, integrating solutions both within and across its various public sector sub-verticals.

Operational Excellence and Market Traction

IIIV's operational execution is evident in its strong market traction across its public sector sub-verticals. In Justice Tech, the company's MiFILE e-filing platform, powered by TrueFiling and integrated payments, is live in 81 Michigan courts, with 44 probate courts in Georgia also adopting the technology. Final contract negotiations are underway for a statewide court system solution, and Ohio has been opened as a new target Justice Tech territory, showing enhanced adoption.

The Transportation group is successfully rolling out its i3 kiosk solution for motor vehicle registrations in a large southern state. In Public Administration and ERP, IIIV is deploying a licensing and permitting solution for a large Western Fish and Wildlife agency, targeting large state agency clients. The Enterprise Utility group is gaining market share with its i3 ePortal and eIVR solutions, including a recent win with the Honolulu Department of Environmental Services. The i3 customer engagement e-portal has also received recognition from J.D. Power, securing the number one spot in the west for large utilities with Seattle and number two in the Northeast with Oakland. The company has won five new portal customer contracts through competitive RFPs, displacing Tier 1 providers or internal systems.

The Education market continues to show strong growth, with IIIV expanding into four new states (Idaho, North Carolina, South Carolina, Delaware) and demonstrating robust market share growth in Texas and Florida. These operational achievements are supported by ongoing technology transformation efforts, including nearing completion of AWS cloud consolidation, migrating data centers to the cloud, centralizing cybersecurity measures, and streamlining back-office technologies for increased efficiency and reduced expenses.

Financial Strength and Performance

IIIV's strategic transformation is translating into solid financial performance and a robust balance sheet. For the three months ended June 30, 2025 (Q3 2025), revenue from continuing operations increased 12.4% year-over-year to $51.9 million, with organic growth at 8%. SaaS revenue, a key strategic focus, grew an impressive 24% compared to the prior year's third quarter, with recurring sources accounting for 77% of total revenues. Adjusted EBITDA for the quarter rose 18% to $12.7 million, outpacing revenue growth and resulting in an adjusted EBITDA margin of 24.5%, up from 23.3% in Q3 2024. Annual Recurring Revenue (ARR) as of Q3 2025 stood at $160.8 million, representing a 12% year-over-year increase.

The company's balance sheet is exceptionally strong post-divestitures. As of June 30, 2025, IIIV reported $55.5 million in cash and cash equivalents and, notably, no debt.

This provides substantial financial flexibility, complemented by $400 million of available capacity under its 2023 Senior Secured Credit Facility. The company intends to deploy this liquidity for future acquisitions and opportunistic share repurchases, with a new $50 million share repurchase program approved on August 7, 2025. While the company made approximately $60 million in tax-related payments in Q1 2025 due to the Merchant Services business sale, its free cash flow conversion in a steady state is expected to be well in excess of two-thirds, driven by the absence of interest expense and increased interest income.

Comparing IIIV's profitability to its larger, more diversified competitors reveals its focused strength. IIIV's TTM Gross Profit Margin of 69.70% significantly outpaces Square (37%), PayPal (46%), and Fiserv (61%), underscoring the high-margin nature of its pure-play software business. While its TTM Operating Profit Margin of 2.26% is currently lower than these larger players (Square 4%, PayPal 17%, Fiserv 29%), this reflects ongoing investments in product development and growth initiatives, which are expected to yield future returns.

Competitive Landscape: Niche Dominance Amidst Giants

IIIV occupies a specialized niche within the broader payment processing and software solutions market, serving small- and medium-sized businesses (SMBs) primarily in the public sector. This focused positioning allows IIIV to deliver highly tailored, integrated solutions that often outcompete larger, more generalized players in specific government verticals.

Direct competitors like Square (SQ), PayPal Holdings (PYPL), and Fiserv (FISV) operate at a significantly larger scale, offering broader ecosystems and more extensive financial technology portfolios. Square, for instance, is known for its mobile and point-of-sale systems, rapid innovation cycles, and wider market reach. PayPal excels in online and e-commerce payments with a vast global network. Fiserv provides comprehensive financial services and digital transformation solutions, primarily to financial institutions and larger enterprises.

IIIV's competitive advantages, or moats, are built on its integrated payment and software solutions. This integration fosters deep customer loyalty and can lead to superior margins through efficient service delivery, particularly in specialized government functions where tailored solutions are paramount. The company's strong distribution channels, including direct sales and partnerships, create network effects that enable effective market access, even against the scale of a Fiserv. This approach can result in lower customer acquisition costs and improved capital efficiency.

However, IIIV's smaller scale compared to these giants presents certain vulnerabilities, potentially leading to higher operating costs and limiting investment in broad-based technological advancements. While IIIV's AI initiatives are impactful within its niche, larger competitors like PayPal, with their extensive R&D budgets, may achieve faster innovation in general-purpose platforms. Despite these challenges, IIIV's strategy of focusing on domain-specific pain points and delivering applied AI technology has been well-received by customers, making its solutions tangible and easier for government agencies to adopt. The company has successfully displaced Tier 1 portal providers in competitive RFPs, demonstrating its ability to win against larger rivals in its chosen segments.

Indirect competitors, such as blockchain-based payment platforms or broader enterprise software providers that integrate payment features, also pose a threat. However, IIIV's deep domain expertise and established relationships in the public sector create a barrier to entry for these alternatives, which may struggle to offer the same level of customization and regulatory compliance. The ongoing industry trend of AI-driven demand for digital infrastructure, as highlighted by broader market developments, could indirectly benefit IIIV by increasing the overall need for advanced digital solutions in the public sector, where its focused strategy can capitalize more effectively than generalized competitors.

Outlook and Risks: A Clear Path Forward

Management reaffirms its fiscal year 2025 guidance for RemainCo, projecting revenues between $207 million and $217 million, adjusted EBITDA of $55 million to $61 million, and adjusted diluted earnings per share from continuing operations between $0.96 and $1.06. This outlook assumes high single-digit organic revenue growth and an annual adjusted EBITDA margin improvement of 50 to 100 basis points over the next several years, driven by the focused public sector strategy and operational efficiencies.

Key assumptions underpinning this guidance include the expectation that the Manitoba project, which has faced delays due to external factors and customer sequencing issues, will return to a normal cadence, although approximately $2.5 million of previously anticipated FY 2025 revenue has been conservatively removed from the outlook. The company also anticipates continued momentum in the utilities market and a return to normal growth rates in the education business. The ongoing shift to SaaS is expected to be less of a drag on revenues, with FY 2025 license sales projected to be similar to FY 2024, albeit with potential quarterly variability. The increased investment in Justice products, estimated at $700,000 in incremental expense for Q4 2025, is a strategic move expected to yield revenue benefits in fiscal year 2026 and beyond, without significantly impacting long-term margin expansion.

Despite a clear path, IIIV faces several pertinent risks. Geopolitical and economic uncertainties, including inflationary pressures, elevated interest rates, and tensions in regions like India/Pakistan (where IIIV has significant employees for IP development) and Canada (due to trade tensions), could adversely impact operations and financial results. Budgetary and political pressures to reduce government spending, such as initiatives like the Department of Government Efficiency, also pose a risk to IIIV's state and local government customer base. Furthermore, while the Healthcare RCM divestiture is complete, post-closing risks related to ancillary agreements and indemnification obligations remain. The company is now highly dependent on the success of its Public Sector business, and any significant delays in large projects, like Manitoba, could affect near-term performance.

Conclusion

i3 Verticals has executed a decisive strategic transformation, shedding diversified assets to emerge as a highly focused, pure-play public sector software provider. This pivot, underpinned by a robust technological foundation featuring integrated payments and advanced AI capabilities, positions the company for sustained growth in a resilient and underserved market. With a strong balance sheet, a clear acquisition strategy for tuck-in opportunities, and a commitment to SaaS transition, IIIV is actively building a durable competitive advantage.

While macroeconomic headwinds and specific project delays present challenges, the company's reaffirmed guidance and long-term targets for high single-digit organic growth and consistent margin expansion reflect confidence in its focused strategy and operational execution. Investors should recognize IIIV's unique positioning as a specialized technology partner for government entities, where its integrated solutions and targeted innovation create significant value, driving both financial performance and market leadership in its chosen verticals.