i3 Verticals, Inc. is a leading provider of seamlessly integrated software and services solutions to customers across strategic vertical markets. The company has established a strong foothold in the public sector and healthcare verticals, leveraging its proprietary payment facilitator platform and robust software offerings to drive consistent growth and impressive financial performance.
Business Overview and History
i3 Verticals was founded in 2012 with the mission of delivering software solutions that are tightly integrated with payment processing capabilities. The company's origins can be traced back to the founders' recognition of the increasing demand for vertically-focused software platforms that could streamline operations and enhance efficiency for businesses and organizations in specific industries.
Over the years, i3 Verticals has successfully executed a strategic acquisition-driven growth strategy, complementing its organic expansion with the addition of complementary software and technology capabilities. The company's public sector and healthcare verticals, in particular, have been the focal points of its M&A efforts, as it has sought to bolster its product portfolio and strengthen its market position in these key areas.
In 2018, i3 Verticals completed its initial public offering and underwent a significant reorganization. This reorganization resulted in i3 Verticals, Inc. becoming the sole managing member of i3 Verticals, LLC, allowing the company to consolidate financial results and report a non-controlling interest representing the Common Units of i3 Verticals, LLC held by Continuing Equity Owners.
The company's growth strategy has been heavily influenced by its disciplined acquisition approach. i3 Verticals has completed numerous platform acquisitions and tuck-in acquisitions, which have been instrumental in expanding its customer base and enhancing its proprietary payment facilitator platform and software solutions capabilities.
In 2024, i3 Verticals made a transformative move by divesting its merchant services business, a decision that allowed the company to sharpen its focus on its core software and services offerings. Specifically, in September 2024, the company sold its Merchant Services Business to Payroc Buyer, LLC for approximately $438 million in cash. This strategic divestiture comprised the company's entire former Merchant Services segment and a small portion of its former Software and Services segment, positioning i3 Verticals to concentrate on delivering integrated software solutions to customers in its strategic public sector and healthcare verticals.
Financial Performance and Outlook
Financials
i3 Verticals has demonstrated impressive financial performance, with revenue growing at a compound annual rate of 12% over the past three fiscal years. The company's revenue for the fiscal year ended September 30, 2024, was $229.9 million, a 1.4% increase compared to the prior year. Net income for fiscal 2024 was $113.3 million, a significant improvement from the net loss of $23.7 million in fiscal 2023. This substantial increase in net income was primarily due to the gain on the sale of the merchant services business.
Operating cash flow for fiscal 2024 was $48.4 million, while free cash flow stood at $33.5 million. These metrics underscore the company's ability to generate cash from its operations and invest in growth initiatives.
For the first quarter of fiscal 2025 (ended December 31, 2024), i3 Verticals reported revenue of $61.7 million, representing a 12.1% year-over-year increase. Net income for the quarter was $3.3 million, demonstrating the company's continued profitability following the divestiture of its merchant services business.
The company's focus on recurring revenue streams has been a key driver of its financial success. In the most recent fiscal year, 78% of i3 Verticals' revenue was derived from recurring sources, including software-as-a-service (SaaS) offerings, transaction-based fees, and software maintenance and support. This emphasis on recurring revenue has provided the company with a stable and predictable financial foundation, positioning it well to navigate any economic headwinds.
Liquidity
As of the most recent quarter, i3 Verticals maintained a strong liquidity position with a cash balance of $85.6 million. The company's debt-to-equity ratio stood at 0.095, reflecting a conservative capital structure. i3 Verticals also has access to a $450 million credit facility under its 2023 Senior Secured Credit Facility, providing additional financial flexibility for potential acquisitions or investments in growth initiatives.
The company's current ratio and quick ratio both stand at 0.937, indicating a solid ability to meet short-term obligations.
Looking ahead, i3 Verticals has reiterated its guidance for fiscal 2025, projecting revenue in the range of $243 million to $263 million and adjusted EBITDA between $63 million and $71.5 million. The company expects pro forma adjusted diluted earnings per share (non-GAAP) to be between $1.05 and $1.25. Management has expressed confidence in delivering high single-digit organic revenue growth, with adjusted EBITDA margin improvement of 50 to 100 basis points per year.
From a seasonality perspective, i3 Verticals anticipates the following revenue distribution for the remaining three quarters of fiscal 2025: Q2 at 25.3%, Q3 at 24.6%, and Q4 at 25.7%.
Vertical Market Expansion and Acquisition Strategy
i3 Verticals' success has been underpinned by its strategic focus on serving the specific needs of customers in the public sector and healthcare verticals. In the public sector, the company's software solutions have been adopted by a growing number of state and local government agencies, helping to streamline operations and enhance service delivery to citizens. Similarly, in the healthcare segment, i3 Verticals' integrated software and payments offerings have been well-received by providers and payers, as they seek to improve process efficiency and ensure regulatory compliance.
The company's acquisition strategy has played a pivotal role in its vertical market expansion. i3 Verticals has demonstrated a disciplined approach to M&A, targeting businesses that can complement its existing product portfolio and strengthen its presence in its core verticals. For example, the company's recent acquisition of a firm focused on the state-level permitting and licensing space has bolstered its capabilities in the public sector vertical, providing a solid foundation for future growth.
Segment Performance
i3 Verticals operates through two primary reportable business segments: Public Sector and Healthcare.
The Public Sector segment provides products and solutions that facilitate efficient information flow throughout various public sector entities. This segment serves customers at both state and local government levels, with a geographic reach covering most of the United States and parts of Canada. For the three months ended December 31, 2024, revenue in the Public Sector segment was $48.8 million, up 12.2% year-over-year. The adjusted EBITDA margin for this segment was 39%, compared to 40% in the prior year period.
The Healthcare segment focuses on delivering integrated solutions across the healthcare ecosystem, catering to both providers and payers. This segment emphasizes enhancing process efficiency and ensuring regulatory compliance. For the three months ended December 31, 2024, revenue in the Healthcare segment was $13.2 million, up 13.7% year-over-year. The adjusted EBITDA margin for the Healthcare segment improved to 28%, up from 24% in the prior year period.
The company also reports an "Other" category that includes corporate overhead expenses, shared technology resources, and inter-segment eliminations.
A key performance indicator tracked by i3 Verticals is Annualized Recurring Revenue (ARR), which stood at $193.3 million as of December 31, 2024, representing an 8% year-over-year increase. ARR provides insight into the health and trajectory of the company's business, measuring the annualized revenue derived from software-as-a-service, transaction-based software, maintenance, and other recurring revenue sources.
Risks and Challenges
While i3 Verticals has demonstrated resilience and adaptability in the face of industry changes, the company is not without its risks and challenges. The highly competitive nature of the software and payments industry, coupled with the potential for disruption from emerging technologies, could pose a threat to the company's market share and profitability.
Additionally, the company's reliance on a limited number of large customers in its public sector and healthcare verticals represents a concentration risk that could impact its financial performance if any of these key customers were to reduce or terminate their business with i3 Verticals.
Furthermore, the company's acquisition strategy, while a proven driver of growth, carries inherent integration risks that must be carefully managed to ensure the successful realization of synergies and the seamless incorporation of acquired businesses into i3 Verticals' operations.
i3 Verticals is currently involved in ongoing litigation with the State of Louisiana and East Baton Rouge Parish related to a previous acquisition of a software company. The lawsuit alleges inadequacies in the company's cybersecurity practices. The outcome of this litigation remains uncertain and could potentially impact the company's financial position and reputation.
Industry Trends and Market Position
i3 Verticals operates in the payments processing and software industries, which have experienced mid-to-high single-digit compound annual growth rates in recent years. A key trend in these industries has been the shift towards cloud-based SaaS business models, which aligns well with i3 Verticals' focus on recurring revenue streams and integrated software solutions.
The company's strategic focus on the public sector and healthcare verticals has allowed it to capitalize on the growing demand for industry-specific software solutions that can streamline operations and enhance efficiency. By continuing to invest in new product development and the integration of payments capabilities within its vertical market software solutions, i3 Verticals is well-positioned to capture a larger share of these expanding markets.
Conclusion
i3 Verticals has established itself as a leading provider of vertically-focused software solutions, with a particular emphasis on the public sector and healthcare markets. The company's strategic focus on recurring revenue streams, disciplined acquisition strategy, and continued investment in product innovation have positioned it well to capitalize on the growing demand for streamlined, industry-specific software platforms.
The recent divestiture of its merchant services business has allowed i3 Verticals to sharpen its focus on its core software and services offerings, potentially driving higher margins and more predictable revenue streams. With a strong liquidity position and access to additional capital through its credit facility, the company is well-equipped to pursue strategic acquisitions and organic growth opportunities in its target verticals.
As i3 Verticals navigates the evolving software and payments landscape, its ability to execute on its growth plans, manage risks, and adapt to changing market dynamics will be critical in determining its long-term success. The company's solid financial performance, coupled with its strategic positioning in high-growth verticals, presents an attractive proposition for investors interested in the intersection of software and payments technologies.
Investors and analysts should closely monitor i3 Verticals' progress in achieving its financial targets, integrating acquisitions, and expanding its market share in the public sector and healthcare verticals. Additionally, the resolution of ongoing litigation and the company's ability to maintain strong customer relationships will be important factors in assessing its future prospects.