i3 Verticals, Inc. (IIIV)

Executive Summary / Key Takeaways

• Transformation Complete, Focus Sharpened: i3 Verticals has successfully divested its Merchant Services and Healthcare RCM businesses, emerging as a pure-play public sector software provider with 76% recurring revenue, 27% adjusted EBITDA margins, and a balance sheet with zero debt and $400 million in available credit capacity, creating a more defensible and capital-efficient business model.

• AI Integration as the Next Growth Engine: The company is embedding AI capabilities across its JusticeTech, Utilities, and Public Administration platforms through tools like Agentch for automated document extraction and AI service agents, which management expects to accelerate revenue in fiscal 2026 while improving development efficiency by 30-50%, representing a tangible inflection point beyond traditional organic growth.

• Financial Profile Improving but Transition Costs Visible: Fiscal 2025 delivered 11.5% revenue growth and 60 basis points of margin expansion, though Q4 2025 saw margin compression to 26.2% due to increased JusticeTech talent investments and a shift from high-margin license sales to professional services, a deliberate trade-off for durable recurring revenue growth.

• Capital Allocation Optionality with M&A Pipeline: With $66.7 million in cash and full access to a $400 million credit facility, i3 Verticals maintains a disciplined acquisition strategy targeting $2-5 million EBITDA businesses at ~10x multiples, with management indicating "a couple of meaningful ones" could close in fiscal 2026, providing a clear lever for inorganic growth.

• Key Risks Center on Execution and External Pressures: The thesis faces execution risk on AI product rollout, potential delays in large contracts like the Manitoba project (which already cost $2.5 million in removed FY2025 revenue), geopolitical tensions affecting Canadian and Indian operations, and cybersecurity vulnerabilities that could undermine trust in public sector clients.

Setting the Scene: From Payment Facilitator to Public Sector Software Pure-Play

i3 Verticals, founded in 2012 as i3 Verticals, LLC and headquartered in Nashville, Tennessee, began as a payment facilitator delivering integrated software solutions to public sector markets. The company's 2018 IPO formalized its structure, but the real strategic inflection occurred in 2024-2025 with two transformative divestitures: the Merchant Services Business (September 2024) and the Healthcare RCM Business (May 2025). These sales eliminated approximately 60% of historical revenue but, more importantly, removed lower-margin, more cyclical operations, leaving a streamlined, single-segment public sector software business with superior economics.

The company now operates exclusively in the public sector, providing mission-critical enterprise software to state and local governments across five core markets: JusticeTech (25% of revenue), Utilities, Public Administration, Education, and Transportation. This focus creates a durable moat. Government customers prioritize reliability, security, and regulatory compliance over price, leading to sticky relationships and 104% net dollar retention. The proprietary payment facilitation platform, retained through the divestitures, integrates deeply with these software solutions, enabling i3 Verticals to capture transaction revenue while competitors typically bolt on payments as an afterthought.

Industry dynamics favor i3 Verticals' positioning. Governments face mounting pressure to modernize legacy systems, improve constituent transparency, and enhance operational efficiency with constrained budgets. The shift from on-premise licensing to cloud-native SaaS models lowers barriers to entry for customers while creating recurring revenue streams for vendors. i3 Verticals' ability to monetize through perpetual licenses, SaaS subscriptions, and user-fee-plus-payment models provides flexibility that pure-play competitors lack, insulating it from government funding cycle volatility.

Competitively, i3 Verticals occupies a unique middle ground. Tyler Technologies dominates large-scale government ERP with deeper workflow automation but lacks i3's payments-first simplicity for mid-market clients. Global Payments offers massive scale in merchant processing but cannot match i3's vertical-specific software integration. Blackbaud excels in non-profit CRM but remains siloed, while CSG Systems focuses on telecom billing. i3 Verticals' multi-vertical approach enables cross-selling across courts, utilities, and schools within the same municipality, a structural advantage none of these peers replicate.

Technology, Products, and Strategic Differentiation: AI as the Force Multiplier

i3 Verticals' core technology advantage lies in its vertically integrated stack: proprietary payment processing embedded within purpose-built government software. This integration translates directly into customer retention and margin expansion. When a court system adopts i3 CourtOne for case management, the integrated payments module becomes inseparable from daily operations, creating switching costs that pure software or pure payments competitors cannot match. The company's solutions architecture scales from single agencies to statewide systems, as demonstrated by the West Virginia Supreme Court's expansion of i3 CourtOne across circuit, family, and magistrate courts.

The AI integration strategy represents more than feature enhancement; it is a fundamental expansion of the value proposition. The Agentch AI tool uses natural language processing to automate document indexing in land records, a task that previously required manual labor and introduced errors. In transportation, an AI service agent now operates across 95 counties, handling complex end-to-end transactions that integrate with agent-assist dashboards. These implementations deliver measurable efficiency gains: significant improvements in accuracy for land records clients and automated communications that improve constituent satisfaction while reducing support costs.

Why does this matter for investors? AI transforms i3 Verticals from a software vendor into an efficiency multiplier for government agencies. The company can now justify premium pricing not just on software functionality but on quantifiable operational savings. Management's disclosure that internal AI tools like GitHub Copilot boost development efficiency by 30-50% suggests R&D leverage that will accelerate product roadmaps without proportional cost increases, directly supporting the 50-100 basis points of annual margin expansion target.

The JusticeTech investment wave underscores this shift. i3 Verticals is adding development and QA personnel specifically for Justice products, expecting these costs to compress Q4 2025 margins but generate revenue in fiscal 2026. This timing mismatch creates near-term margin pressure but builds a foundation for accelerated growth. The 18 new Michigan courts going live on MiFILE and 44 Georgia probate courts adopting TrueFiling with integrated payments demonstrate market traction that will convert to recurring revenue as these implementations mature.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

Fiscal 2025 results validate the transformation thesis. Revenue from continuing operations reached $213.2 million, up 11.5% year-over-year, with 8% organic growth—meaningfully above the high single-digit long-term target. The composition reveals strategic progress: SaaS revenues grew 25% in Q4 2025, offsetting an 8% decline in maintenance revenue, while transactional and payments revenue grew 10-11%. This mix shift toward cloud-native subscriptions improves revenue quality and predictability.

Adjusted EBITDA margin improved to 27% for the full year, up 60 basis points, though Q4 margin compressed to 26.2% from 28.5% in Q4 2024. The compression stems from two deliberate choices: increased JusticeTech talent investment (approximately $700,000 incremental expense in Q4) and a shift from high-margin nonrecurring software licenses to lower-margin professional services. While this pressures near-term profitability, it accelerates recurring revenue recognition and deepens customer relationships, a trade-off that enhances long-term earnings power.

Annual Recurring Revenue (ARR) of $165.3 million in Q4 2025, up 9.2% year-over-year, provides forward visibility that transactional businesses cannot match. Net dollar retention of 104% (including payments) indicates successful upselling, though this metric lags best-in-class software peers and represents an opportunity for improvement as AI features roll out. The remaining healthcare workflow software business, at approximately $8 million annually with low-40% margins, offers potential upside if management decides to monetize or divest this non-core asset.

The balance sheet transformation is complete. With $66.7 million in cash, zero debt, and $400 million in available credit capacity, i3 Verticals has the firepower to execute its acquisition strategy without diluting shareholders. The company repurchased 1.57 million shares for $38 million in fiscal 2025 at an average price of $24.20, and a new $50 million authorization remains fully available. This buyback activity, combined with management's opportunistic approach, signals confidence in intrinsic value despite the stock trading at 3.6x sales.

Outlook, Management Guidance, and Execution Risk

Management's fiscal 2026 guidance—revenue of $217-232 million and adjusted EBITDA of $58.5-65 million—implies 2-9% topline growth and margin expansion to 26.9-28.0%. The conservative revenue outlook reflects expected declines in nonrecurring professional services, particularly in Q1 2026, driven by revenue recognition timing on utilities and transportation projects. This is a deliberate strategic choice to "lean into recurring revenue" by prioritizing SaaS contracts over one-time implementation fees, as evidenced by the West Virginia CourtOne deal structure.

The long-term algorithm remains intact: high single-digit organic revenue growth and 50-100 basis points of annual margin improvement. Management expects recurring revenue to grow 8-10% in fiscal 2026, consistent with fiscal 2025 performance. Pricing increases of 3-5% will contribute 1.5-3% to net dollar retention in 2026, up from 1-2% in 2025, representing a strategic lever that requires minimal incremental investment.

Execution risk centers on three variables. First, the JusticeTech talent investment must convert to revenue in fiscal 2026 as promised; any delay would extend margin pressure without commensurate growth. Second, AI feature adoption must drive measurable NDR improvement beyond the current 104% level; failure to do so would suggest the AI narrative is more hype than substance. Third, the acquisition pipeline must deliver "a couple of meaningful" deals in fiscal 2026 to supplement organic growth; management's 13-year relationship-building suggests high probability, but execution remains uncertain.

The Manitoba contract delay illustrates external execution risk. Ongoing trade friction between the U.S. and Canada, combined with customer sequencing issues around ERP projects, forced management to remove $2.5 million from FY2025 guidance. While this demonstrates conservatism, it also highlights vulnerability to geopolitical tensions that could affect the Canadian transportation business and Indian development operations.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is customer concentration in the public sector, where budget cycles and political priorities can shift abruptly. Approximately 60% of revenue ties to government agencies that face constant cost-cutting pressure. While i3 Verticals' solutions drive efficiency—making them more valuable during austerity—severe budget crises could delay or cancel projects, directly impacting the high single-digit organic growth target.

Geopolitical tensions present asymmetric downside. The company's Canadian operations face potential contract cancellations if trade relations deteriorate further, as advocated by some Canadian authorities. The Manitoba delay may be a harbinger of broader restrictions on U.S. technology providers. Similarly, i3 Verticals' significant development workforce in India could be disrupted by escalating India-Pakistan tensions, limiting intellectual property development and creating operational bottlenecks.

Cybersecurity vulnerabilities could undermine the entire value proposition. A material breach affecting public sector clients would not only trigger liability and litigation but also destroy the trust-based relationships that drive 104% net dollar retention. While the company maintains SOC 2 compliance and PCI DSS reviews, the evolving nature of AI technologies may introduce new attack vectors that existing controls cannot address.

Legal proceedings pose contingent liabilities. The PaySchools Litigation regarding school lunch fees in New York and the SS Litigation from Louisiana regarding cybersecurity practices could result in material cash outflows or reputational damage. Management's inability to predict outcomes, while asserting immateriality, leaves investors exposed to potential negative surprises.

On the positive side, an asymmetry exists in the healthcare workflow business. The $8 million annual revenue stream with low-40% margins could be divested for 2-3x revenue, generating $15-25 million in cash to fund acquisitions or buybacks. More significantly, successful AI integration could drive net dollar retention toward 110-115%, transforming the growth algorithm and justifying a higher valuation multiple.

Valuation Context: Positioning for the Next Phase

At $25.67 per share, i3 Verticals trades at a market capitalization of $830.5 million and an enterprise value of $768.6 million, representing 3.6x trailing twelve-month sales. This multiple sits between high-growth vertical software peers like Tyler Technologies (TYL) (8.4x sales) and payment processors like Global Payments (GPN) (2.2x sales), reflecting the market's uncertainty about whether IIIV is a software or hybrid business.

The EV/EBITDA multiple of 46.1x appears elevated but reflects transition-period earnings depressed by JusticeTech investments and professional services mix shift. As margins expand toward 30% and EBITDA grows to $65 million guided for fiscal 2026, the multiple would compress to approximately 12-13x, more aligned with profitable software peers. The key question is whether management can deliver on the 50-100 basis points of annual improvement while maintaining high single-digit growth.

Balance sheet strength provides a floor. With net cash of $66.7 million and $400 million in available credit, the company has a strong net cash position, eliminating financial risk, a significant advantage over levered peers like Blackbaud (BLKB) (9.9x debt/equity) and CSG Systems (CSGS) (2.0x debt/equity).

Cash flow metrics show room for improvement. The price-to-operating cash flow ratio of 145.9x reflects the impact of divestiture-related tax payments in fiscal 2025. Management's guidance for free cash flow conversion "well in excess of two-thirds" of EBITDA implies $40-45 million in free cash flow for fiscal 2026, which would place the stock at 17-19x forward free cash flow—a reasonable multiple for a software business with 8-10% recurring revenue growth.

Conclusion: A Transformed Business at an Inflection Point

i3 Verticals has completed a strategic metamorphosis from a payment-centric services business to a pure-play public sector software provider with durable recurring revenue, expanding margins, and a pristine balance sheet. The 11.5% revenue growth and 27% EBITDA margins in fiscal 2025 demonstrate that the streamlined model works, while the AI integration across JusticeTech, Utilities, and Public Administration platforms offers a credible path to accelerate organic growth beyond the high single-digit target.

The investment thesis hinges on execution of three interdependent variables: converting JusticeTech talent investments into fiscal 2026 revenue, driving net dollar retention above 110% through AI-enabled upselling, and deploying the $400 million acquisition war chest to compound growth. Success on these fronts would validate the current 3.6x sales valuation and support multiple expansion toward pure-play software peers.

Conversely, failure to deliver on AI promises, combined with external pressures from geopolitical tensions or public sector budget cuts, could relegate i3 Verticals to a low-growth, mid-tier software provider deserving of a payment-processor multiple. The next 12-18 months will determine whether this transformation creates a durable compounder or a strategically sound but operationally challenged niche player. Investors should monitor Q1 2026 professional services trends, ARR growth acceleration, and announced acquisitions as early signals of which path the company will take.