i3 Verticals, Inc. Q3 FY2025 earnings call

• The company successfully completed the divestiture of its healthcare revenue cycle management business and another prior business, streamlining to focus solely on its public sector software business. - In the third quarter, revenue grew by 12% and SaaS revenue grew by 24% year-over-year. - The balance sheet is robust with net cash exceeding $50 million and a revolving credit facility of up to $400 million. - There was an investment in talent for Justice products to accelerate revenue opportunities. - AI tools have been implemented in areas such as enhanced product features, more efficient service, streamlined product development, and comprehensive testing. Success has been achieved in land records products, and expansion to other products like transportation, Justice Tech, and ERP is planned. - Strong performance is seen in various public sector markets including education, utilities, transportation, Justice Tech, and public administration, with new wins and expansions in these areas.

In the third quarter of fiscal year 2025, RemainCo (excluding the divested healthcare and merchant services businesses) saw revenues increase by 12.4% to $51.9 million compared to $46.2 million in the prior year's third quarter. Annual recurring revenues (ARR) for RemainCo grew 12% to $160.8 million in Q3 2025, up from $143.6 million in Q3 2024. 77% of revenues originated from recurring sources, with SaaS revenue rising 24%, payments revenue up 11%, and transaction-based revenue up 9%. Software and related services accounted for 70% of RemainCo revenues, payments made up 25%, and other sources 5%. Adjusted EBITDA for RemainCo increased by 18% to $12.7 million, with adjusted EBITDA as a percentage of revenues at 24.5%.

• The guidance for RemainCo in FY 2025 was reaffirmed: revenues are expected to be between $207 million and $217 million, adjusted EBITDA between $55 million and $61 million, and adjusted diluted earnings per share from continuing operations between $0.96 and $1.06. - The company expects high single-digit organic revenue growth and adjusted EBITDA margin improvement of 50 to 100 basis points per year. - The revenue distribution for the second half of FY 2025 has been slightly adjusted from the original expectations.

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: 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: I think we need to call that out because it will start to compress margins a bit in Q4. In the long run, we don't see this as significantly dragging margins down as it's done with revenue in mind. As for the revenue in '26 and beyond, we're seeing great traction. The Justice Tech space is performing well, and we're competing for bigger deals. Clay M. Whitson added that there might be about $700,000 in incremental expense in Q4.

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: That's a great question. We're uniquely qualified to handle most aspects of deals regarding the breadth of our product and integration/implementation capabilities. So maybe 1 out of every 5 or 6 times we'll have an integration partner, and those tend to be on enterprise-level deals, more often in the transportation sector than other areas, but it's not the norm for us.

Q: In terms of 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: When we provide the FY '26 guide, we'll have a clearer picture, but for now, I wouldn't move you away from the 50 to 100 basis points where the people investment should be offset by revenue growth.

Q: And then is that -- the people investment, is it right to think those are sales folks? Or is there something else to consider there?

A: No. We are investing in our sales team margins. We're always looking to add good people there. But the investment we're referring to here is more in development, QA, and bringing great products to the market.