i3 Verticals, Inc. Q3 FY2026 earnings call

Overall Performance

• Q3 2026 results fell short of internal expectations, driven primarily by slower-than-expected growth in less recurring revenue streams.
• Long-term market fundamentals remain positive: public sector agencies continue to prioritize technology modernization, digital engagement, and operational efficiency, and I3 Verticals' platform, domain expertise, and transaction solutions position the company well to capture this demand.

AI Strategic Deployment

• AI is integrated as a core strategic capability across internal operations (product management, engineering, QA, cloud operations, security, customer support) and customer-facing solutions, driving productivity and quality improvements.
• AI-assisted development cut project timelines to 1/3 of historical averages for a recent court system integration project, and produced a reusable configurable integration framework that will be deployed to 2 additional clients this quarter, with a third to follow immediately.
• AI-enabled early testing and security reviews have improved product reliability and reduced downstream costs; internal metrics show a 25% improvement in development velocity with a flat engineering headcount, as software releases have become more frequent.
• AI-powered document processing (extraction, redaction, separation) is already a material growth driver: the company holds 8 active public sector contracts across 4 U.S. states, with these capabilities increasingly required in customer procurement rather than offered as optional enhancements.
• Management focuses AI investment on high-value use cases leveraging the company's existing industry expertise and customer relationships, and actively manages rising AI infrastructure costs by matching model capability to functional requirements.

Go-To-Market and Vertical Market Progress

• The company has refined its public sector sales process to build a higher-quality pipeline, prioritize disciplined pursuits, and shorten the time from booking to revenue recognition, with a focus on integrated, recurring-revenue platform solutions.
• Transportation: The company launched a new comprehensive state electronic lien and title (ELT) solution that serves the full title and registration ecosystem, and the Georgia statewide vehicle renewal EOSC program is now fully operational, creating new scalable recurring transaction revenue.
• Education: The segment delivered a solid quarter, with nearly half of FY2026 bookings coming from net new customers. A new AI proof of concept for school nutrition inventory optimization, menu planning, and food cost management is underway to help districts optimize USDA funding and reduce waste.
• Justice Tech: The company secured multiple core agency conversions, expanding its market presence in this segment.
• SaaS migration strategy continues to progress, converting legacy customers to scalable recurring revenue models.

Balance Sheet and Capital Allocation

• At quarter-end, total debt was $114.3 million, cash balance was $2.6 million, and $285.7 million in undrawn revolving credit capacity remains available. The company maintains a 5x leverage constraint.
• The company will use available capacity for opportunistic acquisitions and ongoing stock repurchases; share buybacks have reduced adjusted weighted average diluted shares outstanding from over 34 million to under 28 million.

For Q3 2026 (ended June 30, 2026): Consolidated total revenue was $53.1 million, a 2% increase from $51.9 million in Q3 2025; organic revenue decreased 2% year-over-year. Annualized recurring revenue (ARR) grew 8% year-over-year to $174.1 million, up from $160.8 million in Q3 2025. Recurring sources accounted for 82% of total Q3 2026 revenue. Broken down by revenue type: SAS revenue grew 38% year-over-year; transaction-based revenue grew 5% year-over-year; maintenance revenue decreased 13% year-over-year (driven by timing of material SAS conversions, with a smaller 3.5% decline expected going forward); professional services revenue decreased $1.8 million year-over-year, with weakness concentrated in the utilities market segment; non-recurring revenue sources decreased 18% year-over-year. Adjusted EBITDA increased 5% year-over-year to $13.3 million (from $12.7 million in Q3 2025), representing 25% of revenue (up from 24.5% in the prior year quarter). Adjusted diluted EPS from continuing operations increased 8.5% year-over-year to $0.25, up from $0.23 in Q3 2025. No material license revenue is expected for the remainder of FY2026.

• For full fiscal year 2026, management revised guidance downward to a revenue range of $216 million to $221 million, adjusted EBITDA of $57 million to $60 million, and adjusted diluted EPS of $1.08 to $1.12. The downward revision is driven by lower-than-expected professional services revenue and decelerated transaction revenue growth.
• For fiscal year 2027, management revised revenue growth guidance downward from the prior expectation of high single-digit growth to mid-single-digit growth.
• Management expects adjusted EBITDA margin to improve in Q4 FY2026, with margin expansion accelerating into FY2027; current expectations call for 100 to 200 basis points of margin expansion in FY2027, above the historical 50 to 100 basis point annual target.

• Persistent delays in professional services projects, concentrated in the utilities vertical, have created year-over-year revenue drawdowns that are expected to continue into Q4 FY2026.
• Elevated interchange rates from high commercial card usage have negatively impacted payment transaction net take rates, and a technical fix for this issue has been repeatedly delayed by the company's processor.
• Product growth can be impacted by factors outside of I3 Verticals' control, such as variability in case throughput for the Resolve product line that reduced growth in Q3, and implementation timing for large contracted public sector projects.
• AI infrastructure costs are rising across the industry as models grow more capable and complex, requiring active cost management to avoid margin pressure.

Q: Analyst Madison Sir asked for details on the $6.5 million downward FY2026 revenue guidance revision, including the vertical/customer breakdown and whether delays are driven by customers or internal issues. / A: Of the total revision, ~$4.5 million comes from lower professional services, with $3 million of that from delayed utility projects (customer-driven push-outs), $500K from justice projects, $500K from public administration licensing/permitting, and additional delays in a large transportation project. Another ~$1 million of downward pressure comes from lower payment transaction net take rates due to elevated commercial card interchange, a long-running issue whose processor-side fix was repeatedly delayed; the Resolve product also underperformed in Q3 due to lower-than-expected case throughput from existing customers and short-term disruption from a product version update, though it remains a strong long-term growth driver. The interchange and Resolve headwinds are expected to be temporary.

Q: Madison Sir followed up by asking what drives management's confidence in margin expansion, and whether the historical 50-100 basis point annual margin improvement expectation still holds for mid-single-digit 2027 revenue growth. / A: Cost structure reductions (labor, rent, and other overhead) have already been completed, with Q3 2026 margin held down by timing and one-time items including receivable reserves. With these one-time items removed, management expects strong margin expansion in Q4 2026 and 100 to 200 basis points of margin expansion in FY2027, above the historical 50 to 100 basis point target, even with projected mid-single-digit revenue growth.

Q: Analyst Alex Margraf asked how the company will return to mid-single-digit growth in 2027 after the 2026 slowdown. / A: Multiple sources will drive 2027 growth: several large transportation go-lives (including high-growth revenue from the recently acquired electronic insurance verification business) will ramp up through 2027, adding meaningful organic uplift. The delayed licensing and permitting segment has a deep backlog of contracted projects scheduled for 2027 go-lives, and the Resolve product line's large West Virginia court project will begin ramping recurring revenue in the second half of 2027. The utility segment, which faced significant headwinds in 2026, has a low baseline for 2027 growth and current trends point to a much improved performance next year.