i3 Verticals, Inc. Class A Common Stock 2026 Q3 Earnings Call

Welcome to the third fiscal quarter 2026 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO, Rick Stanford, our President, Geoff Smith, our CFO, Paul Christians, our Chief Revenue Officer. To the extent any non-GAAP financial measures discussed in today's call, you will also find a reconciliation to the most directly comparable GAAP financial measure by reviewing yesterday's earnings release. It is the company's intent to provide non-GAAP financial information to enhance understanding of its consolidated GAAP financial information. This non-GAAP financial information should be considered by each individual in addition to, but not instead of, the GAAP financial statements. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others, regarding the company's expected financial and operating performance.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. You are hereby cautioned that these forward-looking statements may be affected by important factors, among others, set forth in the company's earnings release and in the reports that are filed or furnished to the SEC. Consequently, actual operations and results may differ materially from those discussed in the forward-looking statements. Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it except as may be required under applicable law. I will now turn the call over to the company's Chairman and CEO, Greg Daily.

Thanks, Clay. Good morning to all of you on the call. Our third quarter results fell short of our expectations. We're disappointed in the outcome. The primary challenge continues to be slower than expected growth in certain areas of the business, particularly within revenue streams that tend to be less recurring in nature. Geoff will elaborate further. Despite the disappointing quarter, there are aspects of the business that continue to perform well. Annualized recurring revenue grew at 8% year-over-year, reflecting the ongoing value of our software solutions provide to our customers and the strength of the markets we serve. We have several material go lives recently that Paul is excited to share with you later in the call. We have laid the groundwork to realize margin expansion in the coming quarters. We remain confident in the long-term opportunity in front of us.

Across our public sector end markets, agencies continue to prioritize modernization, digital engagement, and operational efficiencies. We believe our software platforms, transaction-based solutions, and deep domain expertise position us well to participate in these trends. With that, I'll turn it over to Geoff. He'll walk you through our financial results in more detail.

Thanks, Greg. The following pertains to the third quarter of fiscal year 2026, which is the quarter ended June 30th, 2026. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion. Revenues for the third quarter of fiscal 2026 increased 2% to $53.1 million from $51.9 million for Q3 2025. Organic revenue was down 2% in the quarter, hampered by a $1.8 million decrease in professional services. The ongoing weakness in professional services continues to be concentrated in our utilities market. We expect a year-over-year drawdown in professional services to persist in the fourth quarter. Overall, non-recurring revenue sources decreased 18% compared to the prior year. Annual recurring revenues increased 8% to $174.1 million for Q3 2026, compared to $160.8 million for Q3 2025. SaaS revenue grew 38% and transaction-based revenue grew 5%.

We are experiencing increased interchange rates related to high commercial card usage, a situation we are addressing with our processor in the fourth quarter. We realized lower growth from our Resolve product in the third quarter than expected, but anticipate re-acceleration into the next fiscal year due to the slate of go lives. Maintenance revenue decreased 13%, which is steeper than normal due to the timing of certain material SaaS conversions, but will be closer to 3.5% down go forward. Overall, 82% of our revenues in the quarter came from recurring sources. We do not expect material license revenue the remainder of the fiscal year. Adjusted EBITDA increased 5% to $13.3 million for Q3 2026, $12.7 million for Q3 2025. Adjusted EBITDA as a percentage of revenues was 25.4%, an increase from 24.5%.

We continue to recognize efficiencies and savings due to process improvements and the adoption of AI. We expect the adjusted EBITDA as a percentage of revenue to improve in the fourth quarter and continue to accelerate into the next fiscal year. Corporate expenses as a percentage of revenues were 8.2% for Q3 2026. Adjusted diluted earnings per share from continuing operations for the third quarter of fiscal 2026 increased 8.5% to $0.25 from $0.23 for Q3 2025. Please refer to the press release for a full description and reconciliation. You will notice an item in other income this quarter, a $9.9 million unrealized gain on a minority equity investment. Years back, we made a small investment in a business a former team member launched. We are pleased with their rapid growth and grateful that our investors participate in that success.

Regarding the balance sheet, at quarter end, debt stood at $114.3 million, and our cash balance was $2.6 million. We still have $285.7 million of borrowing capacity under our revolving credit facility and a 5X leverage constraint. The expectation remains that we will use any borrowings for opportunistic acquisitions and stock repurchases. Our share buybacks have reduced our total adjusted weighted average shares outstanding from over 34 million to under 28 million. The following updates are guidance for continuing operations for FY 2026, which was last updated during our second quarter fiscal 2026 press release, dated May 7th, 2026. The outlook does not include acquisitions that have not yet been announced or transaction-related costs. Revenue, $216 million to $221 million. Adjusted EBITDA, $57 million to $60 million. Adjusted diluted earnings per share, $1.08 to $1.12.

We appreciate that this is meaningfully lower than our previous guidance, primarily due to lower than anticipated professional services and a deceleration of transaction revenues. Looking past 2026, we expect better growth on a go-forward basis. Last quarter, we elaborated on several reasons for that, which all hold true. However, for 2027, our current expectations is mid-single-digit revenue growth, which is lower than previously guided high single-digit growth. I will now turn the call over to Rick for additional business-related comments.

Thank you, Geoff. Good morning, everyone. I want to spend a few moments discussing AI and the impact it's having on our business. Obviously, AI continues to be one of the most significant technology trends shaping our industry, and we view it not only as a standalone initiative, but as a strategic capability that is increasingly embedded throughout our operations and our customer-facing solutions. Over the past year, we have systematically deployed AI-enabled tools across product management, engineering, quality assurance, cloud operations, security, and customer support. These capabilities are helping us increase productivity, improve service delivery, accelerate innovation, and maintain a high standard of quality while operating efficiently. A good example is the integration we delivered this quarter connected to a client's court case management system. What was originally considered an aggressive development timeline was completed in approximately one-third the time that similar projects would have historically required.

More importantly, we did not just build a one-time integration. Because of the efficiencies created through AI-assisted development, we built a configurable integration framework that can now be leveraged for future deployments. We expect to bring two new clients live this quarter using that infrastructure with a third immediately behind them. AI is also allowing us to improve quality, security, and long-term maintainability. We've expanded our investments in automation engineering and security engineering, enabling testing and security reviews to occur earlier in the development life cycle. Human oversight with specific domain expertise and established quality controls remain central to our process. Issues are now identified sooner, reducing downstream costs and improving reliability for systems our customers rely on every day. The results are tangible. Internal sprint metrics show that more than 25% improvement in development velocity, and we are releasing software more frequently while maintaining a flat engineering headcount.

Just as importantly, those internal advances are translating directly into customer value and commercial opportunities. Customers increasingly want solutions that automate routine work, improve accuracy, extract meaningful insights from data, and create more efficient user experiences. We are seeing this firsthand in our markets, where AI-powered document processing capabilities are becoming a meaningful growth driver. Today, we hold eight contracts spanning Louisiana, Tennessee, North Carolina, and South Carolina for AI-enabled document extraction, redaction, and document separation services. These implementations began going live this quarter, and we are increasingly seeing extraction and redaction capabilities specified directly within customer procurement requirements rather than being viewed as optional enhancements. As we evaluate AI opportunities, our focus remains on solving real customer problems and generating tangible returns. We are applying AI in areas where we possess deep industry expertise, proprietary workflow knowledge, and trusted customer relationships.

We believe this positions us to deliver differentiated solutions while creating opportunities for both future revenue growth and operating leverage. It's no secret that AI vendors are changing the way they price their platforms from per seat to usage-based models. While AI-related infrastructure costs are increasing across the industry, as models become more capable and agentic workflows become more sophisticated, we are actively managing those investments. Not all embedded features require the most robust and pricier platforms, but instead, some functions are basic and simply require less costly solution. In fact, we are starting to see competitive situations where before it was a take it or leave it on the proposal side for AI platforms.