i3 Verticals Inc Class A Stock

Thank you. Good day everyone and welcome to the i3 Verticals third quarter 2026 earnings conference call. Today's call is being recorded and a replay will be available starting today through August 14. The number for the replay is 855-669-9658 and the code is 9466422. The replay may also be accessed for 30 days at the company's website. At this time, for opening remarks, I would like to turn the call over to Clay Whitson, Chief Strategy Officer. Please go ahead, sir.

Good morning and 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 are 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 facts 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 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 and 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 provided 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 30, 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. Ongoing weakness in professional services continues to be concentrated in our utilities market. We expect the 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. In addition, we realized lower growth from our Resolve product in the third quarter than expected but anticipate reacceleration 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%, 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. Again, 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 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. Following updates our guidance for continuing operations for FY2026, which was last updated during our second quarter fiscal 2026 press release dated May 7, 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 2 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 lifecycle. Human oversight with specific domain expertise and established quality controls remain central to our process. But 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, these 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 8 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. We believe we are still in the early stages of long-term transformation in the software and the momentum we are seeing today reinforces our confidence that AI will be an increasingly important component of our growth strategy. With that, let me turn it over to Paul for revenue updates.

Thank you, Rick. The third quarter remained active across our core markets with customers increasingly evaluating broader, more integrated platform solutions. Our strategic focus has translated this demand into a higher quality sales pipeline, more disciplined pursuits, stronger recurring revenue opportunities and shorter paths from bookings to revenue recognition.

We have enhanced our approach to identifying, qualifying and pursuing public sector opportunities. Governments continue to invest in modernization initiatives and i3's focus is on delivering integrated software platforms that serve as operational backbone for mission-critical functions.

We are expanding our presence in the JusticeTech market, securing multiple core agency conversions that demonstrate the strength of that platform and our ability to complete -- compete successfully in large established markets. At the same time, we continue to advance our SaaS and cloud strategy, creating ongoing opportunities to migrate customers to more scalable recurring software models.

Cross-selling remains a meaningful growth driver across our vertical markets, particularly where software platforms, payments and adjacent workflow solutions can be bundled to increase customer value and deepen long-term relationships. We continue to make meaningful progress across our public sector portfolio and our transportation business serves as a strong example of that momentum this quarter.

i3 currently serves 34 jurisdictions across the United States and Canada. During the quarter, we launched the state electronic lien and title solution as part of a broader transportation platform. Unlike traditional ELT providers that operate as single point solutions connecting to an existing state system, i3 provides mission-critical software across the entire title and registration ecosystem, including dealers, county clerks, state motor vehicle agencies and integration points for lender service providers. This comprehensive approach enables a seamless end-to-end digital workflow that improves data accuracy, reduces administrative costs, enhances security, increases operational efficiency and accelerates user adoption.

Demand for our motor vehicle insurance verification solutions remained strong. During the quarter, we supported the implementation and launch of insurance verification systems in 2 major Midwestern states. Most recently, Kansas implemented the Kansas Insurance Verification System, real-time platform designed to streamline compliance and strengthen enforcement statewide.

The system enables immediate insurance verification for authorized agencies, connects with hundreds of participating insurers and supports the state's effort to reduce uninsured motorists.

In Georgia, following statewide approval and execution of agreements with all participating counties, the state's vehicle renewal kiosk program is now fully operational. This achievement further expands i3 Verticals' transportation footprint, establishes additional recurring transaction revenue stream and provides a scalable foundation for future growth across the state. Education delivered another solid quarter, driven by new customer additions and continued expansion with our existing base. Nearly half of the fiscal '26 bookings were generated from net new customers, demonstrating the continued demand for our solutions. On the innovation front, we continue to advance AI initiatives in our education platform. This quarter, we initiated a proof of concept focused on AI-driven inventory optimization, menu planning and food cost management for school nutrition programs.

The initiative is designed to help educational institutions better optimize USDA meal program funding while improving efficiency, reducing waste and providing actionable operational insights. Looking ahead, we remain confident in the long-term fundamentals driving public sector technology investment. Government agencies continue to prioritize modernization, automation, enhanced citizen experience and greater operational efficiency. With our integrated software platform supporting critical government functions, we believe i3 Verticals is uniquely positioned to capitalize on these trends. We remain focused on disciplined execution, expanding our market presence and delivering sustainable growth and long-term value to our customers and shareholders. This concludes my comments, Megan. At this time, we will open the call for Q&A, please.

[Operator Instructions] The first question comes from Madison Suhr with Raymond James.

I wanted to start just on the FY '26 revenue guide here. Obviously, it was lowered by $6.5 million. Maybe just double-click on the composition of that. I know, obviously, it's driven by non-recurring revenue, but is it mainly 1 large customer? Is it multiple? Any color on vertical? And just to be clear, is this a customer-driven kind of push-out or lower, or is there any kind of implementation delays internally?

Thanks for the question, Madison. To unpack it a little bit for you, of the $6.5 million guide down, probably about $4.5-ish million or so that I would attribute to professional services. Within that, about $3 million of that is utilities and I would classify that as pushout, just ongoing delays in our large CIS and a couple of smaller projects, but the vast majority of that being ongoing push out there. About $500,000 justice, $500,000 licensing and permitting in our public administration and a significant project in our transportation market, too, is delayed a little bit. That brings you up to about $4.5 million there.

In the transaction revenue, you see that kind of throttle down this quarter. I view that as temporary. A big chunk of that is payments, probably $1 million plus of that is the net take rate on payments, and it's being driven by what we alluded to in the comments around elevated interchange around commercial cards. And basically, that's a data fix that is going in, in the fourth quarter. It's been hurting us for a while. It was particularly acute this quarter, and the fix has just been repeatedly delayed, and there's been some dialogue with our processor that we've just kind of been working through and we just had to bite the bullet here.

And then our Resolve product, that is a product we've been upfront about just how excellent the pipeline and the growth is for it. It had a really weak quarter. It's subject to a number of forces that are kind of in the -- you might call in the realm of things outside of our control, mostly the throughput of cases through the existing customer base. There will be times that, that's a really great kind of wind in our sails item as that throughput is rising in the existing customer base and times when it's kind of dragged down a little bit.

We also had some good long-run implementation things, but they were short-run disruption items within that product suite as we went on to a new version of the product this quarter. But long run, that's going to continue to be a really strong growth driver for us. So anyway, that's kind of the anatomy of the guide down.

Okay, yes, that's very helpful color, Geoff. I appreciate it. And then just a follow-up, I think Greg mentioned, you know, have a solid foundation for margin expansion here. Can you guys maybe just touch on what gives you confidence in improving profitability? Geoff, I know, for example, you've talked about AI efficiencies in the past. And historically, you've talked about normalized margin improvement in the 50 to 100 basis point range. Is that still the right way to think about margins, given your comments around mid-single-digit revenue growth? Thanks, guys.

So, for the fourth quarter, we're looking at very strong margin growth. I'll kind of take it out to 2027 and look at that. We already have reduced our cost structure, and I'm referring specifically to people costs and some other things like some rent and things like that, materially. And frankly, there's a few things that have already been done that we're not getting the benefit from yet in Q3. Some of that is timing and some of that is also, there were some offsets in this current quarter in the form of reserves we had to take on some of our receivables. And so those are one-time items, and we already are looking at kind of a cleaner path to better margins in 2027.

A little bit of that is also compressed by the revenue growth situation, and as that improves into 2027, the margin expansion will benefit from that as well. But the long run guide that we've always put on margins being 50 to 100 basis points, I think you're looking north of the 100 basis points in 2027 currently. If revenue is growing in the mid-single digits, as we've kind of described here, we should be more in the 100 to 200 basis point margin expansion range for fiscal 2027.

[Operator Instructions]

Alex Markgraff at KeyBanc is having audio troubles, but he emailed a question he'd like for us to address. Curious to understand the bridge back to single-digit growth in 2027 and our degree of confidence in that path.

It's a really fair question from Alex. We're definitely sensitive to that and appreciate the market. You need to kind of understand how we get from the growth picture in '26 to '27. So the first thing I would highlight is, Greg and Paul touched on this in their comments, but we have several significant go-lives in our transportation market. Two of those are sort of in what you might call the legacy i3 transportation market. Good recurring revenue go-lives that have just kicked in here in the fourth quarter. Those will be on a ramp-up period, so the impact in Q4 is going to be really modest, but the impact in 2027 will be stronger and then into 2028.

And the other two are, in our most recent acquisition, the electronic insurance verification software and frankly, we're not, that's not all touching our organic growth until we get to Q2 of 2027.

But the growth in that acquisition is tremendous. They just have a really, really strong market position. The things that we had in the pipeline at the time of the acquisition several months ago are all on track and several material new things are also already in the hopper as well. Really great growth picture there. Once that becomes part of the organic picture, that's going to be a nice, significant uplift on its own.

Also, the Board Licensing and Permitting software has had a really rough 2026 with a lot of project delays, but they have a deep backlog of contracted implementation revenue and go-lives slated for 2027 here. So their picture gets a lot brighter in that period.

I alluded to the go-lives in our Resolve. Everybody's well aware of West Virginia, which will continue to progress forward. It'll be the back part of 2027 before we start going live on courts with that project. At that point, you get on the ramp of the recurring revenues. But in the meantime, we'll still have a slightly better diet of professional services in the next year. And then finally in the utility space, in both our portal business and the CIS project, that's been a really difficult year in that space in 2026. We've set the bar pretty low to grow over and what we see right now for 2027 looks a lot brighter on both of those fronts.

[Operator Instructions] This concludes our question and answer session. I would like to turn the conference back over to Greg Daily for any closing remarks.

Again, thank you everyone for dialing in this morning. And we appreciate your support.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, everyone, and welcome to the i3 Verticals Second Quarter 2026 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through May 14. The number for the replay is (412) 317-0088 or (855) 669-9658 and the code is 6088860. The replay may also be accessed for 30 days at the company's website.

At this time, for opening remarks, I would like to turn the call over to Clay Whitson, Chief Strategy Officer. Please go ahead, sir.

Good morning, and welcome to the Second Fiscal Quarter 2026 Conference Call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Rick Stanford, our President; Jeff Smith, our CFO; and Paul Christians, our Chief Revenue Officer.

To the extent any non-GAAP financial measure is 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 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'll now turn the call over to the company's Chairman and CEO, Greg Daily.

Thanks, Clay, and good morning to everyone on the call. We are pleased with our performance in the second quarter as we continue to execute against our strategy and further improve the quality of our business. Revenue from continuing operations grew 6% year-over-year and annualized recurring revenue increased 12%, which we continue to believe is the best indicator of our long-term growth opportunity.

Across each of our public sector markets, we are investing thoughtfully in products and capabilities where we see opportunities. For example, we continue to find compelling opportunities to invest in Justice Tech market to help courts modernize and capitalize on their own revenue opportunities.

However, we are seeing opportunities for cost control and margin expansion amongst many of our highly durable products. Importantly, the process improvements and the efficiency initiatives we've been driving through the organization are beginning to show up in our operating model.

While we continue to invest for growth, we believe these efforts position us well for margin improvement as we move through the remainder of fiscal year '26. We remain well positioned from a balance sheet perspective, which gives us the flexibility to pursue all manner of capital allocation opportunities.

Overall, we're encouraged by the momentum we're seeing across the business and remain confident in our ability to create long-term value for our shareholders. With that, I'll turn it over to Jeff to walk through the financial results in more detail.

Thanks, Greg. The following pertains to the second quarter of fiscal year 2026, which is the quarter ended March 31, 2026. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion.

You will see we have retooled our presentation of revenue. We believe this clarifies our recurring revenue and simplifies the categories investors track while maintaining visibility in the important trends in the business.

Revenues for the second quarter of fiscal 2026 increased 6% to $57.5 million from $54.1 million for Q2 2025, principally reflecting revenues from two acquisitions, which have not yet annualized.

Organic revenue was flat in the quarter, hampered by a $2.2 million decrease in professional services. The ongoing weakness in professional services continues to be concentrated in our utilities market, and we expect this to continue through the remainder of the fiscal year.

Overall, nonrecurring revenue sources decreased 11% compared to the prior year. Annual recurring revenues increased 12% to $183.5 million for Q2 2026 compared to $164.5 million for Q2 2025.

SaaS revenues grew 37% and transaction-based revenue grew 7%. We expect elevated levels of SaaS growth for the remainder of the fiscal year and accelerating transaction-based revenue growth.

Overall, 80% of our revenues in the quarter came from recurring sources. Most of our expected software license sales for fiscal 2026 have been, and we expect lower levels for the remainder of the year.

Adjusted EBITDA increased 5% to $16.6 million for Q2 2026 from $15.8 million for Q2 2025. Adjusted EBITDA as a percentage of revenues was 28.8%, a decrease from 29.3% -- similar to last quarter, the percentage decline was driven by the previously mentioned investments in our Justice Tech market, higher hosting costs and lower professional services revenues.

While professional services margins are relatively lower, the associated costs can revenue fluctuations. We expect the adjusted EBITDA as a percentage of revenue to improve for the remainder of the year, and our long-term expectation remains 50 to 100 basis points improvements per year.

Corporate expenses as a percentage of revenues were 9.3% for Q2 2026. Adjusted diluted earnings per share from continuing operations for the second quarter of fiscal 2026 increased 10% to $0.32 from $0.29 for Q2 2025. Again, please refer to the press release for a full description and reconciliation. Balance sheet, at quarter end, debt stood at $81 million, and our cash balance was $7.1 million. We still have $319 million of borrowing capacity under our revolving credit facility with a 5x leverage constraint. The expectation remains that we will use any borrowings for opportunistic acquisitions and stock repurchases.

The following updates our guidance for continuing operations for FY 2026, which was previously set forth in our first quarter fiscal 2026 press release dated February 5. The outlook does not include acquisitions that have not been announced or transaction-related costs.

Revenue, $221 million to $229 million; adjusted EBITDA, $61 million to $65 million; adjusted diluted earnings per share, $1.09 to $1.15. We expect recurring revenues to continue to grow at a double-digit rate through the remainder of FY 2026.

However, our view of nonrecurring professional services has deteriorated further, leading us to guiding down the midpoint of our revenue range. Greg and I have alluded to margin strength in the back half of the fiscal year. You can see that in our guide as we expect to hold closer to our previous guide on EBITDA despite the lower revenue expectations.

Looking past 2026, we expect better growth in 2027 and beyond. To highlight several discrete items that will compound with our normal growth algorithm, ongoing boarding of courts in West Virginia and other states on our CMS platforms and other transaction-based revenues will continue to feed excellent ARR growth in our Justice Tech market.

In our transportation market, near the end of fiscal 2026, we will turn on two long-delayed transaction-based revenue opportunities, the impact of which will be felt in 2027.

In addition, the insurance verification acquisition we made on January 1 continues to accelerate, and we will add multiple new state contracts in this fiscal year and the next. While professional services is not our preferred revenue source, we always pursue ARR when given the chance.

We expect the professional services line to be far more stable than it has been in 2026. Our long-term expectation of organic revenue growth remains high single digit. From a seasonality standpoint, we currently expect our revenue distribution for the remaining 2 quarters to approximate the following: Q,3, 48%; Q4, 52%.

I will now turn the call over to Rick for additional business-related comments.

Thank you, Jeff. Good morning, everyone. This past quarter, we continued our focus on AI-powered capabilities that create measurable value for our government clients we serve by strengthening the core platforms they rely on every day. Our core platforms serve as systems of record containing critical IP sensitive data and are designed with deep domain knowledge and experience.

An example of our AI-powered capabilities is our newly released Ad Hoc query and reporting tool, which allows users to extract meaningful insights from their existing data using natural language without requiring lengthy custom report development or IT involvement.

At last month's IUCX conference, which is the leading utility customer experience conference for electric, gas, water and wastewater utilities, the response to this new set of tools was immediate with clients requesting access on the spot and citing the ability to compress what had been a multi-day reporting cycle down to minutes.

In addition, our AI-assisted document analysis and management platform brings the same philosophy to unstructured content, enabling clients to ingest, separate, extract, redact and search documents throughout their entire life cycle, providing our customer workforce with the tools to improve the value of their existing data and documents with an auditable AI-assisted workflow.

In both cases, human review remains at the center of the process, ensuring accuracy, traceability and compliance in the regulated environments our government clients operate in. What makes these capabilities particularly valuable is that they are designed as a platform architecture, not isolated point solutions.

That distinction matters in an AI-driven market. Both tools are architected to layer on top of any product within the i3 enterprise, which means the value compounds as adoption grows. For example, a client using our transportation or justice tech solutions today can extend these AI capabilities across their existing workflows without disruption to their data models or existing integrations.

This positions i3 to expand the value of existing relationships within our installed base while simultaneously making our platform more compelling to net new clients who are prioritizing durability, depth and long-term efficiency in their technology decisions.

Beyond our client-facing products, we are seeing meaningful gains in how we build software today versus a year ago. We began with AI assistance across the enterprise, which in layman's terms simply suggests snippets of code to enhance overall code development, debugging testing among other uses and now have moved to AI agent tools that plan, write, test and modify code with minimal human intervention and increased our product development capabilities, allowing us to pursue opportunities that would have previously required difficult trade-offs and prioritization, such as new feature development and product releases.

Both AI assistant and AI agent design tooling is elevating the user experience of existing applications and automated testing through Playwright is improving our reliability and quality of our releases. Playwright allows us to create a library of automated testing scripts that would run on the cadence of our choosing without human intervention or action.

Taken together, these investments are expanding what our teams can accomplish within a given sprint, letting us do more across our product portfolio without compromising on quality or execution discipline.

We believe the work we're doing today in AI-powered product development will compound in value over time. but it is deeply embedded in mission-critical systems and workflows our clients depend on, strengthening our capabilities and our long-term customer relationships. I'll now turn the call over to Paul for revenue updates.

Thank you, Rick. Demand across our core markets remained healthy in Q2 as government agencies continue to prioritize modernization, improved constituent experience and platforms that reduce long-term operational complexity.

Across procurement and active opportunities, we continue to see three consistent buying patterns, broader solution scope beyond a single core system, preference for platforms that support integrated analytics, payments, transactional services and AI platform architecture that layer on top of existing features and benefits, seeking vendors that can scale and also seeking vendors that can scale from local agencies to statewide deployments.

These trends continue to favor i3's market-centric model and our ability to provide integrated platform solutions. From a commercial execution standpoint, we continue to see sustained interest across Justice Tech, transportation, education and licensing and permitting, increased multi-module evaluations rather than single solution procurements, all with integrated analytics, payments, transactional services and AI-enabled workflows.

Justice Tech remained one of our most active markets this quarter, supported by continued court modernization demand and strong alignment of our court case management system, jury solutions and transactional services.

We saw increased customer engagement, reflecting agencies urgency to reduce workload, modernize workflows and improve customer outcomes at both the state and local levels. creating increased interest in offerings that include payments, analytics, transactional services and citizen access.

As i3 continues to expand and deploy our case management system footprint, we are seeing growing market awareness of the transactional services embedded in that ecosystem.

Historically, case management system deployments served as the primary entry point with transactional service adoption following as customers became operational and more educated on their value. Over time, this created strong demand, but with long sales and implementation cycles typical of public sector system replacements.

We are entering the next phase of this strategy. With the ability to offer transactional services independently of a full case management system deployment, we have introduced another commercial motion that accelerates time to revenue recognition.

This approach allows agencies to engage with transactional services first, which drives revenue for the agency, generating pull-through demand for broader software adoption. As transactional services adoption grows, it strengthens our customer relationships and enables faster and more natural expansion into additional products and platform capabilities without requiring a full system replacement upfront.

In transportation, market momentum continues to be supported by AI-enabled verification and enforcement workflows, proven deployments that validate scale and reliability and cross-sell opportunities, expanding our platform reach.

Transportation continues to execute strongly within our platform-first strategy, delivering durable recurring revenue while deepening our role as a long-term modernization partner for motor vehicle, driver services and motor carrier agencies.

We further strengthened strategically important customer relationships by securing multiyear support and maintenance agreements and delivering multiple large renewals with disciplined pricing, reinforcing platform stickiness and long-term pricing durability.

Operationally, we remain focused on core platform execution and supporting future modernization efforts. As recent acquisitions have expanded -- or excuse me, our recent acquisition has expanded our footprint as the market-leading insurance verification provider while enabling tighter integration with payments and shared data services in the broader i3 platform.

Across licensing and permitting in our public administration area, agencies continue to expand platform scope, building on core implementations. Commercial trends include broader adoption of licensing and permitting and compliance modules and an increased focus on citizen engagement and digital services delivery.

These dynamics reinforce higher deal values and longer-term customer relationships and introduce AI as an accelerator. In the second quarter, we expanded adoption of AI indexing across new client agencies, demonstrating clear willingness among public sector customers to invest in practical embedded AI that delivers immediate operational value.

These wins are also accelerating our broader sales actions, and we are compressing engagement time lines and driving significant pipeline expansion.

In utilities, we continue to expand our platform capabilities with our i3 Unifi 360 customer information system and our Unifi 5.0 portal systems into a platform cloud offering. These capabilities, including real-time analytics, help agencies streamline operations, improve customer experience and reduce friction across billing, payments and service interactions.

As adoption grows, we are seeing increased opportunities to extend these solutions through embedded payments and data services, reinforcing our platform approach and expanding long-term value within the utility market.

Education continues to be a strong perennial performer for i3. This quarter, we opened up another state with the addition of Utah. We are also pleased to report that close to half of our new sales for fiscal '26 so far are net new customers.

In addition, we have operationalized AI and development, operations and product with near-term plans to augment our customer-facing AI-powered reporting tools. While deal timing remains product-driven, overall bookings activity reflects healthy deal flow across core markets, increased average solution scope for each opportunity, continued customer preference for SaaS delivery models augmented by integrated transactional services.

Looking ahead, our commercial priorities remain centered on sustained pipeline and RFP growth with both new from new and new from existing clients, expanding solution scope within existing accounts and leveraging platform architecture AI capabilities as part of our sales and service delivery.

This concludes my comments, Cindy. At this point, we will open the call for Q&A, please.

[Operator Instructions] Our first question comes from Madison Suhr of Raymond James.

I wanted to start just on the nonrecurring side. I know there's some headwinds this year, but you did call out high single digits is still the right way to think about the business. Just what gives you confidence that, that's the right longer-term growth rate?

And if you can also maybe just touch on what the key verticals are that you think can drive an acceleration back into that range over the medium term?

Thanks for the question, Madison. So we touched on this a little bit in the script. If you think about 2027, you started to kind of like give a little bit of breadcrumbs on that. Specifically, the justice market is going to be -- continue to be a really strong ARR grower through that period. That business, they have the West Virginia win, will really start to keep scaling and has really good prospects as they land and expand those courts.

Our Resolve product, which is we're assisting with revenue generation for these courts is absolutely the kind of the right product for the right time with a very deep pipeline right now and a lot of implementation in front of us. We're really excited about that.

Transportation market also has a couple of really solid things going for it. A couple of long-term ARR things that have been years in the works and have been long delayed are finally going live. That will be nice additive items. And then the most recent acquisition, we touched on this, but just to hit it a little bit more.

They currently have five states in implementation and several more that are kind of near line of sight, just an incredible market position that they have there is kind of the right -- with the right to win status, you might say, as these states implement this kind of no-brainer solution to preemptively monitor for insurance on their registered vehicles.

They're in a great market position. It's going to be a great growth driver for the company. That's a couple of things that layer on top of our already existing growth algorithm. And then outside of the net dollar retention growth algorithm, which we expect to kind of remain in that sort of 103% to 105%, hopefully push it a little higher kind of level. We were 104% this last year, not expecting any significant changes there.

The story this year and why the growth isn't kind of still up in that high single digits is the nonrecurring stuff. Our professional services specifically has gone from about $39 million to the current guide expects somewhere more in the high 20s on an organic basis. We'll have a little bit of inorganic in there.

And that's what has been revised down from the initial guide. This coming year, as you look out to 2027, you don't have to expect that, that growth -- that revenue line rebounds back up to $40 million nearly to see us getting back to a much better growth number that's in the high single digits, in line with our longer guidance. Even if that kind of maintains at the already kind of depleted level as it's at, you're already kind of there.

And we have some things in the hopper that the give or take on that number is decently wide as always because it's nonrecurring. But we have some opportunities in front of us that are still really attractive.

Utilities, in particular, has been kind of where some of the pain has been felt this particular year. That's a project that's still very much moving forward, and we still remain very excited about it and convicted about the market opportunity. We've had to be a lot more patient than we would prefer, but that is what it is, and we're still going to get this thing done ultimately.

Okay. No, that's all very helpful color. I appreciate it. And then just a follow-up on the 2026 outlook. You did touch on this a little bit as well in your prepared remarks, but you took revenue down by about $3.5 million and EBITDA only down $750,000. So call it about a 20% decremental margin. So just as we think about expenses here, to the extent some of these nonrecurring headwinds persist, do you feel like you can continue to manage expenses to partially offset a big portion of those headwinds?

And do you think some of these efforts you're doing now sets you up well to be in that 50 to 100 basis points of normalized margin expansion in FY '27, assuming the revenue also is more in the normalized range?

Yes, absolutely. On margin specifically, as always, there's a mix of things going on within that. But we've highlighted this on the last couple of calls, as our professional services drops down, those costs lag a little bit on the revenue drawdown, especially in our utilities market, we had a lot of third-party contractors and things like that, that we're engaged in projects that we were able to kind of manage and mitigate.

And then the same trends that we've been talking about for a little while are still present. We have been doing less acquisitions. And as a result, we have been continually tightening up and improving and efficiency and processes all over the business in multiple different pockets. We have been benefiting greatly from AI. And I think there's still more room to kind of benefit enhance there. And that goes for a lot of different processes and pockets within the company.

I mean, obviously, DevOps, but there's probably not a single person within the business who isn't benefiting from this stuff in some form or fashion. So you're able to do more with less when you have attrition, you're able to consider do we really need to backfill roll, things like that.

Cumulatively, that's all adding up to a pretty attractive margin expansion situation. We expect margins to be stronger in the back half of this fiscal year. We still are making sure we invest in opportunities when we see those to run right through them, the Justice market being an example of that. So it's not all kind of reduction in costs.

There are some pockets where we're really accelerating and pouring fuel on the fire. But the net picture is still one of -- it's a pretty attractive margin expansion scenario for us.

The next question comes from Peter Heckmann of D.A. Davidson.

As regards to the recent acquisition in auto insurance verification, when you win a state there, do you automatically get 100% share of the state's business? Or is that something where potentially maybe like a hunting license or you're one of several suppliers and so you have to compete for share?

So the short answer is we would get 100% of their insurance verification. There's no scenario that we're aware of, and I think it's extremely unlikely that the state would ever try to bifurcate that. There needs to be kind of a single system of record of these -- what it is, is basically civil penalties proactively being sent out when there's an uninsured motorist.

There needs to be a single system of record for that, and that's our software. there's not really a scenario where you would bifurcate that. Now that being said, this is sold into the Department of Transportation. There's a lot of other software that the Department of Transportation needs, a lot of which we provide.

So the added footprint we have here on the insurance verification improves our market position to provide other features, motor vehicle, driver's license, some of the fuel tax solutions, truck routing, all the different things that the Department of Transportation needs to provide services to its constituents. So that's where the competitive landscape is.

Got it. Okay. And if I remember correctly, that acquisition already had something like 18 to 20 states. So just -- I didn't write down whether you said you had three or five implementation. But can you talk a little bit about the number of states that, that company has live, how many are in implementation? And then does the revenue model -- is it geared towards the underlying population of the state?

So we'll just speak in broad numbers, we'll be in the -- we're in the low 20s at this point. We'll be in the high 20s, I think, when you look back in 2 years. Revenue model is like a lot of our software, I'll say, flexible. We -- this is generally SaaS.

There's some implementation revenues on the front end and SaaS, and that would be sized based off of the size of the state generally, maybe not quite like it's probably the type of thing where like a larger state is definitely going to pay more, but a smaller state isn't going to get like proportionately lower cost necessarily.

And then we also have the opportunity to do transactional revenue here. This is another classic situation for i3 where this company could monetize payments and wasn't monetizing payments. It absolutely will go forward. We've already got two states lined up for that. They have a state that is a very small state that they monetize on a per transaction basis.

And that model has worked out really well for them. That state punches way above its weight relative to population. That model will -- that won't be the only state on that model long run. And then we can also charge for the presentment of these. There's a lot of different levers we can pull. So we can be flexible and work with the state for what works with them in their budget situation.

Great. Great. So that one looks like it should be -- as that falls into the organic calculation, that one also looks like it should be additive to organic growth.

Yes, absolutely.

[Operator Instructions] Our next question comes from Alex Markgraff of KeyBanc Capital Markets.

A couple of questions. Maybe one for Paul and Jeff, just around some of the AI comments. I'm curious, it sounds like you all are doing quite a bit. Would just be curious to kind of understand where you expect this to show up most materially in the model in the near to midterm, thinking about things like growth in existing relationships, new customer relationships, pricing retention, maybe implementation time lines.

Just help us think about how that sort of materializes from a model standpoint based on what you're hearing on the ground?

This is Paul. I'll get started on it. We see it really early in the sales process, and we see the ability because we've got a lot of domain expertise organized by market to really hit the trigger points for where they're creating issues for our customers. And so it typically will start with the pain point reduction, and that may manifest itself in increased maintenance fees as we annualize on those conversations.

It may manifest itself in specific pricing related to an AI deployment on that. It just depends on the customer and the particular process for how that's working. It also allows us -- since it's -- the architecture is sitting on top of the AI component and it's architected on top of our existing positions. It also allows us to affect those more quickly than we would if we were just doing that on a pure stand-alone basis and having to do deep integrations because it's already our stuff, and we're enhancing that program.

I do think we're in early innings of that conversation. And it does appear to me that as we have customers who look at it and say, "Hey, we're excited and they want AI exposure. In many cases, they don't know what that means or how to go about it.

And so we're trying to focus on tangible value add that can improve their operational efficiency or enhance their constituent experience much more naturally, which then tends to open up yet another opportunity and yet another opportunity.

So as we run down the road, I think we'll have more opportunities, but it also puts a little bit of pressure on us to continue to evolve in that fashion on a consistent basis, and we're structured to accommodate that. So we're excited about it.

Just to the financial model, Alex, we Obviously, we're experiencing benefits in the margin area already, but also absolutely in revenue. Rick in his script highlighted a couple of discrete items where you're talking direct revenue that's a result of functionality that's been added to the software that would not have been possible kind of in the pre-AI area, features and things like that, that are directly taking advantage of the capabilities now.

And the opportunities there are very large, I think, over the next several years. There -- there's a lot of -- the pie of what can be delivered and the range of things that can be delivered to our customers, the functionality of the software has just expanded greatly.

But then it's -- honestly, it touches a lot of other revenue, too, just when you think about like how the software is built now. in terms of like what revenue is enabled by AI is going to be in the not so far future. It's like kind of everything.

Got it. That's helpful. And then maybe just one follow-up on the sales front. I think I heard 50% or about half of sales this year from new customers. If I heard that correctly, maybe just a reminder how that sort of compares to the last couple of years?

Yes. That was for education, particularly. And it's probably close to 2x what their average would have been 5 years ago.

Education...[Audio Gap]

Helle, Is anyone there?

Yes, We are here.

Okay. Does that conclude the question from Alex?

Yes, yes. Sorry about ...

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Greg Daily for any closing remarks.

Thank you for your continued interest in the company. Stay tuned. We're excited about our pipeline, our team that we've put together. And thanks again, call us if you need anything.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

All right we'll go ahead and get started here. Thank you very much this morning for joining us to kick off the second day of the 2026 Morgan Stanley TMT Conference. I'm James Faucette, senior FinTech analyst and its FinTech and Vertical software analyst at Morgan Stanley.

I'm very pleased to be kicking off this morning with Clay Whitson, Chief Strategy Officer of i3 Verticals. So thanks for being here. Before we get started here, a quick disclosure I need to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures.

So Clay, great to have you here at the TMT Conference. For those who are not familiar with i3, particularly post the merchant services and health care RCM divestitures. Can you provide a quick overview of the company as it is today?

What are your core end markets, key products, mix of recurring revenue and SaaS and how you think about the growth algorithm on a go-forward basis.

Okay. Well, we're currently pure-play public sector. We're in 5 markets: justice, transportation, utilities, public administration and education, which we've been in since 2014. Over 80% of our revenues are recurring revenues.

The two largest components of those are either SaaS or maintenance from old perpetual licenses and transactional revenues, and I'll include payments in those transactional revenues. The remaining 20% is mainly professional services, but we still have a small amount of perpetual licenses, certain customers like to buy and even some equipment.

Got it. So when you look at and talk about the different parts of public sector, et cetera. Can you compare and contrast maybe some -- where you sit versus some of your competitors? And what kind of work you're doing for public sector typically?

Okay. Well, I guess, Tyler would be the most obvious public company comparable. We compete with them in certain markets, but not other markets of course, they're in Justice our largest and most quickly growing market right now.

They have offerings in education, but they're not similar to our education product is the lunch programs and the payments associated with those. I'm not all that familiar with theirs, but I know they have bus routing in...

Yes, some of those things like in education, right.

Yes. In transportation, we don't really run into them. They're in utilities as we are, but they are in a different tiers than we are in utilities and the public administration, they've got the leading fund accounting product. And we have a cloud-based fund accounting product, but it's generally for smaller applications.

Got it. Got it. Got it. And is there a difference in terms of -- you mentioned utilities. Do you guys run into them for most of your customers in the same size municipalities? Or is there differences in the types of sizes of municipalities and other areas that you serve?

I would say, Justice is where we do run into them the most. But even their estimate of market share and market share is not all that easy.

It's tough in that sector.

To determine. Even in that sector, I think they estimate their market share at 10% which would put us maybe at 1%.

Right, right.

And so we do see them, but not all the time. Usually, it's local competitors who grew up and knew a judge and have established a business over time in a particular state.

Got it. Got it. And then one of the -- one of the companies we often hear about is -- have you run into much of Axon trying to come into the Justice system? I know that they've come more from the enforcement and, frankly, digital cameras and that kind of thing, but that's something that they've talked about. And do you see that much at all or not really?

We haven't yet. We do have a public safety group, and it is a good crossover with courts and the records police keep versus the records, the courts keep. So I do see it as a logical extension, and we're pushing more into public safety. Definitely, the entire public sector is underserved and outdated. So it's just a long runway for...

Yes. Like hyper-fragmented, it seems like, like you said, is that a lot of these systems were custom built by somebody local a long time ago.

Well in laws can vary locally. In Louisiana, they have on remnant of Code Napoléon, which is from the French influence there a long time ago, and it's just very different laws in each state.

Right. Yes. No, absolutely, absolutely. So you guys have been historically a very astute acquirer of businesses. Some of them are in some of these smaller solutions that we were referring to a moment ago. With the portfolio now really focused on public sector software, how is your M&A sourcing and target profile evolved, whether that be by product categories, geography, deal sizes?

Well, I do think we'll stick with our 5 markets now. When we first went public, we had a much broader focus as you know. But we self-source all of our deals. We work very hard on that, and it's through our network of CEOs and founders that we've gotten to know over time.

I think we've earned a preferred buyer status. We're a very good home for a founder-led company who might have a son, a daughter, a granddaughter in the business, and they want to find a good home for the next generation. And so it's going to be hard to believe, but it's not all about the money when they reach a certain stage.

So yes, the growth profiles we look for are the things we like are founder-led, no outside money usually. It's preferable if the founder wants to keep working. They can work their own. If they want to work 10 hours a week, that's fine with us. That 10 hours is very valuable.

Financial profile, growing over 10% recurring revenues. We prefer cloud, SaaS, of course, good margins that shows defensibility in the business. Yes. So that's...

So when you're putting together this group, and as you said, it's like a lot of times, you have a preference to be cloud-based, et cetera. How much work are you able to do to harmonize those acquisitions and their platforms with your existing catalog or base of offerings? And over what time frame does that usually take place?

Well, it depends on the acquisition that's target. But the one we just did was very quick. If they're already on AWS or Azure, it's pretty seamless for us to integrate that. If their products are on-prem, it's a bigger lift, of course. And if their tech stack is different than ours, it's a bigger lift.

But more -- the one we just bought is cloud-based, then it's Azure. I mean, it's a .NET stack. And so it was very easy to fit in.

Got it. And then from an ongoing basis, do you -- how do you handle service and maintenance and maintaining the code base of the acquisitions? And then do those ultimately remain kind of stand-alone just because of the way the customer sets are? Or do you end up with kind of -- are you trying to push towards homogeneity of code bases ultimately?

Well, we're organized by product, the 5 products I went through or market -- the 5 markets I went through earlier, and they report up to a common person. We have -- whose name is Chris Laisure. We have a CTO. One CTO and one tech stack and one horizontal payment stack, which is a PayFac model, you look at -- and so we do try to harmonize them. Education might be a good example. We've had it the longest since 2014.

We originally had 4 different code bases there. We're now down to 2, one is .NET, one is PHP. And we're pushing those together over the coming years. But we go about it slowly. So that's a 10-year time period to go from 4 to 2. Our customers, not only in education, but the public sector in general, don't like change.

And so we try to accommodate them as much as possible, but it does come a time where in education, we got down to '25 customers, districts, school districts, and we told them a year in advance, this time next year, we're going to have to turn off the switch. So you're going to have to either find a new provider or upgrade.

I mean even if you're giving them a better product, maybe even for the same price, they still hold sometimes. I know it can be daunting, right?

Right, right, right. So speaking of acquisitions, can you just recap for us a little bit what you're pacing or how much you were able -- how many companies in revenue you were able to acquire in '25? And then how are you thinking about that for '26?

'25 were just 1 August of '25. And in '26, there have 2. And so that's 3 over the past two years. And they were gyms. So I think you'll see us acquiring less frequently, but we really, really like the ones we do decide to buy. And all 3 of those have been cloud-based. They've been primarily SaaS models. They're growing well, and we're really excited about their future.

Got it. So let's talk about one of those acquisitions that at least I found interesting is that you acquired a driver and motor vehicle insurance verification software company. And I think that acquisition was effective January 1 of this year. Can you walk through -- and you kind of alluded to a few things that you like, but what did you like about that asset, whether it be the market positioning, competitive positioning itself, cross-sell opportunity, et cetera?

Well, they're the undisputed leader in the market. We do this in Tennessee, and we have not been able to compete with them in RFPs. States are modernizing this way. Certain states mandate, I think maybe 20 -- they have maybe 20 states today and they mandate for the insurance companies to open up their files.

And so this company has integrations with all the insurance companies, big and small in these 20 states. And in the old days, a policeman would pull you over and discover that your insurance had lapsed. And that's the only way they knew that.

Now if an insurance does not get renewed, there's an automatic notice and the state can levy a fine and keep uninsured motorists off the road, and it is a revenue source as well to them.

Got it. Got it. And you said -- so this will take you into how many states? Is this taking you into 20 incremental states?

There might be some overlap. We were in maybe 18 U.S. states and 4 Canadian provinces. But there might be some overlap. But yes, it really helps. And they get along really well with our transportation people. They've known each other from being at conferences together and whatnot.

And then what's the cross-sell opportunity for something like that?

Well, they do 0 payments today. They just let the states have whoever their normal payment provider might be at the time. And their new offerings, they're bundling our payments with their software. And so they have one state, and it's one of the smaller states population-wise in the United States. And that small state earns more in payments. They have a payment model. I think the state must have wanted to do it that way.

They earn more in that state of payments than they do selling their software and all these others. So it's a very good payments opportunity. Another is printing. They have to print bills as part of collecting and they outsource that, and we got a better deal for that. But those are the most immediate.

And what kind of growth profile did that have at the time you acquired it?

We think they'll grow over 20% a year for several years. wow because they're winning new states.

They are winning new states. Got it. Got it. That's really fascinating. And then on acquisitions.

And their margins are 50% And you mentioned the ability to cross-sell payments, et cetera. Does that change the margin profile once you can start to layer that in?

Payments are a thinner margin than SaaS, but it's an incremental revenue stream. It's an additional moat if you believe the AI commentary these days. So it is a little thinner margin, but they're on the high end of our margin profile company anyway.

And as you said, it's incremental, just the same. So -- in the M&A market, obviously, you guys are always well engaged there. How would you characterize the valuation and seller expectations today versus, call it, a year, 1.5 years ago? And where do you see the best opportunities? Is it -- have those changed at all with those expectations?

Well, I think -- you won't remember this, but I think we had this conversation a few years ago.

I remember that's why I'm asking.

And it's surprising how disconnected to me, private companies' expectations are with what's going on in the public market. During COVID, after COVID, all types of the payments market gets whacked. The software part gets whacked. But for these founders, it's a life event for them. They've been running a company since they got out of college and maybe it's 30 to 40 years.

And they're trying to think about retirement, the next generation. They want to take some chips off the table, but maybe they're not completely ready to retire. They want to find the right home. They, of course, want a fair valuation. But if they don't like what's going on in the public markets this year, they're just going to wait and do wait 2, 3 years from now.

Right. Got it. Got it. And so do you find people doing it like that's becoming evident now? I mean, particularly as a lot of the software valuations have been significantly compressed over the last really few months, but even going back a few quarters.

Honestly, I don't think these founders really care.

Really.

Yes. They have a certain price on their head that they think is fair, and that's from 20 years of reading the Wall Street. It's not from...

And I'm sure, to your point, is like as they're looking at a life event, they're kind of also having their own heads like what they kind of need or want to be able to move on, et cetera.

Yes. Yes.

That's interesting.

I mean they're all playing a long game. It's kind of more about timing to them than it is about what's going on this year.

Right. So let's talk about organic growth. In fiscal Q1 of 2026, your annualized recurring revenue ARR grew about 8%. And you called out SaaS growth of 24%. What is driving the SaaS acceleration? Is it new logos versus expansion within existing customers versus pricing?

I guess maybe always trying to look forward, what needs to happen to sustain momentum through this fiscal year?

Well, first of all, the past 3 acquisitions we talked about a moment ago, all of those are SaaS-oriented, right? And so that's helped SaaS growth and will for the remainder of this year and next year. So that's part of it. We sell very few perpetual licenses anymore.

We went through a SaaS transition about 2, 3 years ago. And now we've kind of plateaued at about $5 million to $7 million of perpetual license sales per year, and that will just kind of go sideways, I think.

Got it.

But as far as what's driving SaaS growth, organically, our NRR, our net revenue retention is 104%. And so that includes cross-sell, price increase, et cetera. It does not include new logos.

Obviously, yes.

And so new logos would be probably the biggest driver of SaaS growth within -- just talking about SaaS now.

Talking within SaaS, yes.

Price increases are inflationary, and they are easier to build into SaaS contracts.

And so while our overall company price increase might not get to an inflation level within SaaS, it might get to an inflation level. And then there's some cross-sell. But most of our cross-sell is more transactional revenues like payments or data or revenue cycle than additional software products, but there are some.

Got it. Got it. So continuing here on organic growth, how are you thinking about that mix between SaaS subscriptions, transaction-based revenue, payment revenue and professional services going forward? And I guess as part of that, where do you see the biggest levers to increase payments and transaction attach within the installed base?

Well, so 80% of our revenues are recurring. And within that, the lion's share is either software or transactional revenues. Those are pretty equal proportion. And with transactional, I am lumping in payments. And in software, I'm lumping in maintenance. Those are fairly equal proportion. And I think they'll -- SaaS is growing faster right now. It will probably come to the mean over a few years, and the two will grow in equal proportion.

We love the transactional revenues. It's really helpful for state and local budgets. We're revenue sharing with them. And so our CFO, Geoff Smith, uses an analogy. Like a state needs a road to the airport. They can either take taxpayer dollars and pay for the road or they can fill this toll road and then the constituents who are using the road actually pay for it.

And so that's sort of a transactional model, and it's easier on budgets. It is a good moat coming back to that. But getting back to the 80-20, the recurring portion will grow faster than the 20%, which is professional services, a smidgen of equipment and some license -- perpetual license sales.

But we will have good years in that 20%. So if I had to bet -- our professional services this year came down from $40 million to $31 million as our current projection. If I have to guess, I'd give it equal odds that it goes up, not down next year. It's not...

So what caused it to come down this year? And why do you think it can go back -- at least return to growth next year?

It's the timing. It's heavily concentrated in utilities because that is -- that customer prefers a perpetual license. They can put it on their balance sheet. They're allergic to SaaS or any other monthly payments because they have to build that into their pricing for their citizens, which is -- gives them political blowback.

Right.

And so they like professional licenses, which come with a lot of professional services and the -- we have some big customers in utilities. And if we have a good year in '25, that gives '26 a tough comparison.

Right.

A low '26 gives us a good comparison in '27.

Subsequent year. Obviously, obviously. So back on the SaaS growth of 24% that we saw in fiscal Q1. Can you break down for us how much of that was organic -- kind of what's the organic growth rate versus how much benefit did you get from these few acquisitions in that SaaS number?

Well, we purchased a utility company in April of last year, which has not annualized in the December quarter, and that was about $750,000 of revenues. Most of that would be SaaS. I don't have the exact amount. But I don't know, let's guess $0.5 million came from that. So the remainder would be organic.

Got it. Got it. Got it. That's really helpful. So one of the key questions that we get on whether it be i3 or across a lot of the other companies we cover are questions around the end market.

And I would love to hear from you where is i3 seeing pockets of strength or weakness across your public sector markets? Is there something interesting or specific happening with transportation or courts in Justice, utilities? Just like how would you characterize the demand environment?

Well, Justice is our most successful market currently. We just won the state of West Virginia, which will maybe turn into our largest project over our largest revenue customer over the next 5 years. That was a big win.

We're hopeful for some more wins in that area. And then we have just -- it's our best cross-sell area to transactional revenues, not to change subjects, but was a big part of our West Virginia win. And so Justice is one. Education has just been a great business for a long time. It's compounded EBITDA at 15% a year since 2014.

And it's still growing double digits. So it's all a small base head, but it's just a real steady. So those would be the two. Transportation somewhere in the middle, I would say, and same with public administration. The one in '26, which is dragging us as we were just discussing is utilities, but we do think it will bounce back in '27 and beyond.

Got it. Got it. Got it. And then another question that we have, especially given the technology cycles, et cetera, and evolution. Are you seeing any changes from your perspective in procurement cycle times, RFP activity or even your win rates as we start calendar 2026?

Not that we can tell. I will say a general comment that we're moving slowly upmarket. Like West Virginia would be an example of that before that, Louisiana. And that means more RFPs. We used not to even 3 or 4 years ago, we didn't even enter RFPs because we were just a feature and some -- we were never the lead horse.

And so with RFPs comes the implication that it's a little bit slower, they can get called off, they can get contested. It's probably a lower win rate. But when you win, the rewards are big, like West Virginia.

Right. So talking about like your customers in the context of rapid technology change, to what extent are your customers prioritizing modernization? And what are they prioritizing, whether that be cloud migration, analytics and AI, citizen engagement versus must-having compliance and maintenance spend?

Well, security is a big deal and fraudsters are becoming more sophisticated. I would say fear of failure is a big thing. All of our customers are very risk averse.

Got it.

And they don't want mud on their face, like that happened with Texas Utilities a couple of years ago or Southwest Airlines or -- and so their systems are getting so old and their predecessors kicked the can down the road, right? And there does come a time where they have to deal with it. They've also got a manpower shortage that's becoming more and more acute over time.

You can imagine a sheriff's office who has one IT person. He gets poached by Amazon. They've got their software in a server in the closet. There's no documentation. It takes them 6 months to fill the job. That's untenable. That's not a model which can last. And so they need to outsource this stuff.

We are the answer to all this. We and our peers, but software is the answer to all this in a chronic manpower shortage that can't compete with the private sector. We believe this will increase our demand as opposed to be a threat to it.

Got it. So let's talk about -- so I think that's a great secular backdrop. What about the -- how do you think about public sector budget risk over the next 12 to 18 months? And what are kind of the leading indicators you watch as to the direction of public sector budgeting?

Well, property -- so we have 0 federal exposure. States run on, income taxes if they have them, property taxes, sales taxes. So looking at taxes and the health of the economy and the real estate market in general are leading indicators. Case filings are indicators in justice, leading indicators.

But right now, the state and local budgets are all pretty flush. I mean, the property market has -- property taxes they've just -- a lot of states have been jacking them way up, as I'm sure you're aware. So that's left healthy budgets for the foreseeable future.

Got it. Got it. And then let's talk about your profitability. Adjusted EBITDA margins in the fiscal first quarter of 2026 were around 25.8%, which were down a little bit year-over-year. Can you walk through the main drivers of that delta, whether that be hosting costs, investments and how you expect margins to trend over the rest of fiscal year '26?

Well, we made a large investment in Justice, and that's over 50 people and also in utilities. And so we're feeling those effects. Those did not really align timing-wise with the revenues we expect from them, but West Virginia is a good start, and we think that will happen for us in utilities also.

I think we did quantify the Westford -- I mean, the Justice investment is $700,000 per quarter. Hosting had more than $1 million increase this December quarter versus the prior December quarter. And that's just variable usage going up.

Now we do have one large customer that we pass through hosting to. And so we do pass it on, but it's a 0% margin, if you will. Anyway, that has something to do. And then the last thing is professional services. Declined $2.6 million.

Now that's low margin, but we haven't been able to pivot our headcount immediately to match that revenue trend.

Got it. And so do you think your long-term target you've talked about in the past of 50 to 100 basis points of annual expansion. Is that still the right way to frame it over the medium to long term?

And I think we'll do that in this year in '26. The acquisition that was effective January 1 is over 50% margin. We do have some headcount adjustments we're making with a lag in regards to our professional services declining. So I think we'll do that this year, and we expect to do that in future years also.

So last couple of minutes here, Clay, to wrap up. Now that you're roughly 18 months past the Merchant Services divestiture and 9 months past the Healthcare RCM divestiture, can you walk through any unexpected learnings from operating as a more focused public sector software company, whether that be investor reactions, your go-to-market, capital allocation? Just kind of how are you looking at maybe some of the things you've learned as you've gone through these sale processes?

Well, just to start with capital allocation, it's good to have a nice strong balance sheet. We haven't had to choose between acquisitions. And I'm sure you're aware, we've been making repurchases. So it's kind of -- we're able to do both ends there. Learnings, the payment business was very steady, but it was lower margin, lower growth, same with health care.

So that's been nice to not have those mixed in with our results. We do have larger customers in public sector. And now that our base is smaller, they can create these swings.

More volatility there a little bit.

More. But it's allowed us to knit together a lot easier and better and become more cohesive internally because our focus is just -- we're roughly half the size we were. And so that's been very nice.

That's great. Well, Clay, thank you very much for joining us today. It's been a great conversation. And certainly, as you've evolved the business, it's been really interesting and fascinating to watch. And public sector, as you said, looks to be a very strong growth opportunity for the company.

Thank you very much.

Good day, everyone, and welcome to the i3 Verticals First Quarter 2026 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through February 13. The number for the replay is (855) 669-9658 and the code is (67)69-466. The replay may be accessed for 30 days at the company's website.

At this time, for opening remarks, I would like to turn the call over to Clay Whitson, Chief Strategy Officer. Please go ahead, sir.

Good morning, and welcome to the First Quarter of 2026 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Rick Stanford, our President; Jeff Smith, our Chief Financial Officer; and Paul Christians, our Chief Revenue Officer. .

To the extent any non-GAAP financial measures discussed in today's call -- 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 the important factors, among others, set forth in the company's earnings release and in 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 by applicable law.

I will now turn the call over to company's Chairman and CEO, Greg Daily.

Thanks, Clay, and good morning to all of you on the call. We're excited with the start of 2026. As we anticipated and guided the market, revenue is only up 1% over prior year's Q1. The recurring revenue was up over 8%, more closely reflecting our expectation of long-term growth.

SaaS revenue led with over 24% growth. We're now -- we've now had 4 quarters in a row over 20% SAP growth, and we see that number staying north of that level through the year. On our recurring revenue sources, professional services and license are both down. We believe our focus on recurring sources will carry the day. We're very excited to announce our latest acquisition.

Rick will share more, but this is a deal we're very proud of. Our best deals tend to be the ones we source ourselves, and this is the latest example. It is a perfect fit within our transportation market. You will always be surprised at the durable, sticky niche software solutions you will find in the public sector.

Well, here's another one. helping states early detect uninsured motorist is only possible because a thoughtful, well-executed software business solutions like this. because they already have integrations with the insurance carriers, they have an incredible defensive market positioning and their growth is compelling.

The team that built this business is staying on and we couldn't be more excited about what we can accomplish together. We remain exceptionally well capitalized and thoughtful about how to deploy our capital and expect to have great opportunities in 2026.

As always, the focus is disciplined. I will now turn the call over to Geoff, and he will provide more details on financial performance. When he's finished, Rick will address our latest deal in more detail, and finally, Paul will discuss revenue. And then we'll open up the call for questions.

Thanks, Greg. The following pertains to the first quarter of fiscal year 2026, which is the quarter ended December 31, 2025. Please refer to the slide presentation titled supplemental information on our website for reference with this discussion.

Revenues for the first quarter of fiscal 2026 increased 1% to $52.7 million or $52.2 million for Q1 2025, in line with expectations. The growth reflected 8% growth in recurring revenues, partially offset by a $3 million decline in nonrecurring professional services and software license revenues.

Annual recurring revenues increased 8% to $169.6 million for Q1 2026 compared to $156.4 million for Q1 2025. We of our revenues 8% of our revenues for the quarter came from recurring sources, driven by SaaS revenue growth of 24% and transaction-based revenue growth of 12% and payments revenue growth of 8%.

Maintenance revenues declined 8%, reflecting the emphasis on SaaS and new sales. Adjusted EBITDA declined $1 million to $13.6 million for Q1 2026 from $14.6 million for Q1 2025, in line with expectations. Adjusted EBITDA as a percentage of revenues was 25.8% in Q1 2026 versus 27.9% for Q1 2025.

The dollar percentage declines were driven by previously mentioned investments in our Justice and utility markets, higher hosting costs and $2.6 million lower professional services revenues. While professional services are not high, the associated costs can follow revenue fluctuations with a lag. We expect the adjusted EBITDA margin to improve for the remainder of the year our long-term expectation remains 50 to 100 basis points per year.

Adjusted diluted earnings per share from continuing operations was $0.26 for Q1 2026. Again, please refer to the press release for a full description and reconciliation. Our balance sheet is strong and well positioned for the future. As of December 31, we had $37 million of cash and no debt. As Greg mentioned, effective January 1, we purchased a provider of software for driver motor vehicle insurers verification for $60 million in cash.

Here's some color to help you incorporate this acquisition into your models. We paid approximately 15x EBITDA. The company is durably growing at a rate above 20% and has an EBITDA margin of 50%. We still have a $400 million revolving credit facility max leverage constraint. We intend to use any borrowings for acquisitions and opportunistic stock repurchases.

This always sets forth guidance for continuing operations for FY 2026. The outlook does not include acquisitions that have not yet closed or transaction-related costs. Revenues, [ 42.3 ] $223 million to $234 million. Adjusted EBITDA and $61 million to $66.5 million. Adjusted diluted earnings per share, $1.08 to $1.16.

We expect recurring revenues to grow at double-digit rate for FY 2026, including the acquisition. However, we expect a decline in nonrecurring professional service revenue driven by the cadence of revenue recognition on certain projects in our utilities and transportation markets. Despite the lower outlook in those markets for fiscal '16 and are well positioned to rebound in fiscal 2027 and beyond.

Our long-term expectation for organic revenue growth remains high single digit. From a seasonality standpoint, software license sales and professional services represent the most variable line items to forecast and can distort seasonality in any given quarter. We currently expect our revenue distribution for FY 2026 to approximate the following: Q1 23%; Q2, 25%, Q3, 25%, Q4, 27%.

I'll now turn the call over to Rick for comments on M&A.

Thank you, Jeff. Good morning, everyone. As mentioned in last night's earnings release on January 1, we closed our latest acquisition. This business operates in the transportation market and does business at the state level. The company's insurance verification product is feature-rich, including real-time verification, continuous insurance lapse updates, direct connection with insurance companies and seamless integration with state motor vehicle systems.

The product can accommodate integration with every possible motor vehicle system in use by the states today, including i3s. This transaction will significantly expand our geographic reach in the transportation market better positioning i3 to be the vendor of choice and ongoing modernization initiatives.

Currently, we have the adjacent market for motor carrier software solutions such as IRP and FTA tax software and truck routing software. It is a major player in the motor carrier and motor vehicle software market with a combined 30 states and 4 Canadian provinces. We are thrilled to welcome this talented team to it and look forward to their many successes in the future.

Relative to our acquisition pipeline itself is continually filled with some promising opportunities similar to this deal. Again, we remain diligent with regard to the value and strategic impact potential acquisitions to our growth prospects.

I'll now turn the call over to Paul for final comments.

You may be on mute. Seems as that Paul's having technical difficulty.

It seems like Paul's line has dropped here.

Okay. That's fine. I'll take it from here. Our focus on refining market offerings, especially in Justice tech and transportation markets is providing -- is proving to be timely and effective as we continue to see an increased demand for technology that enable decision-making. This shift towards market-based solutions is evident through expanded solution scope within RFPs, increased emphasis on unified debt structures to support analytics and growing expectations for continuous innovation and system evolution.

In JusticeTech, we have seen uptick in opportunities at both the state and local levels as we rolled out our new court 1 offering, especially around case management systems and the court one jury solution. These offerings are aligning well with current market demand, allowing us to engage meaningfully in opportunities as agencies modernize their systems.

We are excited that the market leader of electronic insurance verification recently joined the family. Their solutions augment the strength of our transportation market offering.

Now some portion of the i3 Verticals transportation platform is live in 30 states and 4 Canadian provinces. Our partnership with West Virginia continues to be strong. We are in the process of fulfilling the recently won contract with the West Virginia Supreme Court of Appeals with II Cohort 1.

Additionally, the Arizona Department of Real Estate selected i3 to provide licensing and regulatory software across the state. We are seeing particularly strong activity across Justice Tech transportation and regulatory and licensing markets. In addition, it Education is realizing the investment in i3 marketplace.

i3 Marketplace is a portal providing unified access complete with SSO single sign-on and MFA, multifactor authentication to all i3 education models. It supports students, parents and administrators across schools and districts. i3 continues to gain traction with AI-enabled solutions. We also delivered an ad support upgrades to our current Georgia JusticeTech footprint and we'll continue to push those changes into our other markets across the U.S. throughout 2026.

Our focus on leveraging AI along with our deep domain expertise, is proving to be positive for both i3 and our customer base.

This concludes my comments, Dave. At this time, we'll open the call for Q&A, please.

[Operator Instructions] Our first question comes from Madison Suhr with Raymond James.

I wanted to start on the FY '26 updated outlook and putting together some of the comments on the deal. It does seem like organic growth may have ticked down very modestly, maybe $1 million or $2. So I guess just for starters, is that generally correct? And if so, just any color on what's driving maybe the slightly modest headwinds relative to last quarter?

Madison, you are correct, and it comes on the professional services line. I think we entered the year thinking professional services would go from $40 million to $33 million, $40 million and $25 million to $33 milion and $26 million. Our current view is that it will go to $31 million on professional services.

Okay. Got it. That's helpful. And then obviously, the recurring side continues to be strong, 8% in the quarter. You guys talked about 8% to 10% for the year last quarter. I apologize if I missed it, but is that still the right way to think about the recurring side for this year?

Yes. That's correct. With the exception of our acquisition, that will tick it up. It's mainly recurring revenue.

8% to 10% organic.

Okay. Awesome. And then if I can sneak one more in, just on capital allocation. Obviously, you guys did a deal. M&A is a key part of the strategy, a differentiator for you guys. But just given what we're seeing in the market and the dislocation for your stock in particular, I would love to just hear your thoughts on buybacks versus M&A here.

And it does look like you guys might have bought back some stock in the quarter. Just any color on kind of the quarter itself from a buyback perspective as well.

There will be more information about that in our 10-Q that comes out here. But to get out in front of that, yes, we did buy back a significant number of shares this last quarter. the outlook and approach has always been for us to be opportunistic with buybacks. We're in a really good place on our balance sheet.

We think that our stock is inexpensive and a great investment for the current shareholders of the business. at the levels we bid at. So that will continue to be the path going forward. But you'll see a little bit reporting about that in terms of quantity in the 10-Q.

And the next question comes from Peter Heckmann with D.A. Davidson.

Congratulations on the new acquisition. Just a few additional details in terms of how you think about the opportunity there. I guess how do you think about this company's market share either by number of states or covered population I think you said it was at the state level, not the county level. And then next, like is the revenue stream transaction-based? Or is it more of a subscription software model.

So we -- thanks, Pete, for the question. We're very excited about the deal. We think the growth prospects going forward are going to be staggering to say the least. They're very good with their customers. They have their very first customer. They never lost one.

We like their presence in the market. They're well known. It's not transactional today. We think that we can take this product into our motor carrier to some degree. And we know that current customers, a handful have been asking for let's say, one neck to choke with payments and software. So we think we can get some payments play in there, too, but that's to be seen. But we're very excited about the deal.

Okay. Okay. So just as a follow-up, it sounds like there's significant opportunity to grow the number of existing relationships.

Yes.

The next question comes from Charles Nabhan with Stephens.

Good to see another quarter of strong SaaS revenue growth. I was Wondering if you could expand on some of the drivers of that 20% plus growth as well as speak to the sustainability of that pace.

So first off, the acquisition will add a whole new layer of SaaS grows. So we'll be well north of that number north of 30% for the rest of the fiscal year on that. But the organic SaaS growth should stay in that general vicinity north of 20% as well.

Drivers are -- it's the fruits of the emphasis that we put on SaaS in all our markets. It's coming from a lot of different markets, utilities, the public administration market, especially our Board and license software, the justice market, it's all the different markets contribute kind of in their own way there.

So the rest of the year, expect organic to be north of 20%, the new acquisition, which is currently monetized primarily off SaaS. And as Rick said, there will be opportunities to add other kind of streams for that will be a great thing, but we'll be in a great spot on SaaS grows for a while.

Got it. As my follow-up, I wanted to get your thoughts on AI, approaching it from a couple of different angles. Love to hear how you're thinking about it in your internal processes as well as how you think about it from the disruption potential for within GovTech from AI, whether it's factor fiction and just generally how you're thinking about it given some of the recent stock movements.

Yes. So Charles, this is Rick. I'll take a stab at this, and I'll let Greg and Clay chime in after. Look, we have pockets where adoption is very high with earning our customer base with the extraction or reduction in CAMA world. We have others where it's -- the adoption is not so great. we're continuing to push it, both on the customer side and on the development side internally.

That's the first thing we think about in our engineering group is how do we use AI to develop new features to our products, but at the end of the day, state, local and municipal agencies will need to create frameworks or processes, functions, structures, laws before creating engineering and security protocols. Initially policies are going to be rigorous and hyper controlled for the fear of AI itself.

So that will be a headwind to us near term, providing minimally viable products and services for constituent use. Without an overall agreed-upon plan in GovTech or guidance at federal level. there's going to be inter-jurisdictional inconsistencies that will cause confusion among state and issuance. And that's something that's going to kind of put a clog in the engine.

In short, we believe that it's going to be a good bit of time away from this concept of proliferation of AI within GovTech being a real working asset because of the headwinds I mentioned. Companies like I can accelerate the AI process. But the customer at the end of the day is going to drive adoption at a slower pace than we can move forward.

You add anything to that?

I think that's right. We're excited about AI. It's it enables us to deliver better products more quickly to our customers. We have deep domain expertise and we are the enterprise platform in most cases or the system of record for our customers. So we're deeply embedded in their everyday workflows just the relationship that we have. .

Go ahead, I'm sorry.

No, no, I was just going to thank you for your thoughts. But always interested in hearing more. If I cut you off, I apologize.

And the next question comes from Alex Markgraff with KeyBanc Capital Markets.

Just a couple for me. Maybe first on the transaction. I think I heard 15 times just based on some historical comments, I think a bit outside the sweet spot, as you all have described it. Obviously, like some compelling financial profile details that you all shared.

Just curious if this is a unique transaction for the multiple and maybe how many more of these sort of unique opportunities that might pull you upwards of that sweet spot there are that exists today?

Well, from a price standpoint, most of the companies we bought historically have been growing organically in the 10% range. This one is north of 20%, and we see new customers coming on sustaining that growth. There are some synergies available, and their margins are in the 50% range. So that's the higher multiple in the price.

What was the second part of your question, Alex?

Just as to whether or not there are more of these types of deals out there in the pipeline that might sort of pull you up outside of that sweet spot for good reason, but notably pulling outside of that upper end that you've historically paid for deals?

Yes, I'm glad you said for good reason. I mean, we've made it known all that while our sweet spot is 7 to 10x, if we find something that's growing, that's a perfect fit with incredible margins like this...

Plan there, and you're seeing some benefits in the sales pipeline around that. Still, just as you described it last quarter, that sort of acceleration investment for '26, still the right way to think about it? And then just any changes to how you're thinking about that spend for the rest of the year would be helpful.

I mean, it's a continuation of what we introduced in our third quarter for last year. the investment in advance of revenues. We're glad we're doing it. It's according plan. Really nothing has changed to that.

This concludes our question-and-answer session. I would like to turn the conference back over to Greg Daily for any closing remarks.

Well, thanks, everybody, for listening and dialing in and showing interest. I wanted to kind of give a shout out to our large utility customer in Seattle. Good luck Sunday.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, everyone, and welcome to the i3 Verticals Fourth Quarter 2025 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through November 25. The number for the replay is (855) 669-9658 and the code is 8288708. The replay may also be accessed for 30 days at the company's website. At this time, for opening remarks, I would like to turn the call over to Clay Whitson, Chief Strategy Officer. Please go ahead, sir.

Good morning, and welcome to the Fourth Quarter 2025 Conference Call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Rick Stanford, our President; Geoff Smith, our Chief Financial Officer; and Paul Christians, our Chief Revenue Officer. To the extent any non-GAAP financial measure is 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 the important factors, among others, set forth in the company's earnings release and in 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, and good morning to all of you on the call. At the end of 2025, it's worth reflecting on how much we've accomplished over the last 2 years. Divesting our Merchant Services and our health care revenue cycle management businesses have turned a new chapter in i3 Verticals public sector. i3 provides transformational solutions in a range of government functions, including courts, public safety, public administration, utilities, transportation and schools. We have streamlined our businesses and narrowed our investment to that end, and the returns are only beginning to accrue. In 2025, results show that our revenue growth was strong. In fiscal Q4, we grew 7% over a prior year tough comp.

For the fiscal year, we grew at 11% and 8% of that growth was organic. Our ability to grow our recurring revenue is the best predictor of our long-term growth prospects. To highlight that point, our ARR grew over 9% in Q4, outpacing revenue. Jeff will discuss further, but we expect similar growth rates in ARR in 2026, while our revenue -- our non-revenue will likely take a step backwards. Last quarter, we highlighted the importance of investing in new product and markets. We are excited that projects are underway in all of our markets. But our justice and utility investments continue to represent an outside portion of our investment, and we expect these to accelerate in 2026. We have conviction about our revenue opportunities attached to these costs.

Many of the impacts will be manifest in the form of durable recurring revenue growth over the long term. We previously announced a win in the state of West Virginia is a perfect example. We look forward to a long partnership serving courts and citizens of West Virginia with our court management solution. Those who know our M&A history are probably surprised we have $85 million in cash on hand and no debt. We will continue to thoughtfully deploy our capital in ways that enhance our ability to bring great solutions to our customers. This includes internal development and M&A. I will now turn the call over to Jeff, and he will provide you more details on our financial performance.

And when Rick is done -- and then when he's finished, Rick will address M&A pipeline, and Paul will then discuss revenue.

Thanks, Greg. The following pertains to the fourth quarter of our fiscal year 2025, which is the quarter ended September 30, 2025. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion. As a recap, we sold our health care RCM business in May 2025, and sale followed the sale of our merchant services business in September 2024.

We are now a pure-play software solutions provider for the public sector operating in a single segment. For financial reporting purposes, when you look at our earnings release for later our 10-K, continuing operations and [indiscernible] refer to our results exclusive of the merchant services and health care RCM businesses. Revenues for the fourth quarter of fiscal 2025 increased 7% to $54.9 million or $51.3 million for Q4 2024, reflecting organic growth of 4.5% and and $1.3 million of inorganic revenues from a permitting and license acquisition in August 2024 and utility billing acquisition in April of 2025.

Organic revenue growth for the year was 8.4%, and Recurring revenues increased 9% to $41.3 million for Q4 2025 compared to $37.8 million for Q4 2024. We our revenues in the quarter came from recurring sources. SaaS revenues grew a healthy 25%, more than offsetting an 8% decline in maintenance Transactional based revenues and recurring software services grew 10%, while payments revenue grew 11%. Nonrecurring sales of software licenses declined $1.9 million, reflecting the ongoing shift to SaaS.

Professional Services revenue increased $0.8 million, partially offsetting the decline in software and license software license sales. Software and related services represented 70% of total revenues for Q4 and with payments 25% and other 5%. At this time last year, we introduced a new metric, net dollar retention, which we will disclose annually. It applies to all recurring revenue line items, but last year excluded payments.

This year, we've included the payments revenue in this metric. The net dollar retention for fiscal 2025 was 104%. Adjusted EBITDA declined slightly to $14.4 million for Q4 2025 from $14.6 million for Q4 2024, principally reflecting a decrease in nonrecurring sales of software licenses our high margin and an increase in lower-margin professional services. Adjusted EBITDA as a percentage of revenues was 26.2% for Q4 2025 and was 28.5% for Q4 2024, but improved for the year to 27% for fiscal 2025 from 26.4% for fiscal 2024. The improvement was driven mainly by lower corporate expenses following the 2 divestitures. The 60 basis point improvement for the year was on the lower end of our long-term expectations of 50 to 100 basis points improvement for the year.

Because of our previously mentioned investment in our Justice products, that will continue into 2026. Adjusted diluted earnings per share from continuing operations was $0.27 for Q4 2025 and and $1.05 for the fiscal year. These numbers exclude discontinued operations. Again, please refer to the press release for a full description and reconciliation. Our balance sheet is strong and well positioned for the future. As of September 30, we had $67 million of cash and no debt. We still have $400 million of borrowing capacity under the revolving credit facility with a 5x leverage constraint.

We intend to use the cash and any borrowings for acquisitions and opportunistic stock repurchases. The following sets forth guidance for continuing operations for FY 2026. The outlook does not include acquisitions that have not yet closed or transaction-related costs. Revenues $217 million to $232 million. Adjusted EBITDA, $58.5 million to $65 million. Depreciation and internally developed software amortization, $10.5 million to $12.5 million, adjusted diluted earnings per share $1.06 to $1.16. We currently expect recurring revenues to grow at a rate similar to fiscal 2025 in the range of 8% to 10%, and However, we currently expect a decline in our nonrecurring professional services are the cadence driven by the cadence of revenue recognition on certain projects in our utilities and transportation markets.

This will be particularly through in Q1. Despite the lower outlook for those markets in fiscal 2026, they are well positioned to rebound in fiscal '27 and beyond. Our long-term expectation for organic revenue growth remains high single digit. While we are now a single operating segment, we would like to provide some detail regarding the size and relative contributions to revenues by our core markets. Justice is our largest market, representing approximately 25% of revenues utilities, transportation, education and public administration are all roughly equally weighted. From a seasonality standpoint, software license sales and professional services represent the most variable line items to forecast and can distort seasonality in a given quarter. We currently expect our revenue distribution to approximate the following: Q1, 23%; Q2, 25.5% and Q3 24.5%, Q4, 27%.

I'll now turn the call over to Rick for updates on the M&A [indiscernible].

Thank you, Geoff. Good morning, everyone. I'll briefly address M&A and then I'll hand the call off to Paul. This past quarter has presented various opportunities to assess potential acquisition targets. Our interest in some of these companies remain strong and discussions are ongoing, acquisition philosophy remains steady. We will pursue opportunities that align with our strategic goals while maintaining a disciplined approach to pricing. Additionally, each potential acquisition must fit well within our operational framework ensuring compatibility.

We remain optimistic as our acquisition pipeline is constantly churning and continually filled with promising opportunities. Our primary focus remains on strengthening our public sector vertical where we see significant potential for growth and innovation.

I'll now turn the call over to Paul for final comments.

Thank you, Rick. High 3 verticals is structured into 5 primary markets: Justice Tech, transportation, public administration, education and utilities, because we intentionally structured our organization in a market-centric model to be made as close to the customer as possible, intra-market cross-selling naturally progressed into solution bundling. As solutions have evolved, some are applicable cross market.

Given that leadership is actively identifying synergistic opportunities across markets, further accelerating revenue and deepening customer engagement. Governments are prioritizing the modernization of legacy systems, enhanced user experience and improved transparency for constituents. The combination of modernization needs and scope expansion creates a unique market opportunity for i3 verticals to address the gap by providing solutions that include ancillary modules such as payments and other revenue cycle activities that may reduce cost of systems modernization.

Additionally, it is positioned to address the needs of all sides of the state and local government agencies. Our solutions architecture and service delivery model allows us to scale from a single agency to an entire state system, broadening our addressable market. Recently, ISP verticals announced the expansion of our partnership with the West Virginia Supreme Court to deliver the i3 Court 1 case management solution to the state's circuit, family and Magistrate Court.

With the new contract, it provides ancillary value-added services designed to maximize efficiency and offset project costs for West Virginia's unified judicial system. An expanded platform will empower Citizens to gain greater access to aggregated public court data, while the revenue cycle management module will streamline financial processes and improving courts case disposition rates. We are experiencing a heightened awareness and demand for technology forward platform solutions across the public sector.

Platform offerings support decision-makers ability to manage results versus managing assembly of multiple systems vendors and ongoing maintenance. Recent evidence of market platform orientation include higher number of RFPs, an increase in the scope of the solutions covered, unified data structure for analytics and ongoing systems evolution and maintenance requirements. The shift from traditional licensing and capital expenditure models to SaaS introduces a new budgeting paradigm for government clients.

One of our differentiators is that it is organized both in solution bundling and delivery structure to scale implementation from a single agency to statewide deployment to address evolving platform market trends, we bundle ancillary services to reduce upfront cost and deliver integrated modular solutions that deliver modernization with extended scope and enable rapid rollout of additional modules. As referenced earlier, we are observing increased RFP activity alongside continued pipeline growth.

This momentum in part reflects increased recognition of it as a trusted platform provider and the enhanced market visibility achieved through our brand unification over the past year. This concludes our comments, Drew. At this time, we will open the call for Q&A, please.

[Operator Instructions] The first question comes from John Davis from Raymond James.

Geoff, I just want to dive in to the '26 organic growth outlook. Our math is about 5%. I heard 8% to 10% recurring and professional services down is that a function of you're no longer selling those professional services or maybe you're not putting things like Manitoba in the guide because they're lumpy, and you don't know if they can if they're going to hit or when they're going to hit. Just trying to get a sense for the level of conservatism and almost and also how much you expect professional services to be down on a year-over-year basis.

Yes. Thanks for the question, JD. So it's absolutely true that we are leaning into recurring revenue, any chance we get. So when it comes to negotiations like the West Virginia deal we just did for any opportunity where we can push and lean on the SaaS and defer or opt for the recurring sources instead of the professional services implementation sources and contract negotiations, we're absolutely doing that at each turn that being said, the professional services, we don't expect that to go away.

We don't think that what we have clear line of sight on 2026 is reflective of any kind of long-term trend necessarily there's a number of things, the West Virginia deal, utilities pipeline. They look really strong on the professional services and implementation front further out just true that for 2026, we think that the cadence and timing of some of those things is going to be a little bit lighter.

And so we expect to see that line drop off a little bit here and it was strong in Q4. Some of that was a little bit of pull forward, but most of it is kind of in that we just think that the actual performance obligation fulfillment, the cadence of when we get to rev rec on these is further back end of 2026 or slipping into 2027.

Okay. And then I just wanted to drill down a little bit on that dollar retention. I think you called out $104 for the year. how much of that was price? And how should we think about kind of the pricing tailwind going forward?

So we've addressed this a little bit with the market, but just to kind of recap some of these things. The company has been extremely conservative on price increases historically. And I'm going to say that we are this isn't like a pendulum swing to the [indiscernible] and spectrum at all, but we're much more bought in and have been working through the contracts and the expectations to make sure we kind of get to more of a 3% to 5% price increase range on a consistent basis with our customers.

We've kind of guided that you might expect if price increases were historically contributing 1-plus percent, that would maybe inch up by about 1% a year for the next several years. And so 2025 contribution from price increase, you're still in that vicinity of that 1% to 2% kind of range. Looking ahead, we're probably getting closer to 1.5% to 3% range for 2026 in our expectations. So modest incremental increases there. We don't think we're at our final destination in terms of the contribution from price increases.

Okay. And then Geoff, one more and I got 1 bigger picture for Greg. Just on the margin front. What was the justice tech investment in the quarter? Was it bigger than you thought it was going to be in line? Just remind us what you're expecting for incremental investments in Justice Tech in 2026.

Yes, a recap where that primarily consists of its bodies put it simply bodies to accelerate the development of our core package bodies to the implementation of our core package. It's all things that we think we're going to get a great return on West Virginia is just 1 of kind of the sources where that's going to kind of come from. We're really excited about that deal. The cost is I'd say it's relatively in line with where we thought it was going to be for Q4.

But these are people who are going to be with us for the foreseeable future here. And that's kind of that elevated cost is going to continue into this next fiscal year here?

Okay. And then, Greg, $85 million cash balance on the balance sheet to hear. How do we think about buyback versus M&A? And just remind us how much you have them on the buyback. It looks like this year is going to be a little bit of a transition here at least on the revenue front. Just how are you thinking about that M&A versus buyback here and remind us how much you guys have authorized left?

We just regarding buybacks, and I'll let Greg hit M&A, but basically buybacks, we just refreshed the approval to $50 million not a lot of activity in this current period. We'll see obviously the detail in our 10-K. That's something that the emphasis is on being opportunistic. We'll do it when we think we get a good return, and we'll and we're not going to chase it when we don't think that we're given. .

On the M&A, we've worked in our pipeline for 13 years. And I think you'll see some activity sooner than later. We've done a couple of small ones that we really don't talk a lot about. And I think we'll still do those. But I think there'll be a couple of meaningful ones that we get done in '26.

And Greg, when you say meaningful more tuck-in but announced deals that are big enough that you're going to announce them versus maybe some that are just immaterial and not even worth kind of press releasing or talking about?

Yes, nothing transforming, but they're larger. They're we say our sweet spot is $2 million to $5 million of EBITDA and we paid 10x we could get a little bit above that, but not dramatically.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Greg Daily for any closing remarks.

Thank you. We do appreciate your interest. We are here if you need to talk, discuss we do appreciate your support. Thank you. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.