i3 Verticals’ Earnings Call: Professional Services Outlook and AI Disruption Timelines Don’t Match

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Date of Call: Aug 7, 2026

Financials Results

• Revenue: $53.1M, up 2% YOY, but organic revenue down 2%
• EPS: $0.25 adjusted diluted EPS, up 8.5% YOY
• Operating Margin: 25% adjusted EBITDA margin, up from 24.5% prior year

Guidance:

• FY2026 Revenue: $216M to $221M (lowered from prior guidance).
• FY2026 Adjusted EBITDA: $57M to $60M.
• FY2026 Adjusted EPS: $1.08 to $1.12.
• Expect better growth going forward; FY2027 revenue growth expected in mid-single digits.

Business Commentary:

Revenue and Professional Services Challenges:

• I3 Verticals reported revenue of $53.1 million for Q3 2026, an increase of 2% from Q3 2025, but organic revenue was down 2%.
• The decline was primarily due to an $1.8 million decrease in professional services, particularly within the utilities market, and ongoing weakness in non-recurring revenue sources, which decreased 18% compared to the prior year.
• The challenges were attributed to delays in projects and a tough year-on-year comparison due to high interchange rates related to commercial card usage.

Recurring Revenue Growth and AI Impact:

• Annualized recurring revenue grew by 8% year-over-year to $174.1 million, with SAS revenue growing 38% and transaction-based revenue growing 5%.
• The growth in recurring revenue was supported by increased interchange rates and the adoption of AI in operations, which improved productivity and service delivery.
• AI also contributed to faster development times and better quality, as seen in the integration of a client's court case management system, which was completed in a third of the historical time.

Adjusted EBITDA and Margin Expansion:

• Adjusted EBITDA increased by 5% to $13.3 million, with a margin of 25% of revenues, up from 24.5% in the previous year.
• The improvement was due to process efficiencies and savings from AI adoption, with expectations for further improvement in the fourth quarter and acceleration into the next fiscal year.
• Margin expansion is anticipated to be in the range of 100 to 200 basis points for fiscal 2027, supported by reduced cost structure and expected revenue growth.

Transportation and Education Market Momentum:

• In the transportation sector, I3 launched a state electronic lien and title solution, expanding its footprint and establishing new recurring transaction revenue streams.
• In education, nearly half of fiscal 2026 bookings were from net new customers, supported by innovation in AI-driven inventory optimization and menu planning.
• The momentum in these sectors is driven by the demand for integrated platform solutions and modernization initiatives in government agencies.

2027 Revenue Growth Outlook:

• For fiscal 2027, I3 Verticals expects mid-single-digit revenue growth, lower than the previously guided high single-digit growth.
• The growth outlook is supported by several go-lives in transportation, expected improvements in resolved product growth, and a stronger pipeline in the insurance verification software segment.
• The company remains confident in long-term fundamentals and its ability to capitalize on government modernization trends.

Sentiment Analysis:

Overall Tone: Neutral

• Management expressed disappointment in results falling short of expectations, citing slower growth in non-recurring areas. However, they noted strength in recurring revenue growth (8% YOY), AI-driven efficiencies, and confidence in long-term fundamentals and margin expansion.

Q&A:

• Question from Madison Serr (Raymond James): I wanted to start just on the FY26 revenue guide here. Obviously, it was lowered by $6.5 million. Maybe just double-click on the composition of that... 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?
  Response: About $4.5M of the $6.5M guide reduction is from professional services delays (mostly utilities) and a $1M+ impact from elevated interchange rates delaying payment growth; the rest is from weaker-than-expected performance in resolve product and some transportation delays.

• Question from Madison Serr (Raymond James): ...Can you guys maybe just touch on what gives you confidence in improving profitability?... Is that still the right way to think about margins, given your comments around mid-single-digit revenue growth?
  Response: Confidence in margin expansion comes from cost structure reductions, AI efficiencies, and timing of benefits; expect 100-200 basis point margin expansion in FY2027, exceeding the historical 50-100 bps range, as revenue growth improves.

• Question from Alex Margraf (KeyBank) [email]: He's curious to understand the bridge back to single-digit growth in 2027 and our degree of competence in that path.
  Response: Growth in 2027 is supported by several material go-lives in transportation (including legacy and acquired insurance verification software), resolution of licensing and permitting project delays, ramp-up from resolve product implementations, and improved utility market performance.

Contradiction Point 1

Professional Services Revenue Outlook

It involves changes in financial forecasts, specifically regarding professional services revenue, which is a significant portion of the company's revenue.

What are Madison Serr's comments on the earnings call from Raymond James? - Madison Serr (Raymond James)

2026Q3: The $6.5 million reduction is primarily attributed to professional services ($4.5 million), with about $3 million concentrated in the utilities market due to ongoing project delays. - Jeff Smith(CFO)

Can you detail the composition of the $6.5 million reduction in the FY26 revenue guide, specifying whether it is due to one large customer or multiple, and whether the cause is customer-driven or internal implementation delays? - Madison Suhr (Raymond James)

2026Q2: The decline in 2026 growth is due to non-recurring professional services revenue, which has dropped from ~$39M to ~$28M organically. - Geoff Smith(CFO)

Contradiction Point 2

Margin Expansion Trajectory & Drivers

It involves changes in the primary drivers and timing for achieving margin expansion, affecting the company's profitability outlook.

Can you discuss the company's recent financial performance? - Madison Serr (Raymond James)

2026Q3: Strong margin growth is expected in Q4, with further improvement in 2027. Confidence stems from cost structure reductions (people costs, rent) not yet fully reflected in Q3, upcoming benefits from process improvements and AI, and one-time items like receivables reserves. - Jeff Smith(CFO)

Given mid-single-digit revenue growth expectations, does the historical normalized margin improvement of 50-100 basis points still apply to the company's margin expansion and profitability outlook? - Madison Suhr (Raymond James)

2026Q2: Yes, margin expansion is expected despite revenue headwinds. Efforts include efficiency improvements and AI benefits across the company, allowing more to be done with fewer resources... margins are expected to strengthen in the back half of FY 2026, setting up for improvement in 2027. - Geoff Smith(CFO)

Contradiction Point 3

SaaS Revenue Growth Sustainability

It involves differing views on the sustainability of high SaaS revenue growth rates, impacting long-term growth expectations.

Alex Margraf (KeyBank) - Alex Margraf (KeyBank)

2026Q3: The path to 2027 growth is supported by several factors: Significant go-lives in transportation... the ongoing ramp of the Resolve product... and an expected improvement in utility projects in 2027. - Jeff Smith(CFO)

How do you plan to achieve single-digit growth by 2027, and what's the confidence in this strategy? - Charles Nabhan (Stephens Inc.)

2026Q1: Organic SaaS growth should remain 'north of 20%' due to an emphasis on SaaS across all markets. - Geoffrey Smith(CFO)

Contradiction Point 4

AI Disruption Timeline in GovTech

It involves a contradiction on the near-term feasibility and adoption timeline for AI in government technology, affecting strategic priorities and market expectations.

Madison Serr (Raymond James) - Madison Serr (Raymond James)

2026Q3: Confidence stems from cost structure reductions (people costs, rent) not yet fully reflected in Q3, upcoming benefits from process improvements and AI... - Jeff Smith(CFO)

Is the historical normalized margin improvement of 50-100 basis points still applicable with mid-single-digit revenue growth, and how confident are you in achieving margin expansion and improved profitability? - Charles Nabhan (Stephens Inc.)

2026Q1: Customer adoption varies. State agencies will need to create frameworks and policies before AI can be widely adopted, which will be a near-term headwind. Disruption potential is currently limited by the need for regulatory clarity...; AI is a 'good bit of time away' from being a 'real working asset' in GovTech at scale. - Geoffrey Smith(CFO)

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