I3 Verticals Navigates Growth Pains in Q2: Can the SaaS Engine Overcome Headwinds?

In an earnings season marked by turbulence, I3 Verticals Inc (NASDAQ: IIIV) delivered a performance that was both encouraging and fraught with caution. The company’s Q2 2025 results, announced on May 9, 2025, revealed a tale of resilience in core SaaS and public-sector software segments, tempered by strategic divestitures, trade frictions, and delayed contracts. Here’s what investors need to know.

Revenue Growth Amid Strategic Shifts

i3 Verticals reported total Q2 revenue of $63.1 million, a 8.8% year-over-year increase, driven by its SaaS and public-sector verticals. RemainCo revenue (excluding divested assets) surged 11.6% to $54.1 million, while SaaS revenue grew 23%—a standout figure reflecting the company’s pivot toward recurring revenue streams. However, this growth came at a cost: the divestiture of its Healthcare Revenue Cycle Management (RCM) business, sold for $96 million in cash, reduced annual revenue guidance by $39 million and Adjusted EBITDA by $8 million.

The trade-off appears strategic. By offloading underperforming assets, i3 Verticals has streamlined its focus on high-margin software solutions. CEO Greg Daily emphasized this shift, stating, “Our core SaaS and workflow businesses are firing on all cylinders, even as we navigate external headwinds.”

Profitability Improves, But Guidance Reflects Realities

Net income from continuing operations turned positive in Q2, reaching $1.1 million, a stark reversal from a $2.3 million loss in the same period last year. Adjusted EBITDA rose 17% to $15.8 million, with margins expanding to 27.2% of revenue—evidence of operational efficiency.

Yet the company revised its fiscal 2025 outlook downward. Revenue guidance was cut to $207–217 million (from $243–263 million), and Adjusted EBITDA trimmed to $55–61 million (from $63–71.5 million). CFO Geoff Smith cited two primary factors:
1. The Healthcare RCM divestiture, which reduced revenue by $39 million.
2. $2.5 million in revenue lost due to U.S.-Canada trade disputes, which have disrupted public-sector contracts.

Risks Lurking in Q3 and Beyond

The company faces near-term hurdles. Q3 is expected to see a seasonal dip in payments and software revenue, with margins dropping to the mid-20s—a 2–3% contraction from Q2. Additionally, delays in a Manitoba utility contract (a $2.5 million hit) underscore execution risks in its newly acquired utility billing business.

Investors should monitor how i3 Verticals navigates these challenges. A key metric is Annual Recurring Revenue (ARR), which grew 6.5% to $199.1 million but faces pressure from payments revenue softness. Management expects this to stabilize by year-end, but any further slippage could weigh on confidence.

Balance Sheet Strength and M&A Ambitions

i3 Verticals enters the second half of fiscal 2025 with a $64 million cash balance and $400 million borrowing capacity—a fortress balance sheet that enables opportunistic moves. The recent $9 million acquisition of a utility billing software firm, with up to $5 million in contingent payments, signals a focus on “tuck-in” deals to expand its public-sector and utilities footprint.

CEO Daily also hinted at larger deals: “We’re not ruling out transformative acquisitions, but we’ll remain disciplined.” This cautious approach aligns with revised guidance, which assumes no major M&A activity in the near term.

Conclusion: A Stock for the Long Game

i3 Verticals’ Q2 results highlight a company in transition. While its SaaS and public-sector software businesses are thriving—23% SaaS growth and a $33.5 million year-to-date Adjusted EBITDA—near-term risks like trade frictions and delayed contracts demand patience.

The revised guidance, though conservative, sets a manageable bar. If i3 Verticals can stabilize ARR growth, leverage its cash reserves for accretive acquisitions, and weather seasonal dips, it could deliver on its $61 million Adjusted EBITDA target by year-end.

Investors should look for two catalysts:
1. Q4 performance, where revenue is expected to rebound to 52% of remaining guidance, with margins hitting the high-20s.
2. Execution on Manitoba and U.S.-Canada contracts, which could remove overhangs on valuation.

At current prices, IIIV trades at a 12.5x forward EV/EBITDA multiple—a discount to peers like Tyler Technologies (TYL) and Tyler’s 16x multiple—suggesting investors are pricing in near-term risks. But for those willing to bet on i3 Verticals’ software-driven future, the dividend of a strong balance sheet and high-margin SaaS could outweigh today’s turbulence.

In short, i3 Verticals is a company worth watching. Its SaaS engine is firing, but the road ahead is bumpy. Those with a long-term view may find value in its strategic pivot—but they’ll need to stay patient.