i3 Verticals: A Strategic Rebirth in the Public Sector—Unlocking SaaS Growth and Insider Confidence

In May 2025, i3 Verticals Inc. (NASDAQ: ITHREE) executed a bold strategic pivot by divesting its Healthcare Revenue Cycle Management (RCM) business to Infinx, Inc. for $96 million. This move, coupled with the earlier $438 million sale of its Merchant Services unit, marked a decisive shift toward a streamlined business model focused on the Public Sector vertical. With 80% of its Q1 2025 revenue now derived from public sector SaaS offerings—a 12% year-over-year increase—i3 Verticals is positioning itself as a pivotal player in the digital transformation of government services. For investors, the question is no longer whether this pivot makes sense, but how quickly the market will recognize its profitability potential.

The Strategic Rationale: From Scattered to Focused

i3 Verticals' exit from healthcare and merchant services was not merely a cleanup of non-core assets but a calculated realignment. CEO Greg Daily emphasized that the healthcare RCM market demands scale—a luxury i3 lacked—to compete with entrenched players like Change Healthcare. By shedding these units, the company has eliminated operational drag and redirected resources to its core strength: delivering mission-critical software to local and state governments.

The public sector's appeal lies in its predictable demand and long-term contracts. Governments, under pressure to modernize infrastructure and reduce costs, are increasingly adopting SaaS solutions for utilities, education, and justice tech. i3's recent acquisition of a utility billing software company for $9 million exemplifies its strategy to deepen its vertical expertise. This acquisition, combined with its existing K-12 education and transportation platforms, creates a portfolio of “indispensable” software that governments cannot easily replace.

SaaS Momentum: Recurring Revenue and Margin Expansion

The financials tell a compelling story. i3's SaaS revenue surged 16% year-over-year in Q1 2025, with Annualized Recurring Revenue (ARR) reaching $193.3 million—a 7.6% increase. The shift from one-time sales to recurring models is accelerating, as evidenced by recurring software license sales jumping from $0.4 million in Q1 2024 to $2.7 million in Q1 2025. This transition not only stabilizes cash flow but also enhances customer lifetime value.

Equally impressive is the company's margin expansion. Adjusted EBITDA for Q1 2025 hit $16.4 million, with margins expanding to 26.5%. The integration of embedded payments into its software—post the merchant services divestiture—has further boosted profitability by reducing customer friction and creating cross-sell opportunities. With $85.6 million in cash and $450 million in borrowing capacity, i3 is well-positioned to fund innovation or acquisitions without diluting shareholders.

Insider Confidence: A Vote of Faith in the Strategy

Management's actions speak louder than words. CEO Greg Daily and CFO Geoff Smith have repeatedly highlighted the company's “de-risked” business model and debt-free balance sheet, a direct result of the divestitures. The CFO noted that the company's adjusted EBITDA for Q2 2025 is on track to exceed $15.8 million, with margins hitting 29.3%. Such guidance, coupled with a reaffirmed 2025 revenue outlook of $207–217 million and adjusted EBITDA of $55–61 million, signals strong conviction in the strategy.

Moreover, the leadership team has been aggressive in deploying capital. The $9 million acquisition of the utility billing software company not only expands i3's footprint but also aligns with broader trends in smart infrastructure. Rick Stanford, the President, underscored the acquisition's potential to enhance cross-selling, while the CRO highlighted AI-driven innovations like a generative AI bot for transportation management. These bets suggest a long-term view focused on differentiation in a sector where customization is king.

Investment Thesis: A Catalyst-Driven Play

For investors, i3 Verticals offers a unique combination of near-term catalysts and long-term scalability. The company's focus on the public sector—still in the early stages of digital transformation—positions it to capture market share ahead of its peers. With governments increasingly prioritizing efficiency (e.g., Biden's $1.2 trillion infrastructure bill), demand for i3's solutions is likely to remain robust.

However, risks remain. The public sector's procurement cycles are lengthy, and regulatory changes could impact adoption. Additionally, the company's reliance on a single vertical means any macroeconomic downturn in government spending could hurt growth. That said, i3's strong cash position, margin discipline, and insider alignment mitigate these risks.

Conclusion: A Buy for Patient Capital

i3 Verticals' strategic shift is more than a rebrand—it's a rebirth. By exiting unprofitable lines of business and doubling down on the public sector, the company has created a focused, high-margin engine for growth. With insider confidence high, SaaS momentum building, and a robust balance sheet, i3 is well-positioned to deliver value in both the near term and long term. For investors seeking exposure to the government digitalization wave, i3 Verticals offers a compelling case—provided they are willing to hold for the full transformation cycle.

Investment Recommendation: Buy with a price target of $28–$30 (based on 18–20x 2025 adjusted EBITDA guidance). Key catalysts to watch: Q2 2025 earnings, AI integration milestones, and potential M&A activity in Q3.