i3 Verticals (NASDAQ:IIIV) CFO Geoff Smith said the public-sector software provider continues to see strong underlying demand across its core markets, though funding conditions are becoming less favorable after a period of elevated government spending and the company recently reduced its outlook following a weaker-than-expected fiscal third quarter.
Speaking at a KeyBanc Capital Markets fireside chat, Smith described i3 Verticals as a vertical-market software company focused exclusively on public-sector customers. Its five primary markets are courts and justice, transportation, public administration, utilities and education.
Public-Sector Demand Remains Strong, but Budgets Are Normalizing
Smith said public-sector organizations have substantial need for modern software because they face staffing shortages, security requirements and pressure to update outdated systems. However, he noted that government customers generally are not motivated by profit and are not typically leading adopters of new technologies.
Funding conditions also vary significantly by jurisdiction and customer type. Smith said government entities benefited from American Rescue Plan funding and rising property-tax bases in recent years, which helped support technology spending. But he said those resources are beginning to thin and that customers are increasingly seeking creative funding structures.
About 25% of i3 Verticals’ revenue comes from payments, Smith said, with another portion coming from transactional revenue sources such as technology fees and collections success fees. Those models can help customers fund projects through constituent-paid fees rather than relying solely on traditional software budgets.
“We’re really bullish on the transactional model” over alternative monetization approaches, Smith said. He added that transactional revenue can grow alongside customers and may create less pressure than recurring price increases in a traditional SaaS contract.
AI Is Accelerating Product Development
Smith said i3 Verticals is broadly adopting artificial intelligence internally, including extensive use of Microsoft Copilot and access to models from Anthropic and, in some cases, OpenAI. The company is monitoring token usage and code commits, but Smith said the ultimate measure of AI success will be whether it produces new products and functions that achieve product-market fit.
According to Smith, AI is helping the company increase software-development velocity while keeping capital expenditures from rising despite greater development activity. He said the technology has made it easier to approve product modernization projects, including an effort to improve the user interface of a customer information system acquired about two years ago for smaller utilities.
In education, Smith described an AI-enabled tool being developed to help school districts identify and pursue state, federal and other funding opportunities for student meal programs. He said the product could help districts access funding that smaller or less-resourced organizations may otherwise lack the capacity to pursue.
While customers are not yet broadly demanding AI capabilities, Smith said i3 Verticals is taking a “push” approach by identifying functions that the technology can provide to public-sector users.
Third-Quarter Results and 2027 Outlook
Smith said i3 Verticals’ most recently reported fiscal third quarter “was not a good quarter” and that the company missed its revenue expectations and lowered guidance for the remainder of the fiscal year ending Sept. 30.
Professional-services revenue declined significantly on an organic year-over-year basis, he said, with pressure affecting board licensing, transportation, justice and especially utilities. A large utilities project has produced less revenue recognition in fiscal 2026 than expected because its timeline has extended.
The company completed the first phase of that customer information system project, which Smith said went live successfully. However, i3 Verticals is reassessing expectations and margins before proceeding with subsequent phases. Smith said the opportunity remains attractive, calling the customer a tier-one public utility in a market primarily served by Oracle and SAP.
For fiscal 2027, Smith said the company now expects revenue growth closer to the mid-single digits, compared with its longer-term expectation for high-single-digit annual recurring revenue growth. More detailed guidance is expected in November.
Smith also pointed to higher interchange costs and slower-than-modeled growth in Resolv 360 as short-term transactional-revenue challenges. He said corrective actions are underway and that the collections product continues to have favorable long-term growth prospects.
Margins, Capital Allocation and M&A
Despite the revenue outlook, Smith said i3 Verticals expects an improving margin profile. The company has reduced costs through process improvements, a slower acquisition pace, selective attrition management and its directly operated India-based workforce. Smith said fourth-quarter margins should improve from the third quarter, which included customer reserve items, and projected fiscal 2027 margin expansion “well north” of the company’s stated baseline of 50 to 100 basis points.
On acquisitions, Smith said the company remains open to deals but has moderated its pace because of valuation discipline. i3 Verticals has completed roughly one deal per year during the past three years, compared with much faster acquisition activity earlier in its history.
Share repurchases have been an attractive alternative use of capital, Smith said, noting that the company has repurchased nearly 23% of its outstanding shares from its peak share count. Future acquisitions may focus on adjacent public-sector opportunities and customer bases that can support cross-selling, particularly in areas such as public safety and courts.
About i3 Verticals (NASDAQ:IIIV)
i3 Verticals, Inc is a provider of integrated software and merchant payment processing solutions tailored for specific vertical markets across the United States. Since its founding in 2001 and headquartered in Columbia, South Carolina, the company has focused on delivering SaaS-based applications and payment services to streamline revenue collection and management workflows for its clients.
The company’s product portfolio includes electronic payment processing for credit and debit card transactions, automated clearing house (ACH) transfers, online and mobile payment portals, and related risk management and compliance tools.
