i3 Verticals (IIIV) Q2 2025: Divestitures Drive 17% EBITDA Gain, Refocusing on Public Sector SaaS
i3 Verticals completed a sweeping portfolio reset this quarter, divesting healthcare RCM and merchant services to emerge as a focused public sector SaaS provider. The RemainCo business delivered double-digit organic growth and margin expansion, powered by recurring software and payments, while new utility software M&A and embedded AI offerings signal a sharpened vertical strategy. With a strengthened balance sheet and a deep M&A pipeline, the company is positioned for disciplined expansion, though revenue seasonality and project delays remain near-term watchpoints.
Summary
- Portfolio Refocus: Divestitures leave i3 Verticals as a pure-play public sector SaaS and payments business.
- Margin Expansion: High-margin software and recurring revenue drive improved profitability and cash flow.
- Strategic Pipeline: Strong M&A pipeline and AI-enabled solutions underpin the next phase of growth.
Performance Analysis
i3 Verticals’ RemainCo business delivered 11.6% revenue growth, with 9% organic expansion and incremental benefit from last year’s permitting and licensing acquisition. Recurring revenue remains the engine, now 76% of the mix, as SaaS, transaction-based, and recurring software services all posted robust gains. Software license sales spiked this quarter but are expected to moderate, reinforcing the company’s pivot toward recurring models.
Adjusted EBITDA outpaced revenue, rising 17% and lifting margins to 29.3%—a function of higher software sales and operational leverage. The company’s balance sheet is transformed, with net debt nearly erased and $64 million in cash post-divestiture. The recent $9 million utility billing software deal, included in guidance, brings high-margin revenue and expands the company’s public sector reach. Management proactively removed $2.5 million in revenue from guidance due to a delayed Manitoba contract, reflecting a conservative stance on project timing.
- Recurring Revenue Dominance: 76% of Q2 revenue is recurring, anchoring visibility and stability.
- Software Margin Leverage: Software and related services now comprise 70% of RemainCo revenue, driving margin expansion.
- Cash Flow Strength: Free cash flow conversion is expected to exceed two-thirds of EBITDA, with interest income now a tailwind.
Seasonality remains a factor, with Q3 expected to be the revenue and margin low point as education and payments soften, before rebounding in Q4. The company is now built to scale recurring SaaS and payments, with non-core drag largely eliminated.
Executive Commentary
"After the divestiture of our RCM business, we're excited to be streamlined and focused on public sector vertical market. That business had a second quarter revenue growth of 12%. and SAS revenue growth grew at 23. It's an exciting time to be building in the public sector."
Greg Daley, Chairman and Chief Executive Officer
"Adjusted EBITDA as a percentage of revenues was 29.3%. an increase from 27.9 for Q2 2024, reflecting higher software sales, which carry high margins. Our balance sheet is strong and well positioned for the future."
Jeff Smith, Chief Financial Officer
Strategic Positioning
1. Pure-Play Public Sector SaaS Model
With the sale of both healthcare RCM and merchant services, i3 Verticals is now a focused public sector SaaS and payments platform. The business model centers on vertical-specific software for state, local, and education clients, with a strong emphasis on recurring revenue streams. This positions the company to benefit from the growing demand for efficiency and modernization in government operations.
2. M&A-Driven Expansion in Utilities and Beyond
The recent acquisition of a utility billing software company opens new state markets and adds cloud-based, mobile-compatible offerings for municipal utilities. The acquired business brings recurring revenue streams in payments and print/mail, with a clear path to SaaS conversion and in-house payments integration—expected to drive both revenue and margin synergies. Management’s pipeline remains focused on small, high-fit tuck-ins to deepen vertical presence.
3. Embedded AI and Domain-Specific Solutions
AI applications are being rapidly embedded across verticals, with generative AI bots, agent assist dashboards, and automated indexing modules already deployed in transportation and ERP markets. The company’s approach is “applied AI,” solving tangible customer pain points in workflow and engagement—an approach resonating with public sector clients who value domain expertise and implementation speed.
4. Cross-Sell and Customer Retention Engine
Cross-selling across public sector verticals—education, justice tech, utilities, transportation—is a key organic growth lever, with contract wins up double digits sequentially. The multi-pronged monetization model (perpetual license, SaaS, user fee plus payments) lowers barriers for clients and insulates i3 Verticals from funding cycle volatility.
Key Considerations
This quarter marks a strategic inflection for i3 Verticals, with the company now a streamlined operator in high-visibility, recurring public sector markets. The balance sheet and margin profile are reset, but execution and project timing remain critical as the company leans into M&A and AI-driven growth.
Key Considerations:
- Revenue Quality Shift: Divestitures have eliminated lower-margin and non-core businesses, concentrating the portfolio on high-margin, sticky SaaS and payments.
- Cash Allocation Optionality: A $64 million cash position and $400 million in credit capacity enable disciplined M&A and potential buybacks, though management favors “rifle shot” tuck-ins over large deals.
- AI as Differentiator: Early traction with applied AI solutions is driving customer engagement and operational efficiency, setting i3 Verticals apart in the public sector niche.
- Seasonal Revenue Patterns: Q3 will see a typical dip due to education and payments seasonality, with Q4 expected to recover—investors should monitor for any deviation from this pattern.
- International and Project Risk: The Manitoba contract delay and US-Canada trade friction highlight the importance of conservative forecasting and client-driven project pacing.
Risks
Execution risk remains elevated as the company integrates new acquisitions, converts acquired clients to SaaS and in-house payments, and manages project delays such as the Manitoba contract. Public sector funding cycles and political shifts could impact demand, while competition in vertical SaaS and payments is intensifying. Management’s focus on small, vertical-specific M&A reduces integration risk but could slow growth if deal flow stalls or if larger rivals accelerate consolidation.
Forward Outlook
For Q3 and Q4, i3 Verticals guided to:
- Q3 revenue at 48% of second-half total, with Q3 as the seasonal low for both revenue and margin.
- Q4 revenue at 52% of second-half total, with margin recovery to high 20s percent.
For full-year 2025, management maintained guidance:
- Revenue: $207 to $217 million
- Adjusted EBITDA: $56 to $61 million
- Adjusted EPS: $0.96 to $1.06
Management highlighted several factors that will shape results:
- Utility billing acquisition is expected to contribute at the high end of the margin range.
- Guidance reflects $2.5 million in revenue removed due to Manitoba contract delays, with further delays possible.
Takeaways
i3 Verticals emerges from Q2 as a focused, high-margin public sector SaaS operator, with recurring revenue and software-driven margin expansion as defining features. The company’s capital position and pipeline support disciplined expansion, but project timing, seasonality, and integration execution are critical for sustaining momentum.
- Business Model Reset: The transition to a pure-play public sector SaaS and payments model is complete, improving visibility, profitability, and strategic focus.
- Margin and Cash Flow Upside: High-margin software and recurring payments are now the core, with free cash flow conversion set to exceed historical norms due to lower interest expense and improved operational leverage.
- Growth Watchpoints: Investors should monitor M&A execution, AI adoption, and contract timing as key drivers of future performance and risk.
Conclusion
i3 Verticals’ Q2 marks a clean break from legacy complexity, positioning the company as a high-growth, high-margin public sector SaaS specialist. Operational discipline and targeted M&A will determine whether this new model delivers on its promise of sustainable, compounding returns.
Industry Read-Through
i3 Verticals’ transformation underscores the value of vertical SaaS focus in government and regulated markets, where domain expertise and recurring revenue models offer insulation from macro volatility. The company’s shift away from commoditized merchant services and healthcare RCM mirrors a broader industry trend of SaaS firms shedding non-core assets to concentrate on high-visibility, defensible verticals. Applied AI is gaining traction in the public sector, suggesting that software providers able to deliver tangible workflow automation will capture outsized share as governments modernize. Fragmented markets like utilities and education remain ripe for tuck-in acquisitions, but integration and cross-sell execution will separate winners from laggards.