All right, we'll go ahead and get started here. Thank you very much this morning for joining us to kick off the second day of the 2026 Morgan Stanley TMT Conference. I'm James Faucette, Senior Fintech Analyst and Fintech and Vertical Software Analyst here at Morgan Stanley. I'm very pleased to be kicking off this morning with Clay Whitson, Chief Strategy Officer of i3 Verticals. Thanks for being here. Before we get started here, quick disclosure I need to read. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. Clay, great to have you here at the TMT Conference. For those who are not familiar with i3, particularly post the Merchant Services and healthcare RCM divestitures, can you provide a quick overview of the company as it is today?
What are your core end markets, key products, mix of recurring revenue and SaaS, and how you think about the growth algorithm on a go-forward basis?
Well, we're currently pure play public sector. We're in five markets, justice, transportation, utilities, public administration, and education, which we've been in since 2014. Over 80% of our revenues are recurring revenues. The two largest components of those are either SaaS or maintenance from old perpetual licenses and transactional revenues. I'll include payments in those.
Okay
... transactional revenues. The remaining 20% is mainly professional services, but we still have a small amount of perpetual licenses certain customers like to buy and even some equipment.
Got it. When you look at... talk about, the different parts of public sector, et cetera, can you compare and contrast maybe some where you sit versus some of your competitors and what kinds of work you're doing for public sector typically?
Well, I guess Tyler would be the most obvious public company comparable. We compete with them in certain markets but not other markets.
Okay.
They're in justice. That's our largest and most quickly growing market right now. They have offerings in education, but they're not similar to ours. Our education product is the lunch programs and the payments associated with those. I'm not all that familiar with theirs, but I know they have bus routing...
Oh, yeah. Yeah. Some of those things like in education. Right. Right. Right.
Yeah. In transportation, we don't really run into them. They're in utilities as we are, but they are in a different tiers than we are in utilities. In the public administration, they've got the leading fund accounting product. We have a cloud-based fund accounting product, but it's generally for smaller applications.
Got it. Got it. Got it. Is there a difference in terms of, you mentioned, you know, utilities, do you guys run into them for most of your customers, and in the same size municipalities, or is there differences in the types of sizes of municipalities and other areas that you serve?
I would say justice is where we do run into them the most.
Okay.
Even their estimate of market share, and market share not all that easy.
Yeah, it's tough in that sector.
... to determine. Even in that sector, I think they estimate their market share at 10 percent-
Mm-hmm
... which would put us maybe at 1%.
Right. Right.
We do see them, but not all the time. Usually, it's local competitors.
Right
... grew up and knew a judge and have established a business over time in a particular state.
Got it. Got it. Then one of the companies we often hear about is, have you run into much of Axon trying to come into the justice system? I know that, you know, they've come more from the enforcement and frankly, digital cameras and that kind of thing, but that's something that they've talked about. Do you see them much at all or not really?
We haven't yet.
Okay.
We do have a public safety.
Mm-hmm
... group. It is a good crossover with courts.
Mm-hmm.
The records police keep.
Right
... versus the records the courts keep. I do see it as a logical extension, and we're pushing more into public safety. It's definitely. The entire public sector market is underserved and outdated. It's just a long runway.
Yeah. Like, hyper fragmented, it seems like you said, is that a lot of these systems-
Yeah.
... were custom built by somebody local a long time ago and...
Well, laws can vary.
Right
... locally. In Louisiana, they have a remnant of Code Napoléon, which is from the French influence there a long time ago, and it's just very different laws in each state.
Right. Yeah. No, absolutely. Absolutely. You know, you guys have been historically a very astute acquirer of businesses. Some of them are some of these smaller solutions that we were referring to a moment ago. With the portfolio now really focused on public sector software, how has your M&A sourcing and target profile evolved, whether that be by product categories, geography, deal sizes?
Well, I do think we'll stick with our five markets now.
Mm-hmm.
When we first went public, we had a much broader focus.
Yes, you did.
as you know. We self-source all of our deals. We work very hard on that. It's through our network of CEOs and founders that we've gotten to know over time. I think we've earned a preferred buyer status.
Okay.
We're a very good home for a founder-led company who might have a son, a daughter, a granddaughter in the business, and they wanna find a good home for the next generation. It's, it's gonna be hard to believe, but it's not all about the money.
Right. Right.
... when they reach a certain stage. Yeah. The things we like are founder-led, you know, no outside money usually.
Mm.
It's preferable if the founder wants to keep working, they can work their own. If they wanna work 10 hours a week, that's fine with us.
Right.
It's that 10 hours is very valuable. Financial profile growing over 10%.
Mm
... recurring revenues. We prefer cloud SaaS, of course. Good margins, that shows defensibility in the business. Yeah. That's
When you're, when you're putting together this group and, you know, as you said, it's like a lot of times you'd have a preference they'd be cloud-based, et cetera. How much work are you able to do to harmonize those acquisitions in their platforms with your existing catalog or base of offerings? You know, over what timeframe does that usually take place?
Well, it depends on the acquisition-
Okay
... target. The one we just did was very quick. you know, if they're already on AWS or Azure.
Mm
... it's pretty seamless for us to integrate that.
Okay.
If their products are on-prem, it's a bigger lift, of course. If their tech stack is different than ours, it's a bigger lift. More in what, you know. The one we just bought is cloud-based, and it's Azure. I mean, it's a .NET stack.
Got it.
... it was very easy to fit in.
Got it. On from an ongoing basis, how do you handle service and maintenance and maintaining the code base of the acquisitions? Do those ultimately remain kind of standalone just because of the way the customer sets are, or are you trying to push towards homogeneity of code bases ultimately?
Well, we're organized by product.
Right.
The five products I went through or market, the five markets I went through earlier, and they report up to a common person.
Mm-hmm.
We have Whose name is Chris Laisure. We have a CTO, one CTO and one tech stack and one horizontal payment stack, which is a PayFac model you'll be familiar with.
Okay. Right. Right.
We do try to harmonize them. Education might be a good example. We've had it the longest, since 2014. We originally had 4 different code bases there. We're now down to two. One is .NET, one is PHP.
Okay.
We're pushing those together over the coming years. We go about it slowly, so that's a 10-year time period to go from 4- 2. Our customers, not only in education but the public sector in general, don't like change.
Right. Right.
We try to accommodate them as much as possible, but it does come a time where. In education, we got down to 25 customers, districts, school districts, and we told them a year in advance, "This time next year, we're gonna have to turn off the switch. So you're gonna.
All right.
You're gonna have to either find a new provider or upgrade." I mean, even if you're giving them a better product, maybe even for the same price, they still sometimes don't want to do it.
No, it can be daunting, right?
Yeah.
Right. Right. Right. speaking of acquisitions, can you just recap for us a little bit what your pacing or how many companies and revenue you were able to acquire in 2025? how are you thinking about that for 2026?
2025 were
Mm-hmm
... in August of 2025. In 2026, there have been two.
Okay.
That's three over the past 2 years.
Right.
They were gems. I think you'll see us acquiring less frequently, but we really, really like the ones we do decide to buy. All three of those have been cloud-based. They've been primarily SaaS models. They're growing well, and we're really excited about their future.
Got it. Let's talk about one of those acquisitions that at least I found interesting is that you acquired a driver and motor vehicle insurance verification software company. I think that acquisition was effective January first of this year. Can you walk through... You kind of alluded to a few things that you like, but what did you like about that asset, whether, you know, it'd be the market positioning, competitive positioning itself, cross-sell opportunity, et cetera?
Well, they're the undisputed leader in the market. We do this in Tennessee.
Mm-hmm
... and we have not been able to compete with them in RFPs. States are modernizing this way. Certain states mandate, I think maybe. They have maybe 20 states today.
Oh, wow.
... mandate for the insurance companies to open up their files. So this company has integrations with all the insurance companies, big and small, in these 20 states. In the old days, a policeman would pull you over and discover that your insurance had lapsed.
Right.
That's the only way they knew that. Now, if an insurance does not get renewed.
Right
... there's an automatic notice, and the state can levy a fine and keep uninsured motorists off the road, and it is a revenue source as well to them.
Got it. Got it. This will take you into how many states? Is this taking you into 20 incremental states?
There might be some overlap. We were in maybe 18 U.S. states.
Okay
... and four Canadian provinces, but there might be some overlap. Yeah, it really helps. They get along really well with our transportation people. They've known each other.
Oh, I'm sure.
... from being at conferences together and whatnot.
Then what's the cross-sell opportunity for something like that?
Well, they do zero payments today.
Okay.
They just let the states have whoever their normal payment provider might be at the time. Their new offerings, they're bundling our payments with their software. They have one state, and it's one of the smaller states population-wise in the United States, and that small state earns more in payments. They have a payment model. I think the state must have wanted to do it that way.
Right. Right. Right. Right. Right.
They earn more in that state off payments than they do selling their software and all these others.
Oh, really?
It's a very good payments opportunity. Another is printing. You know, they have to print.
Mm-hmm
... as part of collecting, and they outsource that, and we've got a better deal for that. Those are the most immediate.
What kind of growth profile did that have at the time you acquired it?
We think they'll grow over 20% a year for several years.
Oh, wow.
Because they're winning new states.
They're winning new states.
Yeah.
Got it. Got it. That's really fascinating. On acquisitions-
Their margins are 50%.
Wow.
Yeah.
You mentioned the ability to cross-sell payments, et cetera. Does that change the margin profile once you can start to layer that in?
Payments are thinner margin.
Okay
... than SaaS, but, it's an incremental revenue stream. It's an additional moat if you believe the AI commentary these days. It is a little thinner margin, but they're on the high end of our margin profile-
Right. Right.
... in the company anyway.
It's, as you said, it's incremental, just the same. In the M&A market, and obviously you guys are always well engaged there, how would you characterize the valuation and seller expectations today versus call it a year, a year and a half ago? Where do you see the best opportunities? Have those changed at all with those expectations?
I think, you won't remember this, but I think we had this conversation a few years ago.
Oh, I remember. That's why I'm asking.
Okay. Okay. Okay. It's surprising how disconnected, to me, private companies' expectations are with what's going on in the public market.
Right.
You know, during COVID, after COVID, you know. You know, the payments market gets whacked. The software market gets whacked.
Right. Right.
For these founders, it's a life event for them.
Yeah.
They've been running a company since they got out of college, and maybe it's 30- 40 years, and they're trying to think about retirement, the next generation. You know, they wanna take some chips off the table, but maybe they're not completely ready to retire. They wanna find the right home. They, of course, want a fair valuation.
Right.
If they don't like what's going on in the public markets this year, they're just gonna wait until-
They'll just wait.
... two or three years from now, yeah.
Right. Got it. Got it. Do you find people doing, like, that's becoming evident now? I mean, particularly as a lot of the software valuations have been significantly compressed over the last, you know, really few months, but even going back a few quarters.
Honestly, I don't think these founders really care.
Oh, really?
Yeah. They have a certain price in their head that they think is fair, and that's from 20 years of reading The Wall Street. It's not from.
I'm sure to your point is, like, as they're looking at it a life event, they're kind of also have in their own heads, like, what they kinda need or want to be able to move on, et cetera.
Yeah. Yeah.
That's interesting.
I mean, they're all playing a long game.
Right.
It's kinda more about timing to them than it is about what's going on this year.
Right. Let's talk about organic growth. In fiscal Q1 of 2026, your annualized recurring revenue, ARR, grew about 8%, and you called out SaaS growth of 24%. What is driving the SaaS acceleration? Is it new logos versus expansion within existing customers versus pricing? I guess maybe always trying to look forward, what needs to happen to sustain momentum through this fiscal year?
Well, first of all, the past three acquisitions we talked about a moment ago, all of those are SaaS-oriented.
Right.
That's helped SaaS growth and will for the remainder of this year, and next year. That's part of it. We sell very few perpetual licenses anymore. We went through a SaaS transition about two, three years ago.
Mm-hmm, mm-hmm.
Now we've kind of plateaued at about $5 million-$7 million of perpetual license sales per year. That'll just kind of go sideways, I think.
Got it.
As far as what's driving SaaS growth organically, our NRR, our Net Revenue Retention is 104%.
Right.
That includes cross-sell.
Right
et cetera. It does not include new logos.
Obviously, yeah.
New logos would be probably the biggest driver of SaaS growth within. Just talking about SaaS now.
Talking within SaaS, yeah.
Price increases are inflationary, and they are easier to build into SaaS contracts.
Right.
While our overall company price increase might not get to an inflation level within SaaS, it might get to an inflation level. There's some cross-sell, but most of our cross-sell is more transactional revenues like payments or data or revenue cycle than additional software products, but there are some.
Got it. Got it. Continuing here on organic growth, how are you thinking about that mix between SaaS subscriptions, transaction-based revenue, payment revenue, and professional services going forward? I guess as part of that, where do you see the biggest leverage to increase payments and transaction attached within the installed base?
80% of our revenues are recurring.
Yep.
Within that, the lion's share is either software or transactional revenues. Those are pretty equal proportion. With transactional, I am lumping in payments.
Right.
In software, I'm lumping in maintenance.
Right.
those are fairly equal proportion. I think SaaS is growing faster right now.
Mm-hmm.
It'll probably come to the mean over a few years. The two will grow in equal proportion. We love the transactional revenues. It's really helpful for state and local budgets.
Oh, yeah.
We're revenue sharing with them.
Right.
our CFO, Geoff Smith
Yeah
uses an analogy I like. A state needs a road to the airport.
Right.
They can either take taxpayer dollars and pay for the road, or they can build a toll road, and then the constituents who are using the road actually pay for it. That's sort of a transactional model.
Yep
It's easier on budgets. It is a good moat coming back to that. Getting back to the 80/20, the recurring portion will grow faster than the 20%-
Yes. Right.
... which is professional services, a smidgen of equipment, and some license, perpetual license sales. We will have good years in that 20%. If I had to bet, you know, our professional services this year came down from $40 million- $31 million is our current projection.
Mm-hmm.
If I had to guess, I'd give it equal odds that it goes up, not down next year. It's not.
Interesting. What caused it to come down this year, and why do you think it can go back at least return to growth next year?
It's the timing. It's heavily concentrated in utilities.
Okay.
'Cause that customer prefers a perpetual license. They can put it on their balance sheet.
Mm-hmm.
They're allergic to SaaS or any other monthly payments, 'cause they have to build that into their pricing for their citizens, which gives them political blowback.
Right.
They like professional licenses, which come with a lot of professional services. We have some big customers in utilities, and if we have a good year in 2025, that gives 2026 a tough comparison.
Right. Right. Right.
A low 2026 gives us a good comparison in 2027.
In subsequent year.
Yeah.
No, obviously. Obviously. Back on the SaaS growth of 24% that we saw in fiscal Q1, can you break down for us how much of that was organic? Kind of what's the organic growth rate versus how much benefit did you get from these few acquisitions in that SaaS number?
Well, we purchased a utility company in April.
Okay
... of last year, which has not annualized in the December quarter, and that was about $750,000 of revenues. Most of that would be SaaS. I don't have the exact amount, but I don't know, let's guess a half a million.
Okay
... came from that. The remainder would be organic.
Got it. Got it. Got it. That's really helpful. One of the key questions that we get on whether it be i3 or across. You know, a lot of the other companies we cover are questions around the end market. Would love to hear from you, where is i3 seeing pockets of strength or weakness across your public sector markets? Is there something interesting or specific happening with transportation or courts and justice, utilities? Just like how would you characterize the demand environment?
Well, justice is our most successful market currently. We just won the state of West Virginia, which will, you know, maybe turn into our largest project.
Oh, wow.
Our largest revenue customer over the next, five years. That was a big win. We're hopeful for some more wins, in that area. We have just... It's, it's our best cross-sell area, too.
Mm.
Transactional revenues, not to change subjects, but was a big part of our West Virginia win.
Okay.
Justice is one. Education has just been a great business for a long time. It's compounded EBITDA at 15% a year.
Wow.
-since two thousand and fourteen.
Yeah. Yeah, yeah.
That's a long time. It's still growing double digits, you know, it's all small base hit, but it's just a real steady-
Yeah, yeah.
Those would be the two. Transportation somewhere in the middle, I would say, and same with public administration. The one in 26, which is dragging us as we were just discussing, is utilities...
Mm-hmm.
We do think it'll bounce back in 2027 and beyond.
Got it. Got it. Got it. Another question that we have, especially, you know, given the technology cycles, et cetera, and evolution, are you seeing any changes from your perspective in procurement cycle times, RFP activity or even your win rates as we start calendar 2026?
Not that we can tell.
Okay.
I will say a general comment that we're moving slowly up market.
Okay.
Like West Virginia would be-
Yeah.
-an example of that. Before that, Louisiana. That means more RFPs. Three or four years ago, we didn't even enter RFPs because we were just a feature and some.
Right. Right. Right.
We were never the lead horse. With RFPs comes the implication that it's a little bit slower. They can get called off. They can get contested. It's probably a lower win rate. When you win, the rewards are big, like West Virginia.
Right. Right. Talking about like your customers in the context of rapid technology change, to what extent are your customers prioritizing modernization and what are they prioritizing? Whether that be cloud migration, analytics and AI, citizen engagement, versus must-have in compliance and maintenance spend.
Well, security is a big deal.
Okay.
Fraudsters are becoming more sophisticated. I would say fear of failure is a big thing. All of our customers are very risk-averse.
Got it.
They don't want mud on their face. Like that happened with Texas Utilities a couple years ago.
Yeah. Yeah.
-or Southwest Airlines or. Their systems are getting so old and their predecessors kicked the can down the road.
Right.
There does come a time where they have to deal with it. They've also got a manpower shortage that's.
Mm-hmm, mm-hmm.
becoming more and more acute over time. You can imagine a sheriff's office who has one IT person.
Yeah.
He gets poached by Amazon. They've got their software in a server in the closet. There's no documentation.
Right.
It takes them 6 months to fill the job. That's untenable or that's not a model which-
Yeah.
can last. They need to outsource this stuff. We are the answer to all this.
Mm-hmm.
We and our peers, software is the answer to all this in a chronic manpower shortage.
Right.
that can't compete with the private sector. You know, we believe this will increase our demand as opposed to be a threat to it.
Got it. let's talk about... I think that's a great secular backdrop. How do you think about public sector budget risk over the next 12- 18 months? What are kind of the leading indicators you watch as to the direction of public sector budgeting?
Well, you know, we have zero federal exposure.
Right.
States run on income taxes if they have them, property taxes, sales taxes. Looking at taxes and the health of the economy and the real estate market in general are leading indicators. Case filings are indicators in justice, leading indicators. Right now, the state and local budgets are all pretty flush. I mean, the property market.
Right.
Property taxes, they've just. A lot of states have been jacking them way up, as I'm sure you're aware.
Right.
That's left healthy budgets for the foreseeable future.
Got it. Then let's talk about your profitability. you know, Adjusted EBITDA margins in the fiscal first quarter of 2026 were around 25.8%, which were down a little bit year-over-year. Can you walk through the main drivers of that delta, whether that be hosting costs, investments? How do you expect margins to trend over the rest of fiscal year 2026?
We made a large investment in Justice, and that's over 50 people, and also in Utilities. We're feeling those effects. Those did not really align timing-wise with the revenues we expect from them, West Virginia is a good start, we think that'll happen for us in Utilities also. I think we did quantify I mean, the Justice investment as $700,000 per quarter. Hosting had more than a $1 million increase this December quarter versus the prior December quarter, that's just variable usage going up. We do have one large customer that we pass through hosting to, we do pass it on, it's 0% margin, if you will. That has something to do.
The last thing is professional services declined $2.6 million.
Right. Right.
Now, that's low margin, but we haven't been able to pivot our headcounts immediately to match that revenue trend.
Got it. Do you think, though, your long-term target you've talked about in the past of 50- 100 basis points of annual expansion, is that still the right way to frame it over the medium to long run?
Yeah. I think we'll do that in this year, in 2026.
Got it.
The acquisition that was effective January first is over 50% margin. We do have some headcount adjustments we're making.
Mm.
you know, with a lag in regards to our professional services declining. I think we'll do that this year, and we expect to do that in future years also.
Last couple minutes here, Clay, to wrap up. Now that you're roughly 18 months past the Merchant Services divestiture and nine months past the healthcare RCM divestiture, do you walk through any unexpected learnings from operating as a more focused public sector software company, whether that be investor reactions, your go-to-market, capital allocation? Just kind of how are you looking at maybe some of the things you've learned as you've gone through these sale processes.
Well, just to start with capital allocation, it's good to have a nice, strong balance sheet. We haven't had to choose.
Right.
-acquisitions, and I'm sure you're aware we've been making repurchases.
Yep.
It's kind of a we're able to do both/and there. Learnings. The payment business was very steady, but it was lower margin, lower growth. Same with healthcare. That's been nice to not have those mixed in with our results. We do have larger customers in public sector.
Right.
Now that our base is smaller, they can create these swings.
Yeah, more volatility there a little bit.
More. It's allowed us to knit together a lot easier and better and become more cohesive internally 'cause our focus is just, you know, we're roughly half the size we were.
Right.
That's been very nice.
That's great. Well, Clay, thank you very much for joining us today. It's been a great conversation, and certainly as you've evolved the business, it's been really interesting and fascinating to watch. Public sector, as you said, looks to be a very strong growth opportunity for the company.
Thank you.
Thanks very much.