10-Q: i3 Verticals Q1 2026: Revenue Up Slightly, Net Income Drops

i3 Verticals, Inc. reports a modest revenue increase of 0.9% to $52.7 million for Q1 FY2026, alongside a significant 76.5% drop in net income attributable to the company, primarily due to discontinued operations and increased share repurchases.

Summary

• Revenue from continuing operations increased by 0.9% to $52.7 million for the three months ended December 31, 2025, compared to $52.2 million in the prior year.
• Net income attributable to i3 Verticals, Inc. decreased by 76.5% to $0.484 million for the quarter, down from $2.056 million in the same period last year.
• Net income from continuing operations attributable to i3 Verticals, Inc. decreased by 68.9% to $0.576 million from $1.855 million.
• A net loss of $0.138 million was reported from discontinued operations, a shift from a net income of $0.318 million in the prior year.
• Operating expenses increased by 1.8% to $51.062 million, primarily driven by higher software costs and internal/external personnel costs.
• The company repurchased 1,522,838 shares of Class A Common Stock for a total cost of $38.317 million during the quarter.
• Annualized Recurring Revenue (ARR) from continuing operations grew by 8.4% to $169.6 million as of December 31, 2025.
• Cash and cash equivalents decreased to $37.523 million at December 31, 2025, from $66.672 million at September 30, 2025.
• The company completed the acquisition of a business in the transportation market for $60.0 million cash, plus up to $20.0 million in contingent consideration, effective January 1, 2026.
• A new share repurchase program authorizing up to $60.0 million of Class A common stock repurchases was approved on February 5, 2026.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a mixed report. While strong ARR growth and a healthy balance sheet with no outstanding debt are positive, the significant decline in net income, both consolidated and from continuing operations, raises concerns about profitability and the impact of recent divestitures and adjustments.

Positives

• Annualized Recurring Revenue (ARR) from continuing operations increased by 8.4% to $169.6 million, indicating strong growth in recurring revenue streams.
• Interest expense decreased by 44.0% to $0.381 million, reflecting a lower average outstanding debt balance.
• The company maintains a strong liquidity position with $37.5 million in cash and cash equivalents and $400.0 million in available capacity under its revolving credit facility, with no outstanding borrowings.
• The company is in compliance with all financial covenants under its 2023 Senior Secured Credit Facility, reporting a consolidated interest coverage ratio of 94.9x and a total leverage ratio of 0.0x.
• A new $60.0 million share repurchase program was approved on February 5, 2026, demonstrating confidence in future cash flow and commitment to shareholder returns.
• Completed a strategic acquisition in the transportation market for $60.0 million cash plus up to $20.0 million in contingent consideration, expanding public sector offerings.

Negatives

• Net income attributable to i3 Verticals, Inc. significantly decreased by 76.5% to $0.484 million from $2.056 million in the prior year.
• Net income from continuing operations attributable to i3 Verticals, Inc. decreased by 68.9% to $0.576 million from $1.855 million.
• A net loss of $0.138 million was reported from discontinued operations, compared to a net income of $0.318 million in the prior year, indicating a negative impact from prior divestitures.
• Income from operations decreased by 21.6% to $1.609 million.
• Provision for income taxes increased by 72.1% to $0.704 million.
• Cash and cash equivalents decreased by $29.149 million from September 30, 2025, to December 31, 2025.
• Significant cash outflow from financing activities, primarily due to $37.938 million in Class A common stock repurchases.
• Revenue growth was modest at 0.9%, driven by recurring revenues but partially offset by a decrease in non-recurring revenues.
• Other costs of services increased by 12.9% to $17.582 million, primarily due to higher software costs.
• Selling, general and administrative expenses increased by 1.9% to $27.0 million, driven by higher personnel costs.

Risks

• Ability to protect systems and data from continually evolving cybersecurity risks or other technological risks, including the impact of any cybersecurity incidents or security breaches.
• Liability and reputation damage from unauthorized disclosure, destruction or modification of data or disruption of services.
• Technical, operational and regulatory risks related to information technology systems and third-party providers' systems.
• Ability to execute on strategy and achieve goals following the completion of the sale of Merchant Services Business and Healthcare RCM Business.
• Ability to successfully manage intellectual property.
• Impact of any potential impairment charges associated with fair-valued assets, including goodwill and intangible assets, in the event of a decline in the price of Class A common stock or otherwise.
• Ability to generate revenues sufficient to maintain profitability and positive cash flow.
• Competition in the industry and ability to compete effectively.
• Consolidation in the banking and financial services industry.
• Risk of shortages, price increases, changes, delays or discontinuations of hardware due to supply chain disruptions with respect to a limited number of suppliers.
• Risks related to economic and geopolitical conditions, including the impact of inflation and fluctuations in interest rates (including current elevated interest rate levels) and tariff and trade-related developments.
• Ability to keep pace with rapid developments and changes in the industry and provide new products and services.
• Reliance on third parties for significant services.
• Exposure to economic conditions and political risks affecting consumer, commercial and government spending, including as a result of budgetary and political pressures to reduce government spending, as well as any decline in the use of credit cards.
• Changes in the budgets or regulatory environments of public sector customers, primarily local and state governments, that could negatively impact spending.
• Ability to increase existing market share, grow within current public sector markets, and execute growth strategy.
• Ability to successfully identify acquisition targets, complete those acquisitions, and effectively integrate those acquisitions into services.
• Potential degradation of the quality of products, services, and support.
• Ability to retain customers.
• Ability to attract, recruit, retain, and develop key personnel and qualified employees.
• Risk of chargeback liabilities if customers refuse or cannot reimburse chargebacks resolved in favor of their customers.
• Risks related to laws, regulations, and industry standards, including ability to comply with complex laws and regulations applicable to the industries in which the company operates or to adjust operations in response to changing laws and regulations, such as the evolving legal, ethical, and regulatory landscape over artificial intelligence technologies.
• Impact of recent decisions of the U.S. Supreme Court regarding the actions of federal agencies.
• Impact of claims, litigation, and government investigations (e.g., PaySchools Litigation, S&S Litigation).
• Risks related to international operations, including potential adverse impact from Canadian governmental authorities reducing business with U.S. companies due to trade tensions.
• Indebtedness and ability to maintain compliance with the financial covenants in the 2023 Senior Secured Credit Facility.
• Ability to meet liquidity needs.
• Ability to raise additional funds on terms acceptable to the company, if at all, whether through debt, equity, or a combination thereof.
• Operating and financial restrictions imposed by the 2023 Senior Secured Credit Facility.

Future Outlook

The company expects to fund future acquisitions through a combination of cash on hand, operating cash flow, borrowings under its 2023 Senior Secured Credit Facility, and potentially through the issuance of equity and debt securities. The obligations under the Infinx TSA are planned to be complete in the first quarter of fiscal 2026, and obligations under the Payroc PSA are planned to be complete in the first quarter of fiscal 2029. The company is evaluating the future impact of the 'One Big Beautiful Bill Act' and new FASB ASUs (2023-09, 2024-03, 2025-06, 2025-11) on its financial statements and disclosures. The company also anticipates seasonal fluctuations in revenue, with stronger transactional revenue for education customers at the start of each semester and weaker revenue in summer months.

Management Comments

• We consistently have positive cash flow provided by operations and expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the 2023 Senior Secured Credit Facility will be sufficient to fund our cash needs as described above for at least the next twelve months and foreseeable future.
• Although we believe our liquidity position remains strong, there can be no assurance that we will be able to raise additional funds, in the form of debt or equity, or to amend our 2023 Senior Secured Credit Facility on terms acceptable to us, if at all, even if we determined such actions were necessary in the future.

Industry Context

StockSavvy.ai notes that i3 Verticals' strategic shift towards mission-critical enterprise software solutions for the public sector, following the divestitures of its Healthcare RCM and Merchant Services businesses, aligns with a broader industry trend of companies focusing on high-margin, recurring revenue streams within specialized vertical markets. The 8.4% growth in Annualized Recurring Revenue (ARR) suggests successful execution of this strategy, positioning the company in a resilient sector less susceptible to certain economic fluctuations compared to broader payment processing. The recent acquisition in the transportation market further solidifies its vertical market focus, a common strategy for FinTech companies seeking deeper market penetration and sticky customer relationships.

Comparison to Industry Standards

• The 8.4% ARR growth rate for i3 Verticals' continuing operations is a solid performance, especially within the public sector software space. For comparison, companies like Tyler Technologies (TYL), a leader in government software, often report recurring revenue growth in the high single to low double digits.
• The company's consolidated interest coverage ratio of 94.9x and total leverage ratio of 0.0x are exceptionally strong, indicating virtually no net debt and robust ability to cover interest expenses. This compares favorably to many industry peers, which often carry moderate debt levels to fund growth or acquisitions. For example, some payment processors or software companies might have leverage ratios between 2x-4x EBITDA.
• The significant decrease in net income attributable to i3 Verticals, Inc. (76.5%) and from continuing operations (68.9%) is a notable underperformance compared to typical growth expectations for software companies. This is largely attributed to specific adjustments and the impact of discontinued operations, rather than core operational decline, but still represents a substantial bottom-line contraction.
• The company's continued share repurchase programs, including the new $60.0 million authorization, are a common practice among mature, cash-generative companies. This is comparable to actions taken by established tech companies like Microsoft or Apple, aiming to return capital to shareholders and potentially boost EPS, though the impact here is overshadowed by the net income decline.

Legal Proceedings

• PaySchools Litigation: A class action complaint was filed on May 16, 2025, alleging unlawful practices related to fees charged for school lunch services. The plaintiff seeks unspecified monetary damages, restitution, disgorgement, attorneys' fees, and injunctive relief. A motion to dismiss is currently pending in the U.S. District Court for the Eastern District of New York.
• S&S Litigation: A petition was filed on June 2, 2021 (amended October 4, 2021) by the State of Louisiana and a putative class against S&S and other defendants. The claims relate to network remediation costs ($15.0 million by the State, $7.0 million by Sheriffs/Districts), return of purchase prices, and potential data breach expenses due to alleged inadequacies in cybersecurity practices. The case was remanded to state court on February 22, 2024, is in the discovery phase, and a class certification hearing is scheduled for March 31, 2026.

Related Party Transactions

• Tax Receivable Agreement: The company is obligated to pay Continuing Equity Owners 85% of certain tax benefits realized from future redemptions or exchanges of Common Units. As of December 31, 2025, the total amount due was $34.911 million, with annual payments ranging from $0 to $5.364 million over the next 22 years.
• Recapitalization Actions (January 23, 2025): The company contributed $21.396 million in cash to i3 LLC in exchange for 896,763 newly-issued common units, followed by a reverse unit split and retirement of 369,256 Class B common stock shares. This action increased the company's ownership in i3 Verticals, LLC by approximately 0.78% to 70.83%.

Stakeholder Impact

• Shareholders: Impacted by the significant decrease in net income and EPS, but also by the ongoing share repurchase programs which aim to return capital and potentially support share price. The strategic focus on public sector software could offer long-term stability.
• Employees: Personnel costs increased, suggesting continued investment in the workforce. The divestitures of Healthcare RCM and Merchant Services businesses would have impacted employees in those segments.
• Customers (Public Sector): The company's focus on mission-critical enterprise software solutions aims to provide more responsive and efficient services to state and local governments and related agencies.
• Creditors: The company has no outstanding borrowings under its revolving credit facility and maintains strong financial ratios (interest coverage 94.9x, leverage 0.0x), indicating low credit risk.
• Continuing Equity Owners: Beneficiaries of the Tax Receivable Agreement, receiving 85% of certain tax benefits. Their ownership interest in i3 Verticals, LLC decreased slightly due to recapitalization actions.

Next Steps

• Complete obligations under the Infinx TSA in the first quarter of fiscal 2026.
• Continue to integrate the recently acquired transportation market business, effective January 1, 2026.
• Reassess current estimates of performance relative to targets and adjust contingent liabilities to their fair values in subsequent reporting periods for the transportation market acquisition.
• Continue to evaluate the impact of new FASB ASUs (2023-09, 2024-03, 2025-06, 2025-11) on financial statement disclosures.
• Conduct a hearing on March 31, 2026, for class certification in the S&S Litigation.
• Execute the new $60.0 million share repurchase program, which terminates on the earlier of February 4, 2027, or when the maximum amount is expended.
• Continue to fulfill obligations under the Payroc PSA, planned to be complete in the first quarter of fiscal 2029.

Key Dates

Recommendation

While i3 Verticals demonstrates strong recurring revenue growth (ARR up 8.4%) and an exceptionally healthy balance sheet with no outstanding debt and robust financial covenants, the substantial decline in net income (76.5% consolidated, 68.9% continuing operations) is a significant concern. The company is undergoing a strategic transformation with recent divestitures and a clear focus on the public sector software market, which has long-term potential. However, the immediate impact on profitability, coupled with ongoing legal proceedings, suggests a period of transition and uncertainty. The new share repurchase program is a positive signal for shareholder returns, but investors should monitor the company's ability to translate ARR growth into improved bottom-line performance and resolve legal matters. A "hold" recommendation allows investors to observe the execution of the refined strategy and its impact on financial results before making further investment decisions.

Keywords

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