IIIV · Research
i3 Verticals Borrowed to Retire a Quarter of Its Class a Stock While Growth Slowed to 3 Percent
A founder-led public sector software company that drained its cash for buybacks, pays insiders under a tax agreement, and lets the founder's vote rise as it shrinks.
- Owner cash after capex, capitalized software and all stock pay
- 9.1% of revenue
- Class A stock retired in nine months
- 23.9%
- Gregory Daily combined voting power
- 23.5%
1. Our call: Hold off, because the buyback is outrunning the business
Our call: Hold off, conviction 3 of 5. i3 Verticals, Inc. sells cloud software and payment tools to state and local governments: courts and public safety, public administration, utilities, transportation and schools, with installations in all 50 states and Canada [1]. It is a Delaware company based in Nashville, Tennessee, so this is a U.S. pick [1].
It is a small company, and we chose it for the control setup rather than size. Founder Gregory Daily is chairman and chief executive, holds 83.0% of the Class B stock and 23.5% of combined voting power, and the company sits on top of an operating LLC whose other owners collect 85% of certain tax savings under a tax receivable agreement [3].
Three directors' affiliated entities received most of those payments [3].
Growth has stalled. Revenue from continuing operations rose 3.2% to $163.3M in the nine months to Jun 30, 2026, and the fiscal 2026 revenue outlook was cut to $216.0M to $221.0M from $221.0M to $229.0M [5].
Yet the company spent $136.9M buying back Class A stock in those nine months, about 9 times the owner cash it produced, our calculation [2].
We measure owner cash as operating cash flow, less capital spending, less capitalized software, less all stock pay. For the nine months to Jun 30, 2026 that was $14.9M, our calculation
2. A real vertical software business, with a payments layer
| Metric | Value |
|---|---|
| Annualized recurring revenue | $174.1M in the third quarter of fiscal 2026, up 8.3% [5] |
| Adjusted EBITDA margin | 26.7% for the nine months to Jun 30, 2026, against 27.3% a year earlier [5] |
| Stock pay | $14.9M in nine months, 9.1% of revenue, our calculation [2] |
| Recurring share of revenue | About 82% of annualized third quarter revenue, our calculation [5] |
| API quality | 2 of 5, our scoring: products are sold as finished applications to agencies, not as interfaces others build on [1] |
| Toll-gate score | 1 of 4 pass, 2 partial, 1 fail (section 2b) |
2b. i3 Verticals holds the government record in narrow lanes
A gate is valuable when its owner holds a record others must check and can price what passes through. i3 Verticals runs court case files, utility billing, motor vehicle and transportation services and school payments for agencies that rarely switch systems, which is a real record [1][2].
| Test | Result | Evidence |
|---|---|---|
| Owns the record | Pass | Court, utility billing, school and statewide transportation systems hold the case, account and payment record for the agency [1][5]. |
| Owns the connection | Partial | It links citizens paying fines, bills and fees to the agency, but each market is a separate product line bought by acquisition [1][2]. |
| Prices close to outcomes | Partial | Transaction based software revenue and payments revenue rise with citizen payments, but much of the rest is fixed fee software and services [2][5]. |
| R&D on the gate vs features | Fail | Capitalized software spending fell to $8.2M in fiscal 2025 from $12.0M in fiscal 2024, and the latest market was bought for $60.0M in cash rather than built [1][2]. |
The verdict is one pass. The record is sticky because a county court or a state motor vehicle office does not swap systems quickly [1].
But the company grows by buying markets, and the research spending on its own platform has shrunk since the sales of the merchant and health care businesses [1][2].
3. Growth after two sales
The company of today is what was left after two sales. It sold its merchant services business to Payroc on Sep 20, 2024 and its health care revenue cycle business to Infinx on May 5, 2025, and both are now shown as discontinued operations [2].
What remains is public sector software and the payments tied to it [1].
Third quarter revenue rose only 2.2% to $53.1M [5]. Mr. Daily said results came in below expectations because of ongoing weakness in certain non-recurring revenue streams and implementation delays [5].
Recurring revenue held up better, with annualized recurring revenue up 8.3% to $174.1M [5].
The fiscal 2026 adjusted EBITDA outlook was cut to $57.0M to $60.0M from $61.0M to $65.0M [5]. At the midpoint that is a cut of 7.0%, larger than the 3.1% cut to revenue, our calculation [5].
4. The transportation bet
On Jan 1, 2026 the company bought a business in its transportation market for $60.0M in cash plus contingent payments valued at $7.6M [2]. Of the $68.9M of assets acquired, $33.8M was goodwill and $26.9M customer relationships, with only $6.6M of capitalized software [2].
Management announced the go-live of four material statewide services in transportation in the third quarter and said they should help re-accelerate recurring revenue growth [5]. That is the one clear growth lever in the filings [5].
The fourth quarter report will be the first full read on whether those statewide services lift recurring revenue [5]. If they do not, the company will have spent its cash on stock and a deal while organic growth stays in low single digits [2][5].
5. Profit is helped by a one-time gain
Net income from continuing operations rose to $9.2M in the nine months to Jun 30, 2026 from $4.1M [5]. The cash flow statement shows a $9.9M gain on investment in that period, larger than the whole of net income from continuing operations [2].
Without that gain, continuing operations would have been close to break-even, our reading [2]. Depreciation and amortization of $21.9M and stock pay of $14.9M are the two large costs that adjusted EBITDA leaves out [2].
Adjusted EBITDA margin was 25.1% in the third quarter, up from 24.5%, but 26.7% for the nine months against 27.3% a year earlier [5]. The margin is steady, not improving [5].
6. Owner cash turned positive in 2026, but it is small
| Period | Operating cash | Capex | Capitalized software | Stock pay | Owner cash |
|---|---|---|---|---|---|
| Fiscal 2023 | $37.2M | $4.2M | $12.2M | $27.9M | Minus $7.1M [1] |
| Fiscal 2024 | $48.4M | $3.0M | $12.0M | $26.3M | $7.1M [1] |
| Fiscal 2025 | $5.7M | $1.9M | $8.2M | $18.3M | Minus $22.8M [1] |
| Nine months to Jun 30, 2025 | Minus $8.3M | $1.5M | $6.3M | $15.1M | Minus $31.2M [2] |
| Nine months to Jun 30, 2026 | $38.4M | $2.0M | $6.5M | $14.9M | $14.9M [2] |
Owner cash is our calculation from the cash flow statements, which include discontinued operations in the earlier years [1][2]. Fiscal 2025 was hit by taxes on the business sales: cash paid for income taxes was $35.1M in the nine months to Jun 30, 2025 against $3.2M a year later [2].
So 2026 is the cleanest read, and it shows a business producing about $14.9M of owner cash in nine months on $163.3M of revenue [2][5]. Stock pay is almost exactly as large as owner cash, which means owners keep about half of what the business makes after capital spending, our calculation [2].
Payments under the tax receivable agreement and tax distributions to LLC members sit below operating cash, in financing [2]. They were $2.5M and $2.2M in the nine months to Jun 30, 2026 [2].
7. Capital: borrowed buybacks and an empty cash line
Cash and cash equivalents fell to $2.6M at Jun 30, 2026 from $66.7M at Sep 30, 2025 [2]. Long-term debt rose to $114.3M from zero, after $227.8M of revolver borrowing and $113.6M of repayments [2].
The money went to stock. Repurchases of Class A stock, including excise taxes, were $136.9M in nine months, against $37.6M a year earlier [2].
Class A shares outstanding fell to 18,241,855 from 23,983,125, a drop of 23.9%, our calculation [2]. Mr. Daily said the company had bought back more than 20% of its shares since October 2024 [5].
On May 12, 2026 the board approved a new $100M repurchase program running to May 11, 2027, after the program approved on Feb 5, 2026 was fully used [6]. On Oct 9, 2026 the company signed a new $350M senior secured revolver with JPMorgan Chase Bank as agent, replacing the May 8, 2023 credit agreement [4].
The new facility also allows extra term loans or revolver commitments of the greater of $100M and 100% of trailing EBITDA [4]. Pricing steps up with leverage, from 1.50% over SOFR at 2.00 or less to 2.50% above 3.00
8. The main risks are slow growth, leverage and the tax agreement
Growth. Two revenue cuts in one year, weak non-recurring revenue and implementation delays are signs that public sector sales cycles are hurting [5].
Organic growth near 3% does not support borrowing to shrink the share count [5].
Leverage. With $2.6M of cash and $114.3M drawn at Jun 30, 2026, any further buyback is funded by debt [2].
The new revolver gives room, but owner cash of $14.9M in nine months does not cover much repayment, our calculation [2][4].
Tax agreement. Long-term tax receivable agreement obligations were $32.2M at Jun 30, 2026, and the proxy says future payments could be substantial [2][3].
Those payments go to the continuing LLC owners, including insiders [3].
Litigation. A putative class action filed May 16, 2025 in New York over PaySchools, and a suit in Louisiana by the East Baton Rouge Parish sheriff over network remediation costs, are both pending
9. Management wants to be the public sector software consolidator
The 10-K describes the mission as helping state and local governments serve their constituents efficiently, and the strategy is to grow within its public sector markets and buy companies [1]. Mr. Daily has done this before: he co-founded PMT Services in 1984, sold it to NOVA Corporation in 1998, and founded iPayment in 2001 [3].
Clay Whitson, chief financial officer from 2018 to September 2024, is now chief strategy officer, and Geoff Smith is chief financial officer [3]. Rick Stanford is president and Paul Christians chief revenue officer [3].
Mr. Whitson was also chief financial officer of iPayment under Mr. Daily from 2002 to 2010 [3].
That record is a selling business, not only a buying one. The company sold two business lines in eight months and turned the cash into buybacks, and Mr. Daily's stake gives him a large say in any next sale [2][3].
10. Superintelligence is a feature here, not the driver
The filings do not tie revenue to superintelligence tools, and growth depends on statewide contracts, courts and utility billing [1][5]. We see superintelligence as a risk for implementation services and a tool for agency staff, not a growth line [1].
If agencies adopt automated case handling and billing, the vendor that holds the record can sell it, but only if it spends on its own platform; capitalized software fell 31.7% in fiscal 2025, our calculation [1]. That supports the Fail on research spend in section 2b [1].
11. A founder's Up-C, a tax agreement and a board of old partners
Vote control. Class A and Class B stock each carry one vote and vote together [3].
Class B is held by the continuing owners of i3 Verticals, LLC, and each LLC unit can be exchanged for one Class A share or cash [3]. At Jan 2, 2026 there were 22,609,537 Class A and 8,381,681 Class B shares [3].
Gregory Daily held 6,955,605 Class B shares, 83.0% of the class, and 23.5% of combined voting power [3]. Directors and executive officers as a group held 92.0% of Class B and 32.9% of the vote [3].
Because buybacks retire only Class A, Mr. Daily's voting share rises as the company buys stock: on the Jun 30, 2026 count it would be about 27.3%, our calculation [2][3].
Outside holders. T.
Rowe Price Investment Management held 14.0% of Class A, The Vanguard Group 8.2%, BlackRock 7.8% and Geneva Capital Management 7.4%, all through 13G filings [3]. A search of EDGAR full-text filings found no Schedule 13D naming the company, and we know of no activist
12. The questions we would ask management, and the calls we are tracking
Question one: why borrow to buy stock when organic growth is near 3% and cash is $2.6M? [2][5]
Question two: who on the board negotiates tax agreement terms when two audit committee members' entities are paid under it? [3]
Question three: how much of the $9.9M gain on investment will repeat? [2]
Question four: when will the four statewide transportation services show up in recurring revenue? [5]
Question five: does the board plan to sell the company, as Mr. Daily has done before? That answer sets our conviction.
Prediction one: fiscal 2026 revenue lands within the $216.0M to $221.0M outlook (70%). [5]
Prediction two: Class A shares outstanding on the next 10-K cover are below 18.0M (55%). [2][6]
Bottom line: a sticky government record, run for buybacks
i3 Verticals holds real government records in courts, utilities and transportation, but growth is near 3%, owner cash is modest and stock pay eats about half of it. The company drained its cash and borrowed to retire nearly a quarter of its Class A stock, which also lifts the founder's vote.
We would change our mind if transportation lifts recurring growth above 10% and buybacks slow to what owner cash can pay for.
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