All right, we'll go ahead and get started here. Thank you very much this morning for for joining us to kick off the second day of the 2026 Morgan Stanley TMT conference. I'm James Fawcett, senior FinTech analyst and it's been taken vertical software analyst at Morgan Stanley, and I'm very pleased to be kicking off this morning with Clay Whitson See up or chief strategy officer of I3 vertical. So thanks for being here Before we get started here, a quick disclosure I need to read. Please see the Morgan Stanley Research Disclosure website at morganstanley.com slash researchdisclosures. So, 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 SAS or maintenance from old perpetual licenses and transactional revenues, and I'll include payments in those 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.

So when you talk about the different parts of public sector, et cetera, can you compare and contrast maybe 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 of course 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 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 and oh yeah yeah some of those things like in

education 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 and the public administration they they've got the leading fund accounting product and we have a cloud-based fund accounting product but it's generally for smaller applications got it got it got it and is there a difference to

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. But even their estimate of market share and market share is not all that easy. Yeah, it's tough in that sector. to determine uh even in that sector i think they estimate their market share at 10 percent which would put us maybe at one percent right right and so we do see them but not all the time usually it's local competitors who right grew up and knew a judge and have established a business over time in a particular state got it got it and then one of the the one 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 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.

we do have a public safety group and it is a good crossover with courts and the records police keep right just the records the courts keep so I do see it as a logical extension and and we're pushing more into public safety it's definitely the entire public sector market is underserved and outdated so

it's just a long runway for yeah like hyper fragmented it seems like like you said is that a lot of these systems were custom built by somebody local a long

time ago well in laws can vary right locally in Louisiana they have a remnant of code Napoleon 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 so 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?

is? Well, I do think we'll stick with our five markets now. When we first went public, we had a much broader focus, as you know. But we self-source all of our deals. We work very hard on that, and 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. 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 want to find a good home for the next generation. And so it's going to be hard to believe, but it's not all about the money when they reach a certain stage. So, yeah, the growth profiles we look for are the things we like, are founder-led, you know, no outside money usually. It's preferable if the founder wants to keep working. They can work their own. If they want to work 10 hours a week, that's fine with us. That 10 hours is very valuable. Financial profile, growing over 10%, recurring revenues. We prefer cloud SaaS, of course. Good margins, that shows defensibility in the business. Yeah, so that's low interest.

So 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 to 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? And, you know, over what time frame does that usually take place?

Well, it depends on the acquisition target. target but the one we just did was very quick you know if they're already on AWS or Azure it's pretty seamless for us to integrate that okay if their products are on-prem it's a bigger lift of course tech stack is different than ours it's a bigger lift but you know the one we just bought is cloud-based and it's Azure I I mean, it's a .NET stack, and so it was very easy to fit in.

Got it. And then from an ongoing basis, how do you handle service and maintenance and maintaining the code base of the acquisitions? And then do those ultimately remain kind of standalone just because of the way the customer sets are, or do you end up with kind of a – are you trying to push towards homogeneity of code bases ultimately?

Well, we're organized by product, the five products I went through, or market, the five markets I went through earlier, and they report up to a common person. We have, whose name is Chris Lazor, we have a CTO, one CTO and one tech stack and one horizontal payment stack, which is a payback model you'll be familiar with. And so we do try to harmonize them. Education might be a good example. we've had it the longest since 2014 we originally had four different code bases there we're now in the down to two one is dotnet one is PHP okay and we're pushing those together over the coming years but we go about it slowly so that's a ten year time period to go from four to two our customers not only in education but the public sector in general don't like change right and so we're we try to accommodate them as much as possible but it does come a time where in education we got down to 25 customers district school district and we told them a year in advance this time next year we're gonna have to turn off the switch so 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, sometimes it can be daunting, right? Yeah. Right, right, right. So speaking of

acquisitions, can you just recap for us a little bit what you're pacing or how many companies and revenue you were able to acquire in 25 and then how are you thinking about that for 26?

25 were just one in August of 25, and in 26, there have been, and so that's three over the past, and they were gems. So I think you'll see us acquiring less frequently, but we really, really like the ones we do decide to buy. And 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. So 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. And I think that acquisition was effective January 1st of this year. Can you walk through, and you kind of alluded to a few things that you like, but what did you like about that asset, whether it 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, and we have not been able to compete with them. And RFPs, states are modernizing this way. Certain states mandate, I think maybe 20, they have maybe 20 states today, and they mandate for the insurance companies to open up their files. And so this company has integrations with all the insurance companies, big and small, in these 20 states. And in the old days, a policeman would pull you over and discover that your insurance had lapsed. And that's the only way they knew that. Now, if an insurance does not get renewed, 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. And you said, so 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 and four Canadian provinces. But there might be some overlap, but, yeah, it really helps. And 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.

And then what's the cross-sell opportunity for something like that?

Well, they do zero payments today. They just let the states have whoever their normal payment provider might be at the time. And their new offerings, they're bundling our payments with their software. And so 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.

They earn more in that state off payments than they do selling their software and all these others.

Oh, really?

So it's a very good payment opportunity. Another is printing. They have to print bills as part of collecting, and they outsource that, and we've got a better deal for that. But those are the most immediate.

And 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. Got it. Got it. That's really fascinating. And then on acquisitions, and their margins are 50%.

Wow. And 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 a thinner margin than SaaS, but it's an incremental revenue stream. it's an additional moat if you believe the AI commentary these days so it is a little thinner margin but they're on the high end of our margin profile right

right anyway and as you said it's incremental just the same so in the M&A marketing obviously you guys are always well engaged there how would you characterize the valuation and seller expectations today versus call it a year or a year and a half ago? And where do you see the best opportunities? Have those changed at all with those expectations?

Well, I think, you won't remember this, but I think we had this conversation a few years ago.

Oh, I remember. That's what I'm asking.

Okay, okay, okay. And it's surprising how disconnected, to me, private companies' expectations are with what's going on in the public market. You know, during COVID, after COVID, you know, all types of, you know, the payments market gets whacked, the software market gets whacked. But for these founders, it's a life event for them. They've been running a company since they got out of college. friends, maybe it's 30 to 40 years, and they're trying to think about retirement, the next generation. They want to take some chips off the table, but maybe they're not completely ready to retire. They want to find the right home. They, of course, want a fair valuation, but if they don't like what's going on in the public market this year, they're just going to wait until two or Three years from now.

Got it, got it. And so do you find people doing it, 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? 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 and i'm sure to your point

is like as they're looking at a life event they're kind of also having their own heads like what they kind of need or want to to be able to move on etc yeah yeah that's interesting i mean that they're

all playing a long game right it's kind of more about timing to them than it is about what's going

on this year, right? So 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? And 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. And so that's helped SaaS growth and will for the remainder of this year and next year. So that's part of it. We sell very few perpetual licenses anymore. We went through a SaaS transition about two or three years ago, and now we've kind of plateaued at about five to seven million of perpetual license sales per year, and that'll just kind of go sideways, I think. Got it. But as far as what's driving SaaS growth organically, our NRR, our net revenue retention, is 104%. Right. And so that includes cross-sell, price increase, et cetera. It does not include new logos. Obviously, yeah. And so 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. and so while our overall company price increase might not get to an inflation level within SAS it might get to an inflation level and then there's some cross-sell but most of our cross-sell is more transactional revenues like payments or data or revenue cycle then then additional software products but but there are some.

So 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? And I guess as part of that, where do you see the biggest leverage to increase payments and transaction attached within the installed base?

Well, so 80% of our revenues are recurring. And within that, the lion's share is either software or transactional revenues. Those are pretty equal proportion. And with transactional, I am lumping in payments. And in software, I'm lumping in maintenance. But those are fairly equal proportion. And I think they'll probably, SAS is growing faster right now. It'll probably come to the mean over a few years, and the two will grow in equal proportion. We love the transactional revenues. It's really helpful for state and local budgets. We're revenue sharing with them. And so our CFO, Jeff Smith, uses an analogy I like. A state needs a road to the airport. 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. And so that's sort of a transactional model and it's easier on budgets. It is a good moat coming back to that. But getting back to the 80-20, the recurring portion will grow faster than the 20%, which is professional services, a smidgen of equipment, and some license, perpetual license sales. But we will have good years in that 20%. So if I had to bet, you know, our professional services this year came down from $40 million to $31 million as our current projection. If I had to guess, I'd give it equal odds that it goes up, not down next year.

It's not up. So 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. Because that customer prefers a perpetual license. They can put it on their balance sheet. They're allergic to SAS or any other monthly payments because they have to build that into their pricing for their citizens, which gives them political blowback.

Right.

And so they like professional licenses, which come with a lot of professional services. And we have some big customers in utilities. And if we have a good year in 25, that gives 26 a tough comparison.

Right, right, right.

A low 26 gives us a good comparison in 27.

A tough one year. No, obviously, obviously. So back on this 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 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 came from that, so the remainder would be organic.

Got it, got it, got it. That's really helpful. So one of the key questions that we get on whether it be I3 or across a lot of the other companies we cover are questions around the end market. And I 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 of justice, utilities? Just like how would you characterize the demand environment?

Well, justice is our most successful market currently. Currently, we just won the state of West Virginia, which will maybe turn into our largest project or largest revenue customer over the next five years. That was a big win. We're hopeful for some more wins in that area. And then we have just, it's our best cross-sell area, too. transactional revenues not to change subjects but was a big part of our West Virginia win okay and it's so justice is one education has just been a great business for a long time it's compounded EBITDA at 15% a year so Wow 2014 yeah and it's still growing double digits so that you know it's all small base heads but it's just a real steady run. So 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, but we do think it'll bounce back in 27 and beyond.

Got it, got it, got it. And then another question that we have, especially 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. I will say a general comment that we're moving slowly up market, like West Virginia would be an example of that, before that, Louisiana. And that means more RFPs. We used not to even, three or four years ago, we didn't even enter RFPs because we were just a feature and we were never the lead horse. And so 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. But when you win, the rewards are big, like West Virginia.

So talking about 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, and 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.

And they don't want mud on their face, like that happened with Texas Utilities a couple of years ago or Southwest Airlines. and so their systems are getting so old and their predecessors kicked the can down the road and there does come a time where they have to deal with it they've also got a manpower shortage that's becoming more and more acute over time you can imagine a sheriff's office who has one IT person he gets poached by Amazon they've got their software in a server in the closet there's no documentation right it takes them six months to fill the job that's untenable or that's not a model which yeah and last and so they need to outsource this stuff we are the answer to all this we and our peers but 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. So let's talk about, so I think that's a great

secular backdrop. What about the, how do you think about public sector budget risk over the next 12 to 18 months? And what are kind of the leading indicators you watch as to the direction of

public sector budgeting? Well, property, so, you know, we have zero federal exposure. Right. States run on income taxes if they have them, property taxes, sales taxes. So 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. But right now, the state and local budgets are all pretty flush. I mean, the property market has property taxes. A lot of states have been jacking them way up, as I'm sure you're aware. So that's left healthy budgets for the foreseeable future.

Got it, got it. And then let's talk about your profitability. Adjusted EBITDA margins in the fiscal first quarter of 2026 were around 25.8%, which we're down a little bit year over year. Can you walk through the main drivers of that delta, whether that be hosting costs, investments, and how do you expect margins to trend over the rest of fiscal year 26?

Well, we made a large investment in justice, and that's over 50 people, and also in utilities. And so we're feeling those effects. Those did not really align timing-wise with the revenues we expect from them. But West Virginia is a good start, and we think that'll happen for us in utilities also. I think we did quantify the Justice investment as $700,000 per quarter. Hosting had more than a million-dollar increase this December quarter versus the prior December quarter. And that's just variable usage going up. Now, we do have one large customer that we pass through hosting to, and so we do pass it on, but it's a 0% margin, if you will. Anyway, that has something to do. And then the last thing is professional services declined $2.6 million. Now, that's low margin, but we haven't been able to pivot our headcount immediately to match that revenue trend got it and so do you think though your long-term

target you've talked about in the past of 50 to 100 basis points of annual expansion is that still the right way to frame it over the medium to long yeah

and and I think we'll do that in this year in 26 the acquisition that was effective January 1st is over 50% margin we do have some headcount adjustments we're making you know with a lag in regards to our professional services declining so I think we'll do that this year and we expect to do that

in future years also so last couple minutes here clay to wrap up now that you're roughly 18 months past emergent services divestiture and and nine months past the healthcare RCM divestiture you walk through any unexpected learnings from operating as a more focused public sector software company, whether that be investor reactions or go-to-market, capital allocation, just kind of how are you looking at maybe some of the things that 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 between acquisitions, and I'm sure you're aware we've been making repurchases Yep. So it's kind of a, we're able to do both ends there. I mean, the payment business was very steady, but it was lower margin, lower growth. Same with healthcare. So that's been nice to not have those mixed in with our results. We do have larger customers in public sector. And now that our base is smaller, they can create these swings.

Yeah, more volatility there a little bit.

more, but it's allowed us to knit together a lot easier and better and become more cohesive internally because our focus is just, you know, we're roughly half the size we were. Right. And so 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 in public sector, as you said. looks to be a very strong growth opportunity for the company. Thank you very much.