The recent Q2 2024 earnings call for i3 Verticals (NASDAQ:IIIV) might have seemed like a routine affair to most, filled with discussions of revenue transitions, margin improvements, and potential divestitures. However, beneath the surface lies a subtle shift, a whisper of something monumental brewing that could reshape the company's future. While analysts focused on the headline figures and the ongoing exploration of selling the Merchant Services business, a different story is quietly unfolding: the emergence of a software powerhouse.

i3 Verticals has long been recognized for its strength in integrated payment and software solutions, serving both the public sector and healthcare markets. But the narrative has often been overshadowed by its Merchant Services segment, leading to a perception of i3 as a payment processor with software add-ons. This perception, I believe, has resulted in a persistent undervaluation of the company's true potential.

The Q2 transcript, however, hints at a decisive shift in focus. The potential divestiture of the Merchant Services segment isn't simply a financial move; it's a strategic declaration. i3 Verticals is signaling its intention to shed the skin of a payments-centric company and embrace its destiny as a pure-play software and services provider.

This transformation is further underscored by the specific language used in the transcript. Clay Whitson, the CFO, didn't merely mention a transition; he declared it a "transitionary year" for the company. This terminology suggests a deliberate and planned shift, not simply a reaction to market forces.

Projected Growth of RemainCo

While overall revenue growth for fiscal year 2024 is projected to be modest, the transcript outlines an expectation of "high single-digit revenue growth beginning in fiscal year '25" for the remaining company (RemainCo) after the divestiture. This suggests that the software and services segment is poised for accelerated growth, freed from the constraints of being tied to a payment processing entity.

Reference: https://seekingalpha.com/symbol/IIIV/transcripts

"A crucial indicator of this software-centric future lies in i3's continued focus on recurring revenue streams. Despite the lower revenue figures from one-time software licenses this quarter, the company is actively replacing those with recurring revenue sources such as SaaS. This strategic decision, while impacting short-term results, lays the foundation for a more predictable and sustainable revenue model, characteristic of successful software companies."

Revenue Breakdown

The following chart illustrates a hypothetical breakdown of i3 Verticals' revenue, highlighting the increasing proportion of recurring revenue sources.

Reference: Created based on information from company filings and earnings calls.

The confidence in RemainCo's future growth is not unfounded. The transcript highlights several key tailwinds: the Manitoba drivers' license project returning to a normal cadence, continued momentum in the utilities market, and the completion of the SaaS transition. Each of these factors points towards a robust pipeline of recurring revenue growth in the core software verticals: public sector, education, and healthcare.

This potential for significant revenue growth and margin expansion paints a very attractive picture for RemainCo. And this is where the hidden opportunity lies. With a cleaner story, a laser focus on high-growth software verticals, and a strong balance sheet, i3 Verticals, post-divestiture, could command a significantly higher EBITDA multiple than it currently enjoys.

While the market has historically valued i3 Verticals as a payment processor, the divestiture could trigger a re-evaluation, leading to a potential surge in valuation. Investors might finally recognize the software giant hiding in plain sight, a company positioned to capture a significant share of the rapidly growing public sector, education, and healthcare software markets.

Beyond the financial figures, the transcript offers insights into a company undergoing a strategic metamorphosis. The internal realignment within the verticals, the strategic hires in product development, and the focus on web-native configurable applications all point towards a company building a foundation for sustainable software-driven growth.

This metamorphosis is further exemplified by i3's recent venture into the world of mobile policing. They acquired a company specializing in mobile solutions for law enforcement agencies, a strategic move that aligns perfectly with their public sector focus and showcases their commitment to cutting-edge technology.

The i3 Verticals of tomorrow might look vastly different from the company we see today. The potential divestiture of the Merchant Services segment could be the catalyst that unlocks the true value of its software business, revealing a hidden giant ready to take its place among the leading software and services providers. While the market might be focused on the short-term noise, those who listen closely will hear the whispers of a software powerhouse emerging, poised to rewrite its story and redefine its future.

"Fun Fact: Despite its growing focus on software, i3 Verticals still processes billions of dollars in payments annually! This vast transactional volume reflects the company's deep roots in the payments industry and its continued ability to serve a wide range of customers."

Reference: Created based on information from company filings and earnings calls.