Verra Mobility Corporation (VRRM) Earnings Call Transcript & Summary

I believe we are now back. Welcome back to the Morgan Stanley Payments and FinTech Symposium. I'm Steven Wald, and I'm joined by Verra Mobility this time. We've got David Roberts, the CEO; and Tricia Chiodo, CFO. Welcome, guys. Thanks for joining us.

Yes. Glad to be here.

Yes. Thanks for having us.

So before I begin, I just have to read that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Okay. So maybe a good place to start with Verra, a lot of people have definitely ramped up on this name over the last year or so. And you guys ran us through during earnings that you guys were sort of outpacing the broader areas you're serving, whether it's broader road volumes or the rental car industry through April. Could you just remind us where we were through April and what May and maybe early June has looked like on both your commercial toll side but also your Government Solutions photo enforcement side of the business?

Sure. So we said this, so we had a really nice Q1. And then in April, our Commercial Services business, which is closely tied to the rental car industry, was down 64%. That, in light of the fact that our underlying customers that we were serving, were down 80%, so we still fared fairly well within the month of April. Our Government Solutions side of the business was actually flat on service revenue and continuing to grow on its product revenue side. So while we've seen pressure in our Commercial Services business, the Government Solutions business has continued to be strong with -- as we continue to roll out programs for New York City.

That's very helpful. Maybe just starting on the government side more broadly. That looks like that's a broader resilience and perhaps, it hasn't had to do necessarily with open states versus closed states. I even saw you guys put out a video reminding people to drive safely, almost a reminder that the more people are flagrantly speeding or violating traffic laws, you're actually earning more. But I'm just curious what you're seeing, whether it's on that side but more focused on the toll side in terms of how much is being driven in terms of the rebound or the improvement since April from open states or opening states versus closed states and how stark is the difference in terms of what you're seeing on your side of the business.

So from -- so what we see, we're monitoring a lot of different things on the tolling side of the business. So we're looking at -- we can actually see the rental agreements that are opened and closed by our 2 largest customers. We're watching TSA travel. So we are very much aligned with what's going to happen in more of the leisure travel industry and definitely more domestic than U.S. We're seeing upticks that are coming from the TSA and a few little upticks from the rental car companies. But I think it's going to take a little while. I think we're sort of going to bump along at the bottom of this cycle for a little bit. Although then, we have news like American Airlines came out and said that they've been operating at 20% capacity from the prior year and that they expect in July that they'll be at 55%. So there's some good news on the horizon for what may happen with volumes. And then on the government side of the business, it's really about when do schools open again. So if schools are geared to open up in this fall that will do well for our business. It impacts our school bus stop arm program, which is currently idle. And some of our municipalities that operate speed enforcement, school zones have them turned off while school isn't in session. But that's not all of them. New York City still is operating its program, and a few others around the country are still operating their school zone speed. So I think we'll see upturns, but probably as we move into Q3.

Yes. That's a perfect segue to my next question, which is as we go into Q3, and like you said, levered a lot to leisure travel, and that is the busy season for it. Are there any indications so far to you or even a notion that you have that you're willing to sort of say, "Yes, that's what we think is going to happen," in terms of behavior shift on the tolling side, where people would just opt to drive and use private vehicles in place of airplanes? Obviously, the airlines are improving, but they're off of a very low base. And you said it sort of hums along the bottom here. But is there any suggestion so far from the rental car side that people are making even a near-term behavior shift? And maybe on the government side, too, any indication of police or local authorities looking to opt out of as many in-person traffic stops and use more cameras in place of that?

Yes. It's a good question. I think one caveat that Tricia and I use in these, because -- when we get asked these questions, is we don't want to play armchair economists because it's very difficult to sort of make broader predictions. But things that you could suppose that will happen on the context for the commercial business. So one, there -- you would anticipate that things like shorter -- where people used to take shorter flights, they may opt to drive. That would be an area where you might see an uptick over the long term. Another area would be instead of people may have an aversion to using cabs or limos or Ubers or Lyft because of cleanliness, and the rental car companies have actually done a pretty nice job of advertising the way in which they're cleaning vehicles, so that may be an uptick. So for vacationers, they may choose to rent a car versus flying as well. So there are some potential trends. But I would say right now, it's just very, very early. We're working off such a low floor that it's -- any uptick would be hard to allocate to any one sort of change in behaviors. On the government side, well, I think over the long term, you will see a positive trend in the photo enforcement more because of, one, the revenue generation capability; and two, the -- it is -- it does act as a force multiplier to keep police away from circumstances that might cause harm. I think it's way too early as municipalities are dealing with so many other issues right now. This probably isn't priority #1 on their plate. So we'll probably start to see that and have more conversations related to that as we head into the back half of the year. But I would say that in general, those contracts have been very resilient, and we certainly find a lot of support from the customers that we do have.

That's very helpful. Can we -- let's shift into the businesses individually for a second here. So commercial, obviously, you provided that tolling is the main driver of that segment for the main rental car businesses, and you're sort of the only player -- you're the only game in town here. And you've typically outgrown that industry, so I'm curious -- and you've done so throughout the trough of this. I'm curious how you see that coming back with the industry. Should we expect that there is -- outpacing should continue at or similar to the level of its outperformance on the swing -- on the upswing? Or would that closely resemble the rental car rebound over time?

I think we're going to be tied on the rental car side to the rebound for a time period. And just because if we're going to differentiate through penetration, meaning that our product is just penetrating into more of the rental agreements, in order for it to be meaningful for us, there has to be a high enough volume of rental agreements to make that differentiation. So I think what you're going to see is as we sort of are on the uptick, we will outpace the rental car companies or, I should say, we won't fall as deeply as they do. But that's less about us penetrating into having more rental agreements with our program than not. It's more along the lines of that we also serve direct fleets, which didn't fall as far. So direct fleets although had declines in their overall movement, it was far less than the 80% declines we saw in the rental car company. So I think you'll see that spread again, but I think it will take a little while for us to get back there to where we're outpacing their volume.

Understood. And maybe just a little bit more high level here on the business. One of the questions that I most commonly get about you guys is, well, couldn't you just be disrupted by some other software also coming in if people are willing to spend the money? But from our discussions, it sounds like the moat is a little bit tougher to climb than that. I guess I'm curious if you could just walk through, aside from just having the contracts out as far as Avis in 2025, what are the main few differentiators for your product that would be very challenging for someone else, whether it's a rental car company? Obviously, they're out dealing with their own issues right now, but any other party to come in and try and compete with you?

Yes. It's a great question. I think what people need to understand is that the level, while on the surface, when we describe what we do, it seems relatively straightforward and sort of imitable from an outside-in perspective. But when you look -- and as is the case with many other businesses, when you sort of pull back the coverage, you recognize there's a level of complexity here that is nontrivial. So when you think about the scale and scope of what we do, you have to consider that there isn't a single technology that can -- at least today, there's no single technology that can come and disrupt this because the toll authorities act differently, and they have different decision criteria around the way they manage accounts. We've gone through the time, effort and energy to integrate with all the toll authorities, which is not something that you can do. There's not one that you can do and get all of them. You actually need to speak to all of them. And that took a long time. So those integrations are important. And it would take a long time to build, even if the toll authorities would be willing to do it. Number two is, we do a fair amount of what I would just call sort of operational or logistics support as well, which is we're procuring the transponders, we're -- we design the boxes that they go in, we're putting them into the vehicles at the airport locations, we're making sure that we have an asset -- a proprietary asset management system that we're using that integrates back to their system, so we can make sure that the right transponder is on the right vehicle. We do marketing support and training for the sales counters for some of the brands. We also have a call center. So there's a fair amount of operational excellence that has to go underneath this alongside highly customized and integrated technology system. So I think from a -- we've always believed that the rental -- we -- our goal is to serve our customers at the highest point of their need. And by doing so, they wouldn't have the inclination or the desire to try to do it themselves because we could do it so well and we scale across several brands versus just one. And two, we think that the things that I just listed make it difficult for competitors to come in, especially in a world where they would be bidding on basically one -- hoping they could win a single contract, and they have to build a lot of technology in advance of that.

That's super helpful in terms of describing the differences. And it brings me to the next question I had, which is you said you scale across different brands, which effectively allows you to serve pretty much the entire market at this point or at least material all of the market. So with Hertz having filed for reorganization, I'm curious, wonder if you could just walk us through and remind those who aren't as familiar, what that reorganization means logistically for your relationship with them and why you're able to continue to operate so long as they're in operation. And then separately, how the displacement of demand into other brands would simply mean you're just earning that revenue from a different brand versus just losing it entirely.

Yes. So if you think about it, Hertz, Avis and Enterprise make up approximately 90%, 95% of the total rental car vehicles in the United States. They -- given Hertz's bankruptcy, they are still in Chapter 11, which means that they're going to continue to operate. And we would be considered a critical vendor to them. And so we'll continue to operate alongside them. So as people rent cars today for Hertz and rentals, we're still performing the services that we did, although obviously, at a less volume than we did previously. You would anticipate that they're going to continue to do that going forward. And if something in the worst-case scenario happened to Hertz or one of the other rental car companies, as the demand would pick back up, it would be shared by the other 2 of the big 3, so to speak, as well as some of the others that are out there that we also support as well. So the good news is that if that were to -- if that demand were to dissipate, we would have a good chance of picking up much of that as we are -- as the demand for rental cars exist, we would be pretty much connected to that.

Got it. That's very helpful. And maybe one last one here, when we're talking about commercial, and then we can shift gears a bit, not to be punny. But David, you laid out during earnings that I think you were thinking that 2021 might be when we would see volumes on the rental car side or at least activity from your side of the business in terms of service revenue reach back to the 2019 levels we were seeing before the disruptions. I'm curious from a goal post perspective or just for our measurement outside the company, what we would need to see as sort of mile markers to think that that's going to come true? What are the general assumptions you're making, if you're able to share with us on those?

Yes. I think broadly to Tricia's point, where we -- the vast majority of the revenue that we generate are -- occur through airport locations. And as a result, we are very much tied to revenue passenger mile. So as airlines go, so does rental car, so does Verra Mobility within the tolling product for rental car. So we are going to continue to watch. And which is why we said at the time -- and I still think, again not wanting to play armchair economists, that if you were to sort of assimilate how airline CEOs and even rental car CEOs are sort of holding on to the future, what they're saying is that there will probably be just a much slower recovery there. Even if the general economic factors start to drive the economy upward at a higher pace, there may be a lagging because of the substantive behavior changes in travel and concerns around the virus up until a vaccine is held. So we would anticipate -- I mean our guess really is that we're going to have a slow recovery and that we would sort of get a run rate to '19 levels as we exit next year. It seems to be our working assumption, at least at this point. Some economists are more sober than that, some are much more optimistic, but we feel like that's kind of a general rule of thumb that we'll continue to watch.

Perfect. That's super helpful to have for us to be able to watch going forward. So let's switch gears to the Government Solutions side. Just right off, one of the areas that I think caught some investors by surprise when you guys announced earnings was the level of nonvolume-related revenue you have in this segment. I think we thought it was going to be perhaps a little bit more variable than it ended up being when you laid it out. Could you just remind us again, what the drivers are and how much of your revenue is related to the violations volume versus how much is -- or maybe what it is coming from the account management side, software-type revenue subscription agreements and maintenance and all that -- all of those other pieces?

Yes. So on the Government Solutions side of our business, about 60% of the overall revenue comes from fixed fees associated with the installation of the camera. So once the camera is installed, which is generally our CapEx, we install the camera, that camera will produce a fixed fee as long as it's operating in any given month, regardless of how many citations that it generates. Now obviously, we work really hard with our municipalities to make sure that the cameras are in the areas where traffic volumes are high and safety restrictions are needed. And therefore, they generally do produce citations throughout their life cycle. And then about 40% of our revenue is associated with systems where we get paid when citations are paid. So with those, there's a varied amount of services that we offer, but in general, they work that we get paid when a citation is paid. So it's a little more on the back end of the cycle and does have some variability that could happen with traffic flows. So you've got 2 things that will impact it. It's the total number of citations issued and also then the payment rate. So in economic times, you could say that -- in troubled economic times, you could say that maybe payment rates would be lower because people's first priority isn't to pay their photo enforcement ticket. And then we do have areas where -- from Government Solutions where cameras aren't operating, school buses aren't operating, and we have cameras on school buses and some of our school zone speed programs. But what's really happening is that we continue to expand one of our largest fixed speed programs in the country, which is school zone speed in New York City. Those are paid on a fixed fee that once the camera is in the ground that it continues to produce revenue into the future. And at our last earnings call, we had installed nearly 278 cameras just in this year. Each of those cameras will produce about $3,800 a month, once installed. So that growth rate is really driving where we're going from the Government Solutions side.

Perfect. And as we think about the different cameras you offer, obviously, you've got the speed, the bus and the red light. And I know there's different pieces within those that you offer. And we talked a little bit about this as sort of early days, but the pandemic has kind of uncovered this with some of the school zones maybe not in operation or the bus arms not in operation. There's pieces of the traffic system that are not necessarily covered or would require more in-person coverage. And I'm curious if any of your conversations with clients or prospective clients looking at photo enforcement has shifted your view of where the growth could come from going forward. I think previously, red light was sort of not expected to really grow, but has it shifted in terms of a greater desire at all? Or do you think it could shift in terms of a greater desire among potential clients for more permanently monitoring cameras versus ones that are only in operation for certain hours of the day like school zone ones?

Yes. I think what you're going to see is that I think everyone is going to go through a great settling in. As cities and states begin to go back to some normal, I think what you're going to see is that the advantages of photo enforcement are going to start to stand out even more so as people sort of assess what their needs are as they think about safety as well as they think about budgets. Moreover, we've already seen a trend pre-COVID that was very positive in terms of legislative sentiment related to photo enforcement, in particular into areas what we call purpose-built, which is school zone speed or school bus or even work zone. And there's been several pieces of legislation passed around that. What we would hope is that there continues to be a tailwind as we head into the legislative sessions for next year, so meaning in '21 as for other states that either want to bring in photo enforcement or expand photo enforcement that, that would be a ready-made opportunity for them to solve several challenges that they might be facing. And so we're actually quite bullish on that opportunity. And we'll probably be, even in this world, be making some investments to accelerate our opportunities in key states that we want to be operating in as well as accelerating our sales and marketing efforts in the areas that we just opened, places like Virginia and Georgia.

Well, that's perfect because it brings me to the next part that I was going to ask in terms of cutting it by state exposure. I think only about 20 states explicitly allow photo enforcement. So selling it into those other 30, I imagine there's a different value proposition that you're going to pitch versus selling more cameras into the states that already allow it or where you're already operating. Walk us through maybe how you're thinking about those different approaches, right? I think previously, you had thought about it as maybe having some partisan events, and so the pitches were a little bit different to each type of state. How do you think about that going forward?

Yes. The -- it's less that you have a partisan. The strategy is that you just need someone to get on board and endorse it. It's not necessarily a partisan strategy. I think overall, when you look at the rest of the country, not every state is going to need photo enforcement. There are certain states that just don't have a populace that would make sense to have it. And the cost-benefit analysis isn't there for them. When you look at as other states for -- as from variability's perspective, you look at states, for instance, like Florida, where today, we only have red light as would there be an opportunity to -- in a state that's had photo enforcement for quite some time, albeit sometimes contentiously, would there be an opportunity for us to expand into something like school zone speed? Or more broadly, you look at a state like California that does have photo enforcement for red light but historically has struggled with that legislation and the implementation of it, would there be an opportunity to look more broadly at a school zone effort or a work zone effort in California, which would be obviously a pretty significant opportunity as well? So it's not so much that we want to be in every state. It's rather that we want to optimize the states that we are in or perhaps expand into states that may not have legislation that is working for them today.

Got it. Okay. And maybe on the ones you've already won in terms of implementations, you mentioned the 2 wins in Georgia that you won a few quarters ago, and those were starting to get into the implementation side. I believe New York has gone on with almost no disruption. I think you were actually running a little bit ahead of pace through last quarter. And I know that's expected to go back to the normal. Any areas that have been halted or disrupted or any of the RFPs that you're looking at that have sort of been accelerated or otherwise disrupted that you can highlight for us?

Yes. No specific names, but what I can say is, I think, outside of New York City, which has really -- their commitment has been really impressive through COVID, through everything. They just really believe in the program. I think in general, just because of all of the level of distraction, as you would anticipate, that there's been some slowing in RFPs where, as an example, we are often part of -- contracts for photo enforcement are voted on by city councils and those city council meetings happen ever so often. And it's very easy to get removed from that agenda when you're dealing with a pandemic and recession and social unrest. There's other things that get on to the agenda. And so we've seen a little bit of a slowing in, but we'd anticipate, especially as schools start to approach getting back in session, is there will be a reacceleration of those decisions.

Perfect. That's very helpful in terms of thinking about the timing of those. Let's talk about Europe and some of your other expansion plans because I think that's one of the areas that, at least from our sense, coming through earnings, it sounded like -- are almost fully undisrupted, if anything, it has. And I'm curious to get your sense around what the time line is for a resumption of your buildout in Europe. I know some of the activity disruptions there and government-imposed rules have disrupted the time line a little bit. But I'm just curious, just to get a status update on the buildout in Europe, whether it's Pagatelia or other opportunities.

Yes. No, we launched our pilot last week in Paris with a company called Rent A Car, and so we literally just -- it's the first time that, that solution has ever been deployed, which is a fully outsourced transponder base program with a third party. So we're excited to be the first to do that in Europe. They launched yesterday in Nice, and so we are in the process of enrolling cars and putting them on our system as well as putting transponders in vehicles. So it will be a couple of weeks before we get real data from that, but we're really excited about the momentum there that despite all the things that were happening, we worked with a local. So Rent A Car pretty much only operates in France. And so they're not having to worry about the border issues that are going on right now in Europe. But as those start to subside, our hope is that we'll be able to engender opportunities with other rental car companies as well as large fleet management companies. So we're excited to be going. Really, the -- the question I've got is, how do we think about success for the year? It really comes down to because things have been disrupted by COVID, this is a year of pilots. It's getting several pilots going, ideally in multiple countries with multiple partners so that we can get data, we can understand the -- you learn from these implementations. The implementation, while we've done it many, many times in the U.S., it's different inside of Europe. And learning how to work through those things to make sure that our system is fully there to support our customers, that's really important to us. So that's kind of the goal as we go through this year. And then next year, we'll turn it -- making sure that we're translating that into revenue and growth is going to be the objective.

It's great to hear about how you think about this year versus next year, and it's very clearly laid out. It kind of takes me to the next piece I was going to ask, which you said looking to get multiple pilot programs up and running. So presumably, you're in some conversations with different rental car companies over there, and this is an offering that's not really in existence in a scaled way across the continent, which is, as I understood, part of the reason you went in there. I'm curious, has that set of conversations you're having with the rental car companies been in -- your value proposition has been enhanced by what they're seeing in terms of the need to get away from cash and other alternatives at the tollbooth and really get this type of product underway? Is that -- has that boosted your stature in those conversations? And how do you think about -- you just laid out this year and early next year. How are we thinking about the next few years? I think the last we spoke before the pandemic, you were thinking sort of 3 years for material contribution here. As you lay out these goals, does that get you to where you're looking to be in 3 years? Or is that a little bit longer now just because of the disruption?

Yes. It's hard to tell how -- what -- the disruption has certainly impacted this year, meaning just -- I mean just candidly, you are having conversations with people that get put on furlough because they work for a rental car company. I mean the issues in Europe are the same here as in the U.S. That being said, I would still think the 3-year time line is very appropriate assuming that things can go back to normal. I think we should -- we are still in many -- we're in in-depth conversations with several companies. And so we feel like our line of sight to getting pilots going this year is strong. And then translating those, there's still going to be a demand issue, just like we talked about earlier from a U.S. market. So there may be a muted demand as we go into next year, but hopefully, that will uptick at the same level as we predict that it will uptick here in the U.S.

Got it. That makes a lot of sense. Okay. Let's -- I've only got a few minutes left. So I want to switch to a couple of other topics here quickly in the time we've got. Let's talk about M&A because I think that popped up more recently in a more robust way on your slides. And obviously, it's some unique times, so some assets are potentially on sale. Is it mainly a focus on Europe? And maybe you can expand there plus the surge in dynamic pricing. Has anything changed in terms of your outlook on those 2 as being the focus?

I think we -- while we've already invested in 2 companies inside of Europe to get things going, I think right now, we're always looking for -- we look at the categories first, and then the opportunities where they are really dictates it. We're not necessarily looking for something in the U.S. or Europe per se. What we're looking are for companies that have a strategic fit and a financial model that is accretive to our business. So those could include accelerating what we've done like with Pagatelia, which was small but accelerates our opportunity inside of Europe. It could be looking at, hey, what are other -- in the markets that we already serve, can we strengthen our position in some way, shape or form? And then we always talk about diversification. And are there third legs of the stool out there that make us a broader more global player in the entire category, smart transportation? And those are things like I've mentioned before, like the category of parking or whether that's traffic management or congestion pricing. Those are interesting areas that we definitely would want to take a look at. Right now, M&A was effectively -- it was going and then it kind of stopped. And I mean not M&A necessarily for us, but for the broader market. And so I think what we'll start to see is we are going to be on offense. We think we have access to capital. We think we can be a player, and so we're going to be as aggressive as we possibly can.

Got it. And maybe on that same vein, as you watch some of the areas that you have explicitly talked about wanting to get more into, one of them is obviously the surge in dynamic pricing as more cities look at that as a source of revenue. And I think the model you were launching was the New York rollout, which you're not participating in, but you were going to watch to get a sense of what you needed to have. Any update there in terms of -- have you seen a greater sense of what Verra needs to have to compete in this space from the New York rollout? We don't get to see that, so I'm curious what you're seeing.

Yes. The New York -- I mean the rollout is, obviously, I suspect that somewhat -- I don't have inside baseball information there either. I suspect it's been slowed a little bit by everything that's going on because it's a new program. When it launches in -- it was supposed to launch in January of next year. So that's really when you're going to get the data and the understanding of how it -- not only does it technically work, but how does the citizenry sort of accept it. We still are believers in that category. What we would need is, most likely through M&A or maybe through a really sound strategic partnership, is a broader set of tools that we can deliver those types of programs. We are more of a back-end process. There are some front-end pieces, which are camera-related, which are different cameras than the ones that we use today in photo enforcement. So there is some portfolio expansion we'd have to do if we decided to make a play in that.

Perfect. Okay. Well, it looks like we're out of time. But David and Tricia, thank you again for joining us. It's a pleasure to have you here.

Thank you.

Thank you.

Enjoyed it. Thanks for having us. We appreciate it.

Yes. And thanks, everyone, for joining us for our Payments and FinTech Symposium. I believe that's the last presentation of the day.

All right. Thanks.

Bye now.