Verra Mobility Corporation (VRRM) Earnings Call Transcript & Summary

Okay. My name is Sameer Kalucha. I am the information services analyst here at Deutsche Bank. On behalf of DB, we are delighted to welcome Verra Mobility CEO, David Roberts; and CFO, Tricia Chiodo, to our conference. And it's a pleasure to have you David and Tricia.

Yes. Thank you.

So just to get started and set a little bit of context on the discussion. It would be great to have a sense of what Verra Mobility does, what kind of business you're in and how you make money, and then we can get into the business trends and segments. So great to start with the company introduction, David, if you don't mind?

Yes. Yes. Happy to. So Verra Mobility is a leader -- a global leader in smart transportation. So that is technology related to making mobility safer and easier. What that looks like for us is we serve 2 very specific customer segments today, one of which is Government Solutions where in North America, we are the #1 provider of photo enforcement, where we provide red light cameras, speed cameras and school bus stop arm cameras to promote safety and driver behavior change within the cities that we work. We work with cities like New York City, Chicago, San Francisco and other cities across the countries to help sort of implement those very important safety initiatives. The way we make money in that business is really 1 of 2 ways. We either get a fixed fee per camera per month or we get a revenue share based upon the paid citation volume of each camera. And that's -- that split is roughly, call it, 50-50-ish or maybe slightly more toward variable, but that's the Government Solutions business. We can talk about some of the things that we're doing there later and some of the other questions, Sameer. On the other side is Commercial Services, where we work with commercial fleets and that's principally in rental cars. So if you or anyone who's ever rented a car from Hertz and Avis or Enterprise and ran a toll, we were a part of their journey. And that's because that solution for rental cars is fully outsourced to Verra Mobility, everything from connections to the toll authorities, to putting transponders in the vehicle, to the shield boxes, to the asset management tracking, to literally billing a renter's credit card at the end of their rental period, that's all of Verra Mobility technology solution. And as I mentioned, we work with the big [indiscernible] as well as others. We also work with fleet management companies that provide vehicles to corporations through leasing. And we view toll management, violation management and title and registration for those bulk fleets. The most of our money is made there through when there is a fee charge per day or per usage day to the renter. There's an administrative split based upon that -- whatever that -- so maybe it's $4.95 or $5.95, they'll just split between us and the rental car partner for that. In addition, we pay the electronic rate that we bill, the catch rate, and that split is something that Verra Mobility keeps. So hopefully, that's a short and concise enough to answer both of your questions there.

No, that's great. Good to see there's a profitable business model in place and it leverages technology. I think those 2 are the key investment themes. And then in terms of just an overview, still [indiscernible] side of the business. It's a specialized market, but seems like a great opportunity. Any way you can size the total opportunity you target like in terms of TAM and the growth rates over there? What are the components of the growth out there? How do you grow the business?

Yes. So principally, the way that -- so if you think about Government Solutions, we grow through either increasing more cameras. So that's through states that adopt legislation that allow us to deploy our solutions in those states. There's only 21 states in the United States today. But so we grow by winning customers and compete against our competitors and winning as well as renewing those plus, obviously, with an increase in traffic, there's an increase in volume and sometimes there's also a related increase in the citations of that, but it's still a government business. So we've always said that, that business will probably grow net of attrition, 2% to 4%. We're outsizing that growth today because of a massive increased installations inside of New York City, where we're currently installing our second tranche of 720 cameras, which is sort of we're outpacing the growth of the industry because that's such a large -- it's a very unique customer in New York City, given the size and scale of their speed enforcement program. In Commercial Services, where we are effectively fully penetrated on tolling with rental car, meaning every vehicle that -- with our customers has our tolling program on it, they can, one, increase the size of their fleets, which they're in the process of doing to address demand; two, there's an increase in demand or -- sorry, an increase in toll roads, meaning more people are -- or more cities and states are putting in toll roads because they are an effective way to manage transportation, also generate revenue; and then thirdly, there is the opportunity to increase the number of cashless lanes. So there are -- believe it or not, there are still lanes for people who actually pay cash or can pull over. And as those reduce, that's actually a tailwind for our business as well. Both businesses have been served in terms of growth through acquisitions. So we're about to close on an acquisition in Government Solutions where we bought one of our competitors, a company called Redflex. They are an Australian manufacturer. So they operate not only in the U.S. but also abroad, principally in Australia and Europe. But in a post-close world, we should have, call it, approximately 70% market share, give or take, in North America. So something we're super excited about, and that's minus a final sort of approval from the Saudi Arabian government we should be moving forward quite quickly with that. And then on the other side of the business, we've done acquisitions over the past couple of years to build out our capabilities in Europe, where, today, there is not a growth -- or there's not rather a fully outsourced provider of toll management in Europe. And so that's something we've been trying to build from the scratch. We've used a few acquisitions to kind of build up our base there. So there's also some growth trajectories there as we think about European expansion as well.

That's quite -- seems like there's growth in both the segments and in terms of -- there's certainly a big camera opportunity on the rental side, international part. Sounds great. So maybe just kind of like getting a little bit into the commercial side of the business to get a better understanding. You mentioned you work with both rental car agencies and fleet management companies. Is there -- how is the business bit? Is one more down than the other or is it like 50-50? How is the mix right now? And how has it trended? And where is it headed?

Yes. The preponderance -- sorry, go ahead, Tricia. You take this one?

Yes. I was going to say, by far and away, the majority of the revenue in this segment comes from rental car companies. Of our 4 largest customers, 1 on the Government Solutions side with city of New York, the other 3 reside in the Commercial Services segment being Hertz, Enterprise and Avis Budget Group. So that is the group that -- where we get the majority of the revenue from. We do see growth in the fleet management companies or direct fleet services just because there's customer acquisition that we can do there, whereas we have the majority of the rental cars already on our tolling program.

And this -- the rental car agencies that are on the program, they are apparently at multiyear contracts. You have been renewing them. And what -- just wanted to get a sense of how are these contracts structured? How often do they come for renewal? And how is the renewal pipeline in this? Do we have like multi-years left in each of the contracts or are there some time lines that we're going to be seeing in the recent -- or in the near future?

Yes. So there are -- we have -- so relative -- starting with the first one. So Avis is extended through 2025. In general -- you have to remember. So these contracts sometimes have run around 3 to 5 years, but -- and we have always been a part of it because we were -- we are a combination of the 2 entities that provided the service to the market. So think of it -- previously, there were 2 providers and 3 customers. Now there's 3 customers and 1 provider. So with that being said, we just recently announced the -- we're just about done. We haven't got the signed contract, but we are done in negotiating a contract extension with EHI, and that will be for an incremental 2 years. So we're very excited about that with substantially the same economic terms that we have in our agreements today. And the final agreement is with Hertz. Hertz is up for renewal at the end of this year in December, and we would anticipate kind of a similar result that we've achieved with either Avis or with Enterprise in terms of an extension with hopefully, really favorable terms.

Got it. So again, it seems like a very, very stable business from a customer perspective. But obviously, rental cars and everything like that, the whole travel industry has been impacted pretty significantly due to the COVID. And as we embark on this recovery, and you've talked about it as well. Just to refresh, the economy seems to be doing better than expected, faster than expected. The vaccination rollout seems to have gone better than expected. I'm wondering how are you seeing the month-on-month rental trends in the car industry? And how far below you are from the pre-COVID levels? And what's your latest sense on where -- when you see the full recovery kind of play out and get back to like 2019 levels?

Yes. So I think what we're seeing is really optimistic. So we're -- as we're sort of looking at where we're going, we saw a 33% growth in March over February. That momentum continued as we rolled into April on our tolling solution to sort of very positive momentum as we've seen that. And we've seen 3 quarters of recovery cycle. So we hit the trough of where we were in Q2 of 2020, and we've been seeing sort of growing out of there since then. With that being said, we're still fairly far off from where we were in the previous years. Our Commercial Services segment was still 25% down year-over-year in Q1, but we would expect it to see that growth come back as we come over Q2. What we've said publicly is we don't really know where the cycle is going to go. But we believe that as we exit this year, so as we exit 2021, that we'll start seeing sort of that trajectory back to this 2019 level, which would be good for us because then it would get us back to our margin profile. In 2019, this business segment had a 63% margin, and we could be heading back to those margin levels.

That's great. So it looks like things are progressing well. And then one of the important components that -- and this is a question we get from investors quite a bit. One of the important components of travel is the corporate side of things. What's your exposure there? And given the corporate levels are down significantly and the company seem to be planning for a fairly like a hybrid model going forward. So number one, what's your exposure there? And number two, where do you think the corporate travel levels settle down when things are recovered? We've heard numbers from anywhere from 10% to 15%. What your perspectives are?

Yes. No, that's a great question. So the only data that we have is what we can glean from the last time we said sort of normalized travel patterns would have been 2019, and there the mix between corporate and leisure is really dependent upon the rental brand. So if you're in like an Avis brand, you've got about 50-50. So 50% corporate, 50% leisure. In the Hertz brand, it's 60% leisure, 40% corporate. And these are numbers that we're gleaning from our own systems. So we only count a corporate user, if they're actually flagged as a corporate -- if the rental agreement has a corporate pricing structure on it. So it's directionally correct. But as you step down to sort of cheaper brands or discount brands like Budget, they're almost 75% leisure. So you could say -- and for us, we're sort of agnostic to who -- why there is a rental. The only thing that we care about is that cars are being rented in regions where there are toll growth. And when that is happening, it's good for us. What we do think is happening right now is that it is far overweighted to the leisure traveler, and that is sort of predicting some -- I would -- I'm calling it sort of driving patterns, meaning that the rental agreements are longer. The number of days that they have a toll on it is increasing. The total number of tolls per rental agreement increasing. The average price of tolls is increasing. All of those things could be sort of consistent with the change in mix between a corporate and leisure blend to just a pure leisure traveler driving, but it's really hard for us to really tell what's happening under the surface. But right now, with our product, there's only one way that you can avoid using our product if you're driving in a tolling region and that to avoid the toll roads. And we believe that people, both leisure and corporate travelers, will opt in for convenience.

Got it. Yes, that certainly ties into the growth trajectory that you should see going forward. And then you already mentioned the toll roads and the cashless lanes. Any color on what percent are cashless right now and where do you see the potential for growth in terms of the lanes? And any sense on -- go ahead, David.

Yes, I was going to say, it's tough to know because what we've said is, relative to the 2 trends, one is a conversion to cashless and then there is the ongoing building of new toll roads and/or the expansion of lanes or current toll roads. The cashless conversion is the one that has the most immediate effect on our business because it's taking the current infrastructure and changing the dynamic, which is good for our business. And we've always said that we're sort of in the -- I guess, now we'd probably say we're like in the eighth inning on that just because a lot -- I think COVID may have accelerated some of the transition to cashless, but there are still some opportunities to convert lanes to cashless. And then the pace of like new toll road, there certainly is a fair amount of new toll roads on sort of state legislators dockets. The pace at which they get done or funded or extended, those can take some time. But you would say that, in general, toll roads do work really, really well. And when you think about the transition to congestion pricing and using that to help control some of the greenhouse emissions and environmental causes that it's actually a really -- it's a user-friendly revenue-generating solution to solve both traffic congestion as well as some environmental causes that you would see a trend to have those increase over time.

So that, again, is a positive catalyst and COVID would be an important component of that. Now staying on the growth trajectory because that is one thing investors do focus upon. And -- so FMCs are not really a huge part of the business right now, but how does the opportunities look going forward for FMCs? Do you think there's potential to add more and drive higher growth from that segment of the market?

Yes. So there's really 2 ways to grow with FMC. So whereas in Hertz -- or excuse me, rental car were -- like on toll management were sort of fully penetrated. There are some opportunities because they use these products and services to offer to their customers. So they are a channel partner that we work with to provide these types of solutions. So the dollar amount is much smaller, obviously, than rental car volumes because the total number of vehicles is significantly smaller as well. But there are opportunities to both increased penetration around some tolling programs with their customers, meaning they have customers that may not be using our program today, perhaps managing it themselves. There are opportunities to sell other services like our violation platform or title and registration services. So there's really a share of wallet. And then that's also where we look at M&A as a tool to accelerate our growth. And as we think about that we have these commercial fleet customers, there are other products and services that we can credibly offer that are within the realm of smart transportation that we would start to look at as well to bring into those channels where we already have these great customer relationships.

That's wonderful. So obviously, there are more things to go after. And again, this is one question I get, and we'll switch to government after this. But on the commercial side, the solutions you have implemented, what are your competitive advantages and what's the competitive mode around the business? Since you're working with a lot of -- with the rental car companies, what is it that prevents someone else from coming in and developing the same solution or these companies trying to do something themselves? What's the competitive differentiation and what's the move around the business?

Yes. So when you think about our business, there's a couple of things to consider. So one is to enable this solution, you have to have a nationwide program, meaning that rental car vehicles move from Florida to Texas and Texas to California and California and Illinois, right? These vehicles move around. So you need to have a nationwide program. And you do that by having integrations with all of the major toll authorities. And that's actually -- while that sounds easy, in practice, it's quite difficult. It took probably the respective entrepreneurs that were the original founders of this business about a decade to do that just because it does take quite a long time. So one, you have to have those integrations; two, you have to have software that is connecting payments of tolling to rental car systems, which are highly customized. Our systems have been working within the rental car billing systems for quite some time. And so there's a high level of integration there. And then third, you would have to decide and not only that we have asset management tracking, we have people that are on the field, we have a call center. So we have a fully outsourced business that is wrapped around serving these core customers of ours that you would have to try to replicate for potentially maybe a single customer. For the rental car companies, it would be -- you also have to look at it from why would they do it themselves, but their principal job is to sweat the assets and get those things out renting. They're not in it for ancillary services. That's a very small portion of their total pool, and they make really good money at no cost to them, and we are an outstanding provider and try to serve them at the highest point of their needs. So there's really not -- there's not a real reason for them to go to all the effort of all the customization to go build it themselves because they want to focus on renting cars.

That makes perfect sense. So that means at least on the commercial side of business, there's a good business proposition and the one that is totally defensible in the competitive landscape or even if somebody tried to come in, so there's -- there are barriers to entry. It seems like -- so switching...

Yes, if you think about it...

Go ahead.

Yes. I was just going to say, if you think about it, there's one company that's provided nationwide toll management, and it's us. We are the only -- we have all the historical knowledge within Verra Mobility. So I think we're a very credible partner for our customers.

Got it. And then maybe switching a little bit to the Government Solutions side of things. As I said, commercial business is certainly impacted by COVID, is coming back. But Government Solutions where the recent action has been and definitely, one of the good things that happened recently was the installation contract for the 72 -- or 720 additional cameras you got from the NYC. The -- can you talk about the progress you've made there and the time lines when you're supposed to implement everything for the next installation [indiscernible] within this year, I suppose?

Yes. No, that's exactly right. I mean -- so it's wonderful that we've got this next order for 720 cameras in the city of New York. We expect that we'll have those installed by the end of this year. I think at the time of our conference call, we had roughly 70 of them installed, and we'll continue to accelerate our pace as we move into the back half of the year. But it's also important, the installation of that magnitude is just growth on top of what is already the largest program in the country, maybe even in the world of photo enforcement. Those 720 cameras will generate somewhere between $50 million and $55 million of product revenue in the current year for the Government Solutions business segment. And at the same time, we'll generate $32 million in forward-looking annual recurring revenue. So that program in and of itself is really bolstering the growth that we're experiencing in the Government Solutions segment. That segment grew a little over 15% in Q1, and we would expect that its growth would continue on through the remainder of this year.

And that means the relationship with the New York City, which we've seen a little bit -- there was the receivable issue that happened last quarter, that means all those issues are resolved. You talked about it on the main call as well. So just to get a clearer sense of what are the arrangements there? And when do you think the whole receivable issue would be like totally behind you?