Verra Mobility Corporation (VRRM) Earnings Call Transcript & Summary

We'll go ahead and get started here. Thank you very much for joining us this afternoon on the second day of Morgan Stanley's TMT conference, obviously, second day of 4. So we're making good headway here. And for this session, we're very pleased to have the senior leadership of Verra Mobility joining us. And we'll get a chance to talk to David Roberts, President and CEO; Craig Conti, CFO; and Jon Baldwin, Head of Government Solutions in just a moment. But as a matter of introduction, I'm James Faucette, senior research analyst at Morgan Stanley covering FinTech. And before we kind of launch into questions for the Verra team, I do need to read this important disclosure. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. So maybe for those that aren't familiar with Verra, David, I would ask, can you give us a quick overview of the business in segments and give a high-level view of mix and percentages, would probably be helpful.

Sure. Happy to do so. So Verra Mobility is a global leader in smart mobility, and we operate through a portfolio of companies. Each of those companies operates in completely different segments. The first segment is what we call Commercial Services. Commercial Services, we are the leader in tolling and violation management in North America. You would most likely know us from rental car -- if you've ever rented a car and seen that little box up in the windshield, that's us. Everything related to that program is part of Verra Mobility's offering and technology. We operate for that business, not only here in the U.S., but also in Europe. In addition to that is Government Solutions, which is Jon's business, I'm sure he'll tell you more about that later, where we're the #1 provider of automated enforcements in North America. So those are things like speed cameras, school bus stop-arm cameras and red light cameras. We have around 70% market share here in North America. We also operate that globally, Europe, Australia and Canada. And then thirdly, we have our parking solutions or T2, where we provide software and hardware solutions for universities and municipalities to solve their parking challenges -- sorry, going back to mix, very roughly 45%, 45% and 10% is about the rough mix.

So let's start with Commercial Services. And within Commercial Services, I think you've talked about looking for high single-digit revenue growth in '24. How should we think about the primary drivers in that business? And can you help rank order or talk about the contribution from dynamics like cashless tolls, new toll roads, penetration of existing customers, adding new customers. So just help us rank order the growth drivers there and what you're most sensitive to.

Yes, James, I think the easiest rubric to think about is let's break down that high single-digit organic growth and talk about its individual pieces, roughly half of that growth is going to come from what we call secular tailwinds. That's more toll roads in 2024 than they were in 2023. It's the increasing penetration of cashless tolling in the United States of America, particularly. We're at about 67% when we close 2023, so still quite a bit to go. And then the ongoing penetration of all-inclusive as a commercial offering through our stack, right? So that will give you about half of that mid-single digit. About 25% of the high single digit. About 25% of it comes from TSA right? So TSA, we expect in 2024 to be somewhere around 101% to 102% of what it was in 2023. Now just for perspective, that's roughly 8% to 10% higher than it was pre-pandemic, right? So still continuing -- still continue to see strength in travel, and the remaining 25% is from our growth initiatives. Growth in Europe and growth in the FMC or the fleet segment of our business.

Okay. So let's talk about that really quickly. So when I look at those 3 pieces, I mean, it seems like there's a little bit of overlap between TSA and -- or, like, a benefit of TSA plus incremental toll roads now. And really, what I'm trying to get at is, like, what are the most likely source of variance could be?

Yes. By far, so TSA, which is referring to TSA throughput, is by far the biggest driver, meaning if there was a downtick in overall travel, that would have an impact to us just as much as we wrote it up in the post pandemic. So because that is real-time impact, whereas a toll road being delayed as an example for 3 months, you're not going to notice that. So, what I would say is the big driver is the one that has the more immediate impact is for sure, basically, people traveling on airplanes to toll dense areas within the United States.

Got it. Got it. And on the fleet management side, what -- talk about, like, a little bit what's driving the growth there and how the solution looks -- maybe a little bit different than what you typically have with the rental cars, et cetera.

So one, we made some investments in our commercial team, and they've done a really nice job in terms of execution. We sell a product to -- fleet management companies provide vehicles to corporations. So think of a pharmaceutical company providing -- I don't know, what are they -- Camry to their -- I don't know -- what they called?

To their sales people.

Yes, for their salespeople. Well, those cars run tolls. Those cars get parking ticket. They get photo enforcement tickets and all those violations can go back to the company, and we want to make sure that it goes to the driver. That's what our technology does, very similar to what we do for rental car. It's also usage based. So some of the growth has been the advent of sales and new vehicles on the platform. And the other part is people seem to be driving more as well, which increases the usage, which again increases our revenue as well.

Got it. Got it. So that's an interesting dynamic. There's the -- not only are you adding new customers, but existing customers within fleet are just seeing increased usage. I mean -- look and then there's also the beneficial impact of like if you increase the number of toll roads, it increases the probability that, that's going to impact that as well.

That's exactly right.

Even though it may be small.

Indeed. Indeed.

So -- got it. And then how do you -- when you're forecasting that part of the business, what are the things that you're looking at, both in terms of new customers, I think anticipating toll roads and looking at what that traffic looks like should be pretty straightforward. But, like, what are the indicators that you look at to try to forecast both new fleets, but then especially the travel component within that segment?

Within the fleet management segment?

Or within the general -- commercials, generally.

Yes. I think where you see the highest correlation really is TSA throughput, right? And so let me break that down for you. It's -- to get a guide on where TSA is going, the industry that has probably the best visibility is the airline industry have. They have bookings to about a year out. So we listen to the airline industry. right? And then it would probably go to the hotel industry, which has bookings maybe roughly 6 months out. And then it will go back to our customers, the rack, some of our customers and then back to us. And we look at our recent experience, how we've responded to that and what the rest of the market is saying. And I think the consensus is right now that the travel environment in 2024 is going to look a lot like the exit rate in 2023. So that -- to go back to David's point, is by far the #1 kind of metric I would look at and we think about when we forecast the business.

One other one in addition to that is the size of the fleet. So as you would imagine, it's -- the volume is predicated in the number of fleets. All of our rental car companies seem to be sort of, what you might call, full alignment to demand. They are certainly de-fleeting some of their electric vehicles. I think it's been relatively pronounced in the news lately, but we also want to make sure they have enough vehicles to meet the demand at the airports.

Got it. Got it. And then on those rental car agreements or with the racks as Craig call them, we often hear -- at least over time, we often hear about timing of contract renewals and potential for Verra to lose one of these primary as customers. Can you talk about, like, when renewals come up, like, how far -- like, when are those, how long are the contracts, and generally, how do those terms renew as we go through?

Yes. So obviously, each customer has a different approach. We -- obviously, these are all publicly disclosed. They're the material contracts. Enterprise just renewed this last year for 3 years. Previous to that, the year before, Hertz had renewed for 5. And previous to that, Avis had renewed for 5. So we have no rental car agreements up for renewal until the end of '25 is our next renewal. So the first part is why would -- would they take that someplace else or do it themselves is a question that we often get. And the way that I would answer that is, so first and foremost, our goal is to make sure we have an expression that we serve our customers at their highest point of need and that we're delivering real value to them. And we are -- in effect, we are the only company to have ever provided a third-party fully outsourced rental car management or toll management program for a rental car. We are the industry history. And so given the economics and the benefit that our customers receive from this, it would probably be relatively challenged to say I'm going to bring on a new vendor that's actually never had any single experience doing it before because the risk is significant. But more than just our reputation and the relationships that we have. We have all of the integrations with the toll authorities which matter. We are deeply integrated into the billing systems of the rental car companies so that we can build a renter when they turn in their vehicle. And those have been customized many, many, many times over many, many years. We provide all -- everything is fully outsourced. It's a call center. It's our transponders. It's our -- the box in there is ours. Everything in there is ours. It just makes -- what I would say is we feel -- the most important thing is that we serve them well, but we also have some aspects of the business model that give us a lot of strength and conviction about how those contracts will continue to go.

Got it. And as we've seen kind of more toll roads and more electronification, there's also been a bit of a change in terms in the way that rental car companies are engaging with their customers with that tolling. For example, Avis, I know that if you opt for the terminal, whether you actually go on a toll road or not, you get charged on a daily basis right?

Yes.

And -- but if it's electronic, told only there's no choice, right?

Yes.

So you don't have a choice but to pay the cash.

The choice is to not drive on the toll road.

Right. That's right. That's right. And so I'm wondering if, like, there have been any resistance to that or any concerns around that and, like, how that may need to be modified, if at all?

Yes. Well, it actually has been modified. So what you look at today is actually a result of, I think, feedback from the market. There's effectively 2 products that the rental car companies use in generally similar forms. One is the usage day, which is you are charged a fee for every day that you have the vehicle that you run a toll. So that's the -- or what is all-inclusive. And all-inclusive is actually a benefit to the renter because if you're going to be in -- let's say, you're vacationing in Florida and there's a toll road basically everywhere you go, you don't need to worry about any of it. They're going to -- we'll just charge you the fee. We'll pay the cost of the tolls and it's on your bill when you turn the vehicle in. And so both of those are much more friendly than it used to be in rental day, and they would just charge you whether you use the program or not. So that has gone away. And when we looked at our call center volume related to questions or concerns or complaints about the program, it's probably less than 0.5% of all the volume from all 3 over the course of the year. So I think that given the value that it's provided and people are recognizing, hey, there's toll roads everywhere, I'd like to use them, it's become more a part of the landscape.

Got it. Got it. Got it. And then also on commercial, I was really excited to hear about the recent win in Italy with Hertz. Europe is -- have a lot of toll roads. It's a lot of visitors, a lot of people vacationing there, and it's largely an untapped market. What's the time horizon that we should be expecting a pickup in Europe? And as that happens, how do we think about -- it seems like that could be additive to the growth rate, but I'm just wondering if that's fair and when we could see that.

Yes. So maybe a way to codify the way we think about it is when we did our Investor Day a couple of years ago when we think about our growth rate. Europe was not a factor in how we thought about the long -- like it wasn't a major factor in the growth rate for Commercial Services. The reason being is that everything you said about Europe is exactly why we went there. Everything you said and our customers said, "Please help us." The big challenge in Europe is the slow pace of adoption of cashless tolling in the major countries. So places like Portugal have what they call free-flow tolling like Ireland and even in Spain, but the vast majority of tolls are in France and Italy, but they still use barrier based. So you can still drive over, put your credit card and pay for the toll. The program has less value. So the good news to the -- what we talked about in our earnings is that -- we are doing work now for Hertz in Italy in and around Milan, where you have started to put in some cashless tolls. And so if the benefits of their customer is high, then our customers will be more assertive about it. And we would anticipate, over time, the sort of falling of -- and there'll be more -- it'll eventually all be cashless. We cannot tell -- we don't -- we know that it's going to happen, but we don't trust that it's going to happen immediately.

Right. Right. Right. And what's that market composition and fragmentation like from a toll road authority and rental car companies -- I mean, like here in the U.S., you basically have 3, 5 -- you all know what I'm saying? And so there's not -- like, you get some big ones and you cover a big population group, but what does that market look like in Europe?

Yes. So still the big 3. Same ones. 6 is a significant player there. We're the much smaller here. And there are some other, what I would call, country-specific local providers, but really, it's those 4.

And those 4 dominate the overall market then collectively?

Yes. And then the majority of the toll roads, as an example, there's more toll roads in the country of France than in the United States, just to give you a context. So -- but most of them are barrier-based relative to toll authorities, just like here where there's a different toll authority in Illinois, that there is in New York, that there is in Maryland. It's very similar by country there. And even within the countries, there's multiple tolls at least.

But in terms of, like, your relationships with those toll authorities, your coverage right now is complete or close or...

We have coverage for all the major areas in the -- so if you think about Spain, Ireland, Italy and France, we were able to provide the service there. The -- so we have the same level of -- the program operates different just because of different rules within Europe, but we have the same relationships there. We just -- the value of it is not quite as high yet because of barrier-based toll.

Right. And then let's talk about -- move to Government Solutions, Jon, this is where you're going to -- you've been over there with your own opinions, but sitting quietly so far. But now you get to speak to where you're actually in charge of. Maybe you can talk about the different product offerings in that government segment. And I know that there's speed safety, red light safety, school bus. Talk about the differences and in particular, where you're seeing the highest and most growth among the different business lines.

Okay. So just for a quick overview, so regardless of which type of enforcement type it is. We will capture the license plates, capture the -- what we call an evidence package, if you're speeding you're speeding, if you violate a red light, we'll take a video of that. We capture your license plate. We do a DMD lookup, we package that all and send it to the police department. So that's kind of the commonality of our service regardless of enforcement type. When you think about the enforcement types, speed, everyone has, at some point, encountered a radar gun. It tracks your speed. If you're breaking the speed limit by a certain amount, you'll get a citation. That can deploy in school zones, it can deploy in work zones or it can just be generically speed anywhere, depending on what the legislative authorization is. So what we're seeing is one of the rapidly growing areas of our market in 2023 with schools zone speed, most notably in Florida and California. right? So that's kind of the big growth market for us right now. On top of that, school bus stop-arm cameras are rapidly growing as well with the biggest authorization that was new in Florida. So Florida has got some big expansions with those 2 enforcement types. California has got a pilot running for a couple of hundred cameras for schools zone speed. But our expectation is those could grow significantly to make a big, big potential market for us in the future.

So what's the -- how -- so let's talk about, like, what was government growth in '23? Kind of what are you expecting in '24? And then we'll kind of try to dissect the drivers of growth there.

Want me to do it?

Yes. Sure.

We expect government to be a mid-single-digit grower, the high end of mid-single digits. And I want to bifurcate that because 2023 still had some hangover on products, so I'm going to live in '24 first, James. Right? So is -- we expect the service to grow at the very, very low end of high single digits. We expect product to be flat. So when you add that together, you get to mid-single digits. And I think what's really important there is what Jon was just talking about, the increase in -- we'll say, increase in TAM for simplicity and the growth that we're seeing in some of the purpose-built photo enforcement around school zones, that number could go up. And I think what we need to see is, as what Jon just identified as legislative wins, if you will, in 2023 are going to turn into RFPs here in 2024, which we'll compete for and we'll have a really good idea coming out of 2024, what that growth could look like. So as we said at Investor Day 2 years ago, mid-single-digit grower, I think this has upward pressure to that. And we'll see if we can take that growth rate up a little higher by the time we come out of' '24.

So when you look at Florida and in their school zone and school, plus arm programs, how much -- kind of what do we know right now in terms of what has been approved, what still needs to be legislated, proposed budgets, et cetera, there?

It's less limited by the budget because that's handled more to municipality. So legislation is all at the state level. At the state level…

So to be clear, the state can facilitate or allow for...

The state allows for it or disallows it. But then to deploy it, it happens at the municipal level. So for a school bus stop-arm, that's typically selling directly to the school district. For school zone speed or red light camera, you might sell to the sheriff's department or to a DOT in a bigger city.

Got it. Got it. And on those, like, how does that revenue model work? Craig mentioned that there's a hardware component typically for that and then a service component. And just -- can you break it down? And what's your expectation for what that's going to look like in Florida as we get approvals?

So nationwide, what we typically do is we'll bundle everything together into 1 monthly service fee.

Including, essentially, a rental on the equipment.

The Hardware as a Service and kind of technology-enabled software and then we've got maintenance services all lumped into one Safety as a Service package. So our clients don't have to know anything about automated enforcement. They just call us. We do everything for them. So we'll plan the site. We'll put the cameras on the ground. We'll set up the back office. We get the whole program up and running. We'll start issuing citations and we'll start collecting money. So city doesn't have to know anything about this.

Right. Right. Right. And historically, there's been some variance though, like, some -- like, wasn't there the case, like, in New York, for example, that they wanted to pay more for the hardware and we didn't have that?

Go ahead, Craig.

Yes, you jump in, Jon. This is your business for sure. When we think about the New York City, it was a little bit unique in that they bought their own cameras. That is not the case just about anywhere else in the United States of America. So it's one bundled offering. Now when you get outside the United States of America, there still exists a different model, much smaller, but where it's a product sale and then a service on that product sale after. So when I say products will be flat '23 to '24. The vast majority of those products are international. When we go back to the domestic for a second, the growth that Jon is talking about in all of the spaces you talked about so far are all service.

Right. And so just remind us, government exposure to U.S. versus international, generally, today or more most recently?

Yes, I'd say it's 25%.

25% international. And is that -- obviously, there's a little bit of distortion because of this hardware sales. But is that hardware and services predominated then so that looks similar to then.

It is. So the way to think about it in terms of -- [ I guess everyone gets ]. The 25% that's international has both hardware and service, but when you're looking at the business in '23 and '24, where we talk about product or hardware sales, that's almost exclusively international from this point.

Got it. Got it. Got it. And then on -- so back to Florida, because this is obviously a big state, big population, which hasn't had really a lot of enforcement of this type previously. Like what is the -- right now, they're really kind of focused on school zones or is the piloting and the contemplated the legislation cover more generalized speed enforcement?

It's specifically schools on speed. And so that can be at the county level or it can be at the school district level, and so we're seeing contracts to lever both. And typically, the stop-arm camera programs go at the district level, where they have a pool of buses.

Right. And what's that -- you said compete for contracts. What's the competitive landscape for school zone enforcement generally?

We've got 3 or 4 key competitors that we see in that market space. We think we're well-positioned to win our fair share, but it is a competitive market and it's competitively procured.

And what's your sense of, like, for school zone enforcement specifically, including camera arms or bus arms? Like, what's your estimated share in the market generally, just so we can kind of size where you're at today?

Well, it's not really a fair question because New York City is schools zone speed. So you would say on a camera by camera basis, we're like 80% or 90% market share, because of so many cameras that we have deployed. Schools zone speed nationwide outside New York City is still a relatively nascent market.

Right. So it's not very big.

Not very big yet.

So this is kind of like a New York market starting to expand elsewhere and you guys have kind of dominated New York then.

And the interesting thing about the story to the communities, why is it getting allowed. It's because anything tied to protecting children tends to have much more legislative buy-in, which is why you see a school bus stop-arm getting such massive acceptance in the market.

So then let's turn to California. You said that's in pilot right now. Can you characterize, like, what that program looks like? Is it also school zone specific or…

It's also school zone specific, but there, it's more very specific in terms of number of cameras per city. So if you think about Florida. Florida, it's optional to the cities, like, how many they want to deploy, even if they're legislatively allowed. In L.A., for example, I think their number is 236 cameras. So they're going to deploy 236 exactly. And San Francisco has got a smaller amount and it stacks up…

And that's the pilot.

That's the pilot.

Exactly. And what's your sense in -- of, like, what should happen or what could happen in terms of evolution of those programs that they become? Because I imagine that people in Davis, California also like to put -- protect their children, right?

That's actually what we hear, because we do operate red light programs in California. So those current customers that are not part of the pilot are asking us how do we get our names onto that pilot or how do we get next generation. There's a lot of groundswell support for automated enforcement across the state.

And what's your -- but moving beyond pilot, is it your sense that it will be similar where it'll be legislatively permitted and then each either municipality or school district, et cetera, will actually be the customer? Or do you think it'll be more broad-based than that? And with funding coming from the state level, what's your view right now?

It's going to be all at the city and municipal level. It's just how these programs are deployed.

And then just once you have a municipality or like New York City and you run the service, what's the revenue -- like-for-like revenue growth potential on a particular camera? What does that curve look like?

It depends on the fee structure that we have for the camera. The majority of our services we have for fixed speed are what we call a fixed fee. So it's just a flat fee per month. So there, the revenue profile is flat for the duration of the contract. Where we see the growth is additional services that we can provide on top of the existing camera or expansions that we do with those customers, because the programs are very effective, and customers tend to expand.

Yes. So customer expansion is kind of -- makes sense, but what are, like, additional fee -- like, services that you would be talking about?

So I'll give you one obvious one that's happening in Colorado right now. Colorado authorized speed expansion, we already have red light at 10 intersections. We just turned on the speed for an additional ancillary fee and that turned on overnight. So that's the kind of the simplest, cheapest way for our customers to achieve the benefits of safety without having to go through any mental gymnastics about figuring out new contracts.

And what's your most recent statistics that you're able to show in terms of, like, for those expansions into speed in terms of reduction of accidents or injuries or other costs that you're helping try to reduce?

I would hate to speculate without the numbers in front of me. Can I follow up with you…

Yes. Yes. No, it's just like -- I'm just trying to get -- internalize what the sales pitch is to…

Well, we know for sure, in New York City, there was a 30% reduction of speeding and accidents at -- in locations where speed cameras were put up.

Right, right, right. But one of the interesting things I've heard historically is that, like, you get that benefit and a lot of that accrues pretty quickly. But then once -- like, people become familiar with that there's speed camera there, then you actually see like a normalization or a plateauing…

That's the point, though, of the technology, right? What's interesting is one of Jon's engineers showed a chart that kind of said, here's the speed camera somewhere in Europe. Here's a speed camera in the United States, and here's another use camera and the curve was very similar between all 3, right? And that's the point is what you see is you see the -- a lot of violations upfront. They may tail off and they hit a very flat curve on the way back, and that's a sustainable benefit of the technology.

No, absolutely. So let's -- go ahead.

So I was just going to add, one of the other technologies that we do have in our portfolio, which is mobile speed, negates that fact.

Okay.

Because now you have no idea where it's going to be.

Okay. So how does that work?

So in the U.S., it shows up in work zones primarily, where you'd have a van at a work zone. So I think we've all driven through a work zone sign on a highway, and it says slowdown to 50 and everyone speeds up. Like, now you would actually get a ticket. Internationally, New South Wales, which is the state that Sydney is in, as in any time, any place policy of mobile speed van. So 24/7, 365, a mobile speed van might be on your road. You do not know.

And to take the -- clearly, like, Florida and California are big TAM expanders. Right now, are there any states where legislation specifically prohibits speed cameras and auto enforcement?

I mean, we've had them where they no longer have enforcement. So Texas is probably the biggest example of that but that was...

2018 .

Yes, 4 years ago.

Okay. Got it. Got it. Got it. . So let's turn to parking here. I think it's -- it's kind of a unique solution. Who are your biggest customers in this space right now? And you touched on university and municipality parking, but what kind of customers are opting for the Verra solutions?

A great example will be Texas A&M. It's one of our largest customers, large universities have surprisingly complex parking challenges. I have 2 children in college and I know what the fines are like. But you have new students coming in that need a parking permit. You have guests and visitors coming in to see their children. You have faculty. You have other visitors and then you have sporting events. All those require the usage of the same sort of landscape, if you will. And our software helps them -- it's an ERP system for the parking management group within these larger universities to manage the permitting and the access of the payment related to those spots.

Got it. And you mentioned, once again, coming into '24 that you thought the growth of this segment is likely to slow modestly but then pick back up in '25. And can you talk through why that's the case and really how we should think about the long-term growth for the Parking segment?

Sure. So what you've got here is -- the value driver for this business is the services and SaaS portion of the business, which is about 75% of the revenue in the segment. The remaining 25% is by resell equipment. So the trend that we're seeing, and it kind of fits and starts, is some sections of the market are moving towards a no-equipment policy. Right. Which is great for us. We have the product on the other side, but equipment revenues today, SaaS revenues over term. As you continue to see those 2 things oscillate a little bit, we'll have a year or 2, which will be in the mid-single-digit growth, which we expect here in 2024, but we still think that this is a high single-digit organic grower.

Got it. Got it. Got it. And as we come into -- start to look forward into '25 and beyond, I want to go back to the government. Like, what's your visibility for growth rates there? And how do you model that out? I mean, I think that your -- the algorithm for commercial is pretty clear. But for government, like, what does that look like?

Yes. I think I'll answer that at the portfolio level.

Sure, yes.

And I'm going to go back and say that as a company, we're in the same place we were at Investor Day 2 years ago, and I'm happy to report that. I still think that a sustainable 6% to 8% organic growth. We can grow margin every year. We grow margin in this company through volume leverage. All 3 of our businesses scale incredibly well and our rubric to return 40% to 50% free cash flow conversion is still intact right? That's the way we think about it. It hasn't changed.

So let's talk about, like, free cash flow and capital allocation generally.

Sure.

Just -- how are you thinking about allocating capital between capital return, but also debt paydown and perhaps improving or shifting EV to equity that way and then also M&A? Like you haven't done a lot of M&A transactions, but the ones that you've done have been really good at consolidating the market and position of Verra.

Yes. And I'll let David wrap on this comment with what we're seeing in M&A. But the way I think about it is, I can't tell you what the environment is going to look like in 6 months. But I'm going to tell you exactly how Verra Mobility is going to deploy their capital. We haven't changed that. And I think, every quarter, we put out an investor summary, which I encourage you to read, which goes back and says, here's how we've allocated capital in the trailing 20 quarters. And you'll see it's a good mix of M&A, debt repurchase and share buyback. And the reason is we look at the next dollar out the door is what's going to be the best return for the shareholder. And really simply, that's what's the return on the after-tax cost of debt, paying down the debt. We keep a very live view of the intrinsic value of the company, what's the intrinsic value of the company versus the screen in terms of share buybacks. And then when we look at M&A, we are a DCF buyer. And we take out only synergies when we're doing our DCF, and we discount the potential acquisition, either at the WACC of the company or the match-funded debt cost to do that deal, which everyone is higher. And then you get a real common size way to look at what's the best return on that next dollar out the door.

Got it. Got it. Got it. And then in terms of M&A acquisition targets, David, what are you seeing or what could be attractive? Like, how are you feeling it? And no conversation around this would be complete without talking about what you're seeing in terms of valuations, et cetera.

Yes. Well, I will say the nice thing is the activity level is back up again. I think toward the end of last year, the whole market saw a bit of a reset relative to just people wanting to take -- bring assets to market. So one, we are always looking to strengthen our position in the markets we have. We have great positions in our markets. So we turn then to adjacency expansions or potentially platform plays, still leveraging the financial discipline that Craig just went through. At Investor Day, we talked about urban mobility as a sort of an overall theme that we operate in, whether it's in enforcement or parking. We also look at connected vehicle, which we operate today in the tolling and violation space, but there are other things like telematics and connected vehicle that we've been looking at. I would say the pipeline today is certainly as robust as it's been probably in the last 5 years. Valuations are probably TBD. There wasn't like a real reset on valuations, in my opinion, related to the 2019. You sort of anticipated a drop back and I still think they're relatively sporty given the cost of debt hasn't come up. But I think that's starting to thaw a little bit with -- essentially, private equity need to get some of these assets and monetize it for [ fees ]. So I think that's a good trend for us.

Got it. Got it. And one more operational question I wanted to ask is, like, back on these cameras and enforcement that you're bundling or even on the commercial side, what's the hardware life cycle on those? And is there a point where, like, we should be aware, like, if there was a big surge, like, for -- New York is a weird example because they bought their own cameras. So let's imagine a situation where you had, like, Florida, let's say, next -- over the next few years, they put a lot of cameras in place. Is there a point at which you need to go back and incur some cost to replace those?

I'll answer that one because I've been with the company 10 years. We had cameras that predated my arrival that are still operating in the state of Florida. These things are built very, very well. They can last a long time because they're component type, meaning we can change out little pieces. We don't have to necessarily put a new camera in. Which -- but we can also reevaluate that at the time of renewal, if that's something that the customer wants to upgrade the technology or not. But generally speaking, they operate for -- their useful life is quite long.

So that's from a cash flow perspective. And then what about the -- conversely, like, how are you -- over what time period are you amortizing those?

It's a contract value, the initial contract value, which is anywhere from 5 to 7 years.

So if you run 5 to 7 years and then let's imagine the scenario that you just renew at the same rate, then that renewals then should be at a better margin, because you don't have the amortization of the hardware associated with it, right?

That's correct. That's correct.

Got it. Got it. Got it. Good. I think lastly, to kind of wrap up is that I think Verra has long -- you guys, like I said, a consolidated position and have dominant share in a couple of different markets. What are the aspirations, David, you have for the company? And kind of what keeps you occupied or maybe awake at night in terms of what you worry about?

Those 2 kids in college takes a fair amount of my brain share, to be honest, with you. Look, we set out a journey a couple of years ago to say, you know what, we want to -- we have this portfolio of assets, and we want to be one of the best run companies ever. And so we have taken lessons from great companies like Danaher and Fortive and that -- and we've hired people with that background. They sit on our Board now. And so what I would anticipate is leveraging what we call the Verra Mobility operating system, which is the way that we run our businesses, that we will continue to create excess cash flow that we can redeploy on behalf of investors and that you'll see, in 5 to 10 years, a much larger, more diversified portfolio of assets in the company.

Well then, David, Craig, Jon, thank you very much for joining us.

Yes, thanks for having us.

Thanks, everyone.

Thank you. Thanks, James.

Thank you. I appreciate it. Jon, nice meeting you.