Verra Mobility Corporation (VRRM) Earnings Call Transcript & Summary

All right. Let's get started. Well, welcome, everyone, to day 1 of the UBS Global Technology and AI Conference. I'm excited to have David Roberts, President and CEO of Verra Mobility with us here today. And as well as Craig Conti, CFO of Verra Mobility. So thanks so much for making the trip across town, okay?

Yes. Easy commute for us.

Great. Well, I think it would be helpful just for David to provide a high-level overview of Verra Mobility's businesses and the end markets and just high-level secular growth trends for each, just to kick things off.

Sure. Happy to do so. And thank you all for coming. So Verra Mobility is a global leader in smart mobility, which means we provide technology and tech-enabled services to our customers within the mobility space. Today, we have 3 business units. The first 1 is Government Solutions, where we are the #1 provider of automated enforcement in North America. What that means is that we are red light cameras, speed cameras, school bus stop arm cameras, bus line cameras, a portfolio of solutions to help create safety for the communities with which we serve. The real tailwind to that business, to part of your question, Nik, is automated enforcement requires legislative support, and we've seen a real surge over the last, call it, 2 years in house legislature wanting to enable these capabilities because they see the proof that it not only saves lives, reduces congestion, has a sustainability impact as well. And so that business really has a great green light ahead of it in the future. The second business unit is Commercial Services, where we're the #1 provider of tolling, violation and title registration management to commercial fleets. Principally, that shows up as rental cars. So in North America, we work with the large rental car companies, Hertz, Davis and Enterprise, on their toll management solution. So if you've ever rented a car, and you're in the car and you see the box up in the right -- up on the windscreen, that's us. Everything related to that service is performed by Verra Mobility, and we partner with each of the rental car companies or what we call RACs to deploy that solution. That solution, we also work with fleet management companies around tolling violations and the registration of their vehicles. That business also operates in Europe, where we work with municipalities on foreign registered vehicle violators. And I forgot to mention, excuse me, on Government Solutions, we do operate in other countries. We operate in Canada, Australia, New Zealand as well as North America. And then finally, in our Parking Solutions segment, we work -- we bought a company called T2, where we're one of the leading providers of parking and parking software management to universities in small municipalities. They -- think of an ERP for parking for a large university. That's what the software is. It's a SaaS-based revenue. But we also have hardware, which is related to things like pay stations where you can go and put your -- literally put the coin in, put your dollars in or your credit card or tap your phone, and we do the enforcement of violations for cities as well. So that's sort of the broader portfolio of the company.

Thanks for the overview. So maybe just starting with the Government Solutions business. I think it would be helpful just to hear your latest views on the robust legislative tailwinds that we've been seeing over the last 2 years and passed in California, Florida, Pennsylvania, Connecticut, Colorado, the list goes on. Like how much has the TAM expanded in terms of dollars?

Collectively, about $150 million of TAM, which is -- that doesn't sound like an enormous number, but that is historic in the context of our business related to the size that we've done in such a compressed time frame. And the reason for that is that the industry has, I think, done a really nice job, and Verra Mobility has helped lead the way, which is initially, automated enforcement was effectively red light camera, so there would be a fixed camera at an intersection. And those were not popular with people that were getting those enforcement tickets. So we pivoted to what we call purpose-built enforcement, which means that we're putting cameras in areas where people should be driving more cautiously. And those include school zones in and around school buses and work zones. And what state legislatures have said is, yes, we agree with that. In fact, we would much rather have our police working on much more highly important crimes, leverage this technology as a force multiplier and change the behavior in these critical areas. So that's been a real tailwind. And legislatures of both sides of the aisle, whether you're Republican or Democrat, have embraced that, and we now operate in 36 states across the country.

Got it. And maybe just like some quick like high-level things that, maybe it's like a state-specific thing, but just like how much does that like reduce any of these like bad behavior in terms of...

Yes, depending on intersections, I mean we will see a material reduction in crash statistics in intersections where there's red light cameras, and usually it's like a 15% to 20% reduction. After the initial warning period of a fixed unit for speed, you're going to see a pretty significant reduction, probably in the same altitude, 10% to 15% of people slowing down and no longer getting that. The recidivism rate is actually quite low. So typically, when people get 1 ticket, that's the only ticket they're going to get.

Got it. So very, very powerful. All right. So you guys have had a very strong year in this business as well, just in terms of the year-to-date contract performance, I think around $45 million year-to-date and half of that came in Q3. So maybe just kind of comment on like which states those are coming from?

Yes, it's really across 2 things. One is customers that we already have that had an expansion related to a contract renewal. Plus new wins where, as an example, one of the real things that we're super excited about is the state of California. California had long had red light camera, but it was enforced uniquely in such a way that it wasn't a great -- it didn't really work for the state or for the providers. They've been working to make changes and they have a pilot now for schools zone speed in 6 cities. The first one to up the bat was San Francisco. We worked really hard on that. We won that tender. Currently, that is the total opportunity in -- excuse me, in California is maybe roughly $10 million because it's a set number of cities. But our anticipation and working with our local legislative support would be that that's going to open up to the entire state, where that automatically becomes a $100 million opportunity just in the state of California alone. So we're super excited about having the first win there. We would anticipate other cities doing RFPs here shortly. I would expect at this first of next year, but having some more wins on the table as we exit next year.

Got it. And maybe one for Craig. How should we think about all these contract wins kind of converting that backlog into revenue in '25? Is that more or less point to a sequential acceleration throughout '25?

Yes. I mean I would think about it, Nik, in terms of what kind of velocity did we see coming out of the third quarter of '24, right? So if we take the third quarter of '24, remove New York City and I remove the product hardware sales from the business, the other part of the business, the core service business grew 12% year-over-year. I like that growth, and I like that as a proxy for next year, and I do expect that to be relatively level loaded throughout the year. It's my best guess today.

Okay. Got it. So level throughout the year. So back to San Francisco. I mean, when does that pilot go live? And what does that mean for the other cities in California?

Right now, best guess is probably sometime in early Q1 was the anticipated go-live. I believe, as of current, that's still the reality that we're working toward. San Francisco is kind of -- has always been -- they were a customer of ours before. They had been an early adopter of technology. What you would anticipate is many of the other cities will piggyback off the RFP that San Francisco used and probably in effect, replicate that as they do their own RFPs. And given that we won that and we won so strongly, we feel pretty good about the opportunities. I would anticipate, again, first half of next year, the other 5 cities that are named in the initial legislation would start to go, and then we would start to see potential new legislation going into -- probably in '26.

Got it. '26. I'll keep an eye out in San Francisco for these cameras. But while on the GS business, I think it would just be helpful if you could just review the pieces of the mid-single-digit growth algorithm. Do you see potential for this to maybe go higher over time, just kind of given all the momentum?

We do. And -- but I'm just -- I'm not ready to call that yet that there is an installed delay here in terms of when we win the deal and when it actually starts to earn in the business. I'd go back to kind of -- I think the third quarter is a really good proxy for how next year would -- might look for Government Solutions. I do expect growth at the high end of mid-single digits. But remember, 40% or plus of that business is New York City, right, which we said we expect to be flat next year. And they're going through an RFP, we'll see how that goes, right? And then 10% of that business is product, which I expect to be flat year-over-year. So only 50% of the business I'm expecting to grow. And even with that light amount of the business growing, we still expect to be in the high end of mid-single-digit business -- or mid-single-digit growth. So that gives you an idea of the trajectory.

Got it. A pretty powerful acceleration that we've seen over the last few years, and we can touch on some of the other parts of that later in the conversation, but I think it'd be good to jump to Commercial Services. So maybe just kind of -- just give us like an update where we are kind of Q4 quarter-to-date in terms of the trends of the first 2 months?

Yes. So I'll go back to the Q3 earnings call, we said we expected the balance of the year to look like about 101% to 102% year-over-year TSA throughput. That's exactly where we are since we did our call. We're like a 101% and change. The other thing that we said is we expected a strong holiday season. And again, I took that from the airlines, that's what we heard from the airlines. And there's an article that if you caught yesterday that the Sunday after Thanksgiving was the largest travel day in the history of the United States of America, with over 3 million people passing through TSA single day record. So we did see that strong travel season. And we're expecting GDP-ish growth as we go forward. So nothing has really changed from the last time we talked and very much as we expected.

Got it. And then just taking a step back, like how should we think about the longer-term growth algorithm for this business now that we're kind of grown past all the 2019 levels? What are the pieces there?

Yes. When you think about this, we do think about it as a high single-digit grower, right? Some years, it will be bigger, some years it will be smaller depending on the comp period, which is what I think we're seeing in 2025, which we discussed at length a few weeks back. But if I think about a normalized year at high single digit, I think of it in 1/3, 1/3, 1/3, Nik. So the 1/3 of that growth is GDP growth for travel. So the business travel will grow in line with GDP, of which the business is a net beneficiary of. Another 1/3 of the growth are from the -- we've discussed this before, through the secular tailwinds. But particularly in the United States of America, that's the addition of new toll roads in the United States and the conversion of existing toll roads from barrier based to cash free -- sorry, yes, cash free, cashless. And then the remaining 1/3 are what we call our growth initiatives. So this is the growth in our fleet business. This is the growth in our title and registration business and in Europe.

Got it. And maybe it would be helpful just to give us like a high level sense of where we are in terms of the cashless tolling penetration? I know that's like an important part of it.

Yes. We're on the rounds, about 70%. But remember that that number doesn't -- the denominator is not necessarily steady here because as roads get added, they're not necessarily added as cashless roads, right? So the transition from 70% to a higher number, we expect to take a multitude of years.

Got it. Got it. That makes sense. All right. So just on the last earnings call, you guys gave a preliminary 2025 outlook. So I think it would be good to just kind of walk through the assumptions that led you guys to point it to the lower end of the 6% to 8% long-term range?

Yes, sure. I think at a high level, on the CS business, that really has to do with the comp, right? So 2024 was probably the last, I'll call it, COVID recovery year. There's still a little bit of COVID recovery in 2024. I don't expect that in 2025. So I'll call that nonrecurring good guys as I look at '25 versus '24. The Government Solutions business is exactly as we've said since Investor Day, right? We expect that to be a mid-single-digit grower, maybe a little bit on the high end to mid-single digits, again, but that's with half the business not growing next year. And the T2 business is a little bit pressured. So we talked about some changes. I know David will walk through those a little bit that we've made in the business. And I think that will be low single digit to mid-single-digit grower. But quite frankly, when I think about that for the total calculus of the company, the difference between low single digit and mid-single-digit growth is $1 million for T2. So that's how we got to the lower end of the 6% to 8%. But I want to go back to what we said at Investor Day, which we did in the summer of 2024. We expect it to be 6% to 8% organic growth, some years on the high end, some years on the low end. We've had a few years on the high end, which created a more difficult comp for '22, hence, why we're forecasting to be on the low end this year. The business is in great shape.

Got it. So all of the Investor Day targets laid out kind of still appear achievable?

They do. So let me just review those real quick. So on the topline, that's -- we said by 2026, we expected $950 million to $1 billion on the topline. Still feel comfortable with that. And we also said by 2026, we expected somewhere between $460 million to $490 million of adjusted EBITDA. We also feel comfortable reaffirming that.

That's great to hear. Just touching on the margins for the outlook next year. I know you guys have a lot of implementation work to be able to onboard all of this legislation that's coming online. So that kind of contributes to this. But just kind of walk us through why EBITDA is going to be growing slower than revenue, implying a slight margin contraction?

Yes, sure. So let me review what that was if somebody is listening for the first time here. So we expect somewhere around 6% growth in organic revenue. We expect adjusted EBITDA to be up low to mid-single digits in terms of dollars. So the genesis to Nik's question is that the lower EBITDA margin percent, why? Again, I'm going to go 1/3, 1/3, 1/3 to keep it really simple. 1/3 of that transfer function is the fact that Commercial Services is going to be a smaller portion of my business next year than it was in 2024. So you have a portfolio averaging effect, the higher margin business. The other piece is a nonrecurring charge of $5 million we're going to spend next year to upgrade our ERP. We've been -- this will be year 6 as a public company. We're still operating on an old instance of Great Plains, which is going off support. So this is -- we have to do it, right? We're going to put in -- we're going to put in Oracle. And then we have the capitalizing of the new TAMs in the Government Solutions business. I've got salespeople I didn't have before, I'm going to conferences. And I'm doing business in locales that are new to us, which requires a small amount of investment. So the combination of those 3 things are making EBITDA not grow quite as fast as revenue in '25.

Got it. So yes, 2 of those 3, at least, are generally things that are nonrecurring in nature, generally speaking. And then we'll see what happens with legislation in '25. And maybe while we're on that topic, I mean, is there any read-throughs for another Trump presidency for any of Verra's businesses?

No, other than good water cooler talk. It doesn't have really an impact on our business. We don't do anything at the federal level, and this isn't something that we would anticipate any slowdown or impact into the states.

Okay. Got it. Well, had to ask. All right. So we haven't touched on T2 yet. So I know it's a smaller portion of the business, but also has some more like exciting longer-term growth prospects as well. That said, the business has maybe performed a little bit below your expectations this year. I know that you pulled in some new leadership more recently. So maybe we can kind of just walk through kind of what you're seeing in that business and what you expect to change with the new leadership?

Yes. What we really like about the business is the one, the recurring revenue nature of it, the stickiness of the contracts and the customers. It solves complexity, which is when software is highly integrated and solves complex problems, that's very, very sticky. So we really like that aspect of it. I think over the course of -- in a post-acquisition world, the team may have gotten a little lost in terms of how to make sure that we're delivering for our customers. That started to show up in the P&L a little bit. We made -- I made a decision to make a change to the leadership, and we brought in a really experienced leader. Super excited. Her name is Lin Bo. She comes from Danaher. A very outstanding track record of commercial execution to really bring in the rigor and discipline that we would anticipate from that business. She's made a very quick change. She's only been here 3 months, so it's still early days, but she's been doing a great job of getting the team aligned and really focusing on getting our -- focusing on the customers as well as the commercial execution on sales. And we would anticipate it will be a slower start because it takes a while to build up that revenue cadence. But as we exit next year, we're excited about where we think the business can go as we head into '26.

Okay. Got it. So more of a later '25 just given it seems like...

Yes, it will just take some time. That's right. That's right.

Okay. Got it. So, all right. Next, I wanted to touch on the New York City contract rebid. It's your largest customer. And it looks like we're not going to have any clarity for about 2 more quarters until around Q2. And I know that given that dynamic, you're limited as to what you can say during the RFP process. But that said, it's a top investor question these days on Verra. So maybe let's just talk about what you can talk about. Which are your competitive strengths in the Government Solutions business and how those match up against the criteria for this RFP?

Yes. It's a fair question. We certainly appreciate the questions. It's an obvious set of questions. Just to be really clear, when you're bidding on a city or a municipality or any sort of government contract, the cone of silence is a real thing, and we have to be very cautious and mindful of that. So thank you for that disclaimer. What I would say is, what are the criteria that are publicly disclosed within the context of the RFP, so you can go download this. If you'd like to download it, it's 800 pages long. It's the longest RFP that I've ever seen by a factor of 100. But I would say that that is something that if you want to go read you can. The -- what it says in there, what are the things that are important. One is experience. We are, by far, the most experienced provider in the country related to fully serviced outsourced automated enforcement for places like New York City. We've been working with the city over a decade now. We feel very good about our ability to deliver at scale the largest automated enforcement program in the world. Two is things like the use of minority women on businesses. That's a very important mandate from the Mayor's office into all of the different parts of the New York City government agencies. Something that we do regulate with some of our other large programs, we feel super comfortable about that. And so as it sets up, we just feel like our software, our data security, the efficacy and our translation of what we've been doing them for so long is going to -- sets us up and we feel really, really strong about our position.

Got it. And just another follow-up question here. I mean I know that the '25 outlook conservatively assumes just flat revenue from New York City kind of while the RFP is kind of outstanding. But is there upside to 2025 if you guys do successfully win the RFP?

It would purely depend on timing. So at the legislature, there is an expansion of 450 intersections for red light. It would purely be dependent on the contract winning and things like that. So a possibility, but no promise.

Okay. Got it. And you guys have like a long track record of winning and retaining large customers in the Commercial Services side of the business. And maybe you can just kind of just remind us about like a few of those relationships and how long you've had those customers?

Yes. Each of our large 4 customers are more a decade in relationship. So that means we've gone through multiple renewals, in particular, on the commercial side as well as in the government side. We've renewed New York City before. So what does that boil down to? We have an expression inside the company that we say, we like to serve our customers at the highest point of their need, which means we want to go above and beyond what they expect us to do so that when it's an opportunity for them to consider elsewhere, they would never do so. And I think that shows up in the quality of the services we provide. It doesn't mean we don't have issues. When you -- the expense and complexity of these programs is enormous. And so there are always going to be issues, but it speaks to how we solve them together in collaboration. So we feel great about these relationships. We love serving them, seeing them benefit from the things that we provide to them. So we feel good about where we stand.

Okay. Got it. And then just a brief follow-up there. Are there any other kind of large customer RFPs on the horizon in 2025 or 2026?

RFP, no. The -- yes, in all disclosed, Avis Budget's contract is up at the end of next year. .

End of next year, okay.

I think in December, if I remember.

Yes. I believe so, yes. Fourth quarter.

Okay, got it. And then maybe a topic for Craig, especially, but also you, David. You guys are tracking towards the lower end, actually like 1 turn below your target. I think you're going to exit the year around 2x. So...

Leverage?

Yes. Exactly. I think you guys have around $50 million in buyback authorization remaining. So can we just lay out kind of how you're thinking about capital allocation for the next 12 to 18 months in terms of buyback, M&A, share repurchase?

Well, let me -- I'll go first and then jump in. The beauty of Verra Mobility is that we -- it's -- we can do both. Meaning that when the stock is trading, in particular, how it is now, we have the capacity to go do meaningful repurchases and the ability to do M&A within the sort of rounding of what we think about the sort of size deals. Generally speaking, we're always looking for growth first. Well, actually, first, we're always going to invest in the business and make sure our businesses are set up with the capital they need to execute the plan that they have in their core business. We'll follow that with M&A to complement or accelerate growth, either in those businesses or in adjacent businesses. And then obviously, if we've already invested in the businesses fully and there's no attractive M&A available, then we've done both repurchases as well as debt restructuring. Just in the last 3 years, we've bought about 10% of the market cap of the company through share repurchases. For a company our size, that's pretty special, and we don't plan on changing our strategy around any of those.

Got it. So maybe just a follow-up here. It's been a little bit since you guys have done an acquisition, I think T2 was like 3 years ago at this point. So can we get an update on how the M&A pipeline is looking? Are valuations becoming more rational? And are there parts of the business that you think are maybe more suited for M&A?

Yes. I think broadly speaking, the last 3 years, we were not silent in M&A because of a lack of effort. It was truly the valuation expectations of sellers. I actually don't think those have necessarily come down. We've done some research recently and found out that in our category, so with the broad mobility technology space, average EBITDA multiples for transactions in the last year was 17.5x EBITDA. So they're like there's no 10x deals left anymore in our space. So that being said, what we want to do is work on what are the strategic advantages that we can bring to an asset so that we can enhance the value of an acquisition if you're going to have to pay those kind of prices, but we're also going to be super sensitive about that. Relative to the spaces, in reality, the businesses, government and the commercial businesses, probably less available targets for us to consider there that are directly in line. It would be more adjacent targets. More so to do in parking, I think, but we also want to make sure that business is stable before we do any M&A with it.

Okay. Got it. So one topic I think would be helpful just to go into, I know it's a longer-term opportunity, but you guys are generating revenue in Europe today in the RAC tolling business. So can you guys just kind of give us an update as to where you are in your various pilot programs across a few countries?

Yes. So for those that don't know, we bought some businesses several years ago to get a foothold in Europe. The idea was there is rental cars that operate in toll roads in Europe in multiple countries, very much like what we do today, our customers that say, "Hey, can you help us solve a problem there?" And the problem is there is just slow in manifestation because much of Europe and certainly the highly densely tolled areas still have barrier base. So that means the arm comes down, you can put a credit card and it goes up, so you don't need a bypass product like what we have in the products that we sell here in the U.S. That being said, we've done some pilots in some cashless toll regions like Ireland and Portugal and Spain. We're launching one in and around Milan. So what I would say is we're still early days, but as they go cashless and those roads will all go cashless at some point, they're starting to, that's going to be a nice opportunity for that business because as of today, we're the only one actually offering that solution. So excited about the long-term future. The good news is that that business is a part of a growing profitable business that does foreign registered violations across Europe. So it's not a cash drain on the business in any way, shape or form. It's just going to take some patience.

Got it. Because you have the commercial relationships already from the overlap.

Yes, we have pilots with all 3 major RACs in different countries within Europe.

Got it. And I think maybe COVID kind of just slowed down the progression there?

Yes. To rewind to take that for part of the issue was COVID, the impact here was, well, I mean, our Commercial Services went to zero. Again, there was nothing going on. They were defleeting, getting -- obviously making their cost adjustments. And it was much worse in Europe and much slower to recover.

Okay. Got it. So something to keep an eye on. I think like the business is something in the neighborhood of like $20 million revenue.

That's right. $20 million, $25 million topline profitable growing. Not a fast growth because it's, again, working on violations for governments. But this is a business within it that we still think has a real opportunity in the next 3 to 5 years.

Absolutely. All right. Well, it looks like we're almost out of time here. Is there any kind of closing remarks that you want to leave the audience with?

Look, I think the major point is if you're thinking of our business and you look at the Q3 earnings and you're going to kind of what happened, I think Craig did a great job of talking about it. But what we would say is over the long term, great business, bright future. We're super excited with what's happened in the government business with all of the wins that we've had. And as we get past the New York City renewal and move into -- going into '26, if you look at some of the costs that will be coming out of business because they're onetime costs in '25, really great trajectory for the company going into '26. So we're super excited about it.

Awesome. Well, thanks so much for attending the conference again. Really appreciate it.

Thanks. Great to be here.

Any time.

Appreciate it.