Verra Mobility Corporation (VRRM) Earnings Call Transcript & Summary

Okay. Great. Good afternoon, everyone. I'm Pat Ennis. I'm on the Payments Processors and Fintech team. Happy to have Verra Mobility joining at the UBS Tech and AI Conference today. On stage with me, we have David Roberts, President and CEO; and Craig Conti, CFO. So thanks for being here, guys.

Thank you.

So to start, for those who may not be familiar with the Verra Mobility story, I think it would be helpful for David to provide or give an overview of the different segments of the business, the high-level secular trends in the verticals the company operates in and the competitive landscape.

Sure. Great to be here. Craig and I both live about 15 minutes from here. So it's nice to have a drive to work or morning's conference to have travel. So Verra Mobility is a global leader in smart transportation, and that effectively shows up in 3 different customer segments. The first one is Government Solutions, where we are the #1 provider of automated enforcement technology in North America. That includes things like red light cameras, speed cameras, school bus stop-arm cameras, bus lane cameras and even a couple of more use cases other than that. Principally, that business operates here in the United States, where we have an approximately 70% market share. And then we also operate in Australia, New Zealand and in Europe. Our primary customer is local cities and municipalities who want to change the trajectory of safety on their roads, and they use automated technology as one of the tools in their toolkit to do so. And that represents, call it, roughly 45-ish percent of our total business. We also -- our next business is commercial services, where we're the #1 provider of toll management solutions for commercial fleets in the United States. That mostly shows up as rental cars. So if you are ever on a business trip and you rent a car from Hertz or Avis our Enterprise and you see that box up on the screen -- on the wind screen, that's us. So everything related to that program is effectively outsourced to Verra Mobility, where we are connected to all of the toll authorities. We pay on their behalf. We collect payment on behalf of the rental car payment. So everything effectively for that, the call center, everything is outsourced to us. We also work with fleet management companies, who offer those services to their corporate clients. That business is mostly North American, but we also operate a little bit in Europe. We can talk about that in terms of growth a bit later. And then our third segment is our Parking segment, which is an asset we bought about 5 years ago now called T2, where they work with universities and municipalities on their parking. So that shows up as permits and enforcements sort of an ERP software platform as well as hardware, meaning pay stations as well as what we call par parks, which is parking access. So those are the gates and the payments that move gates up on parking lots. So that's kind of the shape of the business.

Okay. Great. I appreciate all that detail. And so I think next, maybe we'll jump into the Government Solutions segment. So at Q3 results, you provided a multiyear Government Solutions total revenue outlook calling for a 10% to 12% CAGR over '24 to '27, and then high single-digit percent service revenue growth in 2028 and beyond. You've also provided your projection for NYC revenue from this outlook. Can you talk about what assumptions underpin your revenue outlook for NYC and the rest of the Government Solutions business portfolio?

Yes, sure. I mean we're really excited about the progression that we have here. So we did announce New York City, their intention to renew. We're still going through the final contract here. This $963 million. That's a 5-year deal with a 5-year option to renew. We've had that -- we've had New York City as a customer for a long time. We're very proud to have that. And when you think about the shape of that contract, there's a 1,000 camera expansion in there, and there's also some things that we're doing that we didn't do before. So some nice revenue growth in the contract. When you look at the Government Solutions business outside of -- and I don't want to hit on any of your other questions. I'm sure you've got a few more. But outside of New York City, continuing to see really strong growth there. We're going to have a year this year where we'll have high single-digit growth in service. I expect that for the next 2 or 3 years, high single-digit, low double-digit growth as we've continued to expand the TAM, and we've continued to penetrate existing states with new modalities. We're very excited about our growth. And I think that growth trend is durable for the medium term.

Definitely. And so I mean, I guess taking a step back then and looking at the opportunity set, and you touched on this a little bit, but can you give us an update of where you are versus the 21 original states that had automated enforcement at the time you went public?

Yes. So if you go back to when I joined the company over 11 years ago, it was -- I think it was a little less than 21, but automated enforcement was still sort of catching on from a state legislature support perspective. We now have authorized legislation in 36 states. So that includes not only just red light camera, but speed, school bus and some of the others as well.

Okay. Great. Perfect. And so I guess, segueing to the Commercial Services segment. Similarly, your preliminary outlook is expecting the commercial services revenue growth to be roughly mid-single digits versus the high end of mid-single digits in 2025. Can you recap the assumptions for that growth outlook and what cadence we should think about next year, especially exiting '26?

Yes. So I think probably a good place to start with that is how does the commercial service business grow, right? So David kind of walked through what our major customers are and a lot of that market that we participate in. And the way I like to think of it simply is 1/3, 1/3, 1/3. That's the growth algorithm. So 1/3 is, call it, GDP-ish travel growth, especially in the United States. Another 1/3 are what I would call classic growth initiatives. So those are things that we can allocate capital to and grow, things like our fleet business, our footprint in Europe. That's the second 1/3, if you will. And then the remaining 1/3 are the secular tailwinds, which is the addition of toll roads in the United States of America, so 20 new toll roads over the last year have been added in the United States of America. That's about the run rate per year. So added toll roads is a tailwind to the company. And then the continued transition to cashless toll roads in the United States. We're about 70% to 75% penetrated with obviously, the balance to go. And as roads go from barrier-based to cashless toll roads, the adoption of our product goes up as a convenience to the customer. So if you take those and you take any growth rate we talk about for commercial services, it's coming from those 3 components, okay? So now let me -- that's the backdrop. Let me answer your question specifically. I expect mid-single-digit growth next year because I think travel is probably going to be a little lower than what would be, call it, the normal run rate of GDP in the U.S. So if the normal GDP growth is 2%, I expect travel to be about 1%. And here's how I got that number. That's pretty much where we are year-to-date in 2025. So there's been a lot of talk in the industry. And I always say, especially at these conferences is if you're looking for a leading indicator for the commercial services business, you'd always look to travel and the folks who have the best view of that are certainly the airlines. So a lot of what I'm going to tell you is what I hear from the airlines, they have forward booking data that's pretty good. But as I look at where we were in the last 3 months with the government shutdown and how that was going to impact the airlines, it's kind of worked itself out at this point, and we're about 0.5% to 1% growth overall year-to-date, almost all the way through 2025. I simply took that growth rate, put it in 2026 and then built from there, that's how we get to mid-single-digit growth.

Okay. I appreciate it. Those building blocks are great. I mean where do you see the kind of long-term growth of this business today? I mean I know you just walked through kind of those 1/3, 1/3, 1/3, but does that growth algorithm by component outside of maybe GDP or the secular tailwinds that -- do you see that changing materially at all? Or mid-single digits is kind of the way to look at it?

I think it's between mid and high. I really think it's between mid and high. So if -- and the swing factor there would probably be to the degree that travel increases faster in the United States, particularly in the United States, you would see our growth rate go higher. But everything I know now tells me it feels more like mid.

Okay. Perfect. And then I know we just touched on this briefly, but maybe you could offer a little bit more specifics on just like how the government shutdown and the FAA impacts -- impacted your business, specifically within the Commercial Services segment?

Yes. It wasn't a lot. So what I'm going to say since it didn't happen for a very long time is a little more qualitative. But what we saw was the rental volume stayed pretty constant. And I think that the assumption is when you have a short-term disruption in airline travel, folks will still take the trip and maybe they'll drive, right now, I don't think that would be the same thing if the government shutdown went on for 6 months. But in the little nanosecond that we had, we did not see a super material pullback on the rental car side of the house in terms of volume.

Okay. Great. And then last year at the conference, you had mentioned the Avis Budget contract renewal comes up in Q4 '25. Can you share any updates on that renewal? Are there important RFPs or renewals coming up over the next year or so as well?

We're -- we don't talk much about it, but we're in active discussions with Avis Budget currently. The next one to come up is enterprise, which is toward the end of next year.

Okay. Perfect. And then moving on, kind of we've talked about the segment level preliminary outlook. But for 2026, putting it all together, you've provided kind of the outlook for mid-single-digit revenue growth with -- in Commercial Services, high single digits in Government Solutions and low single digits to mid-single digits in the Parking segment. What are some of the biggest variables in this outlook?

I feel pretty good about that outlook. I think we have a good view of Government Solutions, a little bit longer cycle of the business, where just for anybody who may be newer to the story, when we win a new deal and we put that forth as this is now in our backlog as annual recurring revenue, between the time that we make that determination, we get what's called a notice to proceed on the deal versus when it actually shows up in revenue is anywhere from 12 to 18 months, right? So that gives us a little bit more surety at least on the top line. When I look at the Parking Solutions business or T2, I feel pretty good about that. The business has grown this year. They've hit their plan. I think they're executing really well. There's always variability on the commercial side of the house. I mean, and that has a lot to do with -- we are a net taker of some of that revenue. People need to come through TSA and come up to the rental counter for our business to begin. So to the degree that you see ebbs and flows there in the American consumer, that will impact our business. But today, how we said it on the third quarter call is kind of how we see it.

Okay. Perfect. And then the adjusted EBITDA margin, that's expected to decline by roughly 250 to 300 basis points next year. Can you recap the drivers for us and help us understand kind of what are onetime items versus persisting?

Yes, sure. I think they're declining...

Declining...

Sorry, sorry, did I say decline.

If anybody is taking...

We like what you...

Everybody's taking notes -- so for 250 basis points, that's right. So a couple of things. #1, I think on the positive side, we did an ERP transition that's mostly behind us. So we won't be spending that next year. Then also, we have kind of a dichotomy in our company, where we have one business with a higher margin profile than the other that's favoring CS. GS is going to grow a little faster. So I've got a portfolio impact that is kind of negative. So it offsets that goodness we get from cost. But I think the biggest piece really is the renewal of New York City. And if you think about the renewal of New York City, I think about it in kind of 4 components, and you have to know all 4, I think, for it to make sense. So we hadn't bid this contract publicly for -- well, not publicly at all for almost 10 years. So there was price discovery and there's different prices in the market now than we were at that time. So there was a price rationalization that was negative to call it the EBITDA margin percent. What we also -- there's an expansion. There's a 1,000 camera expansion that's positive EBITDA dollars over the life of the deal. And there's also new things, new scope in the contract, things that we didn't charge for previously that now are done not at cost but at margin. So that was positive. If you added all those up on the EBITDA dollar side, it's slightly positive, right? I feel good about that. Well, the other piece of this, and we've been very consistent and the customer has been very consistent that there's a requirement for minority and women-owned businesses. And that is going to be about a $20 million to $25 million investment per year by the company. So in other words, that's work we used to do in-house that now we do through a third party just to adhere to the contract. That's going to cause a margin step back in Government Solutions, which is what's hitting the overall company. Now that's a onetime thing. I mean it finds a new level, and then, of course, we expect to grow from there.

And to that point, growing from there, margins in 2027, is there any expectation off of that '26 base?

Yes. And I'll do this. I'm not going to do it for the total company level, but I'll do it for Government Solutions because we did kick that out publicly. I think we'll grow Government Solutions margins anywhere from 1 point to 1.5 points per year compounded out through 2028. I think that business, that government business is a high 20s, 30% margin business by the time we're done in the next couple of years.

Okay. Great. Perfect. And segueing here to -- maybe before we go into some capital allocation thoughts. just new wins and opportunities. In terms of new wins, the company called out an automated photo enforcement pilot win in San Jose in Q3. Any updates on how this pilot is going? What metrics municipalities are monitoring during the pilot?

Yes. So that's part of sort of a broader California strategy where we've been working with local legislators to do a couple of things. 1 is to introduce school zone speed, which they did not have previously in the state of California. They now are doing a pilot in 6 cities. The 3 that have RFPs, we have won all 3 at this point, which includes San Jose. That's early days, so no real numbers. But what they're going to look at is the efficacy of the program or is there a reduction in speeding in school zones and a reduction of citations and/or critical accidents. The other part of the California strategy is also fixing the former red light legislation, which was a little bit onerous for both the DMV and the government as well as for the citizens, and that's been fixed. We expect that will have some growth. Ultimately, big picture, we'd love to see California embrace school zone speed and school bus enforcement across the entire state, which is our objective.

Okay. Awesome. Appreciate you hitting on that. And then I guess longer term, just one, with -- we were talking before coming on here about Waymo and some automated vehicles. I mean, how do you see that impacting the business longer term if you see greater adoption of those types of vehicles?

Yes. Currently, they're really -- it's such a small thing. The statistic I like to share is that there's 230 million or 240 million personally owned passenger vehicles in the United States, none of which are autonomous. If you were to look at the fleet size of Waymo here in Phoenix, I think it's around 500 vehicles. So we're sort of -- it's a bit of a pebble in the ocean at this point. Longer term, and when I say longer term, that's 20 years from now, I think there'll be a sea change of what that means. It's probably less of the fact that there's a Waymo or the Tesla version of that, which I can't -- cybercab or whatever the name is [indiscernible] excuse me. It's going to be more of the vehicle's ability to self-drive itself. The people would own a vehicle that it can also self-drive. But that doesn't necessarily mean it's going to abide by the speed limit or avoid a school zone or things like that. So I think for the midterm, so the next 10 years, it's not something that we see as a major impact to our business. It's certainly something we're keeping an eye on. We're actually looking for ways to partner with Waymo and others on some of those things.

Okay. Perfect. And I imagine for tolls, that would still be involved if cars are automated cars, that would be.

I don't think toll roads are definitely not going anywhere. And if you want -- I don't know, if this is in your script, but we just announced a partnership with Stellantis, where we've embedded our tolling technology inside Stellantis vehicles so that people can actually pay for a toll from their vehicle versus having a transponder.

Okay. Makes sense. Perfect. And then -- so I mean, I guess, diving into capital allocation, you've increased the buyback authorization by roughly $150 million to a total of $250 million available through November 2026. I believe you've made no repurchases year-to-date through Q3. Is the increase in that authorization a more definitive signal you're likely to meaningfully ramp up share repurchases in the coming quarters?

No, I think it was just that what we've always said is that our first priority is to invest in the business, which we've done, if you look at the investments we've made, in particular, in our government business, which are starting to bear fruit. We're always -- we have always maintained an active M&A posture to look for areas that we can expand our growth horizon through highly adjacent and complementary assets. We just haven't found one that meet our criteria, whether it's strategic or financial. So with that, we've shown a pretty strong history of returning capital via share repurchases over the time we've been public. So this was -- we're effectively arguably underlevered at this point, where we're sitting right at about 2x, I think. So it was an indication of, 1, that the strong cash flow generation capability of the company, our belief that where our shares are currently trading, this is a really good purchase for us because we think they're undervalued. And I think it certainly is -- I don't know that it's a signal to the future, but it's very consistent with the past of how we've treated our capital allocation.

Okay. Perfect. And I guess just expanding on that a little bit. You mentioned kind of that net leverage being maybe below where you've been in the past. Could you walk through how you think about prioritization over the next 12 to 18 months between organic investment, M&A, -- we hit on buybacks a little bit and then just debt repayment, especially in this kind of more benign interest rate environment?

I would say, first and foremost, invest in the business you have. We have a great portfolio of businesses. We want to see them continue to grow and have run rate. So we'll continue to do that, especially on the technology side. Part 2 would be, as I mentioned before, M&A. I think we've -- I think the markets have given us a lot of feedback on how we think about leverage. So I think our M&A is going to be pretty tight to adjacencies that fit. We don't want to go too high on our leverage. So we want to stay in that probably max 3, 3.5x on any sort of deal. But the business does delever very quickly. But in lieu of that, I think share repurchases, we generate a lot of cash. We could consider restructuring our debt, but we just did a great -- we just did that earlier this year in terms of the term loan and everything else. So I think we're in a really good position on our balance sheet. You want to add to that?

Yes. The only thing I would add to that, Pat, is when we were on stage last year, we said the same thing, and I want to make sure we're consistent because this is really how David and I run the railroad is we commensize our cash flows. We commonize our cash flows. We know exactly I have a covenant-light term loan B, I can prepay at my option. I know what my tax rate is. I know what the return on that dollar out the door is. This is after we fund everything internally, by the way, with the excess cash flow. The second thing we can do is buy back shares. We have a very live view of the intrinsic value of the company. We know where the screen is at. I have an open authorization. That's another common sized cash flow. Then the third thing is on M&A with the leverage kind of governors that David just talked about is we look at the free cash flow of the deal back at the whack and I compare it, pick the highest one. That's what we've done. And I would say to anybody researching the company every quarter, we put out an investor presentation after earnings that has a wheel in it that says, here's how we've allocated capital for the last 5 years or last 6 years. And that wheel, each piece of that pie is relatively large because we've done all 3 at different times in the market. So we've paid down over $200 million worth of debt since we went public. We've bought back over $0.5 billion worth of shares, and we've done some pretty marquee deals. So we keep that live and given the free cash flow generation of the company, which has remained healthy even through our Government Solutions growth cycle here that we're in, we get the opportunity to make that decision every 60 days. We take it really seriously.

And on that, I mean, you touched a little bit on this, but just in terms of M&A, I don't think you've made an acquisition since T2 in December '21. That's right. Is there any update on how the company sees the M&A pipeline at the moment? What parts of the business are you looking to enhance maybe with M&A versus organic?

I think we're sort of -- I don't know that we -- some of this is about what's available to in the market. I mean we have a pretty strict screening criteria. Us not closing a deal doesn't mean that we haven't been remarkably active in M&A. If you looked at the last 10 deals that we went pretty far in a process, 9 of them did not transact. And the reason was for the same reason we walked away, which was price. So the market still has, I think, an elevated view of itself related to valuation. And so we're not in a hurry. We can be very, very patient and we can continue to buy shares, pay down debt or invest in our own business. So -- but there's also things in -- there's areas of technology and camera technology that we've been really interested in, in terms of the innovation around AI and the capabilities of multiuse cameras at the roadside. So those are kind of -- that's an example of some of the areas that we're looking at.

Okay. Great. And we still have some time left, but just given the audience participation here, I just thought I'd open it up just in case I still have a few questions...

From both of you.

Either way. So I had a few more questions just as it related to the NYC Department of Transportation contract costs. I know you mentioned some of the kind of these onetime readiness investments and then also maybe some of the minority-owned subcontractor costs. But within the minority-owned subcontractor costs, the onetime readiness investments for this contract, one of the cost headwinds was the requirement that at least 30%, I believe, of the total contract is invested in minority and women-owned subcontractors. The company noted that outside of New York City, only a few major metropolitan areas have the same level of requirements around the use of, example, minority women-owned businesses. But as the company notes, as you noted, they tend to do better in larger municipalities. So as far as you're aware, what other large metropolitan areas that the company aims to work with might have similar requirements here or something down the line that...

New York is very unique. It was a very high percentage and it's a fixed based upon the amount of revenue. That's -- I don't know anyone that does -- that's the only one I know of that has done that so far. But if you look at San Francisco, there is a requirement significantly less as a percentage. But you're going to -- you'll probably see California probably have a bit of that. But I would not say it is industry standard, but it was certainly very important to the city of New York.

Okay. Understood. And I guess on -- we talked about margins a little bit and some of these onetime readiness, but do you expect a similar level of investments for all large-scale projects similar to kind of the NYC contract -- or is the company able to do.

We've already made -- I mean, we talked about a platform called MOSAIC, that's effectively the investment for all other customers. New York is -- it's very unique. It's -- there's no other customer like it. So you really treat it as its own business to some extent because it's so large. They have over 3,000 installed cameras. I think our next largest customer is several hundred. So it's a big -- pretty big magnitude and just the size and scale of the program and the location of it. So you just have to think of it a little bit differently.

Okay. And then last question here. Just expanding TAM. We know legislative decisions are very impactful to the TAM expansion of the business. We talked about California a little bit in those positive legislative changes. Is there any new legislative changes throughout Q4 to call anything you expect on the horizon to come to kind of.

I don't -- most legislatures are relatively quiet this time of the year. They tend to pick up in January and the spring for the most part. I don't see any material change one way or the other. We did -- we released a statement related to Ontario, and they -- we canceled the program there based upon legislative -- they no longer wanted the program, so they shut it down, and we issued a release around that, which was disappointing. There was quite a few citizens that didn't really like the cameras there. They were actually literally chopping them down. And given that it was our CapEx and the Premier was no longer interested, we decided to pull out. But other than that, that's the only sort of negative one that we could talk to right now.

Yes. Understood. So I mean, we're about at time here. So I really appreciate you both being on stage and being a big part of our conference.

Yes. Thank you for having us. Appreciate it.

Appreciate it. Thank you.