Verra Mobility Corporation
Q4 2022 Earnings Call Transcript

Published: 1 Mar 2023

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's Fourth Quarter 2022 Earnings Conference Call. My name is Julie, and I will be your conference operator today. This call is being recorded. I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please go ahead, Mr. Zindler.

[Mark Zindler:]

Thank you. Good afternoon, and welcome to Verra Mobility's fourth quarter 2022 earnings call. Today, we'll be discussing the results announced in our press release issued after the market closed. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. During the call, we'll make statements related to our business that may be considered forward-looking, including statements concerning our expected future business and financial performance, our plans to execute on our growth strategy, the benefits of our strategic acquisitions, our ability to maintain existing and acquire new customers, expectations regarding key operational metrics and other statements regarding our plans and prospects. Forward-looking statements may often be identified with words such as we expect, we anticipate or upcoming. These statements reflect our view only as of today, March 1, 2023, and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise any forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our annual report on Form 10-K and our Form 10-Qs filed during 2022, which are available on the Investor Relations section of our website at ir.verramobility.com and on the SEC's website at sec.gov. Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, which can be found on our website at ir.verramobility.com and on the SEC's website at sec.gov. With that, I'll turn the call over to David.

[David Roberts:]

Thank you, Mark, and thanks, everyone, for joining us today. For today's call, I'm going to first provide a high-level discussion on our outstanding fourth quarter results and key drivers. I'll move on to a discussion of several key trends that are shaping the smart mobility market before closing with our strategic priorities that will influence our 2023 operating plan and build upon the foundation for the long-term outlook we outlined at our Investor Day in July 2022. We delivered fantastic fourth quarter results, highlighted by robust revenue and adjusted EBITDA generation and strong free cash flow. Fourth quarter revenue of $186 million exceeded our expectations and was primarily driven by strong tolling trends in our Commercial Services segment. Adjusted EBITDA of $84 million for the fourth quarter also exceeded our forecast, driven by volume-based operating leverage in both Commercial Services and Government Solutions. Our strong results are aligned with two macro trends across our operating segments. First, we're seeing continued strong travel demand by both consumers and businesses, particularly in the U.S. The major U.S. airlines have cited strong or significant bookings in their recent quarterly earnings announcements. The second macro trend is the continued push for safer roads in communities, which drives the need for investments in automated safety enforcement. Traffic fatalities in the U.S. reached a 16-year high in 2021. And while early estimates are showing a very slight improvement in 2022, these numbers are simply unacceptable. Transportation officials, elected officials and safety advocates will be looking for technology solutions that can save lives that make transportation more efficient for everyone. Starting with Commercial Services. The team again delivered strong performance. Revenue of approximately $82 million for the quarter represented a 14% increase over the same period last year. And compared to pre-pandemic levels, we achieved 20% growth over the fourth quarter of 2019. There were several factors driving this performance. First, TSA throughput continued to approach pre-pandemic volume, reaching 94%, 2019 levels for the fourth quarter. In addition, key performance indicators included adopted rental agreements and rental duration experienced growth over the same period last year. Lastly, the secular trends underpinning these business drivers, continued conversion to cashless tolling, rack, refleeting and new toll roads continue to positively impact our business. Cashless tolling reached 64% this past year and 6 new U.S. toll roads were implemented in 2022 as well. In addition, Florida and Georgia recently announced significant investment plans to expand toll lanes over the next 3 to 5 years. Moving to our Government Solutions business. We generated total revenue of $85 million with $82 million being recurring service revenue. Service revenue increased 10% over the fourth quarter of the last year, driven by the completion of the New York City’s school zone speed installation. Government Solutions margins were about 36% in the fourth quarter, basically flat with the prior year. T2 Systems delivered revenue of $20 million with adjusted EBITDA of $4 million; and for the full year, revenue of $79 million and adjusted EBITDA of $14 million. Full year revenue growth was about 11%, which was slightly below our expectations. SaaS and service revenues were in line. However, hardware sales were slightly below expectations for both the fourth quarter and the full year due to customer requested installation timing. Craig will further elaborate, including the actions being taken in his prepared remarks. In summary, the fourth quarter was another outstanding quarter of top line growth, strong adjusted EBITDA and free cash flow generation, the secular trends driving our performance are durable, and we continue to experience strong operating momentum in each of our business segments. Turning to the balance sheet and capital allocation. I'm pleased to report that we lowered net leverage a full turn over the course of 2022, ending the year at 3.3x adjusted EBITDA. In addition, we repurchased $125 million of shares over the course of 2022. And in November, as we previously reported, our Board of Directors authorized a new share repurchase plan of $100 million. Furthermore, we also remediated all material weaknesses reported in our 2021 Form 10-K. This is a significant accomplishment by the entire organization. Thank you to all the employees that drove this change in implementation of our new controls and processes. Compliance is critical to our company, our customers and our shareholders, and we take it very seriously across the organization. Overall, 2022 was a record year in Verra Mobility's history, setting new all-time highs in revenue, adjusted EBITDA, adjusted EPS and free cash flow. We entered 2023 with significant business momentum in each of our segments underpinned by strong secular trends. Travel demands remain strong and durable. TSA throughput in the first quarter of 2023 is currently exceeding 2019 levels and forward-looking travel demand as communicated by major U.S. airlines remain strong. Second, we continue to experience a shift in cashless tolling across the U.S. in an effort to improve efficiencies and reduce congestion. For example, in the second half of 2022, both the Lincoln Tunnel and George Washington Bridge transitioned completely to cashless tolling. With that, all bridge or tunnel crossing into New York City have eliminated toll booths for payments. We expect the automated payments trend to continue on more toll roads across the country. Third, we expect to see cities place a renewed focus on Vision Zero safety programs, which includes investments in automated enforcement to reverse a troubling trend of traffic-related fatalities. And lastly, over the longer term, we expect to see cities make efforts to improve urban mobility in their communities through investments in curve management solutions and automated bus lane enforcement, which our parking and government platforms are well positioned to serve. With that as a background, I will turn to our top strategic priorities in 2023. Over the past year, we have implemented what we call the Verra Mobility Operating System, or VMOS. It's a robust standard business system that drives growth, efficiency and talent development. At the heart of VMOS are three strategic pillars

[Craig Conti:]

Thanks, David. Good afternoon, and thanks to everyone for joining us on the call. I'll start out today by providing an overview of our fourth quarter and full year 2022 results followed by our 2023 financial guidance. And I'll conclude with discussions on clients, capital allocation and our long-term outlook. Let's turn to Slide 11, which outlines revenue and adjusted EBITDA performance for the consolidated business. Total revenue increased approximately 9% year-over-year to about $186 million for the quarter, driven by strong operating performance across the company and the inclusion of T2 Systems in our financial results for a full year. On an organic basis and excluding New York City hardware sales, we grew 16% year-over-year. Expanding on this point, given the prior year included an incremental $21 million of product sales from the New York City camera installations, revenue growth is the best proxy for our performance. Q4 service revenue grew 24% over the same period last year, of which 16% was organic growth. This growth was attributable to several factors

[Operator:]

[Operator Instructions] Your first question comes from Daniel Moore from CJS Securities.

[Daniel Moore:]

Let me start, just kind of high level remind us where we are on the curve as far as the shift to cashless tolling at this stage. How much of a tailwind do you expect that to be? And how long is that likely to last?

[David Roberts:]

In the remarks, we talked about that we were about 64% in the U.S. market and we certainly see -- while it's hard to -- you can't necessarily put a numeric number, you see a lot of trends that I -- and I identified several specific ones in Florida and George and others where that is -- seems to be continuing. So we would anticipate that to be a trend for the next several years.

[Daniel Moore:]

Very helpful. Curious, David. In terms of Europe, what are your goals for Europe for '23? What kind of milestones would you consider a successful year, whether that be revenue, new agreements, just general progress? Anything that would be helpful for us to track.

[David Roberts:]

I don't think we're -- I mean while we have -- obviously, we're internally, we're working towards revenue. I think we're still in the place of, hey, do we have enough vehicles with current customers and enough locations that we can say we're finalizing proof of concept, improving the value to customers. So I think it's a bit of a combination, meaning we sort of look at enrolled vehicles on the program as the primary driver. That's the kind of the unit economic view. If we get that through one customer or several customers, that's fine. But we would also like to have a distributed view, meaning multiple countries.

[Daniel Moore:]

Understood. Really helpful. And then just maybe talk a little bit about on the government services side, the level of dialogues regarding Vision Zero initiatives. Is it relatively steady? Or is it actually picking up given the traffic fatality numbers that you described there?

[David Roberts:]

What I would say is even -- what I would say, as the traffic fatalities numbers were being reported and occurring, there was already a pretty significant increase, certainly in the countries that we're providing services in related to newer programs, expansions of current programs and even looking at other use cases. So I think it's -- I think that business has a very, very strong outlook for the next several years based upon some of the current dynamics.

[Operator:]

Your next question comes from Dave Koning from Baird.

[David Koning:]

I guess my first question, I often think about the Government Solutions, the services revenue kind of in the three parts, the New York service, other service, and then Redflex in there. About a 30 to Redflex, I think, is a little less than that. How did each of those do in the quarter? Because it seems like that continues to do extremely well. Like those three combined somehow do really well. And maybe kind of distinguish kind of which ones -- how fast each of them are growing or which ones are doing really well.

[Craig Conti:]

Yes. So I'll take a shot at that. So I think you're right. We talked about the total business. If you take out New York City, you just look at GS, right, this is a double-digit grower. New York City services in the fourth quarter continued to grow. It's going to continue to grow next year. We talked about that in terms of being plus 10%. Redflex service, we continue to see mid-single-digit growth there, as you would anticipate. And really, as you look at GS year-over-year, I think the one thing that you have to take out of that, and as you probably well know, David, right, is the fact that we're going from a year where we had product sales, I'll make sure I'm going to give you the right number here, right, in the Americas of $20 million, right? We're going down to effectively nothing. And if you look at those product sales for Redflex, that was a $10 million year looking at another $10 million to $11 million a year. So the business continues to perform well. We're seeing growth across the board. The real idiosyncratic piece there is the New York City install ending in 2022.

[David Koning:]

Yes. Okay. Okay. That's good. And then I guess the Parking business, you talked a little bit about Q4. I think you said the product was a little below your expectations. Has T2 overall, you've had it for just about a year now. Has that overall been in line? And did you say all through the year, you should have sequential growth in '23?

[Craig Conti:]

I would say -- David, I'd say yes to both of those, right? It has continued to perform to our expectations. And the equipment thing really was a delivery -- acceptance of delivery in the last couple of days of the quarter. So when we talk about choppiness, I'm talking about 3 or 4 deals that we'll end up getting, I think, here in 2023. So it's continued to perform well. As we look at this business next year, we're looking at somewhere of an 80-20 split with 80% of SaaS and service and 20% of equipment. And that's exactly where we want that business to be, so we're very pleased.

[Operator:]

Your next question comes from Faiza Alwy from Deutsche Bank.

[Faiza Alwy:]

So I wanted to pick up on T2. I guess, give us a bit more color in terms of where you're seeing the most traction. At Investor Day, you talked about adjacent categories, you talked about how your market share is lower with Tier 2, Tier 3. You talked about additional sort of large cities. So give us a bit more color in terms of what you're expecting for '23 from T2?

[David Roberts:]

Yes. I mean, I would say right now, the strongest is still in their home turf, which is in the university segment is strong and continuing to grow. They have an outstanding track record of not only keeping customers on very -- for long-term -- tenure of a long-term contract in addition to that expanding related services to that. So what I would say is that's still the core of the business. It's the backbone and it's continuing to grow. We're obviously looking at primarily how do we take those capabilities, in particular, on permits and enforcements and how do we bring those into other larger municipalities. T2 has done a really nice job in what you might call smaller, almost coastal vacation-oriented cities, and we're trying to bring that in. So we're making some investments in sales and marketing and organizational structure to make sure that we're supporting that with the right level of capability. And that's where we would anticipate the growth probably in the back half of this year and going into next year to be.

[Craig Conti:]

Right. And just to tack on to that. We are expecting high single-digit organic growth out of T2 next year. We expect margin expansion of about 1 point from where they landed this year. So business is on a good trajectory.

[Faiza Alwy:]

Great. And my next question was going to be on margins, so thank you for giving that color on T2. I was going to ask about the margin expansion that you expect from each segment. For Commercial Services, especially, I feel like, especially on a quarterly basis, like the quarterly cadence hasn't always been easy for us to figure out externally. So I know there are some dynamics in terms of what type of services you're providing. So maybe give us a bit more color in terms of what you're expecting on EBITDA margin expansion across the other two segments. And to the extent you can give us some thoughts around quarterly cadence of margins.

[Craig Conti:]

Yes, sure. I'll unpack both of those for you. So I think going forward, into 2023, we expect to -- I'm going to start at the portfolio, Faiza, and drill down, okay? We're expecting about 0.5 point of margin expansion across the portfolio, which is consistent with what we said at Investor Day that we'd expect on an annual basis. So we feel good about that. If I look at how that shakes out, now this is just for the total year, I'll get to the quarterlies in a second in terms of volume. So for the total year, I expect the CS business to be up about 50 basis points. A lot of that is volume leverage, right? As that business continues to grow, it scales really well. And that's a high single-digit grower for us next year. I expect the GS business to be down slightly anywhere from 10 basis points to 30 to 40 basis points year-over-year. And really that doesn’t have anything to do with product mix but they have to do with some investments that we are making in the platform to make sure we can continue to grow at scale both domestically and internationally in the half of decade or so. So about flat, slightly down in GS. And like I just said on T2, I expect that to be up about 1 point. A couple of things there. We continue to win business. And as I mentioned, I expect that mix of business to start favoring SaaS and service to an 80% of the total, which is more than we saw in 2021 and certainly more than we saw in 2022. So that factors out to about 0.5 point for the company. Now if you're going to look at trending, I'm going to tell you what the CS trending looks like because I think that will probably make a little bit more sense and I'll be happy to tell you how that kind of adds up for Verra Mobility. And the reason why I make the distinction is Commercial Services grows through the third quarter, steps back in the fourth quarter, which is 45% of the business but 10-plus percent of the business is T2, which sequentially grows from the first quarter out to the fourth quarter. So it gets a little muddied at the total company level. So let's go through CS first. I expect the first quarter to look a lot like the fourth quarter. It will be down a little bit. Typically, the first quarter is our lowest revenue quarter of the year but it will be relatively similar to the fourth quarter, I think, of 2022. Then we'll grow high single digit to low double digits into the second quarter, as we typically do. We'll grow again into the third quarter, I would say, low single digits to mid-single digits. And then we'll step back in the fourth quarter, call it, mid-single digits. And that trajectory that I just gave you is what we're planning for 2023 and is also spot on to the arithmetic average of the three normalized years in our history. So that's CS. Did that track?

[Faiza Alwy:]

Yes, that's very helpful.

[Craig Conti:]

And then if you go and look at Verra in total, right? So we're going to -- the trend is the same, but it's a little bit muted. So I'll be down in the first quarter, a few ticks lower than I will be for just CS. Again, it's the lowest revenue-generating quarter of the year. We'll grow, I'd say, high single digits in the second quarter. We'll grow again mid-single digits or so in the third quarter. And then we'll step back mid-single digits in the fourth quarter, which is that the end of the 3Q summer driving season in CS circulating all the way through to the consolidated company results.

[Faiza Alwy:]

Great. That's all that -- really appreciate all the color. Just my last question is, I think you mentioned as part of the Commercial Services growth drivers, you mentioned improving TSA volumes. So just wanted to just clarify that. Are you expecting growth? I mean, the way I've been looking at it is really TSA volumes as a percentage of 2019. Are you expecting that volume sort of get back to those pre-COVID levels in 2023?

[Craig Conti:]

The short answer to your question is, yes, that's what we're expecting. I think the way I have the plan done right now, I think the second half of the year looks like 2019, the first half kind of ramps to get there. But in all fairness, I have to compare that to where we are in a February year-to-date basis, we're at 102% through February. Now this is not an exercise in false precision here. I do think over -- I would look at 2023 as a percentage of 2019. And in general, we expect to get back to 2019 levels, and that's where we have the business plan today.

[Operator:]

Your next question comes from Louie Dipalma from William Blair.

[Louie Dipalma:]

David, Craig and Mark, good afternoon. What is the expectation for the non-tolling services for your commercial division in terms of growth? And by non-tolling, I'm referring to like the violation, management and title and registration. Is there expected to be growth in those services as well coming off what appeared to be a pretty solid 2022?

[Craig Conti:]

In totality, the answer is yes. We don't spike those out specifically in terms of growth rates. But I can tell you that if you look at the consolidated growth of the business, the RAC tolling piece is going to grow faster than the combination of the ones that you just mentioned. But yes, there will be growth year-over-year.

[Louie Dipalma:]

Great. And for David or Craig. In January, you announced your zero-in initiative. I know it's early, but what has been the initial feedback? Do you expect other municipalities to follow the lead of New York City and Oslo?

[David Roberts:]

Yes. I mean I think that's already been happening. Other cities have adopted that globally. I think what we were just trying to do is to make sure we wanted to draw attention that it's still relevant, it's still important and that we don't want to anyone to not stay focused on that, given the increase in traffic fatalities over the last year or so. So we wouldn't -- we believe a key driver of government solutions over the long term is an increased attention to traffic safety and congestion.

[Louie Dipalma:]

Great. Another one on the Government Services division. David, you indicated that you're investing in software. What does that new software enable strategically for you?

[David Roberts:]

Yes. I mean, I guess what I would just say is the software that we have has been -- it's the original software that the business was founded on. So we're just modernizing both the architecture as well as building in new capabilities and functionality to streamline the way that it's both built, coded and service. So just think of it as a bit of an update. Now with that, we'll obviously -- that will be our in the cloud web-based platform that we'll be using for the future that will also host a new functionality as we provided in the years to come.

[Louie Dipalma:]

Great. And are there any, I guess, new features that you're able to implement with your existing cameras with the software such that -- I remember a few years ago for your red light cameras, you indicated that in certain situations, law enforcement would have the ability to tap into your feeds for your red light cameras or for your feed cameras. And right now, there seems to be a major focus on school safety, and you have a big network of cameras around schools. And so I'm wondering if there's any type of school public safety services that you could cross-sell or add on top of your existing services with your network of cameras.

[David Roberts:]

Yes. I mean, I guess, point 1 is, yes, our customers have access to -- and local police and actually federal please have the ability to look into the cameras to look at video. That's a service that we provide as a part of the total package for our customers today. And two, we certainly are looking to the same extent that as we started off with schools on speed, we added school bus. There's obviously a portfolio of solutions that we could add there that don't necessarily have to be automated enforcement. They could be other sort of related types of technologies. I won't disclose anything specific, but just rest assured, that's certainly one of the categories that we're looking at.

[Operator:]

[Operator Instructions] Your next question comes from Keith Housum from Northcoast Research.

[Keith Housum:]

Dave, as we look at some of the legislative fronts out there, especially with the data that came out recently in terms of the pedestrian deaths, we talked about like Georgia and Virginia being states that have -- pass legislation recently. But any other states that are pretty far along that perhaps are close to passing legislation along more traffic enforcement cameras that as we look in the next year or 2, we see potential opportunities for you guys?

[David Roberts:]

Yes. I would just be -- I mean, look, a lot of those states are in legislative sessions right now. And so I wouldn't say that I have a specific one that I would lean into. But obviously, we're continuing to look at key critical states such as California and Florida and others. We've also opened up -- I think it was last year that we opened up legislation in Washington State as well. So we're always on both -- we're always on offense on that, and we're looking. So -- but nothing that I would report to specifically right now and wouldn't do so until those laws are passed.

[Keith Housum:]

Got it. Appreciate it. I think on the last quarter, you guys talked about opportunities in the construction zone camera space and a few large projects that perhaps are out there close to being signed. Any additional thoughts or context you can share in terms of the construction zone area?

[David Roberts:]

Well, we have two working currently, and we obviously think it's something that is -- it's another growth vector. It was one of the benefits of the Redflex acquisition because that's not an area that we have previously played in. But when you look at the target of customers that we have today, it seems as if that's an area where legislators are also going to lean into in the days and years ahead. I don't have a specific pipeline or anything like that in front of me, but I would just say that it certainly is -- it's not dissimilar from school zone speed or school bus, which is it's a pretty rational belief that workers in work zones should have the opportunity to work so safely and that these types of tools are force multipliers and enablers of affecting that outcome.

[Keith Housum:]

Okay. I appreciate it. If I could sneak one more in here. Last year, there was some discussion that you guys not yet won it, but there's potential for it, the 150 fixed busing cameras in New York City. Is that included in your guidance? Or is that the potential upside for the year?

[David Roberts:]

It is not included in our guidance, so therefore, is upside -- potential upside.

[Operator:]

There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. You may now disconnect.