Verra Mobility Corporation Q2 2022 Earnings Call

To begin. Good day and welcome to the Verra Mobility second quarter 2022 earnings conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Mr. Mark Zindler, Vice President Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and welcome to Verra Mobility second quarter 2022 earnings call. Today we'll be discussing the results announced in our press release issued after the market close. 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 and key growth strategies, 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, August 3rd, 2022, 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-Q for the first quarter 2022, which are available on the Investor Relations section of our website at ir.veramobility.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.veramobility.com and on the SEC's website at sec.gov. With that, I'll turn the call over to David.

Thank you, Mark, and thanks everyone for joining us today. We've had a very busy and productive second quarter as well as the first few weeks of the third quarter, including our recent Investor Day. I'll spend a few minutes recapping these events and then turn to the trends that are influencing our strong results in each of our business segments. I'll begin with a brief recap of our Investor Day on July 19th. First, we announced an increase to our guidance for total revenue and adjusted EBITDA based upon our performance to date and outlook for the remainder of the year. Following that announcement, we had what we believe was a successful, well-attended Investor Day in which we articulated our long-term growth strategies, provided a deep dive into each of our business segments, discussed our M&A criteria, and concluded with our long-term financial outlook and capital allocation priorities. The event also provided the opportunity to communicate our long-term vision of operating in the broader connected fleet solutions and urban mobility markets and how these emerging opportunities provide upside to the long-term outlook provided by Craig in his presentation. My goal was to leave investors and analysts with one key message: Verra Mobility is a great business with a bright future, and our results and outlook validate that message. If you weren't able to attend Investor Day in person or virtually, I encourage you to review the presentation materials and webcast replay available on our Investor Relations website. Prior to Investor Day we announced several key developments in Commercial Services. As you'll recall, when we announced first quarter earnings, we signed a five-year contract extension with Hertz for our U.S. operation and also signed a contract with Hertz Spain for our European tolling pilot. Moreover, immediately leading up to Investor Day we announced several new partnerships we expect will contribute to core business growth, European expansion, and long-term emerging opportunities. While these partnerships will not lead to significant revenue generation in the near term, they are the building blocks to drive the future of our connected fleet solutions portfolio over the long term. Now moving on to our results, we had an outstanding second quarter highlighted by strong revenue growth and free cash flow generation. Commercial Services delivered exceptional top-line and bottom-line results driven by continued strong demand for travel in the U.S. In addition, Government Solutions continued to drive strong year-over-year growth fueled by the New York City school zone speed camera implementation, and T2 Systems delivered results in line with our deal thesis. Going into a little more detail, beginning with Commercial Services, the team again delivered strong order taking full advantage of the surge in travel demand across the U.S. Revenue of approximately $85 million for the quarter represented a 28% increase over the same period last year, and compared to pre-pandemic levels we achieved 25% growth over the second quarter of 2019. As we noted during our Investor Day presentation, we achieved these results despite the fact that rental car fleet volumes and TSA traveler throughput are below 2019 levels. This is predominantly due to increase in cashless tolling and customer adoption across the U.S. Moving to our Government Solutions business, we generated total revenue of $84 million, representing growth of 34% over last year. In addition, the 265-camera installed commitment for New York City remains on track. Through the first half of the year we've installed 121 cameras and plan to complete the remainder of the installations by the end of the third quarter, barring any supply chain risks which we do not currently anticipate. Finally, T2 Systems delivered $19 million of revenue for the quarter, directly in line with the deal model, and they remain on track to deliver full-year results in line with our internal expectations. Q2 was another strong quarter of growth and free cash flow generation. We are excited to build on the momentum of our Investor Day and continue to drive extraordinary results across the portfolio. Now I'll turn over to Craig to guide us through our financial results.

Thank you. If you'd like to ask a question, please press star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you'd like to ask a question. We'll go ahead and take our first question from James Fleschette with Morgan Stanley. Please go ahead.

Hey guys, this is Jeff Goldstein off for James. Thinking about your revenue growth by segment in the back half, should those growth rates generally line up with your Investor Day guidance around long-term growth, maybe if we strip out the New York City benefit to the government business? I'm just trying to understand if there are other factors in play right now that would cause you to under or outperform those long-term targets.

Got it, okay, that was all very helpful. And then as my follow-up, you talked a lot about at your Investor Day the bus stop camera opportunity. So maybe you can just remind us of how much revenue you're currently doing there and how you view the pipeline. Is that a six to twelve month opportunity to move the needle, or more like a four to five year opportunity?

Okay, fair enough. Thanks guys.

Thank you. We'll take our next question from Dan Moore with CJS Securities.

This is Stephanos Chris calling in for Dan. Thanks for taking our questions. Could we talk a little bit more about T2, maybe about the integration so far to date and some updates on cross-selling opportunities you expect to achieve?

Yeah, so as a reminder, the integration for T2 is actually very, very light. We look at it as a portfolio company, not something that's going to be sort of brought into any of our other businesses at this time. Outside of some of the costs that we burdened onto the business that Craig mentioned in his remarks related to SOC and sort of public company costs, it's continuing to grow. We're seeing a good recovery of that business coming again out of the pandemic — it was a business that was also pretty severely impacted. So we're seeing strong recovery. What I would say right now is that large parking opportunities are not necessarily super quick in the manifestation of those, so they're building a pipeline now and there's a lot of collaboration between the businesses to help generate those opportunities. We don't have a marker as of yet that we can point to and say that was the one, so we're still in the early phases of that.

Got it. Thanks. And then just in terms of your rack customers, what are you hearing about their willingness and ability to grow their fleets looking out to '23, '24 and beyond?

Yeah, I think the best — we try not to comment on those companies in terms of their specific plans because we want to, they're both publicly traded, there's plenty of information available to them. What I would say is that they are being super responsive to the demand and they are continuing to be very active in re-fleeting. They are as of yet not back up to 2019 levels, that has not impacted our business at all. But I would say the trajectory is to continue to get to a line of those assets to the demand as quickly as possible.

Perfect, thanks so much.

Yeah, thank you.

Thank you. I think our next question with Deutsche Bank.

Yes, hi, thank you. I just wanted to touch on Government Solutions. Can you remind us of the puts and takes around service and product revenues at least for the rest of the year and what the margin implications of that might be as we look at the back half for Government Solutions?

Yes, that helps. And margins, we've talked about it being mostly allocations. Is this sort of — I know this quarter is a little bit different because you didn't get the full revenue, but how should we think about margins for T2 sort of exiting the year? Are you able to offset some of these costs? I imagine it should benefit some of the other segments because we are allocating lower cost to those segments. Maybe just walk us through how we should think about T2 margins from here.

Great, thank you so much.

Thank you. We'll take our next question from Louie De Palma with William Blair.

David, Craig, and Mark, good evening.

Hey Louie.

Rental car providers — and David, you just mentioned how two of them are publicly traded and they have reported record revenue. This record revenue is partially as a result of the travel rebound and also partially a result of price increases. Is there an opportunity for the $5.95 daily fee that's charged to use your tolling service to be increased in the future?

I mean potentially. What I would say though is the pricing of what goes to the end renter is completely 100% set by our customers. We are not providing any influence on that whatsoever. So if they believe that is a better value proposition and sort of matches the cost and everything else, I think they would make those types of decisions. They certainly have made increases in the past, but I would say we're not necessarily the ones that drive those decisions.

Great. And I had — when you say it's been increased in the past, has it been increased in the past 12 months such that any of your really strong growth over the past year from rental car tolling has come from price increases or has it come from the factors that you referenced at the analyst day in terms of the volumes and the shift to electronic tolling?

The direct answer is no, and just as a reminder, that pricing is very geographically dependent and also product dependent. If it's an all-inclusive in the Northeast, that's significantly different than an all-inclusive in Florida. It really is very dependent upon the product, the brand, the location. There isn't — as an example, you don't just do a one dollar increase across all products. That's not how the business works for our customers.

Right, that makes sense. And another question, David. Thanks for that. Two days ago, the New York City school zone speed camera program went into effect 24/7. Does this have any impact on your contract for that program or should we expect there to be any impact in the future associated with this?

Yeah, I mean we'll be the one operating the cameras 24/7 so it wasn't comprehended in the initial contract. So we're just going through the process to make sure it gets appropriately covered.

Great, so would that have a positive impact and is that positive impact already in your guidance?

Right, that's all I have. Thanks guys.

Thank you, thanks Louie.

Thank you. Once again, that's star one for questions. We'll hear next from Keith Hossum with North Coast Research.

Good afternoon guys, I appreciate the opportunity. Can you walk us through the ASR and the timing of that, the life in the third quarter? If we understand it right, you have 2.7 million shares that came out in the second quarter and there's a balance that comes out in the third quarter.

Yes, and that $10 million — that's a volume weighted average price of the shares from the date you guys entered it to whenever it concludes, so maybe it's 60 or 90 days. Is that a fair assumption?

Okay, cool, thanks. I appreciate it. This is a follow-up. In the Commercial Services segment, you've got obviously the three segments: the toll management, the violations, the title and registration business. Can you kind of unpack how each of those three little verticals did in terms of the quarter? Obviously I'm assuming toll management was the biggest driver with the growth, based on the size and success, but how did the violations and title and registration do?

Great, fair enough, appreciate it. Thank you.

Thank you. At this time there appear to be no additional questions in the queue. That does conclude today's conference. I want to thank you all for your participation and you may now disconnect.