Verra Mobility Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Vero Mobility Second Quarter 2024 Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. I would now like to turn the conference over to Mark Zimmler, Investor Relations. Please go ahead.

Speaker 1

Thank you. Good afternoon and welcome to Vero Mobility's Q2 2024 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market close along with our earnings presentation, which is available on the Investor Relations section of our website at ir.veramobility.com. 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 and A.

Speaker 1

Management may make forward looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward looking statements due to a variety of risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for VeriMobility's complete forward looking disclosure.

Speaker 1

Any forward looking statements that we make on this call are based on our beliefs and assumptions today, and we do not undertake any obligation to update forward looking statements. 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, quarterly earnings presentation and investor presentation, all of which can be found on our website at ir.veramobility.com. With that, I'll turn the call over to David.

Speaker 2

Thank you. Thank you, Mark, and thanks everyone for joining us. We had a strong second quarter with revenue, adjusted EBITDA and earnings directly in line with our internal expectations. The businesses are performing as expected and we're poised to have a strong second half of the year. Travel demand remains robust and we anticipate continued strength through the balance of the year.

Speaker 2

Year to date TSA passenger volumes as of June 30 stands at 106 percent of 2023 volume for the same period driven by strong consumer and business demand with the latter demonstrating potential for more growth. In our Government Solutions business, the bid pipeline for automated enforcement is strong and growing. 2nd quarter contract awards represented approximately $12,000,000 in incremental ARR at full run rate, bringing the year to date incremental ARR up to $22,000,000 I'll explain on our awards and bids opportunities later in my prepared remarks. Transitioning back to our Q2 financial highlights, consolidated revenue growth was 9%, adjusted EBITDA increased 8% and adjusted EPS increased 7% over the prior year period demonstrating the predictable strength of our portfolio of businesses. Based on our year to date financial performance and our outlook for the remainder of the year, we are reaffirming full year 2024 guidance, which Craig will elaborate on in his remarks.

Speaker 2

Now moving on to our business unit operations. The Commercial Services team delivered outstanding results driven by strong and durable domestic travel trends and our continued strong performance in the fleet management business. 2nd quarter revenue of $104,000,000 grew 10% over the prior year quarter and adjusted EBITDA margins of 67% were up about 2 10 basis points over last year due primarily to the strength of rental car tolling. 2nd quarter TSA throughput volume was about 106% of 2023, driving strong growth and adopted rental agreements and tolls incurred, all of which resulted in an 8% increase in RAC tolling revenue. Additionally, our FMC business generated revenue of $18,000,000 for the quarter, representing 18% growth over the prior year period, primarily driven by enrollment of new vehicles and increased tolling from FMC customers.

Speaker 2

Moving on to Government Solutions. Recurring service revenue, which reflects 94% of total revenue for the quarter, grew 8% over the same period last year. The recurring service revenue growth was driven by program expansion from existing customers and new cities implementing photo enforcement efforts to improve road safety. To this point outside of New York City, we drove 14% service revenue growth due to these factors. Total revenue including international product sales were up about 11% over the prior year quarter.

Speaker 2

Next, I'll elaborate on the 2nd quarter award activity I highlighted earlier and provide an update on a strong quarter for legislative actions supporting automated enforcement. As I mentioned, we won contract awards representing about $12,000,000 of ARR in the 2nd quarter, bringing the year to date incremental ARR total to $22,000,000 Of note, we were awarded contracts in California for red light enforcement, representing about $3,000,000 in ARR. We are highly engaged in California and are excited to compete for impending speed program pilots. Other notable awards include speed enforcement in Doral, Florida Tempe, Arizona and several locations across New Zealand, all of which represent about $5,000,000 in total incremental ARR. I am also pleased to report several authorizations and expansions of legislation to advanced automated enforcement that advanced automated enforcement across the U.

Speaker 2

S. In Hawaii, the existing Redlight program was expanded and speed enforcement was newly authorized. Minnesota authorized Redlight, Work Zone Speed and School Zone Speed pilot programs. Additionally, in Vermont, a Work Zone Speed pilot program was authorized. Finally, in Oregon, the state passed authorization for school bus stop arm enforcement.

Speaker 2

This is truly an exciting time for our industry as state and local governments embrace technology to solve our most important traffic safety challenges. Over the past 18 months, we have seen the total addressable market for automated enforcement in the U. S. Grow by about $225,000,000 with the potential to further expand to greater than $250,000,000 as further legislation allows. Moving on to New York City, in July, the city's Department of Transportation released its RFP for operating and maintaining its automated traffic enforcement programs.

Speaker 2

The RFP outlines the agency's requirements and expectations for a qualified single vendor that will run the current programs with the ability to support back office services for all existing use cases and any potential future expansions. With New York City being among our most important clients, we look forward to submitting our proposal on or before the deadline. Next, a brief update on T2 systems. We generated total revenue of approximately $21,000,000 for the 2nd quarter. As we anticipated, one time product revenue declined about $1,000,000 compared to the prior year quarter due to a structural transition away from hardware and towards software and mobile solutions.

Speaker 2

As product revenue decelerates, we also experienced a decline in one time professional services revenue. Recurring SaaS revenue grew mid single digits over the prior year quarter. Adjusted EBITDA was $3,000,000 for the quarter. We anticipate this quarter to be the low point for adjusted EBITDA dollars and margins and to increase sequentially over the balance of the year. As we look to the future of the urban mobility market, we're confident that cities will continue to seek out technological solutions to help address their transportation challenges.

Speaker 2

We recently partnered with survey company Wakefield Research to learn what municipal technology leaders were focused on with their technology investments. More than half of these leaders have reducing road safety incidents as a top three priority for tech based solutions. When asked which AI driven options for traffic monitoring and enforcement would you most want for your jurisdiction, more than half of the responses identified safety needs and high fatality corridors in their top 3. We remain steadfast in our optimism that technology solutions are going to be a top of mind investment for our urban mobility customers. Next, turning to capital allocation, we maintain net leverage at 2.4 times providing optionality for future capital deployment.

Speaker 2

In the Q2, we repurchased 2,000,000 shares from a selling stockholder, leaving slightly less than $50,000,000 under our stock buyback open authorization. We also remain active in our evaluation of M and A opportunities. The M and A market and specifically within smart mobility continues to present opportunities for investment. As we look to adjacent market expansion to broaden our portfolio of companies, we continually scan the landscape for markets where our technology and experience can be leveraged into new vectors for growth. Adjacencies within urban mobility, government software and public safety are examples of markets where we have begun to that we have begun to look more deeply into.

Speaker 2

In summary, we've had a great first half to the year. We're doing exactly what we said we do in terms of financial performance. Additionally, travel demand remains robust and the bid pipeline is strong and growing. This is a great business with a bright future and I look forward to sharing additional updates as we continue to execute against our growth strategy. Craig, I'll turn it over to you to guide us through our financial results and the 2024 guidance discussion.

Speaker 3

Thank you, David, and hello everyone. Appreciate you joining us on the call today. Let's turn to Slide 4, which outlines the key financial measures for the consolidated business for the Q2. We're pleased with our Q2 performance, which included 8% recurring services revenue growth and 9% total revenue. The recurring service revenue growth was driven by strong travel demand in the commercial services business and recurring revenue growth outside of New York City in the Government Solutions business.

Speaker 3

At the segment level, commercial services revenue grew 10% year over year, government solution services revenue increased by 8% over the prior year, while T2 Systems SaaS and services revenue was flat over the Q2 of last year. Product revenue increased to $10,000,000 for the quarter, driven primarily by an increase in international product sales and government solutions. GS contributed $6,000,000 and T2 delivered about $4,000,000 in product sales overall for the quarter. Our consolidated adjusted EBITDA for the quarter was $102,000,000 an increase of approximately 8% versus last year. We reported net income of $34,000,000 for the quarter, including a tax provision of about $13,000,000 representing an effective tax rate of 28%.

Speaker 3

This rate includes certain discrete items which favorably impacted the tax rate for the quarter. For the full year, we are anticipating an approximate 30% effective tax rate. GAAP EPS was $0.20 per share for the Q2 as compared to $0.13 per share for the prior year period. Adjusted EPS, which excludes amortization, stock based compensation and other non recurring items was $0.31 per share for the Q2 this year compared to $0.29 per share in the Q2 of 2023. Adjusted EPS grew 7% over the prior year quarter despite nearly 16,000,000 additional shares in the share count due to the completion of our de SPAC process during the second and third quarters of 2023.

Speaker 3

Cash flows provided by operating activities totaled $40,000,000 and we delivered $26,000,000 of free cash flow for the quarter, which was below our quarterly run rate due to the normal seasonal timing of cash tax payments as well as collections timing among several large customers. Regarding the latter, approximately $16,000,000 in collections were received in the 1st 3 days of July and will benefit Q3 free cash flow as a result. Turning to slide 5, we've generated $384,000,000 of adjusted EBITDA on approximately $853,000,000 of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin. Additionally, over the trailing 12 months, we generated $139,000,000 of adjusted free cash flow or a 36% conversion of adjusted EBITDA on a weighted average base of approximately 100 and 69,000,000 shares. We expect a large sequential increase in free cash flow for the 3rd quarter followed by a modest decline in the 4th quarter, all of which is expected to drive a 40% free cash flow conversion of adjusted EBITDA for 2024 in line with our full year guidance.

Speaker 3

Next, I'll walk through the 2nd quarter performance in each of our 3 business segments beginning with Commercial Services on Slide 6. CS year over year revenue growth was 10% in the 2nd quarter. RAC tolling revenue increased 8% or about $6,000,000 over the same period last year, driven by robust travel volume and increased rental volume. Additionally, our FMC business grew 18% or about $3,000,000 year over year driven by the enrollment of new vehicles and tolling growth from existing and newly enrolled FMC customers. Commercial services adjusted EBITDA margins expanded about 2 10 basis points to nearly 67% driven by volume leverage as the summer driving season began ramping up.

Speaker 3

Turning to Slide 7, Government Solutions had strong recurring revenue growth in the quarter, driven by 14% service revenue growth outside of New York City. Total revenue growth grew 11% over the prior year quarter bolstered by strong international product sales in addition to the solid non New York City service revenue growth. Adjusted EBITDA was $30,000,000 for the quarter, representing margins of 31%. The reduction in margins versus the prior year is primarily due to increased spending on business development efforts, the non capitalized portion of our platform investments and revenue mix as a result of an increased international product sales. Let's turn to Slide 8 for a view of T2 Systems, which is our parking solution segment.

Speaker 3

We generated revenue of $21,000,000 and adjusted EBITDA of approximately $3,000,000 for the quarter. SaaS and services sales were flat with the prior year quarter offset by a $1,000,000 year over year reduction in product revenue. Breaking the SaaS and services revenue down a bit further, pure SaaS revenue grew mid single digit over the prior year quarter. However, offsetting this increase was a decline in installation and other professional services due to the reduction in product sales over the past 2 quarters. Okay, let's turn to Slide 9 and discuss the balance sheet and we'll take a closer look at leverage.

Speaker 3

As you can see, we ended the quarter with a net debt balance of $928,000,000 up modestly on a sequential basis due to the repurchase of 2,000,000 shares during the Q2. We ended the quarter with net leverage of 2.4 times and we've maintained significant liquidity with our undrawn credit revolver. Our gross debt balance at year end stands at $1,100,000,000 of which approximately $700,000,000 is floating rate debt. As we've discussed in the past, our notional hedge of approximately $675,000,000 covers over 95% of our current floating debt total with a float for fixed rate swap that is canceled at our option. Okay, let's turn to Slide 10 and have a look at full year 2024 guidance, which remains unchanged from our discussion last quarter.

Speaker 3

For purposes of review, I'll give you a quick refresher on our guidance by major category. We expect total revenue growth of approximately 8% and adjusted EBITDA margin expansion of about 50 basis points compared to last year. Adjusted EPS is expected at the upper end of the $1.15 to $1.20 per share range. Adjusted free cash flow is anticipated in the range of $155,000,000 to $165,000,000 And finally, net leverage will land at approximately 2 times, assuming no additional capital allocation investments beyond the investments we've made through the 2nd quarter. We anticipate revenue and adjusted EBITDA to increase sequentially in the Q3.

Speaker 3

However, as we experienced in both 20222020 we expect sequential growth to slow to low single digits in the Q3 due to travel demand shifting forward in the year. Consistent with historical trends, we would then expect a low single digit reduction to revenue and adjusted EBITDA in the 4th quarter. Adjusted EBITDA margins are expected to follow the same sequential revenue trends. We expect commercial services to grow mid single digits sequentially in the 3rd quarter and to decline mid single digits in the 4th quarter consistent with historical performance. In Government Solutions, we expect flat to low single digit sequential revenue growth over the balance of the year.

Speaker 3

Lastly, parking solutions revenue is now expected to deliver flat total revenue compared to prior year. As we've discussed, the temporary reduction in revenue growth is comprised of strong demand in SaaS offset by a reduction in one time product sales and related installation services as the industry transitions to a focus on software and mobile solutions. We expect T2 adjusted EBITDA margins to grow sequentially in the 3rd and 4th quarters with a full year up about 10 to 25 basis points over last year. Over the long term, we expect parking to return to strong organic growth as we execute our SaaS and transactional revenue growth strategies. Other key assumptions supporting our adjusted EPS and adjusted free cash flow can be found on Slide 11.

Speaker 3

In summary, we had a strong first half to the year and I'm confident in our ability to deliver on our 2024 outlook. We are benefiting from a number of secular tailwinds, strong travel, continued transition to cashless tolling as well as a robust and growing landscape for automated enforcement and other urban mobility technology solutions. The strength of our end markets and our continued focus on execution have set us up well to execute on our long term growth commitments. This concludes our prepared remarks. Thank you for your time and attention.

Speaker 3

At this time, I'd like to invite Jenny to open the line for any questions. Over to you, Jenny.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question is from Faiza Alwy from Deutsche Bank. Please ask your question.

Speaker 4

Yes. Hi. Thank you so much. So David, thanks for all the color around the incremental ARR and government solutions. I wanted to ask about competitive activity there, sort of what type of contracts are you winning?

Speaker 4

How would you characterize sort of your win rate? Is it in line with historical levels? Just give us a bit more color around the competitive landscape there.

Speaker 2

Yes, of course. One, the competitive landscape really depends on what where in the country or really, I guess, where in the world, but mostly where in the country where we are. It seems that some of our other competitors have focused more on in certain areas. There's a couple of competitors that have really focused in what I would just call generally the Southeast of the United States. Others are a little bit more in the Northeast and then less so on the West, but a little bit there.

Speaker 2

In general, what you would say is that our win rate both in terms of the total number of contracts as well as the dollars that we're going after, which is obviously a more important number, is in line with our expectations and similar to historic numbers overall. What I would say is that our competitors are definitely feisty. They've been doing a good job because of all the work we've done to open up the market. But in the major accounts, I feel like we've done a really good job there.

Speaker 4

Great. Thank you. And then in Commercial Services, right, you had strong growth in the quarter. It sounds like you are saying that you expect sort of strong travel demand to continue. Just talk a little bit more about your confidence there because it seems like there's some travel companies are calling out a little bit of slowing in demand.

Speaker 4

And I wonder if there are other factors that are making up for any slowing. Just there's a little bit more concern around the consumer environment. So talk a bit more about confidence there.

Speaker 3

Yes. Thanks Faiza. I think I know what you're referring to, but in general, if you look at the demand commentary coming from the airlines and quite frankly some of our largest customers that continues to remain, strong, right. And I think the let's take a look at the TSA throughput. I mean the TSA throughput is 106% year to date.

Speaker 3

It was 106 percent versus 2023. It was 106% 1st quarter, it was 106% in the 2nd quarter, it was 106% in July, it's in and around that range in August. So we have not yet seen that. So we still think that the level of travel that we've seen year to date is what we're going to experience go forward and I haven't heard anything different. I think the only other thing I would add to that and it's qualitative, but we have seen a return to the business travel, right.

Speaker 3

So to the degree that the consumer would have slowed down a bit, there is an offsetting increase in business travel that we've continued to see come through 2024. And I think that's why we've seen TSA hold really, really flat through the 1st 7 months and change of the year.

Speaker 4

Great. Thank you.

Operator

Thank you. Your next question is from Daniel Moore from CJS Securities. Please ask your question.

Speaker 5

Thanks, David. Thanks, Greg. Thanks for all the color. I wanted to maybe just dig in on margins a little bit by segments, not necessarily this year, but actually commercial services 67% margin, clearly exceptional and benefiting from seasonal strength. But just talk about sustainability of those levels as we look beyond 24% And then conversely, in Government Solutions margins come in a bit with some of the investments that you've made, talk about the opportunity for operating leverage as we look out and some of those new enforcement programs come online?

Speaker 3

Yes, great. So a lot to unpack in that question. So I'll do my best. So I'll start with what I think is going to happen for the year and then I'll give you some directional indication and how we're thinking about 2025, okay. Overall for the company for the year, I think we're going to accrete 50 basis points, which is consistent with what we said at the beginning of the year.

Speaker 3

I think CS will probably be about 100 basis points, GS is going to end the year flat, slightly down and T2 will be up a shekel or 2. So again, if you cost that out, you get up to 50 basis points. Now the one thing on 67% for CS, remember, we're in the summer driving season. So we could see that even maybe potentially tick a bit higher in the Q3, but that will come back in the Q4. Okay.

Speaker 3

For the GS business, you're right. If you compare where we're at today year over year, you will see the reduction in GS that's roughly split fifty-fifty between us doing more product sales internationally, which have follow on service agreements, which are higher margin, but they're lower margin sales upfront. That's what you're seeing journalized. And then the other side are the investments that we're making to win some of these new TAMs. But I think if you look at GS sequentially, one thing I'd like to point out, we're down 50 basis points sequentially in the Q2.

Speaker 3

That's all mix driven. So as we see those investments ramp up year over year, we're consistent within the year. And I'm going to use that as a jumping off point, I think for the second part of your question is what does 2025 look like? If travel remains where it is today, like we've said, it will be a GDP grower, right? If nothing else changes, the business will continue to scale.

Speaker 3

So we should see margin accretion again year over year in CS just based on what we're seeing for travel. For GS that one's a tougher pot. If the volume falls exactly as we see it today, we'd probably be flat to slightly accretive. But here's what can happen as you've listened to the calls for the last couple of quarters, every time one of these new markets open, we mobilize and we get our feet on the ground and that cost money to do. Obviously, it's the easiest return on investment you could imagine for us to invest, but we will continue to see that.

Speaker 3

So if I had to guess on GS, I don't think we'll see margin percent accretion next year. I think flat would probably be good, down another 50 basis points probably wouldn't be horrible. But then once we know where we land in California and some of these other camps and we get some notices to proceed, then the margin accretion will start as we're able to lean out that cost that you need to put in when you're opening up a new market.

Speaker 5

Really helpful. And then on T2 side, you obviously continue to shift from hardware to SaaS based solutions and appreciate you calling out the maintenance work that goes along with that, or the implementation work. Maybe just talk about the pipeline of opportunities, 1. And then 2, as when do you think those 2 sort of inflect and we might get back to more positive growth or start to drift back toward the kind of longer term expectations for that business? Thanks.

Speaker 2

Hey, Dan, it's David. Yes, great question. So what I would say is right now I think the team is really building some momentum. We're seeing a lot of traction in our permits and enforcement side of that business. As you recall, there's a university segment where we're back in software and then there are municipal segment that is more permits and enforcement.

Speaker 2

We're seeing a tremendous growth well above plan, that's a smaller portion of the business. And so what I would say is we've obviously we're going to be adjusting ourselves to make sure we're taking an opportunity to capture that demand. I would say that as we exit the year, we should probably be back on toward trajectory of getting to a higher run rating. I would expect next year is still not going to be at the high single digits, but probably starting to get toward that toward the end of next year is probably the best trajectory in the margin to come along with that.

Speaker 5

All right, really helpful. Last one for me is just the balance sheet guidance for is to exit the full year with net leverage of 2.0 times. Is that a priority for you? Or you still be opportunistic looking at M and A and or buybacks between now and year end? Thanks again.

Speaker 3

Yes. Thanks for asking that. And the fact that you asked the question means I should have said it different in the script, so double thank you. No, that's not a target. That is not a target.

Speaker 3

That will be the result, right? So the target for the company over term, I think we talked about this a quarter or 2 ago, Dan, is 3x net leverage. So we are out there looking to deploy capital, but like we said, right, if we can't do that in accretive way, I mean, it will delever the company. But that would be the result, not necessarily a target.

Speaker 5

Thought that was the case. Just wanted to confirm. Thanks again.

Operator

Thank you. Thank you. Your next question is from Keith Housum from Northcoast Research. Please ask your question.

Speaker 6

Great. Thank you. Good morning guys or good afternoon I should say, it's been a long day. In terms of the T2 parking, is there any KPIs or any kind of metrics you can give us to give us some confidence that business is growing? Understanding the shift from license to the SaaS model, but just want to give a little more confidence to that story if we can.

Speaker 2

Yes, I mean, I won't give any specific KPIs that we manage internally necessarily. What I would say is that the revenue growth from permits and enforcement is well above plan. What I would also say is that our pipeline of new and expansion sales opportunities in our current basis is also starting to expand again. So what I would say is right now after sort of this conversion in the market of our operator segment, we've really pivoted the business back to the core around university and small municipalities. And so what I would say is that we are probably in the bottom of the trough right now is the way I would describe the business from that and we are moving our way up the other side of that.

Speaker 2

And again, I think about this business as trajectory based. So how do we think about it if it's going to end this year? And maybe more importantly, how do we get back to that high single digit growth rate and expanded margin opportunities toward the end

Speaker 1

of next year as well.

Speaker 3

And let me just add to that a bit. So David did it from a product standpoint, which is good. Let me try to do it from how we go to market standpoint. So there's three things that we look at and we're not going to do this externally on a regular basis, but I think given this quarter and Warren's mentioned, right, is we've got true traditional SaaS revenue. We have service revenue, which are hardware enabled services.

Speaker 3

So it's not SaaS and it's also not hardware. Then of course we got hardware. When hardware goes when hardware demand pulls back, which we saw happen year over year, it brings with it some of those services. Okay. But the true value driver of Q2 is the recurring SaaS part of the business.

Speaker 3

That's the part that we want to see continue to grow. That's the part that becomes a larger part of the portfolio over the next handful of years. It's going to make this more sustainable and it's going to make it a higher margin business. We saw that part this quarter grow 5% year over year. So when we talk about being flat in total revenue, what we're seeing happen is the shift away from hardware, which again for us is by resell, right.

Speaker 3

So we're not too sad to see it go. And some of the attached services that go along with that, But the stuff that keeps us in front of the customer and drives our 97% retention rate in this business actually grew mid single digit even in a pressured quarter like this.

Speaker 6

Okay. Great. I appreciate that color. Thank you. In terms of the European tolling efforts, is there any update to report there?

Speaker 2

Yes, nothing new from the last quarter in terms of number of pilots or things like that. And off the top of my head, no new toll roads that have opened or gone cashless that would be of any note. So kind of in the same position that we were, which is we've got a couple of pilots in some key countries. We are beginning to see a bit of the thaw as it relates to the barrier based tolling in places like France and Italy. And we'll just continue to monitor that and execute on the pilots that we do have.

Speaker 6

Great. And last question for me. In terms of the Florida School Zone cameras, if I remember right, you guys really are thinking that revenue is really going to be more of a first half of twenty twenty five versus a second half twenty twenty four event. Is that still a line of thought?

Speaker 2

Yes, that's correct. That's exactly right Keith.

Speaker 6

Great. Thanks guys. Appreciate it.

Speaker 2

Yes.

Operator

Thank you. Your next question is from Louie DiPalma from William Blair. Please ask your question.

Speaker 7

David, Craig and Mark, good afternoon.

Speaker 5

Hey, Louie.

Speaker 7

Following up on the answer that you just gave, the $22,000,000 in ARR bookings year to date for photo enforcement represents roughly 6% of our forecast for your government services revenue this year. And do you still expect that the ARR growth rate will accelerate in 2025 from these wins? And are you expecting that the acceleration will likely be like back end loaded to the second half of the year as it generally takes time to install these cameras? Or like what are your thoughts in terms of the time of installation for these wins that you've achieved thus far?

Speaker 3

The short answer to your question Louis is yes. Okay. The slightly longer answer is timing really matters here. It really, really matters, right. So when we're looking myopically at a 90 day cycle or a 360 day cycle to show growth for the company.

Speaker 3

So let me bring it back for a second and then I'll try to give you a little more detail. So bringing it back, we expect the government solutions business still to grow mid the high end of mid single digits this year. I don't see that changing. I don't see anything that in the new ARR that we've been able to put under contract here. I don't see anything that's going to move that for 20 24.

Speaker 3

As we go out into 2025 and those notice to proceed start coming, couple of things happen. The notice to proceed gets awarded, right. Then the actual install happens and there's a calibration period, then the program actually starts. And it really matters if that last thing, then the program actually starts happens in April or it happens in June. You're going to see a materially different impact in 2025 because of that.

Speaker 3

I'll just have a better view of that 6 months from today, But bringing it back to the easy answer is, I do think this is for sure a 2025 impact, most likely second half is where you'll see the most material impact just given how long it takes the program to actually start turning the revenue for the company.

Speaker 7

Great. And does anything stand out with the New York City RFP? I think you mentioned that bids are due in October, but do you think that it's a fair RFP?

Speaker 2

Well, what I would say, it's the best word I can use long, it's 800 pages.

Speaker 3

It's a pretty comprehensive RFP. They did

Speaker 2

a really thoughtful and it RFP. They did a really thoughtful and we had as you recall, we had expected it earlier in the year and clearly they were busy putting together a very, very comprehensive note. So I would say, yes, it was originally going to be due in, I think, August and it's moved back now to the end of October is the current. And I think it's been written extremely New York has high expectations and the RFP reflects that.

Speaker 7

Great. And one final one on the tolling side, does the rollout of your and your partners all inclusive plans, does that continue to do well? And is it continuing to expand with your partners?

Speaker 3

It's continuing to do well, Louis. It's going to flex quarter to quarter depending on opt in and counter incentives, but we're very happy with the performance. But what we're not going to see, so we've anniversaried the inclusion of was ABG, Mark, second one? Hertz. So we've anniversaried Hertz actually flipping the program on.

Speaker 3

So you're not going to see those kind of momentum year over year growth now that that's in the run rate. But we the opt in rate there continues to be exactly where we have a peg. We're very pleased.

Speaker 7

Sounds good. Thanks everyone.

Speaker 8

Thank you.

Operator

Thank you. There are no further sorry, we have another one that just came through. That's from Dave Conant from Baird. Please ask your question.

Speaker 8

Yes. Hey, guys. Sorry, I'm a little late to join, but a couple of questions. 1, credit loss expense year to date is a little higher. Both Q1 and Q2 were up about 50% compared to last year.

Speaker 8

Now those are big numbers, so 50% move isn't that much. But is that economic related at all or maybe what is that?

Speaker 3

Yes, Dave, great question. It is not economically related. Let me start with that. We did have some 2 contractual things that we're still quite frankly negotiations with to get recoveries that we booked prudently in the Q1. As I look at our number, I'm doing this off the top of my head, Dave, so I know you'll keep me honest.

Speaker 3

But I believe the credit loss expense was something on the rounds of about $3,900,000 in the Q2 of 2024. That's pretty much exactly what it was in the Q3 of 2023, right. So, and if I look at it year over year, it's up about 25%, but my volume is up roughly half that. So, what I'm seeing today is literally volume driven. I have not seen the consumer getting any weaker in our stack.

Speaker 3

And again, I think some of that stuff that we put on the books in the Q1, hopefully I'll be able to come back to you in the back half of the year and tell you that we had a favorable contractual settlement.

Speaker 6

Got you. No, that's helpful.

Speaker 8

And then I guess the other question, Avis and Enterprise obviously doing really well, Hertz, and maybe you had Ancestry, but Hertz was down year over year in the I guess in the quarter, maybe not surprising at all, but is that kind of expected from Hertz just given kind of where they're at?

Speaker 3

Yes, I was surprised too. I saw that too, Dave. And look, I think it just has to do with snap in the chalk in 90 days. I can't my business is not necessarily a reflection totally of Hertz, right, because Hertz does business a lot of places where my product doesn't exist because there's no toll roads, right. But as long as those numbers are directionally correct over a longer period of time, I think we're okay.

Speaker 3

If I'm not mistaken, I think Hertz's rental days were about flat year over year. So I would chalk us being down in Hertz year over year more to locational mix than it would anything macroeconomic or anything going on with the customer.

Speaker 8

Got you. No, that's great. Thanks guys.

Speaker 3

Thank you. Thanks.

Operator

Thank you. There are no further questions at this time. And that concludes the question and answer session for today. Ladies and gentlemen, we have reached the end of the conference. Thank you all for joining.

Operator

And may be asked that you please disconnect your lines.

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Key Takeaways

  • Verra Mobility reported a 9% revenue increase in Q2 with adjusted EBITDA and EPS rising 8% and 7% respectively, all in line with expectations, and reaffirmed its full-year 2024 guidance.
  • The Commercial Services segment saw 10% revenue growth to $104 million, driven by 106% of 2023 TSA passenger volumes, an 8% uptick in rental-car tolling and 18% growth in fleet management revenue.
  • Government Solutions booked roughly $12 million of incremental ARR in Q2 (bringing YTD wins to $22 million), with contract awards in California, Florida, Arizona and New Zealand and legislative expansions boosting its U.S. automated-enforcement market by $225 million over 18 months.
  • T2 Systems generated $21 million in revenue with mid-single digit SaaS growth offsetting a decline in hardware product sales, and expects adjusted EBITDA to bottom in Q2 before improving sequentially in H2.
  • The company ended Q2 with 2.4x net leverage, repurchased 2 million shares under its buyback program, remains active in M&A within smart mobility and anticipates strong H2 performance with typical Q3 growth and a modest Q4 slowdown.
AI Generated. May Contain Errors.
Earnings Conference Call
Verra Mobility Q2 2024
00:00 / 00:00