Great. Good afternoon. I'm Louie DiPalma. I cover smart city technologies on William Blair's equity research team. This is day three and the final day of the 44th Annual William Blair Growth Stock Conference. And we're pleased to be hosting a presentation fireside chat with the management team of Verra Mobility in front of this standing room-only crowd. Joining me today are CEO David Roberts, CFO Craig Conti, and the head of investor relations, Mark Zindler, who's part of the standing room only. I am required to inform the audience that a complete list of disclosures and potential conflicts of interest can be found on our website at williamblair.com. And David will lead off with a few slides, and then we will hop into some Q&A. So thanks.
Yeah, thank you, Louie, and thanks for having us here. Thank you all for coming. I appreciate the opportunity to introduce some of you to Verra Mobility. Verra Mobility is a global leader in smart mobility. So we work with commercial fleets, local governments, and universities on their mobility challenges. I'll talk more specifically about that in just a second. Just a snapshot of our financial profile you see is a TTM from Q1, $835 million of revenue, $376 million adjusted EBITDA, 45% margins. We've had a really great run at growth and free cash flow conversion over the last several years, which speaks to both the durability and the operating leverage that we get across our businesses. I'm going to tell you a little bit about those now. We do have about 1,700 employees. We operate in 17 countries around the world as well.
If you were to look today at the portfolio of businesses, within commercial services, we are the number one provider of automated, excuse me, of toll management solutions in North America. That principally shows up with rental cars. So for many of you here, you have rented a car from Hertz, Avis or Enterprise, and you've seen that little box up in the windshield. Everything related to that is us. It's a fully outsourced program, everything from the integrations to the toll authorities to putting that transponder into your vehicle to then billing your rental car at the end of your trip. We also work with fleet management companies around tolls, violations, and registration. That business operates principally in North America, but also inside of Europe as well. That represents, call it, 45% of the total revenue of the company.
In addition to that, we have our government solutions business, where we are the number one provider of automated enforcement technologies in North America. That includes red light cameras, speed cameras, school bus stop arm cameras, bus lane cameras. We operate principally here in North America. We also operate in Australia and in Canada and New Zealand and somewhat in Europe. Here in North America, we are the leader. We have approximately 70% market share. And then finally, our most recent portfolio is parking solutions, which is called T2. T2 is a leading provider of parking management software to universities and small municipalities. That gives you a sense of the segments that we operate in today. And then finally, this is a slide you can go back and look at our investor day. We've had a really strong record of capital deployment.
If you looked overall at what we've done through M&A, debt repayment, CapEx, which is our investment in the business, share buybacks, I think the major punchline for you all to think about is that we're able to do all of those in a very short amount of time because of the free cash flow conversion of the business we're able to do. We're able to very much on a very opportunistic sort of a quarter-by-quarter basis look at what the best use of our capital is and deploy that in the benefit of our shareholders, which if you look at the history of the company has, I think, overall been a really, really strong track record. So with that, I'll go back to Louie. We're happy to answer any questions.
Excellent. Fantastic. David, you discussed how you are an industry leader for automated camera enforcement technologies. You act as a service provider, and you have your own software platform. There has been a lot of legislative momentum that we've been following in the news in terms of states having passed positive speed camera legislation. How does this compare all of the activity that we've seen in the previous couple of years with the prior five years and what has caused this big change in the industry?
Yeah, so maybe just for context, so for automated enforcement to exist in a certain state, there needs to be legislation. And that legislation is very specific to a use case. It could be just red light. It could just be school zone. But that has to occur. And over the last 3 years, we have seen more positive legislation sort of enabling automated enforcement in new states than we had probably in the previous 7 combined. I've been with the company 10 years, and this is by far the greatest tailwind. Let me tell you why I think that has happened and what that means.
Why is that over the course of time, the industry and certainly our company has pivoted toward what we call purpose-built enforcement, which means instead of just having a red light camera at an intersection, we want to have technology that is putting the precious cargo and keeping them out of harm's way. So we focus on things like school zones, school buses, and work zones. That's significantly harder to argue that that's not a good use of technology, and it still acts as a force multiplier in terms of not having to have police go in those areas as well. So that's been the real positive trend. We've opened up new legislation in states like Florida, Washington State, Pennsylvania, and also California. California has opened up, which is really exciting for us. California is doing a pilot right now where they have six cities and up to 260 cameras.
But if that were to transfer, that could be up to $150 million of TAM. So in total, in the last year or two, we've opened up about $125 million worth of TAM opportunity for us. If California goes wide at some point, we'd be closer to $250 million. So super exciting as we think about the growth of that business.
Great. You just discussed some TAM figures. How has this outlook in terms of that TAM compared to even your forecast two years ago at your analyst day when you discussed how there was the potential for a lot of these states to move forward, but there was always uncertainty in that there's a lot of politics that go behind that?
Sure. Yeah. So if you go to our investor day, we talked about this as a mid-single digit growing business. And what I guess the best that I would tell you now is our conviction in that is incredibly high. There's a potential to change that view later. But these are still government entities. They don't move quickly. Just because the TAM opens up, that doesn't mean RFPs are coming the next day. There's often a lag in the time from a legislative body saying yes, the governor signing the bill, and that's sort of working its way to the cities as often six months to a year. But that being said, we just look at this as with Florida having opened up a little over a year ago, we're starting to see the RFP activity, and we'll see more RFP activity in the days and weeks ahead.
Great. Craig, I think on your earnings call, you discussed some bookings metrics in terms of how some of that new legislation has translated into bookings. When do you expect for there to be an inflection point in terms of revenue from a lot of these positive developments?
Yeah, Louie, I think we'll see the first pieces of this probably in late 2024. But this would be a material mover out towards 2025 and into 2026. And I think, as David, I want to put a finer point on the TAMs that David just walked through, right? So that's, call it $150 million worth of TAM that we have some line of sight to, and then $100 million of TAM if California goes a little bit faster. So when you think about that California piece, that's probably later, right? But when you think about some of the stuff in Florida, so we talked about on the call that we put $7 million worth of ARR on the books, that'll start showing up again in late 2024 and 2025. But this is a long-term tailwind for the business.
Great. Thus far, there's been a lot of activity, and there's been a lot in the news. Do you expect to be able to maintain your general market share across these markets? You have a very high market share, but the economics for this industry appear attractive. It's recurring revenue. So have you been making investments? How do you plan to maintain your?
Yeah, we feel very good about our chances. We have the longest history of success in this industry by far. But that being said, we are making investments. As each of these new opportunities open up, we increase the level of sales and account management coverage in each of those geographies to make sure that we're ready to participate. We've talked about on our calls, we've made some significant investments in our core technology platform so that we're sort of fit for purpose for all this increase in opportunity that we're seeing. But yeah, we like our chances. We've been doing this a long time, and we feel like we're ready to compete. But to your fair point, Louie, there's more competitors that are starting to take a look at this business, but we have no fear of them. I can tell you that.
Can you discuss, you've recently talked about the Verra Mobility Operating System and how you've made different acquisitions with Redflex, and you have different platforms that you're integrating and how that integration?
Yeah, thanks, Louie. So we run our business much like a portfolio company. So companies you're familiar with, a Roper or Danaher or others that sort of run them. And we have a business system that we use to run those businesses. It's called the Verra Mobility Operating System. It really just refers to the standard way which we run all of our businesses so that we can expect above-market growth and above-market operating margin expansion for each of our businesses. So when we bought Redflex or as we buy T2, we deploy our resources into that to apply those skills and tools into those businesses to not only train and equip the people that are in those businesses, but also to create the culture of ongoing improvement that we expect across the company.
Great. And still sticking with this government division, even though we discussed how there's going to be an inflection potentially next year from the legislation, is the government division growing this year? And what are the general economics, Craig, for the government division?
Yeah, no, we will see nice growth this year. We certainly have that in our guidance, that mid-single digit we feel good about for the year. And I think it's a bit of an investment year this year for us in getting ready for these TAMs. So just to give you the shape of what that means, the investment kind of comes in two places. The first is on the CapEx side, where we're consolidating historic systems into fewer systems that'll make us more responsive as these TAMs open. And then the second piece is, quite frankly, when you're opening up a new market, you have to go to conferences, and you have to hire salespeople. So how I would bracket that together is I expect to exit the year with a margin percentage that looks a lot like we are today.
I do expect to continue to accrete margins and certainly grow nicely as we get into 2025 and beyond.
Great. And the growth that's taking place this year, is it broad-based? I know that New York City is one of your large customers, but there's activity everywhere. Is a lot coming from outside of New York?
Yeah, I would say right now a big portion of the new AR that we talked about is coming out of Florida, which is a state that just Florida had historically only had Red Light Camera, but a year or so ago launched a school zone speed, which includes School Zone Speed Cameras in school zones, as well as cameras on buses, so what we call Crossing Guard. And I think that's been a big portion of it, as well as some opportunities in Work Zone in places like New York State, not New York City, New York State and Pennsylvania has been a big part of that as well.
Great. And you discussed the competitive environment, but are there benefits associated with you having such tremendous scale and the fact that you have a pretty favorable balance sheet in terms of the flexibility? And Craig, you mentioned the CapEx, and David, you mentioned the investments that you're making into the software. Does that provide a competitive advantage when you're pursuing the new opportunities in Florida and California, Connecticut, Colorado?
Yeah, what I would say is we have the longest history of working with larger cities around these programs. These programs are not easy. It's not just putting a camera in the ground. There's a lot to it. There's everything from where we are supporting and enabling the legislation. So we're working with the legislatures up at the House and Senate and all the way down to working with police chiefs and mayors around how to deploy that within their city. And if you look at the major programs around the country, we are typically managing the larger ones. We feel really good about that.
With the investments we're making in our platform, which was already market-leading, we feel like we're going to really start to differentiate and have a platform that's fit for purpose for the future that will not only drive increased customer satisfaction and retention, but set us up for higher operational margin expansion as well.
Great. In terms of the service centers that support the photo enforcement operation, have you been making investments there? Do you have people on the ground in order to service the 7,000 or 8,000 cameras? How do you deal with all of those?
We do. So in places like New York, like Washington, D.C., we have those cameras. I know this would surprise you. People shoot the cameras. People spray paint the cameras. They try to unplug the cords on the cameras. People have a real emotional attachment to our cameras. We really appreciate their confidence. But to do that, we then have people that are in cherry picker trucks that are driving all over Manhattan or all over D.C. to make sure they're being fixed. And so yeah, we have a real scale advantage based upon certain locations within the country where we are able to readily deploy our resources or those resources of our subcontractors that we leverage to do that.
Yeah. And you bring up a great point in that there's a lot of oftentimes hostility associated with red light cameras.
We like to say it's passion. We think it's passion. Yeah.
There seems to be a much more positive, cordial sentiment for speed cameras. I think that was related to your comments earlier associated with them being associated with safety. Can you talk about the different studies and how your cameras have promoted safety in the different?
Yeah. I think ultimately this comes down to are they working? And what you can tell is that when you put in a speed camera or a red light camera, that there is a marked increase based upon a reduction of accidents and a reduction of speeding, and ultimately that reduces fatalities. Speeding is still one of the number one issues that local enforcement have to deal with in communities, and it creates a lot of havoc on not only just people's experience in operating inside of the city, but just traffic congestion and ultimately lives saved. So what we have seen is that using automated enforcement to help change that behavior does so in such a way that local police can deploy their resources to more high-level crimes.
Because all these budgets are constrained, it gives them an opportunity to use this technology in a way that has a measurable impact and also a low level. It's a high level recidivism. People aren't doing repeat offenders, so they're seeing the change in the community as well.
Great. I just wanted to comment that in prior years at this conference or at other conferences, the focus on Verra Mobility has always been on its commercial division. We recently had Verra on the road meeting with investors, and 95% of the questions focused on this government division for automated speed cameras as there's this trend across the country for focusing on safety. It's just been a great shift of the narrative, even though there's definitely hallmarks to the tolling division as there's a lot of secular trends. That's the segue into what are those secular trends. The reason I didn't lead it off is because it seems to be a lot of smooth sailing with the commercial division.
You're talking about the growth out of it?
Yeah, yeah. So the business is doing well. And I think for those who might be a little newer to the story, the first time you look at the company and say, if you've got the majority of the rental cars already on contract and you say this is a high single-digit growth business, where's that coming from? How's that possible? And it goes back, Louie, to the secular tailwind. So let me break that down for you. I think it's the easiest way to think about it. This is a high single-digit organic grower year-over-year. We expect that year-on-year and out into the future as well.
About half of that growth is driven by three secular tailwinds: the increasing number of toll roads in the United States of America, the conversion of toll roads from gated to cashless, and then finally the penetration of the all-inclusive product that we've launched a couple of years ago with our customers that's been going very well. So let me just give you a little bit of perspective on each of those. So for number of toll roads, to give you an idea, about 20 toll roads were added in the United States of America over the last two years. Every time a toll road is added, rental cars go on the toll road, and it's uptake in our product. When roads go from barrier-based to cashless, it removes the ability to pay with a credit card. So then it automatically enrolls in our program.
To give you an idea where we are on that transition, we're about 68% of the roads in the United States, toll roads in the United States of America, are cashless today. So there's quite a bit left to go there. Then finally, all-inclusive is a new way that we contract with our customers. That's about half of that growth. The remaining half is split 50/50. 25% of the growth comes from our growth initiatives within the company that's growing in Europe and growing in our fleet business. We talked about the rental car business. These are the fleets, the Wheels, and the Donlens of the world. The remaining 25% of the growth is GDP-ish growth on travel. Now, travel's been very strong this year. I think we'll probably talk about that. But as we go forward, we would expect travel to grow with GDP.
When you add those together, you get to a high single-digit sustainable organic grower.
Great. So it's more than just travel volumes.
Much more than that.
These trends. Also over the past five years, two of your major partners, Hertz and Avis, have rolled out all-inclusive plans. What has been the impact of all-inclusive tolling plans on you and also on just customer satisfaction?
Yeah, I would say the biggest is customer satisfaction. So for those of you who may not be familiar with it, there's historically been effectively two ways to use a rental car today for tolling. One is called usage day. Usage day refers to the fact that you pay the administration fee every day that you run a toll. So if you have five days, you run two tolls on two days, you get charged for those two days, plus the cost of the tolls. In all-inclusive, you pay one fee per day. You run all the tolls you want. So when you're in the New York area or South Florida or places where there's a lot of tolls, that's an advantage to you. The real benefit is that you also get, when you turn in your vehicle, it's on your credit card.
There's no tolls that come to your credit card after the fact. In some cases, we're not allowed to. We don't get the toll from the toll authority. You might get a bill on your credit card two weeks after the fact that says something like e-toll or ATS processing or something like that. That's not a great customer experience. This allows you to turn in the vehicle. You're done. You don't have no more. That's been a benefit. That's a benefit from us from a revenue perspective as well as for our customers. But more importantly, it's been a customer thing.
Great. And you also have different solutions that you provide in Europe. You've made a couple of acquisitions. And how have those acquisitions enhanced your solution set in Europe? And what are the differences between Europe and the U.S.?
Yeah. So for commercial, thank you. Years ago, we bought a couple of businesses there to put sort of our footprint in Europe for tolling. There is no pan-European rental car solution. And so for us, it was a highly adjacent opportunity. And our customers were saying, "Hey, can you help us out here?" Which is in effect the same product, the same customer in a new geography. The one thing that's been different is, as Craig mentioned, the conversion to cashless has gone much, much slower in Europe than we would have anticipated. So if you go to places like France and Italy, which is the preponderance of tolling, they still have barrier-based where you can pull over and put your credit card in, which is so the value proposition of our solution is not as high. So it's gone slower, but it is starting to thaw.
We saw some cashless roads built in France last year. There's one outside of Milan. So we're starting to see that. So we would anticipate that. That being said, when we bought our business there called EPC, it does collections for issuing authorities on foreign registered vehicles. So if you were to drive a license plate into a congestion zone inside of or low emission zone inside of London, they would issue a violation. And if you went back to your country, we would collect on that violation for them. It's a great little business. It's growing. It's cash flow positive. So our investment is sort of we're just sort of waiting for this to thaw, but it's not like we're over-indexed on investment. As soon as we've already made the investments, we're ready to go when we see that conversion to cashless.
Great. You also acquired T2 Systems in the U.S. a few years ago, which provided an entry into parking management software. How has that acquisition?
Yeah. The reason we like parking is one, it's very adjacent to, as we think of the urban mobility landscape of the set of solutions that governments and other customers like universities need. It creates complexity. It's very sticky. For T2, it's mostly SaaS-based revenue with a very, very high renewal rate and a real market-leading position inside of the universities and small municipalities, which is the reason we bought it. And it's gone well, especially on the SaaS revenue side. The hardware piece of it, where we actually sell pay stations and access control, has gone a little bit slower because we sell to operators.
Coming out of COVID, where there historically had been a relatively significant cadence to refreshes of hardware, that kind of went away as operators decided to not spend dollars on that and move to more mobile payments, which is fine because we actually have a mobile payment solution. It just has taken the top-line revenue, has been a little more bumpy because of that sort of change in the hardware. Longer term, we would anticipate this to be 80%-85% SaaS-based revenue and 25%+ EBITDA margins.
Great. And on that subject, your margins is one of the standout features for the company. Can you discuss what makes your margins what they are, what are the different costs, and whether your margins are high? Is there potential for future margin expansion even though they're really high?
Yeah. So let me start at the end and work my way back to the beginning with that, Louie. So we think about the organic growth of the company, 6%-8%. It's what we said at investor day. It's what we've delivered for the last two and a half years and what we expect to deliver for the next several. A question I get a lot is how much of that is price, right? And effectively, the answer for Verra Mobility is zero, right? So when we talk about growing revenue at 6%-8% and margins at 8%-10%, where does that margin accretion come from? I think that's the shape of the question. It's volume leverage. Our businesses scale very well. All three of our businesses scale very well.
That has to do with making a solid software investment that's aligned with customer needs and then, of course, adding to that over time with volume. That's how we think about it. I think our margins should grow on average 50-75 basis points a year through term.
Great. And with those margins, you generate a lot of free cash flow. And what is your current leverage and what is your leverage that you would be comfortable in this?
Yeah. So when we did investor day two and a half years ago, we said 3.5x net leverage was the right level flight path for the company. I still believe that two and a half years ago, that was the right number. But as we look at that today in the current environment, we believe that that same set of facts, it's the same business it was, it's performed as we expected, that 3x net leverage is the right contemporary kind of call it market clearing level for leverage. And that's where we're going to run the company to. To be clear on that, though, we do generate free cash flow on a conversion of Adjusted EBITDA between 40%-50% a year.
So the reason I say that is to the degree that we saw something accretive that made sense on the M&A side, we could take that leverage north and delever very quickly because of the cash flow generation business.
Great. And on this slide, and as you're discussing, you've been buying back a lot of stock. And you've also made different acquisitions of T2 Systems and several companies to enhance your strategic positioning in Europe. How are you thinking about M&A right now versus stock buybacks?
Yeah. I mean, the sequence of how we think about capital is kind of the same no matter what. The first is we invest in the businesses that we have, meaning we love the businesses that we're in. They have great market positions. If you look at the CapEx that we're spending, it's all about a business that we're already in that's growing. We want to make sure that it's appropriately resourced to take advantage of those opportunities. As we look at M&A, we're always going to be looking for where can we sort of expand ourselves in current markets or geographies that we already play in. When we can't do that, we look for adjacent opportunities.
So a great example is years ago, we bought a title and registration business because it serviced the same customers that we were already serving for tolls and violations to expand our share of wallet. And then we'll look at other aspects of smart mobility to say, "Hey, are there other lanes in this that we're not in today that we'd like to be in that could sort of be that third or fourth leg of the stool?" And that's where the parking came. But we are a DCF buyer. We don't buy pre-money businesses. We're not looking to take big bets on that. We're looking for businesses that are going to be cash flow accretive quickly and that will expand our strategic interests in the future.
Great. And I guess one of the themes that a lot of companies get asked is the AI question. And it's interesting because AI takes on a number of different flavors from generative AI, but one of the big aspects of AI is machine vision. And you've done that, and you've been doing it for a while with your cameras, your automated speed cameras, your red light cameras. But how have the cameras been getting smarter? What's the next generation camera technologies that could be deployed for some of these?
Yeah. We deployed AI or machine learning into our cameras about 18 months ago. It was really for our own benefit because those cameras use video as evidence. We pull that video back over a network that when you look at tens of thousands of violations a day across the country, that can get quite expensive. We developed an AI algorithm that would allow the camera at the roadside to determine which was an actual violation or sort of a false positive with a 99% accuracy rate. We reduced our operating cost significantly because we don't have to pull that back. That was the first part. The second part is that the cameras are effectively becoming multifunction so that you can do more than one thing at a particular intersection.
You could do red light, you could do speed, you could do pedestrian detection, you could do bus lane, bicycle. That's kind of the future of what's next, I think, for the cameras that are being deployed today.
Great. I think that is all the time that we have, but we are going to continue this conversation in the Jenny A room. Thank you, David.
Yeah. Thank you.
And Mark.
All right. Thank you, everyone.
Thank you, Louie. Thank you, everyone.