Good morning, everyone. My name is David Konig. I'm a Senior Research Analyst at Baird, covering payments and services. Thrilled to introduce Verra Mobility today, a leader in safety solutions in speed cameras and school zones, etc., and in tolling, rental car tolling, the clear leader in that. We have CEO Dave Roberts, we have CFO Craig Conti, and then have the government solutions business, Jon Baldwin. Maybe what we'll do here is Dave will step up and do a couple of slides, and then we'll jump into Q&A.
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All right. Whoops. There we go. Okay, great. I'll stand up over here just for these, just a couple of slides. Good morning. My name is David Roberts. I'm the CEO. Thanks for coming here today. Just want to introduce you very briefly to who Verra Mobility is, in case you're not familiar with our business. We are a global leader in smart mobility. We operate across three different segments. One is where we're the number one in what we call government solutions, commercial services, and parking. You can see just on the far left here, it gives you sort of a view of the size and scale of the business, strong revenue growth over the last several years. You can see really strong margins, and I'm sure there'll be some questions we can answer related to that.
We have 1,900 employees, and we have expanded over about 17 countries globally. Let me give you a sense of kind of what we do. In commercial services, we are the number one provider of toll management solutions for commercial fleets in the United States. For any of you that have ever rented a car from Hertz or Avis or Enterprise and run a toll, that is us. Everything related to the deployment of that capability, from the transponder in the windshield to the billing of your credit card at the end with the cost of the tolls, is performed by Verra Mobility. We also work with commercial fleet management companies. These are companies that procure vehicles for large fleets. Think of a Johnson & Johnson, and they need to buy 3,000 Toyota Camrys for their salespeople.
We equip our capabilities of tolling, violations, and registrations to those vehicles. Government solutions, and Jon here is the leader of that business, we're the number one provider of automated enforcement in North America. That means red light cameras, speed cameras, and school bus stop arm cameras. We operate that business not only here in the United States, but globally in Canada, Australia, and New Zealand. I'm sure you'll be asking about the New York program if you have questions, and Jon will be able to address those later. Finally, we also operate in a parking business where we provide software as well as hardware to universities and municipalities around the permits and enforcements and access and payment related to parking. Principally, we are a recurring revenue business. Probably 90% of the business is recurring revenue.
We've had really, really strong growth over the last several years and looking forward to talking more about the business. Thank you for your time. We can take questions now. I'll leave this up here for you.
All right. Thank you. Maybe we can kind of kick off with the commercial segment, the tolling segment, and just maybe talk about the market position a little bit and what prevents, you know, what prevents the rental car companies from developing their own system or the states developing their own systems, etc.
Yeah. While tolling on the face of it probably does not seem like a very complicated proposition, it actually is. The reason is that there are over 54 toll authorities that we have proprietary integrations with that allow us to register vehicles on our behalf and then make payment to that specific toll authority. That is not something that can, there is no one-stop shop to do that. You actually have to have the integration with the individual toll authority. As a rental car customer, what you realize is that becomes really important because those vehicles move around. Those vehicles start in Florida, they end up in Texas, they then go to California, then they go back to Illinois, running tolls all along the way in different toll authorities that have to have separate integrations.
What we provide is a system of interoperability for the rental car systems to provide to their customers so they can access those toll roads to make their journey a little bit easier. Those have been built, those integrations have been built over a decade of relationships and technology. That is part one. Part two is then the integration with the rental car company. We have been working with these customers for, again, well over a decade and highly customized integrations into their rental car billing system so that we can bill their customers on their behalf.
Yeah. Thank you. What do you think happens over time when the car manufacturers start putting transponders right into cars? Because currently you work with the big rental car companies and you have people that actually put those transponders in, I believe. What happens when they're already in the cars? Are you still involved?
Yeah, absolutely. One, that won't happen very quickly, certainly. What we call is that is a connected vehicle. The way we think about our technology that exists within transponders supports the technology that we deploy, but we also work where there are no transponders today. We can use video images as well as GPS signaling from the vehicle itself. In addition to that, we actually are in the process of packaging our software so that we could embed that into the head unit of a vehicle working with an OEM manufacturer so that that tolling will just be enabled inside the vehicle without having to have the transponder.
I would just say, again, having worked with OEMs for a while now, that's not something that's going to be, it's not the most important thing they're working on right now, so it's going to take some time for that to get fully deployed.
Yeah. Okay.
We feel, I guess maybe better said, we feel very well ahead of the curve when that trend starts to take place.
Yeah. No, that sounds great. You talk about high single-digit growth in commercial. We often just think it's highly correlated with travel data, the TSA data we track, and over time that usually grows kind of mid-single digits. How do you grow high single digits? Are there other products other than just the consumer tolling? We talked about fleet. Like what else are you doing to drive the better than mid-single digit growth?
Yeah. So the way to think about it is obviously travel is, you know, people traveling on airplanes and renting cars is a big part of our business. It's also very specific to the locations. There are very specific locations in the U.S. where the toll density is. So that's places here in New York, Illinois, Texas, Florida, and California. That's where we want the travel to occur. Two is we have multiple products that we can use with rental cars to help increase the adoption of the program. So even if the units of travel are flat, we can have a higher level of adoption, which increases the revenue uptake, things like an all-inclusive program. Two is there are more toll roads being built. Each and every year there are more toll roads, and the toll roads that are here are also converting to cashless.
When toll roads go cashless, that increases the adoption automatically because renters no longer have an option to pay cash or pull over and have a boom go up or not. In addition, we have an FMC business that I referenced. That is a business where we sell tolling and violations and registration too. That business continues to grow. We also have a European violation business. We have kind of multiple ways of winning related to getting to that high single-digit growth rate.
Maybe just to contextualize that in terms of quantifying it a bit, the way we think about that growth is a third, a third, a third, right? How do you go from zero to a high single-digit growth? Roughly a third of that is GDP-type travel growth. I think that'll be important as we talk about what's going to happen in the back half of the year. I'm sure we'll get to that, right? Then you've got the secular tailwinds and the way that we can track commercially that David just walked through, which is the second third of the growth. The remaining third of that growth are the organic growth initiatives, things like penetrating the fleets, what David mentioned that we do in Europe and also connected vehicle, right?
That's how you get from a travel growth environment that looks like GDP to a high single-digit growth business. The only thing I would put a finer point on that, Dave, is that's been durable over many years.
Yeah. Yeah. Okay. Maybe then if we think about just trends through May, I think when we look at TSA data, it is very close to Q1, maybe just a touch of deceleration. Are we tracking pretty much to what you expect? How are you seeing trends?
Yeah. I think you kind of hit it right on. If we look at it year to date, I think as of yesterday morning, you know, we're slightly better than last year, you know, about a half % better. If I look at it on a quarter-to-date basis, we're about a half % lower than last year. In terms of is that what we expect, when we laid out guidance for the year, we expected travel to grow along with GDP, 2%-2.5%. Clearly, that's going to be a little bit lower.
On our last earnings call, we kind of laid out and said, "Hey, look, we're going to keep our guide intact." As we look at the back half of the year, as long as travel is somewhere in the flattish to down a handful of percentage points, we could still maintain, albeit towards the lower end of the range that we kicked out at the beginning of the year. As far as expectations, I think as you would hear from an airline, certainly our customers, the racks, it's we have to see how that plays out, right? We are watching it in real time. I do think we have some insulation in our guide to a little bit of worsening where we are today.
Yeah. Okay. That's great. Maybe the last thing on the commercial business, the three big clients, you know, you give some detail in the filings, and each of their growth is a little bit volatile. Like it's not like they're all the same. They collectively get to write about what the travel data says, but some are up, some are down. Why is there the variance? You know, is it just how each company is doing specifically? Is that all it is?
Fleet size is a big part of it. Enterprise's fleet is probably double what some of the others are. That would be number one. Two, really it's just, it's effectively their fleet size related to the locations where they're operating at the airports. That's kind of, from our perspective, that's what matters. That's kind of the ballgame.
You've read obviously all the articles around certain rental car companies trying to dispose of vehicles and others are trying to add vehicles. That's kind of the, that's how the demand floats between the three.
Yeah. Okay. EVs and stuff, that doesn't matter, right? Because whether an EV or a motorized vehicle.
Car, yeah, it doesn't matter. It could be a car, a scooter, as long as it's got a transponder or a license plate, it doesn't make a difference to us.
Yeah. Gotcha. Okay. Good. Maybe if we move to the government business, New York is your biggest client across everything, though. It's like, what, 15-17% of revenue.
That's right.
You know, New York just chose you to renew their contract. Maybe just talk about, you know, how did they choose you and maybe what are some of the potential, you know, revenue drivers with the new contract?
Okay. To answer your first question, we've been operating in New York for almost 20 years. We are the incumbent. Part of what we do in operating these programs for our clients is really listen to them and what they're giving us feedback on. We're constantly evolving our programs to meet the needs and meet their future needs. They were very explicit in terms of the new procurement, some of the changes that they wanted to see. We invested ahead of the curve to make sure that we had a program that could meet their future demands of the new procurement. We stood up a large team to make sure that we put our best foot forward. We're deploying brand new state-of-the-art technology in New York that's kind of the first of its kind in the world.
I mean, there's some kind of a combination of great customer relationship, you know, really experienced service team, and then new technology deployed is kind of the tipping point that got us the win here.
If we think about how many cameras are in New York today and maybe what I think there's been, you know, chatter that maybe 450 red lights that they're thinking about adding, like would that go onto your program or maybe talk just about where we're at today and maybe how many cameras you could have?
When New York announced the award in March, they also announced the intent to install 450 additional intersections for red light camera. And so that's like a clear indication that they want to expand the program because they see how successful the program has been at protecting the lives of New Yorkers. You know, so that obviously is a constant conversation that we have with our client about kind of the timing and the location of those expansions.
Yeah. Have you said how many cameras you have in New York today?
We have, let's see, a little bit less than 3,000.
Yeah. So that's a pretty meaningful.
It's a large-scale program. It's the biggest in the world.
Yeah. Yeah. Okay. And then non-New York has been ramping very aggressively. I mean, the non-New York business, you're growing like what, 10-15% every quarter?
Double digits.
Double digits.
Yeah. It was double digits in the fourth quarter, it is 12%. I think we closed the first quarter maybe slightly underneath that. For total year 2025, we will grow non-New York City service revenue on the P&L double digits.
Yeah. That's great. What's driving the non-New York business to grow so fast?
There are two main things. Number one is market expansion. We're seeing, you know, Florida, Massachusetts, Colorado, and California have all enacted legislation over the past 18 months that have significantly expanded our market by, I think our last estimate was about $200 million over the last two years of increased TAM. The other one is increased win rate. We're winning more than we'd expected at the start of the year. Part of that's just a combination of the type of procurements that are coming out and also kind of a modification of how we go to market in a much more strategic approach. We're not relying on a salesperson.
We have a team of people set up to go install these programs and partner with the cities so that we can install these programs in a way that they're going to be off and running and deliver the expectations of the program.
What it felt like to me five years ago, it felt like municipalities, state governments were kind of like, well, our constituents do not like paying speed tickets and they do not like the cameras and stuff. What has changed in the last two or three years is all of a sudden it is like, well, wait a minute, school zones would be a great place to put cameras. We want to keep the kids safe. Maybe what is the path? Because it does take a while. What is the path for, like, a municipality has to agree to it, then a school has to agree to it, then it has to be bought. It seems like there is a long path, but what are the steps?
It all starts with state legislature. At the state level, we have to enact legislation that allows us to set up a program. Every state operates these slightly differently. We have a team of people, obviously, that are really well versed in the law in the state. We understand what's required in these programs to make them successful. We would go into kind of a city. We'd help educate them about the options available to them. In some cases, we'll do a speed study. In some cases, we'll do a pilot so we can actually see kind of what the problems are on their streets to help them sell their constituents that, hey, this is a very useful program for us. Lastly, these programs are violator-funded. It's not a big budget lift to ask for the city.
It really is a commitment on the safety protocols. If they're committed to the safety and they believe that the programs will work based on the testimonials we have from all the other customers that are seeing the benefits, there's not a big lift for them to go do the work because we invest the capital to go deploy the technology.
Maybe what's the timeframe from, you know, the state legislature says, yeah, this is a good idea to you starting to actually get paid revenue?
It's anywhere from 12-18 months. Yeah. You can imagine, mass adoption is really going to vary depending upon the state. You know, Florida has moved very quickly for school bus stop arm and school zone speed. California took a more deliberate approach with just six pilot programs in six cities. It really depends on what's allowed at the state level and then how fast do the cities really want to move.
You have a very strong backlog. I think it's about 13% of your revenue base. Does that mean at some point we're going to have a quarter here where that annualized revenue is starting to really hit and you grow 13% for the total segment? Like is there any reason that couldn't happen?
It could happen. It could happen. And just on the term backlog, the number that we kick out is an ARR number. So it's not, if you were to look at a units business, it's not exactly for anybody in the audience who's trying to say, you know, backlog, book to bill. It's a little different for Verra Mobility for a myriad of reasons. So let me contextualize that with numbers, right? We talked about on our earnings call that on a TTM basis, we have $52 million worth of ARR that hit. If you compare that $52 million to a $400 million business, that's the basis of your question. For sure. But you know, the one thing you got to think about there is these are pretty chunky, right? And that's why I don't like talking about ARR on a 90-day basis.
I like it more on a TTM basis. There could be a quarter in the future where that would happen. I would not think that that would be the permanent state of affairs. I still think about this business today as the high end of mid-single digit growth, but certainly trending more positive to that as we continue to build that ARR.
Maybe what should we think about? How big is the school business as a percent of your total right now? Maybe what, five, ten years ago, what's like the TAM if we, you know, add Florida and California and just all the markets?
We don't call it the school business separately.
No.
No, we don't.
We can talk about the TAM when we get to that.
It's tricky because a lot of the speed programs we have are actually school zone speed.
Yeah.
You know, the speeding programs are authorized within a certain distance or radius from the school because in many ways it's to protect speeding around children. You can imagine a high population density area like New York, a school zone speed can be, you have a school every 1 kilometer, every 500 meters even. You can get a very high camera density even in school zones.
I mean, the way to think about it is I've been with the company now almost 11 years and we've opened up more TAM for government solutions in the last two years than we did in the previous eight. I mean, we just have, there has been a real sea change in the adoption of these programs, whether that be purpose-built speeds, so school zones, work zones, school bus, or red light.
Like what could be, you know, if we look at all the states or all the realistic school zones, how big could that just speed camera business be in, you know, 10 years?
It's hard to say because right now it's, I mean, look, what we've said is we've opened up about $200 million of TAM in the last couple of years if California chooses to go to. Right now it's at a pilot phase where it's named cities. If it moves to a full state rollout, that would be another incremental.
150.
Yeah, $100 million. So we're sort of looking at a $300 million opportunity expansion for a business that's around $400 million in revenue. So pretty good, pretty good place to be.
Yeah. That's a very good place.
Our market share is 70% in the United States. If you just said that our win rate was anywhere close to that, then you would feel pretty good about the opportunity for the business.
Yeah, that's amazing. Your win rate slash market share. What has put you in that position? You know, in a school zone like a bake-off, how do you get chosen relative to a competitor?
If you think about, if you're in a government agency and you want to procure something that's not core to your mission, so you're a school board or you're a superintendent, you're not well versed in how do you run the streets around your school. They need a vendor that can come in and do all that work for them, plan the program, show them what's going to make an effective program, be that trusted partner as we stand these programs up. It's not trivial. It's not a SaaS offering. It is a pure technology-enabled service. We have to go in, plan the sites. We have to dig holes in the ground. We have to run power. We have to pull all the permits. Once we get the camera up and running, we have to integrate with the back office.
We have to integrate with the police department to actually review the citations before they're sent to a violator. Then we get involved in the billing on the back end. If you think about all those things I said from a school district's perspective, none of that has anything to do with their mission at running the school. They really want to outsource that purely to a technology partner who's got scale and proven ability to support the complexity of the program.
Once a school has a camera up and running, A, the municipality is getting ticket revenue, and B, you're probably proving out like, oh, there's 30% less accidents through here now, right? That seems very compelling. Once you have that in place, is it like 99% retention for the next 10 years plus?
That is pretty much how these programs operate. We have very little churn in this business because once they're up and running, revenue generating, saving lives. You know, one of the big growth factors we haven't talked about is expansion from current clients. Half of our growth any given year is going to come from our current clients will add more cameras to the program. Right? We see that as a great upside. It's two things. One is it's a reinforcement how effective the programs are. Number two, that's the lowest cost way for us to grow revenue on the top line because we don't have to go build a new back office or do a lot of new investment aside from just putting a new camera on the ground.
Yeah. Yeah. No, that's great. Maybe if we talk a little bit about margins, I know the government margins have come down a little bit. You know, how do you see that playing out? I guess next year you had some one-time stuff happen kind of this year. How do you see that play out into next year? Over time, is incremental margin of new cameras like accretive to margins?
Yeah. So this year we've put in some money into the platform. We talked about setup costs. When you look at the other side of the non-New York City business growing at double digits is there's one-time costs you need to do that's not necessarily capitalizable they need to incur. To the degree that that strong growth occurs, we will be putting some dollars in. If I roll it forward, I have to take, you know, anything that's going on with New York City. We'll see where that shakes out. I do expect this to be, you know, a very high 20s business, you know, getting towards 30%. If I roll it back to what we said at investor day, the overall business is going to accrete margins at 50 basis points a year. GS will be a contributor to that.
Yeah. Okay. That's good. We have about five minutes left here. We'll touch maybe on the parking business. I know you made the acquisition. Was it three, late, late 2022 maybe?
2021.
Yeah.
2021.
2021. Yeah. Maybe that's grown a little slower than we've expected. It's pretty close, but just a little slower. Margins have been, it's the lowest margin unit. Maybe touch on those two. Like what do you think revenue growth, the margins can be over time?
Yeah. We, as we've talked about on some of our calls, we've reestablished a new management team and they have done an exceptional job of kind of stabilizing. We, you know, we got off the rails a little bit what I would just call commercially. And they are back on plan relative to what the plan is for the year in terms of sales execution.
That's right.
Hitting, you know, salespeople hitting quota, going out winning with customers, renewing customers, all the things that you would call sort of commercial execution 101, which they had sort of fallen off on a little bit. They are doing really well. I look at the business right now as how we think about exit rate velocity for the end of the year, which is how is our recurring revenue base. That is, principally there are two aspects. One, we sell hardware. Think of access controls, the booms that come down when you get in and out of a parking lot, as well as pay stations for municipalities. There is that chunk. Then there is the kind of an ERP for parking management. That is the software SaaS business.
I look at the exit rate on that as sort of the, what we'll judge how the next year is going to be for the company.
Yeah. Is there sort of a synergy between all three businesses at all?
There's probably a little bit between parking and government, but really we run more as a portfolio play just because the customer sets are so unique. While both parking and government do serve some municipalities, Jon's business tends to be much larger and the parking business tends to be much smaller. They are not necessarily overlapping. Maybe just a little bit, but not much. Totally different solutions and platforms though. The overlap is really the common operating system.
Yeah.
That we have throughout the company.
Yeah. My daughter recently got a ticket from T2 up at a university she's at. And she was all a little depressed about it. I looked and I saw T2. I'm like, oh, I was super excited.
Yeah, you go.
This is great.
Good.
This is great. All right. You know, I guess over time, you know, one thing you said, Cash, you've done a really nice job deploying either buybacks or acquisitions over time. It's been a nice, you know, factor of accretion. You've recently done another buyback. Maybe talk through like what's kind of the goal over time with the cash flow?
Yeah. I mean, ultimately we've kind of run the same playbook since we went public, which is the, you know, we want to drive value for our shareholders. We always, and we feel like that is both growth and stewardship of the capital. So we're always looking for growth first. We've, you know, we've bought several companies. We haven't bought in a while because we've been trying to be, what I would just say the pricing in the market still doesn't come back to what we would consider fair value for some of the assets. We've been a little more conservative, looking for the right opportunities. We're also not in a hurry because we do generate a fair amount of cash flow. We can readily deploy that back to shareholders through buybacks, which we've done pretty significantly over the last couple of years.
We're able to, because of the cash flow, we're able to almost look at that in a real-time view. We can make those decisions based upon what's in the pipeline from M&A or do we want to do buybacks. It's kind of a nice place to be because we have that flexibility.
To put some numbers on what David said, when we're in front of this crowd, something I always like to say is that, you know, it's not lost on us. We compete for investor dollars, right? That's what we're here doing today. I think, you know, a piece of that is you have to demonstrate your ability to allocate capital. With a business like ours that'll generate anywhere from 40-50% free cash flow conversion on adjusted EBITDA, that's something you want to see the company be really good at. If you think about the last four years, you know, we haven't done a deal since the end of 2021. It doesn't mean we haven't been very active in processes. It means we've been very selective. In that same amount of time, we fully funded our CapEx.
We paid down over $200 million in debt and bought back over $500 million worth of shares. The final piece I like to say on this, David probably heard me say it before, is I can't tell you what's going to happen in six months, but I'm going to tell you exactly the screen that we're going to use to deploy our capital. It's the same play that we've been running.
Yeah. Maybe just final question. We've got a minute to go here. I guess what do you look at as the bigger risks? I look at your guidance. You kind of de-risked it by building in some deceleration already from travel, just assuming the market could actually get a little worse. You're fine with that. You have highly recurring government camera business.
Like it seems like you're very well insulated, but like what do you look at as some of the risks?
It's true. I mean, for us, it's really travel. Travel or, you know, we had when COVID happened, we had months that we had 99% falloff. I mean, we just, that's, we are connected to those big rental cars. If travel has a significant dip, like a significant dip, 10-12%, something like that, that's our biggest risk because Jon's business is literally going the other direction with growth.
Yeah.
The parking business is recovering. So we're really in a great spot right now.
I think you have 27% EBITDA margins in 2020 when COVID was out. I mean, even with that, even with the travel, you still had massive margins.
Yeah. Even though that drop, we still generated $20 million for cash flow. I mean, so we, it's a great business.
Yeah. Great. Thanks so much. Please join me in the next round.
Thanks, Travis. Thanks, everyone.
Thank you.
Yeah.
Appreciate it.