Morgan Stanley Virtual US Financials Conference

Jun 9, 2020

I believe we are now back. Welcome back to the Morgan Stanley payments and fintech symposium. I'm Steven Wald, and I'm joined by Vera Mobility this time. We've got David Roberts, the CEO, and Tricia Chiodo, CFO. Welcome, guys. Thanks for joining us. Yeah. Glad to be here. Yeah. Thanks for having us having us. So before I begin, I just have to read that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay. So maybe a good place to start with Zara. You know, a lot of people have have definitely ramped up on this name over the last year or so, And you guys ran us through during earnings that you guys were sort of outpacing the broader areas you're serving, whether it's broader road volumes or the rental car industry through April. Could you just remind us where we were through April and what May and maybe early June has looked like on both your commercial toll side, but also your government solutions photo enforcement side of the business? Sure. So we said this so we had a really nice q one. And then in in April, our commercial services business, which is closely tied to the rental car industry, was down 64%. That, in light of the fact that our underlying customers that we were serving were down 80%, so we still fared fairly well within the month of April. Our government solutions side of the business was actually flat on service revenue and and continuing to grow on its product revenue side. So so while we've seen pressure in our commercial services business, the government solutions business has continued to be strong as we continue to roll out programs for New York City. That's very helpful. Maybe just starting on the government side more broadly, looks like that's a broader resilience and perhaps it hasn't had to do necessarily with open states versus closed states. I even saw you guys put out a video reminding people to drive safely, almost a reminder that the more people are flagrantly speeding or violating traffic laws, you're actually earning more. But I'm just curious what you're seeing, whether it's on that side, but more focused on the toll side in terms of how much is being driven in terms of the rebound or the improvement since April from open states or opening states versus closed states and how stark is the difference in terms of what you're seeing on your side of the business? So from so what we see, we we're monitoring a lot of different things on the on the tolling side of the business. So we're looking at we can actually see the rental agreements that are opened and closed by our two largest customers. We're watching TSA travel. You know? So we are we are very much aligned with what's gonna happen in more of the leisure travel industry and definitely more domestic than US. We're seeing, you know, upticks that are coming from the TSA and a few little upticks from the rental car companies, but I think it's gonna take a little while. I think we're sort of gonna bump along at the bottom of this cycle for a little bit. Although then then we have news, like American Airlines came out and said that they've been operating at 20% capacity from the prior year and that they expect in July that they'll be at 55%. So there's some good news on the horizon for what may happen with volumes. And then on the government side of the business, it's really about when do schools open again. So if schools are geared to open up in this fall, that'll that'll do well for our business. It it impacts our school bus stop arm program, which is currently idle. And some of our municipalities that operate speed enforcement in school zones have them turned off while school isn't in session, but that's not all of them. New York City still is operating its program, and a few others around the country are still operating their schools on speed. So I think we'll see if we've upturns, but probably probably as we move into q three. Yeah. That's that's a perfect segue to my next question, which is as we go into q three, and like you said, levered a lot to leisure travel, and that is the busy season for it. Are there any indications so far to you or even a notion that you have that you're willing to sort of say, yes, this what we think is going to happen in terms of behavior shift on the tolling side where people would just opt to drive and use private vehicles in place of airplanes? Obviously, the airlines are improving, but they're off at a very low base. And you said it sort of hums along the bottom here. But is is there any suggestion so far from the rental car side that people are making even a near term behavior shift? And maybe on the government side too, any indication of police or local authorities looking to opt out of as many in person traffic stops and use more cameras in place of that? Yeah. It's it's a good question. I think one caveat that Trish and I use in these because when we get asked these questions is we don't want to play armchair economist because it's very difficult to sort of make broader predictions. Things that you could suppose that will happen on the context for the commercial business. So one, you would anticipate that things like shorter where people used to take shorter flights, they may opt to drive. That would be an area where you might see an uptick over the long term. Another area would be instead of people may have an aversion to using cabs or limos or Ubers or Lyft because of cleanliness. And the rental car companies have actually done a pretty nice job of advertising the way in they're which cleaning vehicles. So that may be an uptick. So for vacationers, they may choose to rent a car versus flying as well. So there are some potential trends. But I would say right now, it's just very, very early. We're working off such a low floor that it's any uptick would be hard to allocate to any one sort of change in behaviors. On the government side, while I think over the long term, you will see a positive trend in the photo enforced world because of one, the revenue generation capability and two, it does act as a force multiplier to keep police away from circumstances that might cause harm. I think it's way too early as municipalities are dealing with so many other issues right now. This probably isn't priority number one on their plate. So we'll probably start to see that and have more conversations related to that as we head into the back half of the year. But I would say that in general, those contracts have been very resilient, and we certainly find a lot of support from the customers that we do have. That's very helpful. Can we let's shift into the businesses individually for a second here. So commercial, obviously, you provided the tolling is the main driver of that segment for the main rental car businesses, you're sort of the only player and you're the only game in town here. And you've typically outgrown that industry. So I'm curious, and you've done so throughout the trough of this, I'm curious how you see that coming back with the industry. Should we expect that there is outpacing should continue at or similar to the level of its outperformance on the swing on the upswing? Or would that closer resemble the rental car rebound over time? I I think we're gonna we're gonna be tied on the rental car side to the rebound for for a time period. And just because it if we're gonna differentiate through penetration, meaning that our product is just penetrating into more of the rental agreements, in order for it to be meaningful for us, there has to be a high enough volume of rental agreements to make that differentiation. So I I think what you're gonna see is as as we sort of are on the uptick, we will outpace the rental car companies, or I should say we won't fall as deeply as they do. But that's less about us penetrating into having more more rental agreements with our program than not as much as more along the lines of that we also serve direct fleets, which didn't fall as far. So direct fleets, although had declines in their overall movement, it was it was far less than the 80% declines we saw in the rental car company. So I think you'll see that spread again, but I think I think it'll take a little while for us to get back there to where we're outpacing their volume. Understood. And maybe just a little bit more high level here on the business. One of the questions that I most commonly get about you guys is, well, couldn't you just be disrupted by some other software outfit coming in if people are willing to spend the money? But from from our discussions, it sounds like the moat is a little bit tougher to to climb than that. I guess I'm I'm curious if you could just walk through. Aside from just having the contract out as far as Avis in 2025, what are the main few differentiators for your product that would be very challenging for someone else, whether it's a rental car company? Obviously, they're all dealing with their own issues right now, but any other party to come in and try and, you know, compete with you? Yeah. It's a great question. I think what people need to understand is that the level, while on the surface when we describe what we do, it seems relatively straightforward and sort of imitable from an outside in perspective. But when you look, and as the case with many other businesses, when you sort of pull back the coverage, recognize there's a level of complexity here that is nontrivial. So when you think about the scale and scope of what we do, you have to consider that there isn't a single technology that can at least today, there's no single technology that can come and disrupt this because the toll authorities act differently and they have different decision criteria around the way they manage accounts. We've gone through the time, effort and energy to integrate with all the toll authorities, which is not something that you can do. There's not one that you can do and get all of them. Actually need to speak to all of them. And that took a long time. So those integrations are important. And it would take a long time to build even if the toll authorities would be willing to do it. Number two is we do a fair amount of what I would just call sort of operational or logistic support as well, which is we're procuring the transponders. Design the boxes that they go in. We're putting them into the vehicles at the airport locations. Making sure that we have an asset a proprietary asset management system that we're using that integrates back to their system so we can make sure that the right transponders are the right vehicle. We do marketing support and training for the sales counters for some of the brands. We also have a call center. So there's a fair amount of operational excellence that has to go underneath this alongside highly customized and integrated technology systems. So I think from a we've always believed that the rental our goal is to serve our customers at the highest point of their need. And by doing so, they wouldn't have the inclination or the desire to try to do it themselves because we can do it so well and we scale across several brands versus just one. And two, we think that the things that I just listed make it difficult for competitors to come in, especially in a world where they would be bidding on basically one hoping they could win a single contract and they'd have to build a lot of technology in advance of that. That's super helpful in terms of describing the the differences. And and it brings me to the next question I had, which is, you know, you're you said you scale across different brands, which effectively allows you to serve pretty much the entire market at this point or at least material all all of the market. So with Hertz having filed for reorganization, I'm curious, wondering if you could just walk us through and remind those who aren't as familiar what that reorganization means logistically for your relationship with them and why you're able to continue to operate so long as they're in operation. And then separately, how the displacement of demand into other brands would simply mean you're just earning that revenue from a different brand versus just losing it entirely. Yes. If you think about it, Hertz, Avis and Enterprise make up approximately 90%, 95% of the total rental car vehicles in The United States. Given Hertz's bankruptcy, they are still in Chapter 11, which means that they're continue to operate. And we would be considered a critical vendor to them, and so we'll continue to operate alongside them. So as people rent cars today for Hertz and rentals, we're still performing the services that we did, although obviously at less volume than we did previously. You would anticipate that they're going to continue to do that going forward. And if something in the worst case scenario happened to Hertz or one of the other rental car companies, as the demand would pick back up, it would be shared by the other two of the big three, so to speak, as well as some of the others that are out there that we also support as well. So the good news is that if that demand to dissipate, we would have a good chance of picking up much of that as we are. As the demand for rental cars exist, we would be pretty much connected to that. Got it. That's very helpful. And maybe one last one here while we're talking about commercial and then we can shift gears a bit, not to be punny. David, you laid out during earnings that I think you were thinking that 2021 might be when we would see volumes on the rental car side or at least activity from your side of the business in terms of service revenue, reach back to the 2019 levels we were seeing before the disruptions. I'm curious from a goalpost perspective or just for our measurement outside the company, what we would need to see as sort of mile markers to think that that's going to come true? What are the general assumptions you're making if you're able to share with us on those? Yes. I think broadly to Tricia's point, we're the vast majority of the revenue that we generate occur through airport locations. And as a result, we are very much tied to revenue passenger miles. So as airlines go, so does rental car, so does variability within the tolling product for rental car. So we are going to continue to watch and which is why we said at the time, and I still think again, not wanting to play armchair economist that if you were to sort of assimilate how airline CEOs and even rental car CEOs are sort of holding on to the future, What they're saying is that there'll probably be just a much slower recovery there. Even if the general economic factors start to drive the economy upward at a higher pace, there may be a lagging because of the substantive behavior changes in travel and concerns around the virus up until a vaccine is held. So we would anticipate, I mean, guess really is that we're going to have a slow recovery and that we would sort of get a run rate to 19 levels as we exit next year. It seems to be our working assumption, at least at this point. Some economists are more sober than that. Some are much more optimistic, but we feel like kind of a general rule of thumb that we'll continue to watch. Perfect. That's super helpful for us to be able to watch going forward. So let's switch gears to the Government Solutions side. Just right off, one of the areas that I think caught some investors by surprise when you guys announced earnings was the level of non volume related revenue you have in this segment. I think we thought it was going to be perhaps a little bit more variable than it ended up being when you laid it out. Could you just remind us again what the drivers are and how much of your revenue is related to the violations volume versus how much is or maybe what it is coming from the account management side, software type revenue subscription agreements, and and maintenance and all that all those other pieces. Yeah. So on the on the government solutions side of our business, about about 60% of the overall revenue comes from fixed fees associated with the installation of the camera. So once the camera's installed, which is generally our CapEx, we install the camera. That camera will produce a fixed fee as long as it's operating in any given month regardless of how many citations that it generates. Now, obviously, we work really hard with our municipalities to make sure that the the cameras are in areas where traffic volumes are high and safety restrictions are needed, and therefore, they generally do produce citations throughout their life cycle. And then about 40% of our revenue is associated with systems where we get paid when citations are paid. So with with those, there's a varying amount of services that we offer, but in general, they work that we get paid when a citation is paid. So it's a little more on the back end of the cycle and does have some variability that could happen with traffic flows. So you've got two things that'll impact. It's the total number of citations issued and also then the payment rate. So in economic times, you could say that in troubled economic times, you could say that maybe payment rates would be lower because people's first priority isn't to pay their photo enforcement ticket. And then we do have areas where from government solutions where cameras aren't operating, school buses aren't operating, and we have cameras on school buses, and some of our schools own speed programs. But what's really happening is is that we continue to expand one of our largest fixed speed programs in the country, which is school zone speed in New York City. Those are paid on a fixed fee that once the camera is in the ground that it continues to produce revenue into the future. And, you know, at our last earnings call, we had installed nearly 278 cameras just in this year. Each of those cameras will produce about $3,800 a month once installed. So that growth rate is really is really driving where we're going from the government solutions side. Perfect. And as we think about the different cameras you offer, obviously, you've got the speed, the bus, and the red light, and I know there's different pieces within those, that you offer. And and we talked a little bit about this sort of early days, but the the pandemic is kinda uncovered is with with, you know, some of the school zones, maybe not in operation or the bus arms not in operation. There's pieces of the of the traffic system that are not necessarily covered or would require more in person coverage. And I'm curious if any of your conversations with clients or prospective clients looking at photo enforcement has shifted your view of where the growth could come from going forward. I think previously, red light was sort of not expected to really grow, but, has it shifted in terms of a greater desire at all, or do you think it could shift in terms of a greater desire among potential clients for more permanently monitoring cameras versus ones that are only in in operation for certain hours of the day, like school zone ones? Yeah. I think what you're gonna see is that I think everyone is gonna go through a great settling in as cities and states begin to go back to some normal. I think what you're gonna see is that the advantages of photo enforcement are gonna start to stand out even more so as people sort of assess what their needs are as they think about safety as well as they think about budgets. Moreover, we've already seen a trend pre COVID that was very positive in terms of legislative sentiment related to photo enforcement. In particular, into areas what we call purpose built, which is school zone speed or school bus or even work zone. And there's been several pieces of legislation passed around that. What you would hope is that there continues to be a tailwind as we head into the legislative sessions for next year, so meaning in 'twenty one, As for other states that either want to bring in food enforcement or expand food enforcement, that that would be a ready made opportunity for them to solve several challenges that they might be facing. And so we're actually quite bullish on that opportunity and we'll probably be, even in this world, be making some investments to accelerate our opportunities in key states that we wanna be operating in, as well as accelerating our sales and marketing efforts in the areas that we just opened, places like Virginia and Georgia. Well, that that that's perfect because it brings me to the next part of it that I was gonna ask in terms of cutting it by state exposure. I think only about 20 states explicitly allow photo enforcement. So selling it into those other 30, I imagine, is a different value proposition that you're gonna pitch versus selling more cameras into the states that already allow it or where you're already operating. Walk us through maybe how you're thinking about those different approaches. I think previously you had thought about it as maybe having some partisan vents and so the pitches were a little bit different to each type of state. How do you think about that going forward? Yeah. The it's it's less that you have a partisan the strategy is that you just need someone to get on board and endorse it. It's not necessarily a partisan strategy. I think overall, when you look at the rest of the country, not every state is going to need federal enforcement. There are certain states that just don't have a populace that would make sense to have it and the cost benefit analysis isn't there for them. What you look at is other states from variabilities perspective, you look at states, for instance, Florida, where today we only have red light. Would there be an opportunity to in a state that's had enforcement for quite some time, albeit sometimes contentiously, would there be an opportunity for us to expand into something like school zone speed? Or more broadly, you look at a state like California that does have flood enforcement for red light, but historically has struggled with that legislation and the implementation of it. Would there be an opportunity to look more broadly at a school zone effort or a work zone effort in California, which would be obviously pretty significant opportunity as well. So it's not so much that we wanna be in every state. It's rather that we wanna optimize the states that we are in or perhaps expand into states that may not have legislation that is working for them today. Got it. Okay. And maybe on the ones you've already won, in terms of implementations, you mentioned the two wins in Georgia that you won a few quarters ago, and those were starting to get into the implementation side. I believe New York has, gone on with with almost no disruption. I think you were actually, running a little bit ahead of pace through last quarter, and I know that's expected to go back to the normal. Any areas that, have been halted or disrupted or any of the RFPs that you're looking at that have sort of been accelerated or otherwise disrupted that you can highlight for us? Yeah. No specific names. But what I can say is I think outside of New York City, which is really their commitment has been really impressive through COVID, through everything. They just really believe in the program. I think in general, because of all of the level of distraction, as you would anticipate that there's been some slowing in RFPs where, as an example, we are often part of contracts for vote enforcement are voted on by city councils, and those city council meetings happen every so often. And it's very easy to get removed from that agenda when you're dealing with a pandemic and recession and social unrest. There's other things that get onto the agenda. And so we've seen a little bit of a slowing. But what we'd anticipate, especially as schools start to approach getting back in session, is there'll be a reacceleration of those decisions. Perfect. That's very helpful in terms of thinking about the timing of those. Let's talk about Europe and some of your other expansion plans because I think that's one of the areas that, at least from our sense coming through earnings, it sounded like are almost fully undisrupted, if anything, enhanced. And I'm curious to get your sense around what the time line is for a resumption of your build out in Europe. I know some of the activity disruptions there and government imposed rules have disrupted the timeline a little bit. But I'm just curious just to get a status update on the build out in Europe, whether it's from Tagetlia or other opportunities. Yeah. No. We launched our pilot last week in Paris with a company called Rent A Car. And so we literally just it's the first time that that solution has ever been deployed, is a fully outsourced transponder based program with a third party. So we're excited to be the first to do that in Europe. They launched yesterday in Nice. And so we are in the process of enrolling cars and putting them on our system as well as putting transponders in vehicles. So it'll be a couple of weeks before we get real data from that, but we're really excited about the momentum there that despite all the things that were happening, we worked with a local. So Rent A Car pretty much only operates in France. And so they're not having to worry about the border issues that are going on right now in Europe. But as those start to subside, our hope is that we'll be able to engender opportunities with other rental car companies as well as large fleet management companies. So we're excited to be going. Really, question I've gotten is how do we think about success for the year? It really comes down to because things have been disrupted by COVID, this is a year of pilots. It's getting several pilots going ideally in multiple countries with multiple partners so that we can get data, we can understand the you learn from these implementations. The implementation, while we've done it many, many times here in The U. It's different inside of Europe and learning how to work through those things to make sure that our system is fully there to support our customers, that's really important to us. So that's kind of the goal as we go through this year. And then next year, we'll turn it making sure that we're translating that into revenue and growth is going be the objective. It's great to hear about how you think about this year versus next year, and it's very clearly laid out. It kind of takes me to the next piece I was gonna ask, which you said, you know, looking to get multiple pilot programs up and running. So presumably, you're in some conversations with different rental car companies over there, and this is this is an offering that's not really in existence in a scaled way across the continent, which is, as I understood, part of the reason you went in there. I'm curious, has that set of conversations you're having with the rental car companies been in your value proposition been enhanced by what they're seeing in terms of the need to get away from cash and other alternatives at the toll booth and and really get this type of product underway? Has that has that boosted your stature in those conversations? And how do you think about you just laid out this year and early next year. How are we thinking about the next few years? I think the last we spoke before the pandemic, you were thinking sort of three years for material contribution here. As you lay out these goals, does that get you to where you're looking to be in three years? Or is that a little bit longer now just because of the disruption? Yes. It's hard to tell how the disruption has certainly impacted this year, meaning just candidly, you are having conversations with people that get put on furlough because they work for rental car companies. The issues in Europe are the same here as in The U. S. That being said, I would still think the three year timeline is very appropriate, assuming that things can go back to normal. I think we should we are still in many we're in in-depth conversations with several companies. And so we feel like our line of sight to getting pilots going this year is strong. And then translating those, there's still going to be a demand issue just like we talked about earlier from a U. S. Market. So there may be a muted demand as we go into next year, but hopefully that will uptick at the same level as we predicted it will uptick here in The U. S. Got it. That makes a lot of sense. Okay. Let's I've only got a few minutes left, so I want to switch to a couple of other topics here quickly in the time we've got. Let's talk about M and A because I think that popped up more recently in a more robust way on your slides. And obviously, it's been a unique time, so some assets are potentially on sale. Is it mainly a focus on Europe? Anything you can expand there plus the surge in dynamic pricing? Has anything changed in terms of your outlook on those two as being the focus? Think while we've already invested in two companies inside of Europe to get things going. I think right now we're always looking for we look at the categories first and opportunities where they are really dictates it. We're not necessarily looking for something in The U. S. Or Europe per se. What we're looking are for companies that have a strategic fit and a financial model that is accretive to our business. So those could include accelerating what we've done like with Hagatelia, which was small, but accelerates our opportunity inside Europe. It could be looking at, hey, what are other in the markets that we already serve? Can we strengthen our position in some way, shape or form? And then we always talk about diversification and are there third legs of the stool out there that make us a broader, more global player in the entire category of smart transportation? And those are things like I've mentioned before, like the category of parking or whether that's traffic management or congestion pricing. Those are interesting areas that we definitely would want to take a look at. Right now, M and A was effectively it was going and then it kind of stopped and I mean, not M and A necessarily for us, but for the broader market. And so I think what we'll start to see is we are going to be on offense. We think we have access to capital. We think we can be a player. And so we're going to be as aggressive as we possibly can. Got it. And maybe on that same vein, as you watch some of the areas that you have explicitly talked about wanting to get more into, one of them is obviously the surge in dynamic pricing as more cities look at that as a source of revenue. And I think the model you were watching was the New York rollout, which you're not participating in, but you were gonna watch to get a sense of what you needed to have. Any update there in terms of have you seen a greater sense of what what Verra needs to have to compete in this space from from the New York rollout? We don't get to see that. I'm curious what you're seeing. Yeah. The New York I mean, the the rollout is obviously, I suspect, somewhat I don't have inside baseball information there either. I suspect it's been slowed a little bit by everything that's going on because it's a new program. When it launches, was supposed to launch in January of next year. So that's really when you're going get the data and the understanding of how not only does it technically work, but how does the citizenry sort of accept it. We still are believers in that category. What we would need is most likely through M and A or maybe through a really sound strategic partnership is a broader set of tools that we can deliver those types of programs. We are more of a back end process. There are some front end pieces which are camera related, which are different cameras than the ones that we use today in photo enforcement. So there is some portfolio expansion we'd have to do if we decided to make a play in that. Perfect. Okay. Well, it looks like we're out of time. But, David and Tricia, thank you again for joining us. It's a pleasure to have you here. Thank you. Enjoy it. Thanks for having us. We appreciate it. Yeah. And and thanks everyone for joining us for our payments and fintech symposium. I believe that's the last presentation of the day. Alright. Thanks. Bye now.