Greetings. Welcome to the Verra Mobility Corporation Fourth Quarter and Full Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Marc Griffin, Investor Relations. Mr. Griffin, you may begin.

Thank you. Good afternoon and welcome to Verra Mobility’s fourth quarter and year end 2019 earnings call. Today, we will be discussing the results announced in our press release issued after the market closed. With me on the call is David Roberts, Verra Mobility’s Chief Executive Officer; and Tricia Chiodo, Chief Financial Officer. They will begin with prepared remarks and then we will open up the call for Q&A. During the call, we will make statements related to our business that maybe considered forward-looking, including statements concerning our financial guidance for the full year of 2019, our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers and other statements regarding our plans and prospects. Forward-looking statements may also be identified with words such as we expect, we anticipate or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our annual report on Form 10-K, which is available on the Investor Relations section of our website at ir.verramobility.com and on the SEC’s website at sec.gov. Finally, during the course of today’s call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the market today, which is located on our website again at ir.verramobility.com and the SEC’s website at sec.gov. With that, let me turn the call over to David.

Thank you, Mark and thank you to everyone joining us on the call today. We are pleased with our execution throughout the year and ended 2019 on a strong note with a solid quarter. We transformed the business in 2018 for two highly strategic acquisitions and 2019 showed investors that our diversified product portfolio can support an attractive combination of growth and profitability at scale. As Tricia will discuss in detail later during the call, our fourth quarter revenue grew 18% year-over-year to $112.5 million and our adjusted came in at $59.6 million, up 26% year-over-year. For 2019, revenue grew 15% year-over-year to $448.7 million and our adjusted EBITDA came in at $241.4 million, up 15% year-over-year. We were able to exceed expectations across our key metrics and deliver consistent quarter-over-quarter performance despite the headwind created from the state of Texas passing legislation that eliminate most red light camera programs in the state. The drivers of our core business remains strong and the commercial services segment cashless tolling continued to drive demand for our product and increasing tolling activity. And in the government solutions segment, our growth is primarily driven by the expansion of school zone speed in New York City. The strength of our core business and our longer term smart city innovation initiatives give us confidence in our ability to maintain momentum throughout 2020 and support our vision to be the global leader in smart transportation. For the fourth quarter, the Commercial Services segment grew revenues 17% year-over-year to $68.2 million and reported adjusted EBITDA of $42.2 million, up 23% year-over-year. For 2019, revenue increased 15% to $276.5 million and reported adjusted EBITDA of $175.4 million, up 14%. The momentum in the quarter was driven by our continued collaboration with our customers to increase adoption of tolling programs…

Thanks, David and good afternoon everyone. I will provide a more detailed overview of our full year and fourth quarter 2019 financial performance and then we will open up the call for questions. We have provided a short earnings deck on our website that has reconciliations from GAAP to the non-GAAP results that we will be discussing today. If you are following along on the investor deck, we are on Slide 2. We are happy to report that we exceeded the high end of our guidance range for both revenue and adjusted EBITDA, with total revenue grew nearly $60 million or 15.4% to $448.7 million for the full year 2019. Product revenue generated nearly half of the total revenue growth with sales and installations of the 300 school zone speed cameras that David previously mentioned. For the year, adjusted EBITDA was $241.4 million, up $31.9 million or 15.2% from the $209.5 million in 2018. Growth in product sales and well-executed integration synergies contributed to our adjusted EBITDA expansion. Adjusted EBITDA margins remained strong at 54% for both 2018 and 2019. Slide 3 has results for our Commercial Services business segment, which delivers tolling, violation processing and title and registration services to rental car companies and fleet management companies in the U.S. and processes violations in Europe. Commercial services had a great year with the full year 2019 service revenue growing $35.1 million or 14.5% to $276.5 million. Much of this growth was driven by higher tolling activity across the entire product portfolio and a shift in product mix that positively impacted revenue and much of the revenue increase dropped to the bottom line with adjusted EBITDA growing $22.2 million to $175.4 million for the full year 2019. This business segment produced adjusted EBITDA margins of 63% for the full years…

[Operator Instructions] Our first question is from Steven Wald, Morgan Stanley. Please proceed with your question.

On the revenue outlook, looking at the 10% to 14%, Tricia, could you maybe take…

Steven, it’s David. You broke up on the beginning of your statement, could you start from the beginning, please?

Yes, sure. Am I coming through better now?

You are.

Okay, great. Maybe if we just look at the pieces driving the revenue growth guidance in 2020, I was hoping, Tricia, maybe you could just walk us through some of the moving parts there. If I’m thinking about the math right, just given the tailwind you are going to get from installing the cameras. What does that mean for the tolling business and sort of what are the drivers there given it looks like it’s a bit of a departure from the mid-teens growth you saw in that segment this year?

Yes. And I think we have said so. And so the camera installation is for the Government Solutions segment, but what we are going to – what you are going to see is you are going to see these sort of two things happening. Well, in the Government Solutions, we are going to continue to see a decline in red light although not as meaningful as it was in the current year, but you are going to see the rise of speed as we continue to install cameras, not only in New York City, but also in Georgia. So we believe that by the end of 2020, the speed will be the largest product revenue that we’ll have within the Government Solutions business segment. So you combine those service trends, will get you double digit growth on the service side. And then you’ve got growth coming out of the product revenue as we are going to install basically double the amount of cameras or sell double the amount of cameras in 2020 as we did in 2019. On the Commercial Services side, we’ve said that on the outer years we thought that Commercial Services would be like a 6% to 8% grower and not where it’s trending to now. So that’s not surprising for us. With our growth in the future coming from European tolling which as David mentioned probably will materialize more significantly as we move into 2021.

Got it. Okay, that’s helpful, thanks. And then just maybe on the rental car agreement, I think I heard, David, you said that you extended the Avis contract out by a year to 2025, do you have any updated thoughts on your approach toward I guess later in the year, coming to the table with the other two major partners?

Nothing that we haven’t said before, but obviously we’ll just approach them at the appropriate time our – I think the approach that we took with ABG is a good one, which is we served them well. We continue to partner and find ways to help them and that led to an extension. So we are hoping that that same strategy will work at the appropriate timing that works for both us and for our customers with the other two.

Got it. Okay. And then maybe just one quick one, if I could squeeze it in, obviously pretty top of mind right now. Rental car activity and travel around the coronavirus, anything you guys are seeing or anything you’re watching for that would be relevant for us to be careful of here?

Yes, two things. One is we get – our information is probably lagging because we get our things after the fact, so I don’t know that we have any real data to support a decline in that at all today. Part two of that is that international renters is a relatively small portion of the total number of renters that we use, it’s a really small number. So that being said, we’re going to remain vigilant, we’ll watch what’s happening as this continues to play out, obviously there is a lot of real-time information, but as of yet, we haven’t seen anything material that will impact our business.

Okay, great. Thanks.

Yes, thank you.

Our next question is from Ryan Cary, Bank of America. Please proceed with your question.

Good afternoon and thank you for taking my questions. To start, I was hoping you could provide a little more color on the adjusted EBITDA margin guide. I know you called out a few contributors driving the faster expense growth in 2020. I was just trying to get a better sense of the magnitude of each and explaining the year-over-year step up?

Yes, you figure that just the overall lower margins to be attributed from the product revenue were product revenue last year was accretive to our overall margins for the Company as a whole. And with this year with the discounts that we’re giving to one of our largest customers in New York City, those margins will – that will put a little pressure on it. You can probably think about that as being about $5 million of pressure on our margins. In addition to that, we have decided to make a real meaningful investment in our systems. If you think about our company we are the accumulation of several founder-led businesses each creating their own proprietary software which we have all brought together. And this is the year that we want to make sure that we are creating stability for the future growth and by doing so, we’re going to make a sizable investment in technology.

Got it. So those incremental investments in the invoicing and billing, is that something that’s more a one-time in nature, meaning we’re going to go through in 2020 and then you could see kind of a rebound in the margins, or is this something that you expect will continue kind of for the foreseeable future?

No, I think it’s just a one-time what I’ve said is that it’s going to be mostly done this year. There may be some tail effect that goes into next year, but it would be de minimis. I think it’s really focused for this year.

Got it. And then just final one from me, it sounds like you’re expecting a pretty meaningful step down in growth in the Commercial Services business from say kind of like the mid-teens growth range you saw this year and we’ve seen for the last several years to more kind of high single-digits range? Is there anything worth calling out beyond just large numbers, just because it seems like a pretty material step down kind of from where you are exiting 4Q? Thank you.

Yes. And I think we have been saying that for about a year that, that’s really where we saw the market going. And really it’s an accumulation that this business segment has been growing in the mid to high teens for the last 4 to 5 years. And as we sort of, it’s just, it becomes more and more difficult to hurdle those high expectations. So we said that this business unit would settle into sort of a 6% to 8% growth and that’s really what we will see. And then in 2021 as we sort of get the steam under our wings or the wind under our wings for the European rental car tolling, we will see growth there as well.

Thank you for taking my questions.

Sure.

Our next question is from Daniel Moore, CJS Securities. Please proceed with your question.

Thank you and good afternoon, David and Trish.

Hi.

Maybe just talk a little bit about the price concessions for – in New York City. Do you see that as kind of the new norm as far as ASPs are concerned, and then beyond that and you mentioned Georgia and some other opportunities, maybe just talk about the level of dialog for other safety zone enforcement area of contracts?

Yes. In New York, the discounts that we referenced are really just related to volume. It’s just – it’s a volume discount. I mean that was really the gist of it. So that’s – and we had talked about that previously, I believe.

Yes, yes. So I mean, I think we’ve previously said that, you know, if you guys were modeling, you could – last year you could probably model a new camera in about $100,000 in revenue and this year you’re probably better off modeling in a more like $75,000 and then the opportunities that we have to grow in Georgia are really us just approaching our customer and I think we have two new contracts there.

Two new contracts and we have a good pipeline, so we’ll feel confident about our plans for Georgia for the year.

Very helpful. And then just maybe a couple of house-keepings, Trish, as we think about modeling for next year kind of tax rate and D&A and then just generally where we see CapEx shaking out?

Yes, I think you should put your tax rate right at that sort of 28%, it’s probably a good tax rate for us. It’s higher than what you were probably previously modeling, but that’s because a shift in our overall apportionment of state revenue is moving from low tax states to high tax states think out of Texas into New York kind of thing. So that’s probably a good way to think about it going forward and then as far as the CapEx. So not only did the investment that we’re making in our system is hitting our P&L, but also it’s going to be hitting our capitalization of internal labor as well. Where CapEx this year was right around in the $30 million mark, you probably should think about it next year, in the $35 million to $40 million mark.

Perfect. I’ll sneak one more in, if I may. Just generally speaking, maybe an update on the progress that we are making both with Pagatelia and then more generally in Europe, obviously, sounds like 2020 continues to be an investment year, number one. Number two, any – just with corona, I know it’s hard to tell right now, but is anything that might slow that progress down at least based on what you’re seeing today?

Yes, I mean, so the first part is, you know, we continue to make progress in Europe and we’ve – we only closed Pagatelia toward the end of the year. So we’re still in the kind of the phases of integration, but they have been doing well. We have our new leader there, that’s kind of taken the helm of our European operations, who will operate out of Amsterdam, which is where our European headquarters is. We’re in the middle of coding and developing right now for the first pilot that we have, many sort of contractual discussions happening with others. But as I mentioned in the discussion, it’s – there’s just things that are slightly more complicated for people that are starting from scratch that they have to do to consider to launch a program. It’s not as if they were doing it. This is new to the world inside of Europe. As it relates to the coronavirus, I mean it’s still too very, very early. I don’t anticipate given that we would be doing pilots with a relatively low number of vehicles that that would have any impact on our ability to rollout because it’s so small. So I would anticipate that – had that been a couple of years from now, then that might be a different answer just depending on what the travel restrictions and the challenges are in Europe as a result of the virus.

Very helpful. Appreciate the color. Thank you.

Yes, thanks.

Our next question is from Ashish Sabadra, Deutsche Bank. Please proceed with your question.

Thanks. Thanks for taking my question. So, a question about the Avis, Avis on their call talked about their unlimited toll product and that’s gaining some pretty good traction among their commercial customers. It’s rolled out, I believe in three states and they are rolling it out across the country. So, my question was, how do you think about this kind of an unlimited product being rolled out by other providers and how do we think about that opportunity over the mid-term? Thanks.

Yes, I mean, we think it’s great, because ultimately we are the inventor of the – we are a part of that model that they’re leveraging. We think that as rental car companies look for a more customer-friendly sort of pricing models, if that’s good for the industry and good for them and the all-inclusive or the sort of as they call the unlimited is a great way to think about it. So we’re fully supportive of that which is and we have been helping them along the way.

That’s great. And then maybe just on Europe, a follow-up question there would be, how should we think about the revenue opportunity in the midterm? I understand there’s going to be material starting on 2021. But as we think over the next year, two years, how should we think about, what the revenue growth potential by as Europe comes on and how that helps accelerate the Commercial revenue growth but also how like revenue opportunity over the next three to five years. Thanks.

I think what we need to do Ashish, is really get the first pilot program up and running, so that we can get all the right statistics to say what that’s going to look like. A lot of people are saying hey could this be a $30 million product. And I think the answer is yes, but not in that timeframe that you proposed. I think it’s got – it’s got potential to grow, it’s just going to take us a little longer. The customers are more, they’re not as concentrated as they’re here in the U.S. and we don’t have enough information from the pilot to see what the price points are going to be that were going to go to market at.

Okay, now that’s helpful. And maybe if I can sneak in one final one, just on congestion pricing, have you had any other conversations with other cities and any kind of traction that you are seeing there, again, the mid-term opportunity on that front? Thanks.

Yes, I mean we still remain very interested in congestion pricing for the future, you’ve probably seen several cities are doing studies as we speak, outside of New York City program. I think we still want to see what happens what the model is that they settle to which is I think is going to take some level of time. It’s still very early. That being said, we still feel like we have products and services and knowledge and know-how that can be valuable. And so as we get line of sight to a clear what the market is going to look like, then I think we can be slightly more specific and slightly more aggressive in how we’re going to be pursuing that go forward. It’s still – it is just still very, very early, meaning that there is no program in United States today. So we’ve got some waiting to do to really figure out what the best way to support our customers will be.

And that’s very helpful. Thanks, David and Tricia.

Yes. Thanks, Ashish.

Yes. Thank you.

Our next question is from Timothy Chiodo, Credit Suisse. Please proceed with your question.

Thank you. Okay. I wanted to follow-up a little bit on the New York school bus stop arm opportunity and then a quick follow-up on the product pricing. So on the New York school bus stop arm opportunity, just to dig into it a little bit more. Maybe we could put some granularity around the opportunity? Our understanding is there is roughly 10,000 buses in the city and that the monthly revenue there could be more in sort of the $500 range and also fully understand that would not be a full year around opportunity, maybe nine months per year, maybe just some added context there given you obviously have a very strong relationship with the City of New York?

Yes, that’s exactly right. I mean, just, I think you guys have gotten to know us well enough now. Just because the law has passed and there are the buses there, doesn’t mean that things move exactly as quickly as we would like. That being said, I think that’s a very fair way to think about the opportunity, which is the total number of buses by a slightly the $500 and then thinking of the nine months, 8.5 month sort of total time that they are going to be deployed, I think is the appropriate way to think about the opportunity. And I think we will start to see traction on that probably toward school next year, not – I don’t suspect there would be anything going on in that this spring.

Okay. And is that….

Sorry, school in the fall of ‘20, not next year as in ‘21, excuse me.

Fall of 2020, some of that begins?

Yes, I would suspect so.

The question is it sort of a school district by school district decision-making process or is it an assumption that all 10,000 eventually maybe it takes a few years, all 10,000 eventually are equipped with the cameras or is it some subset of that 10,000?

It will. Probably, it depends on the school districts. So it is – there is multiple decision makers involved, which is why it takes some level of time to roll out. In general, you wouldn’t necessarily have to put out a camera on every single bus, but it just depends again on the school, because some people do vote for a full fleet install, others do not depending on the routing. And it’s still a little early to determine how we would be doing that in the city. So right now I look at the 10,000 as the TAM, and underneath that is what we’ll get into once we get some more information to start deploying.

Okay, great. Thanks a lot. And then the last one is very minor. I apologize, you might have touched on this earlier, I had to hop off for something else briefly. But on the product pricing, I know you mentioned, think about, I think it’s 75k instead of 100k for the sort of next round, makes total sense buying in greater bulk. Just roughly speaking, I think that the overall product margin, including some of the other items that go into that revenue line item have hit as high as high ‘50s. What percentage in terms of the gross margin should we be thinking about this year, does this put us in sort of the high 40s?

Yes, probably mid-40s, not that, not as high as you’re thinking.

Mid 40s?

Yes.

Okay, great, thanks a lot for taking my questions.

Yes. Thank you.

Our next question is from Louie DiPalma, William Blair. Please proceed with your question.

David, Tricia, and Mark, good afternoon.

Hey, good afternoon.

Good afternoon.

When you say that you expect Europe to generate material revenue in 2021, are you assuming any contribution from your big three U.S. rental car partners in Europe?

Yes. I think, yes, we would assume that we will be working with some of the customers that we serve currently in the U.S.

Yes. And I think what we are saying is just that we are not going to have any meaningful revenue in 2020 and that will start to escalate as we move into 2021. But on a base of revenue of $512 million material or meaningful is you know, in the eye of the beholder.

Indeed. And related to that question, by the end of 2020, should most of the upfront European infrastructure investment be complete? And I guess, in total, how much of – how much CapEx and OpEx is necessary to form the foundation for Europe?

The first part of your question is yes, we would anticipate by even later in the year that we would have sort of load balance the infrastructure to meet with what we think the demand will be related to the pilots. Once the pilots go outside of that, meaning more pan-European and multi-country those types of things that we may have to hire or adjust accordingly to meet that demand.

Yes. And I think, I think in the 2019 numbers, we had about $3 million of investments and in Europe for the expansion and you know, you were probably going to have $3 million to $5 million this year as we continue to roll out to multiple countries.

Okay, okay. And one final one, how many cameras for the New York City school zone speed camera contracts are currently in backlog relative to the more than 600 that you expect to install this year? Like, in other words, at the end of this year, how many cameras are you contemplating will be remaining for 2021?

I think what we have originally said is that we believe that if they were going to expand into 750 schools zone from the initial 150 that they started with, then it would be about 1,200 cameras, of which we installed 300 in 2019, and we’ve got an order for 720 for this year. But if we said we’re going to install 600 of those, then we would still have 300 cameras left to roll into 2021.

Sounds good. Thanks everybody.

Our next question is from Daniel Moore, CJS Securities. Please proceed with your question.

Thanks again. Last one from me, but just an update on capital allocation obviously is we’re getting down, ticking down quickly, closer to three times in addition to M&A and debt repayments, but is there any other possibilities or considerations in terms of opportunistically adding shareholder value?

Yes. I think at this point we are going to continue to the pipeline, as we think about M&A is very strong. And so the likely scenario to be deployed through M&A if for some reason, those dried up, and we weren’t able to do anything, then clearly we would reassess and look for ways to increase shareholder value in other means, but I think right now, M&A is the strong candidate for that.

Understood. Thank you.

Yes. Thanks Dan.

Thank you.

We have reached the end of the question-and-answer session. And this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.