00:06 Good day and welcome to the Verra Mobility Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to , Please go ahead, sir.

00:21 Thank you. Good afternoon, and welcome to Verra Mobility's third quarter twenty twenty one earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Tricia Chiodo, our Chief Financial Officer. David will begin with prepared remarks followed by Tricia, and then we'll open the call up for Q&A. 00:45 During the call, we'll make statements related to our business that may be considered forward-looking, including statements concerning 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. 00:59 Forward-looking statements may often be identified with words such as we expect, we anticipate or upcoming. These statements reflect our view only as of today, November four, twenty twenty one and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise any forward-looking statements. 01:18 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 ten K/A and quarterly report on Form ten Q, which are available on the Investor Relations section of our website at ir.verramobility.com and on the SEC website at sec.gov. 01:51 Finally, during the 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 close today, located again on our website at ir.verramobility.com and on the SEC's website at sec.gov. 2:09 With that, let me turn the call over to David.

2:12 Thanks you, . And thank you, everyone, for joining us on the call today. Q3 was yet another strong quarter for Verra Mobility this year. We are proud of the great results our team delivered with their consistent execution and both of our business segments have continued to perform well. As Tricia will discuss in more detail later, our third quarter revenue grew sixty seven percent year over year to one hundred and sixty two million dollars and our adjusted EBITDA was eighty two million dollars, which is up fifty three percent year over year. 02:42 The primary drivers for these results include the ongoing expansion of the school zone speed program in New York City and a continued strong recovery in travel in the U.S., which has had a positive impact on our rental car tolling business. 02:55 We've also made excellent progress this quarter in collecting eighty seven point five million dollars in receivables from our automated enforcement contract with the New York City Department for transportation. 03:08 Q3 was a strong affirmation of our capital allocation strategy and our approach to deploying our cash on behalf of our shareholders. The Redflex Acquisition, which closed at the end of Q2 is fully aligned with our strategy to use M and A to both expand our portfolio and solidify our position in core markets. 03:25 As we highlighted previously, the Redflex Acquisition strengthens our leadership position in photo enforcement in North America, by providing an enhanced technology portfolio to our customers and creating cost synergies and new revenue opportunities for the business. In addition, we gained access to new markets such as Australia and Europe, which is consistent with our vision in becoming the leader in smart transportation globally. I’ll discuss more about the integration efforts later in…

10:57 Thank you, David, and good afternoon, everyone. I'll provide a detailed overview of our second quarter financial performance, and then we'll open up the call for questions. We've provided a short earnings deck on our website that provide some insights to the quarter and has reconciliations from GAAP to any non-GAAP results. 11:14 If you're following along in the earnings deck, I'm on slide two, which outlines revenue and adjusted EBITDA performance for our commercial services segment. This business segment offers tolling, violation processing, and title and registration services for rental car companies and fleet management companies in the United States and a subset of those products in Europe. 11:33 Our commercial services segment delivered revenue of seventy seven point three million dollars, an increase of thirty three point one million dollars over the same quarter in the prior year, but more importantly, it's in line with the service revenue generated in Q3 of twenty nineteen. The recovery and leisure travel that we saw in Q2 continued into Q3 driving this strong performance. 11:55 The rental patterns that we have recently seen remained prevalent this quarter with leisure travelers driving demand, creating more billable days for rental agreement, more toll usage and higher toll fees than in previous years. These trends have improved revenue without the full recovery of rental volumes. 12:13 We continue to believe that business travel will return in twenty twenty two, albeit at a lower level and anticipate rental volumes to reach turn to their more traditional seasonal patterns in Q4, which should pull back from the Q3 level. Adjusted EBITDA for the quarter of fifty one point three million dollars increased from thirty one million dollars for the same quarter of the prior year and generated adjusted EBITDA margins of sixty six percent. 12:39…

20:35 Thank you. And we'll take our first caller Daniel Moore with CJS Securities.

21:11 Good afternoon, David and Trish. Thanks for taking the questions. So many directions to go in, so sorry to hear it, Trish. Thank you all of your help, but congratulations. Maybe quickly, talk about the acquisition process for T2. I assume there’s an auction and more to the point, what type of revenue and our cost synergies should we be thinking about?

21:38 Yeah. Dan, it’s David. So, with us here today, we have Mike McMillin as well. Mike is our SVP of Corporate Development and he led the transaction, come start the business. answer that question for you. Okay.

21:52 Perfect. Thank you.

21:54 This is Mike. So, it was a competitive process. It wasn't necessarily an option, but it was a competitive process. And we were very happy to complete the acquisition or announce the signing of the acquisition. As we think about the business in general, in our press we had eighty million dollars of expected revenue in twenty twenty one with EBITDA of around twenty one million dollars. 22:20 As we look at that, historically, we've seen revenue in this business on the services side, which represents about seventy percent to eighty percent of their total revenue growing the five percent to ten percent range. And we would expect that the revenue in the future to grow at near the top half of that range for four services. 22:42 And they also had hardware sales, which represents around twenty percent to thirty percent of their revenue and similar to us their hardware sales are lumpy from year to year, but on average, we'd expect more modest growth there, maybe in the two percent range. So, overall, we would expect total revenue combining services and hardware to grow in the high single digits over the next few years.

23:05 And on the synergy side?

23:07 On the synergy side, so what we are focusing on in this acquisition is growing and emphasizing the core business and leveraging our existing government relationships to really help accelerate their revenue with cities and municipalities. So, our plan really is to focus on the growth and revenue synergies in order to grow the long term strategic position of T2 and our own position in the parking ecosystem, including the long term opportunity associated with curbside management. So, the focus for us for this acquisition is really on the revenue in growth side in order to strengthen their position and our collective position in the parking market.

23:52 Super helpful, Mike. And forgive me because I'm not as familiar with their business model, but that seventy percent to eighty percent that services, how do we think about that? Is that SaaS type, is it recurring revenue? Maybe just help understand the revenue model there? Thank you.

24:08 It's both of those things Dan. They have a portion that, which is their SaaS revenue licensing and they have maintenance agreements associated with the equipment as well.

24:18 Got it. Very good. Okay. I will jump back in queue with any follow-ups. Thank you very much.

24:25 Thank you.

24:27 Thank you. Next we’ll take Keith Housum with Northcoast Research.

24:34 Good morning guys. And congratulations on the quarter and Tricia I echo that statement, sorry to see you go, but congratulations on that decision. Building on a T2 acquisition, as I may just kind of add, obviously, any kind of acquisition you can do is going to be dilutive to your margins, but what kind of scale or incremental margins can this company deliver as it grows?

24:58 You mean just for T2 by itself?

25:01 Correct.

25:04 Yeah, maybe if we speak to the EBITDA margin on this, what we actually expect as the services and specifically the software to services grows greater than the hardware sales over time, we would expect a natural, sort of natural uplift in margin over time as the higher margin software of the services business takes over more of the revenue mix. 25:27 So, we would actually expect EBITDA from a margin perspective to outpace revenue growth. So, we have revenue growing in the high single digits. We would actually expect EBITDA over the next years to grow in the low double digits, just due to the natural shift in mix over time.

25:44 Great. And then maybe you can educate us a little bit more on like parking the market in terms of largest competitors. I mean, you guys obviously have a dominant share of the business where you currently do business, does T2 have the same type of dominance or is it much more diverse or fragmented competitor base?

26:02 Yes. It's a bit of a difference. So, they don't compete as much in our market. So, they are – traditionally they've been in universities, has been, most of their businesses has been working parking systems for large universities. They also work with some city and municipalities. 26:18 So, there is a host of characters there that they would compete with, but they don't compete with traditionally with for instance, the Conduent’s of the world. Conduent is more known for large city implementations for parking. And certainly, our hope is to work with them to bring them up at a higher level and using our relationships and expand our capabilities on our government side with over two twenty customers here in North America that that would be advantageous as they look to kind of drift upmarket a little bit and give them that entre.

26:48 If I could just one more in here, is there an opportunity to take these guys international as well leveraging your Redflex relationships?

26:56 No. They would be disconnected from that point. I think perhaps the technology, but if you were going to do this internationally, you would probably need a different asset in a different – whatever country you're going to go to.

27:06 Got you. All right. Thanks, guys. Appreciate it.

27:09 Yeah, thanks.

27:12 Thank you. Next we'll move on to Dave Koning with Baird.

27:17 Yeah. Hey guys. Great job.

27:21 Thank you.

27:22 Yeah. And maybe first of all, just looking at the progression, like when we look at your percent of nineteen, you've like far outpaced basically any data point we can find on travel Avis or any of those, you just consistently just kind of crush those. This quarter, your step up wasn't quite as big, and my guess is that's a function of last quarter being so big with registration work, but maybe you can just kind of walk through that? And then how we should see a progress as long as travel keeps going better, should that keep moving kind of above that one hundred percent in Q3?

27:58 Yeah. So, I think on the commercial services side, I think what we really thought was that the summer driving season opened up a little bit earlier than it normally does. So, Q2 was a little stronger than it normally would be. Normally, your summer driving is, sort of booked mark by Memorial Day and Labor Day, which is when kids exit and restart school. So, I think we saw more in April. That's why we really had a really strong quarter in Q2. And as you mentioned, we did have an uptick and it was happening in title and registration. 28:28 In Q3, we are seeing that we are matched with rental car tolling from where we were in twenty nineteen. We are ahead of where we were with S&P tolling for the twenty nineteen period. And then, we had some pullbacks in title and registration, which you can just call a quarter over quarter shift. 28:47 I think what we're going to see as we move into Q4 is you are going to see the sort of downtick that's going to happen. That normally happens with seasonal patterns of driving, so we normally see Q4 to be lower for commercial services in Q3. We're that to happen this year as well. And for the total company, what's really driving our year over year growth from twenty nineteen is that the commercial – the government solutions speed program is really, really thriving. That program has really grown in the last two years.

29:22 Got you. Thank you. And maybe just my follow-up. Can you give us the Redflex numbers by service and product again? And then if that sort of mix or if those levels of both kind of sub segments of Redflex are pretty normal just as we go forward?

29:41 Yes. So, the revenue for service revenue was fifteen point nine million dollars. Let me get you the other number. And then the product revenue was three point six million dollars for Redflex in the quarter.

30:00 And is that pretty normal? Like is that sixteen million dollars a quarter of service and three million dollars to four million dollars a quarter of product kind of what you'd expect over time?

30:09 I think the product revenue is probably lower than we would expect over time. So, I think they're experiencing some start-up cost and other things that we're seeing here. So, I would expect those numbers to grow over time. And we did add some really nice little charts and our earnings that layout some of these items.

30:32 Thank you. Got you.

30:37 Thank you. And we will move on to our next question from James Faucette with Morgan Stanley.

30:58 James, you there?

31:03 Sir, your line is open and active. And we are not getting a response from him. We'll move on to Daniel Moore with CJS Securities.

31:23 Very good. I'll go again. Just talk a little bit as T2 as a sort of a new platform I like to the tool. What do you see the opportunity, rollup is not the right word, but should we see this as a platform for further expansion via M and A over time?

31:42 Yes, I think so. I mean it's –I think what you would look at the parking business as a whole is, there's not a lot of assets like T2 that are sort of size and scale with the level of cash flow and profitability that they have. It’s a unique market. There's some real big players and then there's a lot of tiny small players. 31:59 So, certainly, there could be some other opportunity there. I think the real strategic imperative here is, I think everyone in the category of smart transportation would say that curbside management is going to be a big challenge for municipalities going forward, and we want to be a part of that future and we think it's going to be important to our customers as well as other customers. 32:21 So, T2 serves as a great platform for us to do that, while at the same time diversifying some of our revenue into an adjacent market.

32:32 Got it. And switching gears David, you touched on this, but any commentary around your rack customers willingness and more to the point ability to re-fleet or expand their fleets as we think about twenty twenty two in light of pretty well documented supply chain challenges etcetera?

32:50 Yeah. I mean, I think overall, I would definitely listen to the public CEO comments around that versus relying on my commentary. But I think what they would tell you is that they are working hard to get their fleets back to where they were. I mean, Hertz even announced they are going to buy hundred thousand Tesla’s. And Elon Musk seem to disagree with them, so we'll find out if that's actually true or not.

33:09 Exactly.

33:09 But that being said, I would anticipate that they will continue to be below twenty nineteen levels probably for a significant portion of next year. I think most have indicated that the end of next year or Q4 next year would when they would think the issues around the chips and the new vehicles coming out of volumes might be solved. But unfortunately, we're seeing a higher level of activity and that seems to be a durable trend.

33:35 Very good. And then I was typing as quick as I could, just if you could give us again the remaining receivable that you expect to bring in from New York City in Q4? Thanks.

33:46 Yes. So, we have, well, right now, we have about an eighty seven million dollars receivable, I’m sorry, just over eighty million dollars is the total receivables that we have out there. We would expect to be collecting on that, but also continuing to build them for the – about the same rate of call it, forty one million dollars in the Q4 as well. So, we'll still have a healthy receivable there, but if we continue to pay on time, which they have done exactly what they said they would do, we would bring in that eighty million dollars in Q4.

34:17 Very good. Thanks again for the color.

34:22 Thank you. And thank you. There are no further questions. So, this will conclude today's teleconference. We do appreciate your participation. At this time. You may now disconnect.

34:44 Thank you.

34:45 Thank you.