Good day, and welcome to the Verra Mobility Corporation Fourth Quarter 2021 Earnings Call. My name is Jenny and I will be your conference operator today. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Zindler, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and welcome to Verra Mobility's fourth quarter 2021 earnings call. Today, we'll be discussing the results announced in our press release issued after the market close. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; Tricia Chiodo, our Chief Financial Officer; and Craig Conti, our newly appointed Incoming Chief Financial Officer. David will begin with prepared remarks, followed by Tricia, and then we'll open up the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our expected future business and financial performance, our plans to execute on our growth strategy, the benefits of our strategic acquisitions, our ability to maintain existing and acquire new customers; expectations regarding key operational metrics and other statements regarding our plans and prospects. 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, April 21st, 2022, and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise any 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 we are targeting to file tomorrow and will thereafter be made available on the Investor Relations section of our website at ir.verramobility.com and on the SEC's website at sec.gov. Finally, during today's call, we will refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures included in our earnings release, which can be found on our website at ir.verramobility.com and on the SEC's website at sec.gov. With that, I will turn the call over to David.

Thank you, Mark and thanks everyone for joining us today. As Mark mentioned, Tricia will lead today's discussion on our financial results, but I'll take a moment to introduce everyone to Craig Conti, Verra Mobility's newly appointed Executive Vice President and Incoming Chief Financial Officer. Craig brings over 20 years of corporate financial management and leadership experience in global publicly-traded companies. He previously served as the Executive Vice President and CFO of Century Aluminum Company, a global producer of primary aluminum. And prior to Century Aluminum, Craig served in senior financial leadership positions with ITW and GE. I'm sure many of you will be getting to know Craig over the coming weeks and months. So, please join me in welcoming him to Verra Mobility. For the agenda for today's call, I'll start with the key highlights and trends that are driving our results. I'll also provide a status update on the integration efforts with Redflex and T2 Systems, and then I'll conclude my remarks for a discussion on recent wins and our business development pipeline. We closed out 2021 with a very strong fourth quarter as our combined businesses continued to perform well. We're pleased with the consistent execution from our teams globally and we believe this momentum will serve as a platform for acceleration in 2022. We -- our results in the fourth quarter were primarily driven by the ongoing school zone speed expansion in New York City and a strong recovery in travel in the US, which has had a positive impact on our rental car tolling business. As Tricia will discuss in more detail later, we exceeded the high end of our full year guidance range for total revenue and adjusted EBITDA, delivering 40% top-line growth, of which 28% is organic growth. Moving to our recent strategic…

Thanks, David. Good afternoon, and thanks to everyone for joining us on the call. I'll start by the slides providing an overview of our fourth quarter and full year 2021 results, followed by a discussion of 2022 guidance. Looking at the big picture, there are three important takeaways. First, we are benefiting from several macro trends that are driving growth, such as the recovery in leisure travel, along with increased cashless tolling and the growing demand for photo enforcement programs in counties, municipalities and school districts. Second, our business development team across our businesses have been very busy and very successful as evidenced by the new business and contract renewal awards David described in his remarks. And third, we put ourselves in a position of strength for the future with the acquisition and integration efforts of Redflex and T2 Systems that further expand our capabilities, market segments and geographic footprint. Today, I'm going to briefly summarize the financial performance of the three segments, discuss our consolidated results for 2021 and spend more time as it relates to the 2022 guidance and the key trends shaping our plan. The detailed results by segment are provided in our press release and earnings presentation, both of which can be found in the Investors section of our website. I'll start with fourth quarter revenue. Total revenue consisted of approximately $145 million in service revenue and about $25 million in product revenue. Excluding about $14 million of Redflex and $4 million of T2 System acquisitions, we delivered approximately $127 million of consolidated organic service revenue, representing nearly 40% year-over-year organic growth and 21% growth over 2019. Government Solutions delivered $92 million of growth for the quarter, total – sorry -- of fourth quarter total revenue, along with $34 million of adjusted EBITDA. Commercial Services generated…

Thank you. [Operator Instructions] And we will go first to Daniel Moore of CJS Securities.

Thank you. Good afternoon. Just quickly, welcome, Craig. And Trish, thank you for all your help. You've been tremendous and a pleasure to work with. Maybe start, David, high level question, but you started to touch on this in the prepared remarks. Can you give us a little bit of a preview of the Analyst Day just as it relates to T2 and the strategy for integrating that business and how you plan to leverage it over the longer term?

Yeah. Good question, Dan, good talk to you. What I would say is we've actually spent some time serving our investors and the investment landscape to really hone in on the messages that we think matter most. And I think the clarification of long-term strategy goes to the top of the list. And so I think what you'll see, and I'll just say this structurally is, one, a clear definition of the markets that we play in, what are the dynamics of those markets and how we feel like we compete today and into the future. And then more specifically, how T2 looks to create value in the market it competes within and how we can accelerate that growth through being a part of the Verra Mobility operating system. And so I think that's going to be the principal way you'll see that is, I think, clarifying the broader world of what we would call urban mobility and how parking is a really important part of that globally, and that's why we're excited to have T2 in the family.

Excellent. That's helpful. Maybe just the expected cadence of the 240 school zone and speed camera installs and then talk about how much interest you're seeing? You talked about this, but growing interest from other municipalities across the country for similar capabilities?

So I think the pace is that will be done there starting in the third quarter.

Should be completed by the end of the third quarter.

Should be completed by the end of the third quarter. So it will look a little bit off from where we were last year, because remember, we started installing the 720 cameras last year in the back half of the year. So you're going to see some probably positive comps in Q1, but negative comps in Q4. So once again, you'll see product revenue being a little lumpy throughout that time frame.

And then maybe on the back half of that question, Dan, I think we continue to see positive momentum in particular in things like speed or speed enforcement globally. I referenced the one opportunity that we won in the Netherlands. There's going to be some others that we'll be able to announce later as well. So I think the trend right now is our friend. And I think globally, we're going to start to see bigger and broader programs in major metropolitan areas in the years ahead.

Perfect. And then maybe just last for me. I think you mentioned the synergies from Redflex may be getting pushed out a little bit. Just clarifying the overall synergies you still expect to achieve and maybe what's causing that? Thanks.

Yeah. I think there's a couple of things in play. I think we needed to just cause regroup. We've got John who's a great addition to the organization who's going to run the organization and create those synergies. But also as we integrate, we lose the ability to separate out what used to be Redflex and what used to be Verra Mobility and it just becomes one entity over time. So I think what you need to look for is just that the North American entity returns to the margins that the legacy Verra Mobility company had. And that's the real sign that synergies are being obtained over time.

Very helpful. Thanks again.

And we'll go next to Dave Koning of Baird

Oh yeah. Hey guys. Thanks. Nice job. And I guess, I guess, first of all, we don't have great Q1 seasonal data going back, just because the last couple of years were so complicated with COVID. But, maybe Q1 2019 is the best we have and revenue was up very nicely sequentially is up 7%. Are we back to normalized trends? I mean, I would think now is even better actually, right? We're getting -- we see TSA data every day even better than that. So should we be up sequentially in Q1 based on some of that data?

In a segment or the company as a whole?

Oh. This is just commercial. Yeah. I'm sorry, just commercial it was up 7% in Q1 2019 in the TSA data is like kind of really accelerating this Q1. So I'm just wondering can it be even better than kind of normal trends, which seem like they would be up sequentially?

Yeah, we could. I think you're going to see a really -- I think you're going to see a really strong Q1 of 2022. I don't know that they're going to be up sequentially from Q4. Normally, they do drop a little bit. We would expect more likely that this would be -- that this would -- if they were flat, that would be a really good result for us. So I don't know that we're going to see that go up from Q4 to Q1. That's not the normal trend.

Okay. Okay, got you. Well, that's good to know. And then secondly, on Redflex, I guess, two parts to a Redflex question. One is what's just kind of the organic growth within Redflex itself like relative to what it was in Q4 of 2020? And then, it was down a little sequentially. Is that the normal trend for in Q4?

I think what you're seeing in Redflex is that their product revenue is really, really lumpy and especially as we converted them into the GAAP accounting requirement whereas previously, they used to be able to take product revenue over a percentage of completion. But in the U.S. GAAP rules, it really doesn't meet the criteria for most of those contracts. So we're -- you're really seeing that you're only recognizing the revenue at the end of the project periods, as the cameras are actually installed and accepted by the customer. So I think that's just making the overall revenue for Redflex appear to be more, lumpy than it normally would. I think the only piece of the Redflex revenue you're going to be able to see going forward is, anything that's on the international segment. And you'll be able to see both the service and project revenue within that segment. But everything that's in the U.S., as David mentioned, with Denver, we're bidding as a collective, and you won't be able to distinguish between a Redflex and a Verra Mobility customer.

Got you. Yeah. That's helpful. Well, thanks, and yeah great job.

Thank you.

And we'll move to our next question from James Faucette with Morgan Stanley.

Thanks very much. I was wondering, as you look at your forecast for this year, how are you building in recovery and travel assumptions, or are you looking for a linear improvement through the course of the year versus what we've seen thus far in the first quarter or acceleration? Just trying to get a little bit of understanding how you formulated that.

Yeah. So we don't necessarily formulate a deep assumption on like, is it leisure travelers, it corporate travel. We've got -- it's more like you said, it's a linear growth that we're seeing, and we're looking at trends as they related to 2019, meaning that as we move through the 2019 time frame, what were the seasonal trends, how did they play out? Because even though travel might be recovering in certain areas, it only concerns us if it's recovering in tolling regions. And a lot of those tolling regions have already seen some of the recovery that was there. So it's more along the lines of, do we expect certain trends in the length of the rental agreement to stay? Do we expect certain things that we've seen in the last 18 months to say like higher toll rates, those are going to stay. I don't see these toll authorities train around and reducing their toll rates anytime soon. And we would expect that maybe driving patterns stay very similar to what they were in the last year. What we did see over the last 18 months is the take rate of our product has increased that people are willing to pay for convenience, and this is a product of convenience. And we're – we believe that those take rates will stay higher as well.

Got it. Got it. And then you mentioned kind of the test and market evaluation in Ireland. It sounds like it's got a lot of vehicles there. What are you thinking about in terms of what next steps are and when that -- we could be looking at expansion and further traction in that region?

I think what we've committed to do with the customers to use once we got fully deployed to use that information to go back and to assess the value of it for their customers as well as the uptake for them as well, and both have been quite positive. What that allows us to do that is to have that sort of walking case study where we can go to other potential partners to say, hey, this is – we're solving a problem. It helps your customers that helps you and makes money for you. And so that was really the opportunity, where our pipeline remains strong in other parts of Europe as well, and we're getting much closer to launching a few pilots in other parts of Europe as well. We've mentioned before that we wanted to get into places like Spain and Portugal, and places like that eventually. So I think all of those are remaining – I think we still remain confident we'll have some of those to announce shortly.

Got it. Great. Thank you very much.

Yeah. Thanks.

And we'll move to our next question from Faiza Alwy of Deutsche Bank.

Yes. Hi. Thank you. I was hoping you could give us a little bit more color around commercial services and how we should think about the long-term drivers there. I understand that, you were talking about 2022 being above 2019, but I was just thinking about what the expectation is going forward? And whether there are any macro considerations that we should keep in mind? Like do you think, to the extent that there's a recession or anything else like does that benefit you? Does that hurt you? What are some of the puts and takes that we should keep in mind as it relates to your business? Thank you.

I think – yes. Sure. Thank you. I think on a longer term, we've always said that, we believe that this business is going to grow at 6% to 8%. And – and that has been driven by some of these macro trends. The increase in toll roads, the movement to cashless tolling, all of those things benefit us. And obviously, then there's the rise in the fall of what's actually happening with the rental car companies. But we've proven over time that historically, we've grown at, call it, 12% to 18% in this overall business segment, even when the rental car companies were relatively flat. Now it would be hard to say that, if there was a real recession and rental car companies were de-fleeting again, or where they were in the cycle that it wouldn't impact us, I think it would. But I think some of these other trends that we're seeing will still hold the higher toll rates, the longer rental agreements. I think a lot of those things will still hold during that if the recession happened.

Okay, understood. Thank you.

And we'll go to our next question from Trevor Bowers of Northcoast Research.

Hi, guys. Congrats on the quarter. Just a couple of quick questions about the toll management business, so how did toll management results in the fourth quarter compared to your expectations prior to the quarter? Would you say the recovery in domestic travel is in line with what you thought or maybe faster or slower?

I think it's faster than what we anticipated. So the fourth quarter came in, it came in really strong. It came in above where we were in 2019 and the rental car companies haven't returned to full fleet yet. So, if you say that TSA data, although recovering isn't where it was in the fourth quarter of 2019 and rental fleets, although recovering are not where they were in 2019, we were really pleased to exceed 2019 revenue for Q1 of 2021 -- I mean, Q4, sorry, Q4 of 2021.

Okay, great. And that kind of leads me into my follow-up question. So, in terms of revenue per user in the toll management business, how is that compared to 2019, 2021 versus 2019?

That's not how we look at those stats. So -- I mean, because there's all sorts of factors in there, the toll rates are a factor. The length of the rental is a factor, whether they're using an all-inclusive very usage shape product as a factor. So, that's not a specific stat that we do. We do keep revenue per rental agreement, but I don't know that that's a number we've ever disclosed.

Okay, great. Thanks a lot.

Yeah.

[Operator Instructions] We will go next to Louie DiPalma of William Blair.

Good afternoon, David, Tricia and Craig.

Afternoon.

Hi.

Tricia, congrats on helping lead Verra where it is today, and Craig, congrats on joining the Verra team.

Thank you.

Thanks.

For David, in February, you indicated that Verra was still negotiating with Hertz in regards to the tolling contract. Was there any update on that negotiation has seen that everything is status quo based upon the guidance and the implied growth. I was just wondering if there is any update with the negotiation?

Yes. I think your -- what you surmise is correct, meaning we still feel very good about it. We have not yet signed the final contract. We are -- I would say, we're in the -- I don't know what inning would we say, we're in the 8.5% inning, and we're getting very close. As you can imagine, with the recovery and with fleets, the challenge they've had keeping their fleets up not just hurts, but all of rental car, they've obviously had other things. They've also had a major leadership change in the last couple of weeks. So given that there's been some other priorities that they've been working on, but that also speaks to the fact that we've had a long-standing relationship that is quite reliable that we can continue to work forward under the current contract, and we'll have a renewed agreement here shortly.

Great. And I was also wondering, David, what are you seeing thus far with strategic synergies with T2 Systems and your photo enforcement division?

Yes. So right now as you recall, we weren't targeting sort of the cost synergy. We're really leaving T2 is more of a portfolio model. And so what we have started to see is two things. One is, what I would say, cross pipeline opportunities, meaning people within the photo enforcement business are looking for potential parking opportunities for T2 and vice versa. It's mostly us looking at our municipalities and bringing those to T2, which is by the way, that was the strategic concept that we would have -- that we talked about. And then two, as I mentioned earlier in my opening comments, we definitely see this opportunity as curbside management does a collective significant opportunity. And so there will be, what I would call increased collaboration as we think about go-to-market or on curbside. We've got some time. That market isn't fully activated yet, but I think we've got the right platforms between T2 and Government Solutions to be real played in that space.

Great. And do you intend to be very acquisitive in that curbside management market? And the reason I ask is for rental car tolling, you have a 100% market share in the U.S. and for photo enforcement, you have the 75% market share. But for parking, it's a very fragmented market, and you just began with T2 Systems. And so should investors think of this as a roll-up opportunity for you, or do you have like the foundation with T2 to organically expand and grow at your own pace?

Yes. So, a couple of ways to answer that, Louie. The first is, are we going to be acquisitive period? Yes, I think you've seen that. We will continue to run our traps as we look across the landscape of smart mobility to deploy capital when it makes the most sense through acquisition that we believe that we can grow and expand, diversify and return value to shareholders. Two is, do we see that in parking to your point, is very, very fragmented, but in particular, in the United States. One of the reasons and as you know, we had some questions about the price we paid around T2, when we acquired the asset is that, it's one of the larger, most profitable in the industry here in the US. And so that was one of the reasons we were so excited to get it. I think what we would say is that, with that and the municipal base we have in government solutions, we have a pretty good foundation. But as we think about curbside management, there are obviously other incremental technologies that are at play in that, and we would certainly consider -- we will always consider M&A when it's appropriate. I don't know that we have a specific roll-up strategy as it relates to parking at this point.

Okay. That is helpful. Thanks, everybody.

Thanks

Thank you.

And we'll go to a follow-up question from Daniel Moore of CJS Securities.

Yes, thank you again. Trish, you alluded to this, but as travel has come back and come back a little faster, have you seen any changes in average terms of the contracts, any reversion to the mean in terms of usage, miles driven length of contract terms, or are we all generally still pretty well kind of above pre-pandemic levels, at least at this stage?

We don't get miles driven. We get – we do get length of rental agreement, and that has remained longer than 2019 for most of the pending time period, including the back half of 2021. And we are seeing that we're getting more billable days per contract, which is awesome because they're keeping for longer and then more days, they're using tools more often in that contract. So that's fairly consistent.

Okay. No change yet, at least as of yet. That's perfect. Thank you again.

And with no other questions in the queue, that does conclude the question-and-answer session. And this concludes today's call. Thank you everyone, for your participation. You may now disconnect.