Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's Fourth Quarter 2022 Earnings Conference Call. My name is Julie, and I will be your conference operator today. This call is being recorded. I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please go ahead, Mr. Zindler.

Thank you. Good afternoon, and welcome to Verra Mobility's fourth quarter 2022 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 Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. During the call, we'll 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, March 1, 2023, 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 and our Form 10-Qs filed during 2022, which are 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'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is 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'll turn the call over to David.

Thank you, Mark, and thanks, everyone, for joining us today. For today's call, I'm going to first provide a high-level discussion on our outstanding fourth quarter results and key drivers. I'll move on to a discussion of several key trends that are shaping the smart mobility market before closing with our strategic priorities that will influence our 2023 operating plan and build upon the foundation for the long-term outlook we outlined at our Investor Day in July 2022. We delivered fantastic fourth quarter results, highlighted by robust revenue and adjusted EBITDA generation and strong free cash flow. Fourth quarter revenue of $186 million exceeded our expectations and was primarily driven by strong tolling trends in our Commercial Services segment. Adjusted EBITDA of $84 million for the fourth quarter also exceeded our forecast, driven by volume-based operating leverage in both Commercial Services and Government Solutions. Our strong results are aligned with two macro trends across our operating segments. First, we're seeing continued strong travel demand by both consumers and businesses, particularly in the U.S. The major U.S. airlines have cited strong or significant bookings in their recent quarterly earnings announcements. The second macro trend is the continued push for safer roads in communities, which drives the need for investments in automated safety enforcement. Traffic fatalities in the U.S. reached a 16-year high in 2021. And while early estimates are showing a very slight improvement in 2022, these numbers are simply unacceptable. Transportation officials, elected officials and safety advocates will be looking for technology solutions that can save lives that make transportation more efficient for everyone. Starting with Commercial Services. The team again delivered strong performance. Revenue of approximately $82 million for the quarter represented a 14% increase over the same period last year. And compared to pre-pandemic levels, we achieved 20%…

Thanks, David. Good afternoon, and thanks to everyone for joining us on the call. I'll start out today by providing an overview of our fourth quarter and full year 2022 results followed by our 2023 financial guidance. And I'll conclude with discussions on clients, capital allocation and our long-term outlook. Let's turn to Slide 11, which outlines revenue and adjusted EBITDA performance for the consolidated business. Total revenue increased approximately 9% year-over-year to about $186 million for the quarter, driven by strong operating performance across the company and the inclusion of T2 Systems in our financial results for a full year. On an organic basis and excluding New York City hardware sales, we grew 16% year-over-year. Expanding on this point, given the prior year included an incremental $21 million of product sales from the New York City camera installations, revenue growth is the best proxy for our performance. Q4 service revenue grew 24% over the same period last year, of which 16% was organic growth. This growth was attributable to several factors: first, Commercial Services grew 14% year-over-year; second, Government Solutions service revenue increased by about 19% over the prior year; and finally, T2 Systems contributed about $15 million of service revenue. As a reminder, we closed the T2 Systems acquisition in early December 2021, so only three weeks of T2 revenue was included in the prior year quarter. Product revenue was $7 million for the quarter, of which $5 million was from T2 Systems. Finally, from a total profit standpoint, consolidated adjusted EBITDA of $84 million increased by approximately 5% over last year. On an organic basis, excluding T2 Systems and New York City product sales, adjusted EBITDA growth was approximately 14% versus 2021. Turning to Slide 12. For the full year, we delivered total revenue of $742 million…

[Operator Instructions] Your first question comes from Daniel Moore from CJS Securities.

Let me start, just kind of high level remind us where we are on the curve as far as the shift to cashless tolling at this stage. How much of a tailwind do you expect that to be? And how long is that likely to last?

In the remarks, we talked about that we were about 64% in the U.S. market and we certainly see -- while it's hard to -- you can't necessarily put a numeric number, you see a lot of trends that I -- and I identified several specific ones in Florida and George and others where that is -- seems to be continuing. So we would anticipate that to be a trend for the next several years.

Very helpful. Curious, David. In terms of Europe, what are your goals for Europe for '23? What kind of milestones would you consider a successful year, whether that be revenue, new agreements, just general progress? Anything that would be helpful for us to track.

I don't think we're -- I mean while we have -- obviously, we're internally, we're working towards revenue. I think we're still in the place of, hey, do we have enough vehicles with current customers and enough locations that we can say we're finalizing proof of concept, improving the value to customers. So I think it's a bit of a combination, meaning we sort of look at enrolled vehicles on the program as the primary driver. That's the kind of the unit economic view. If we get that through one customer or several customers, that's fine. But we would also like to have a distributed view, meaning multiple countries.

Understood. Really helpful. And then just maybe talk a little bit about on the government services side, the level of dialogues regarding Vision Zero initiatives. Is it relatively steady? Or is it actually picking up given the traffic fatality numbers that you described there?

What I would say is even -- what I would say, as the traffic fatalities numbers were being reported and occurring, there was already a pretty significant increase, certainly in the countries that we're providing services in related to newer programs, expansions of current programs and even looking at other use cases. So I think it's -- I think that business has a very, very strong outlook for the next several years based upon some of the current dynamics.

Your next question comes from Dave Koning from Baird.

I guess my first question, I often think about the Government Solutions, the services revenue kind of in the three parts, the New York service, other service, and then Redflex in there. About a 30 to Redflex, I think, is a little less than that. How did each of those do in the quarter? Because it seems like that continues to do extremely well. Like those three combined somehow do really well. And maybe kind of distinguish kind of which ones -- how fast each of them are growing or which ones are doing really well.

Yes. So I'll take a shot at that. So I think you're right. We talked about the total business. If you take out New York City, you just look at GS, right, this is a double-digit grower. New York City services in the fourth quarter continued to grow. It's going to continue to grow next year. We talked about that in terms of being plus 10%. Redflex service, we continue to see mid-single-digit growth there, as you would anticipate. And really, as you look at GS year-over-year, I think the one thing that you have to take out of that, and as you probably well know, David, right, is the fact that we're going from a year where we had product sales, I'll make sure I'm going to give you the right number here, right, in the Americas of $20 million, right? We're going down to effectively nothing. And if you look at those product sales for Redflex, that was a $10 million year looking at another $10 million to $11 million a year. So the business continues to perform well. We're seeing growth across the board. The real idiosyncratic piece there is the New York City install ending in 2022.

Yes. Okay. Okay. That's good. And then I guess the Parking business, you talked a little bit about Q4. I think you said the product was a little below your expectations. Has T2 overall, you've had it for just about a year now. Has that overall been in line? And did you say all through the year, you should have sequential growth in '23?

I would say -- David, I'd say yes to both of those, right? It has continued to perform to our expectations. And the equipment thing really was a delivery -- acceptance of delivery in the last couple of days of the quarter. So when we talk about choppiness, I'm talking about 3 or 4 deals that we'll end up getting, I think, here in 2023. So it's continued to perform well. As we look at this business next year, we're looking at somewhere of an 80-20 split with 80% of SaaS and service and 20% of equipment. And that's exactly where we want that business to be, so we're very pleased.

Your next question comes from Faiza Alwy from Deutsche Bank.

So I wanted to pick up on T2. I guess, give us a bit more color in terms of where you're seeing the most traction. At Investor Day, you talked about adjacent categories, you talked about how your market share is lower with Tier 2, Tier 3. You talked about additional sort of large cities. So give us a bit more color in terms of what you're expecting for '23 from T2?

Yes. I mean, I would say right now, the strongest is still in their home turf, which is in the university segment is strong and continuing to grow. They have an outstanding track record of not only keeping customers on very -- for long-term -- tenure of a long-term contract in addition to that expanding related services to that. So what I would say is that's still the core of the business. It's the backbone and it's continuing to grow. We're obviously looking at primarily how do we take those capabilities, in particular, on permits and enforcements and how do we bring those into other larger municipalities. T2 has done a really nice job in what you might call smaller, almost coastal vacation-oriented cities, and we're trying to bring that in. So we're making some investments in sales and marketing and organizational structure to make sure that we're supporting that with the right level of capability. And that's where we would anticipate the growth probably in the back half of this year and going into next year to be.

Right. And just to tack on to that. We are expecting high single-digit organic growth out of T2 next year. We expect margin expansion of about 1 point from where they landed this year. So business is on a good trajectory.

Great. And my next question was going to be on margins, so thank you for giving that color on T2. I was going to ask about the margin expansion that you expect from each segment. For Commercial Services, especially, I feel like, especially on a quarterly basis, like the quarterly cadence hasn't always been easy for us to figure out externally. So I know there are some dynamics in terms of what type of services you're providing. So maybe give us a bit more color in terms of what you're expecting on EBITDA margin expansion across the other two segments. And to the extent you can give us some thoughts around quarterly cadence of margins.

Yes, sure. I'll unpack both of those for you. So I think going forward, into 2023, we expect to -- I'm going to start at the portfolio, Faiza, and drill down, okay? We're expecting about 0.5 point of margin expansion across the portfolio, which is consistent with what we said at Investor Day that we'd expect on an annual basis. So we feel good about that. If I look at how that shakes out, now this is just for the total year, I'll get to the quarterlies in a second in terms of volume. So for the total year, I expect the CS business to be up about 50 basis points. A lot of that is volume leverage, right? As that business continues to grow, it scales really well. And that's a high single-digit grower for us next year. I expect the GS business to be down slightly anywhere from 10 basis points to 30 to 40 basis points year-over-year. And really that doesn’t have anything to do with product mix but they have to do with some investments that we are making in the platform to make sure we can continue to grow at scale both domestically and internationally in the half of decade or so. So about flat, slightly down in GS. And like I just said on T2, I expect that to be up about 1 point. A couple of things there. We continue to win business. And as I mentioned, I expect that mix of business to start favoring SaaS and service to an 80% of the total, which is more than we saw in 2021 and certainly more than we saw in 2022. So that factors out to about 0.5 point for the company. Now if you're going to look at trending, I'm going to…

Yes, that's very helpful.

And then if you go and look at Verra in total, right? So we're going to -- the trend is the same, but it's a little bit muted. So I'll be down in the first quarter, a few ticks lower than I will be for just CS. Again, it's the lowest revenue-generating quarter of the year. We'll grow, I'd say, high single digits in the second quarter. We'll grow again mid-single digits or so in the third quarter. And then we'll step back mid-single digits in the fourth quarter, which is that the end of the 3Q summer driving season in CS circulating all the way through to the consolidated company results.

Great. That's all that -- really appreciate all the color. Just my last question is, I think you mentioned as part of the Commercial Services growth drivers, you mentioned improving TSA volumes. So just wanted to just clarify that. Are you expecting growth? I mean, the way I've been looking at it is really TSA volumes as a percentage of 2019. Are you expecting that volume sort of get back to those pre-COVID levels in 2023?

The short answer to your question is, yes, that's what we're expecting. I think the way I have the plan done right now, I think the second half of the year looks like 2019, the first half kind of ramps to get there. But in all fairness, I have to compare that to where we are in a February year-to-date basis, we're at 102% through February. Now this is not an exercise in false precision here. I do think over -- I would look at 2023 as a percentage of 2019. And in general, we expect to get back to 2019 levels, and that's where we have the business plan today.

Your next question comes from Louie Dipalma from William Blair.

David, Craig and Mark, good afternoon. What is the expectation for the non-tolling services for your commercial division in terms of growth? And by non-tolling, I'm referring to like the violation, management and title and registration. Is there expected to be growth in those services as well coming off what appeared to be a pretty solid 2022?

In totality, the answer is yes. We don't spike those out specifically in terms of growth rates. But I can tell you that if you look at the consolidated growth of the business, the RAC tolling piece is going to grow faster than the combination of the ones that you just mentioned. But yes, there will be growth year-over-year.

Great. And for David or Craig. In January, you announced your zero-in initiative. I know it's early, but what has been the initial feedback? Do you expect other municipalities to follow the lead of New York City and Oslo?

Yes. I mean I think that's already been happening. Other cities have adopted that globally. I think what we were just trying to do is to make sure we wanted to draw attention that it's still relevant, it's still important and that we don't want to anyone to not stay focused on that, given the increase in traffic fatalities over the last year or so. So we wouldn't -- we believe a key driver of government solutions over the long term is an increased attention to traffic safety and congestion.

Great. Another one on the Government Services division. David, you indicated that you're investing in software. What does that new software enable strategically for you?

Yes. I mean, I guess what I would just say is the software that we have has been -- it's the original software that the business was founded on. So we're just modernizing both the architecture as well as building in new capabilities and functionality to streamline the way that it's both built, coded and service. So just think of it as a bit of an update. Now with that, we'll obviously -- that will be our in the cloud web-based platform that we'll be using for the future that will also host a new functionality as we provided in the years to come.

Great. And are there any, I guess, new features that you're able to implement with your existing cameras with the software such that -- I remember a few years ago for your red light cameras, you indicated that in certain situations, law enforcement would have the ability to tap into your feeds for your red light cameras or for your feed cameras. And right now, there seems to be a major focus on school safety, and you have a big network of cameras around schools. And so I'm wondering if there's any type of school public safety services that you could cross-sell or add on top of your existing services with your network of cameras.

Yes. I mean, I guess, point 1 is, yes, our customers have access to -- and local police and actually federal please have the ability to look into the cameras to look at video. That's a service that we provide as a part of the total package for our customers today. And two, we certainly are looking to the same extent that as we started off with schools on speed, we added school bus. There's obviously a portfolio of solutions that we could add there that don't necessarily have to be automated enforcement. They could be other sort of related types of technologies. I won't disclose anything specific, but just rest assured, that's certainly one of the categories that we're looking at.

[Operator Instructions] Your next question comes from Keith Housum from Northcoast Research.

Dave, as we look at some of the legislative fronts out there, especially with the data that came out recently in terms of the pedestrian deaths, we talked about like Georgia and Virginia being states that have -- pass legislation recently. But any other states that are pretty far along that perhaps are close to passing legislation along more traffic enforcement cameras that as we look in the next year or 2, we see potential opportunities for you guys?

Yes. I would just be -- I mean, look, a lot of those states are in legislative sessions right now. And so I wouldn't say that I have a specific one that I would lean into. But obviously, we're continuing to look at key critical states such as California and Florida and others. We've also opened up -- I think it was last year that we opened up legislation in Washington State as well. So we're always on both -- we're always on offense on that, and we're looking. So -- but nothing that I would report to specifically right now and wouldn't do so until those laws are passed.

Got it. Appreciate it. I think on the last quarter, you guys talked about opportunities in the construction zone camera space and a few large projects that perhaps are out there close to being signed. Any additional thoughts or context you can share in terms of the construction zone area?

Well, we have two working currently, and we obviously think it's something that is -- it's another growth vector. It was one of the benefits of the Redflex acquisition because that's not an area that we have previously played in. But when you look at the target of customers that we have today, it seems as if that's an area where legislators are also going to lean into in the days and years ahead. I don't have a specific pipeline or anything like that in front of me, but I would just say that it certainly is -- it's not dissimilar from school zone speed or school bus, which is it's a pretty rational belief that workers in work zones should have the opportunity to work so safely and that these types of tools are force multipliers and enablers of affecting that outcome.

Okay. I appreciate it. If I could sneak one more in here. Last year, there was some discussion that you guys not yet won it, but there's potential for it, the 150 fixed busing cameras in New York City. Is that included in your guidance? Or is that the potential upside for the year?

It is not included in our guidance, so therefore, is upside -- potential upside.

There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. You may now disconnect.