Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's First Quarter 2023 Earnings Conference Call. At this time all lines are on listen-only mode. [Operator Instructions] This call is being recorded on Thursday May 4, 2023. I would like to turn the conference over to Mark Zindler, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Verra Mobility's first quarter 2023 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 4, 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 2022 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 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 call today. Today's call I'll start with an overview of our excellent first quarter results and provide an update on key business drivers. I'll move on to a discussion of the industry trends that are driving our results and influencing our future views of the business. And I'll close with a recap of our strategic priorities across each of our business segments and share a summary tracking our progress. We delivered exceptional first quarter results highlighted by strong revenue and adjusted EBITDA and solid free cash flow generation. We delivered $192 million of revenue in the first quarter, representing 13% growth over the prior year quarter. This was primarily driven by strong tolling trends and commercial services and increased recurring service revenue in government solutions. Adjusted EBITDA of $88 million for the first quarter increased 17% over the prior year, and was driven by volume based operating leverage in both commercial services and government solutions. As a note, we had a catch up entry in government solutions that benefited revenue and adjusted EBITDA by about $2 million. Craig will provide the details in his remarks. Starting with commercial services, I'll provide an overview of the first quarter performance for each of our segments. TSA team again delivered strong performance revenue of approximately $86 million for the quarter represented a 17% increase over the same period last year. The primary factor driving this performance was increased volume. TSA throughput reach 100% of pre-pandemic 2019 volume, driving an increase in adopted rental agreements. We're also experienced strong adoption rates from renters for all inclusive tolling product offering. I'm pleased to announce that we recently entered into a partnership with telepath for rental car tolling in Italy. This partnership effectively allows Verra Mobility to offer…

Thanks, David. Good afternoon, and thanks to everyone for joining us on the call. I'll start out today by providing an overview over first quarter results followed by our 2023 financial guidance and I'll conclude with a brief discussion on capital allocation. Let's turn the slide 7 which outlines revenue and adjusted EBITDA performance for the consolidated business. Total revenue increased approximately 13% year-over-year to about 192 million for the quarter driven by strong operating performance across the company. Excluding domestic government solutions product sales in the first quarter of last year, we grew 15% year-over-year. Reoccurring service revenue grew 15% over the prior year quarter driven by strong travel demand in the expansion of the New York City School Zone Speed program. At a segment level, commercial services revenue grew 17% year-over-year. Government solutions service revenue increased by about 14% over the prior year and T2 systems service revenue grew 10% over the first quarter of last year. Product revenue was 7 million for the quarter. About 4 million of this total was from T2 systems, while 3 million was from international product sales within government solutions. From a total profit standpoint, consolidated adjusted EBITDA of 88 million increased by approximately 17% over last year. The core business defined as excluding onetime domestic government solutions product sales generated adjusted EBITDA of approximately 18% versus first quarter of 2022. As David mentioned in his remarks, we had a catch up entry that benefited revenue and adjusted EBITDA in the first quarter. The underlying activity was operational in nature and hence was not adjusted out of our reported revenue or adjusted EBITDA. We recognized approximately $2 million in government solutions revenue for photo enforcement contract activity for a prior period resulting from a contract amendment in the first quarter of 2023.…

Thank you. [Operator Instructions] Your first question comes from Daniel Moore from CJS Securities. Please go ahead.

Thanks, David, Greg, for taking questions and all the color. Good afternoon. Start with the guide. Obviously very strong quarter above our expectations and I believe consensus and sounds like TSA back to pre-pandemic levels. So just maybe talk about your thoughts on holding the guide into the stage of the year versus potentially raising it. And how much of conservatism may be in there? Thanks.

Sure. Yes. Thanks for the question, Dan, thanks for being on the call. So as we think about this one from the revenue side, you're right, the TSA throughput came to 100% for the first quarter of 2019. In as I talked about in the prepared remarks were modeled in the high 90s for the balance of the year. We just want to see this play out for another quarter. We don't have any reason to believe it's going to be any different right now. But I want to get another quarter under our belt, I think at this level to see if we would go ahead and raise that's one piece. I think the second piece, Dan on the revenue side is the GS business that favorable $2 million catch up that we had in the GS business was one time non-recurring. That's another thing I'd throw out there. And then if I take those revenue comments and slow them down to EBITDA and EPS, the only other thing I'd add is that we're making those investments on the CS and GS side of the house. So in CS, those are product investments about running faster in our core markets, especially in the fleet business, which as you heard was up 13% in the first quarter, and then it's continued cost, we had some delayed hiring, and some of the work that we're going to do in GS on our platform in the future. So as I add all those things up, I still think I'm in the same spot for the year. But if travel continues strong, we'd certainly relook at it and another quarter or so.

Makes perfect sense. And then maybe one follow up related, despite the increased investment SG&A continues to tick lower as a percentage of revenue, obviously aided a little bit by that $2 million that you talked about. But is that Q1 level kind of sustainable? And what's kind of a realistic goal, if we look out over the next three to five years embedded in your long term plan? Thanks again.

Yes Dan. Sure. I think it was a little artificially depressed here in the first quarter. So the first thing, if we just take it down to EBITDA percent probably be the easiest way to do it. So we did get a benefit, obviously from that catch up entry. I don't know if you caught it in the prepared remarks, but that was 100% flow through we'd already accrued the cost for that back in 2022. So when you look at the margin, you're going to see a steep jump in GS, and then for the overall business. So if I think about total margins for the company, I still think we're going to accrete about half a point year-over-year. And I still think we're on that trajectory. If you look at just operating in SG&A costs as a percent of revenue, more specifically, to your question those costs, especially in the GS business, what we did see as the delay on some of the hiring on that, just due to other priorities in the business, and of course, repeated headcount, availability, and some of the skills that we're trying to hire. So I do expect that cost to go north in the second quarter and in the back half of the year, and expect it to look a lot like the total year that we discussed with you last time out.

Make sense. Okay. We'll jump back with and follow up. Thanks.

Sure. Thanks, Dan.

Your next question comes from Faiza Alwy from Deutsche Bank. Please go ahead.

Yes. Hi. Thank you. I would love a little bit more color on the telepath partnership that you mentioned in your prepared remarks. And I think I heard you say that there's no current revenue anticipated, but give us a sense sort of dimensionalize the partnership for us a little bit? Any further color on that would be helpful.

Yes. I mean, this really just goes back to the original thesis of going to Europe was, hey, can we replicate the value proposition that we have for commercial fleets here in the U.S. related to access to toll roads for the most part in Europe, you're doing that in a country by country basis. The partnership with telepath, but actually, it's sort of allowing us to accelerate our access to a group of countries that I listed in my prepared remarks. And so we'll anticipate that we can hopefully, to kind of accelerate our value to those countries. Some of that is going to be, you obviously working with our customers in those countries. And then as we've spoken about the conversion to cashless will need to come alongside that to really get the full benefit of it. But telepaths is a major-major player in the toll it's probably the major player in Europe related to tolling. So we're super excited to be on the radar and have a partnership like this.

Got it. Thank you, and then you Secondly you were just talking about certain investments across both segments. I'm curious with respect to your approach, or these would you characterize these as really discretionary expenses where maybe to the extent revenue comes in better than what you're forecasting, you may end up investing more. And if it's a bit lower, you can pull back on some of the spending. So give us a sense of how you're thinking of investments this year?

Yes. Sure Faiza I think I know where you're going with that one. The investments that we have in the business right now, we're going to make pretty much regardless of the environment, unless, of course, we saw something extreme. So I don't know that I'm waiting on revenue. To make these investments. I think what we've seen in the GS space is just simply timing. I think, well, we have the same investment that we expected coming into the year with just the pacing of that investment is going to be weighted towards the back three quarters versus the first quarter. When I think about on the CS side, this is after we've seen the efficacy of the early efforts that we've done and this is primarily in the fleet business and rounding out some additional tools that will help us capture the small and mid market players in the space as well as putting in the right commercial talent. As we've seen the early efficacy of those, we're doubling down on those efforts for future growth.

Understood, thank you.

Your next question comes from James Faucette from Morgan Stanley. Please go ahead.

Hey, guys, this is Jeff [indiscernible] on for James. I wanted to touch on the legislative opportunities, and maybe just touching on Washington, specifically where you said it was recently signed into law there. So how should we think about the timing of you getting on the ground and potentially seeing a financial impact from that? And then maybe also talk us through the potential timing around recent events in Florida and Colorado as well?

Yes, I mean, Washington, basically becomes another state that has all three use cases related for speed red light as well, as we've been working Washington for some time, now they have all three. So that would actually be I would anticipate time to revenue, they're shorter mean, we could probably, depending on RFP timing and things like that, that'd be this year type of thing in terms of pipeline. Relative to places like Porto, while there's been really, really positive activity, it hasn't been signed yet. So we'll wait obviously, until that's finalized. Those things typically take a few months relative to making sure that all the Is are dotted, so to speak both legislatively as well, in terms of policy, in terms of how they roll it out. So I would anticipate discussions with customers this year, I would anticipate revenue for those next year.

Got it. Okay. And then can you talk about the shift to the all inclusive fee structure within commercial? What are you doing there? How many customers on that type of fee structure? Or what type of lift do you see to revenue when you get customers on that platform? Maybe just talk us through that.

Yes. First of all, this is our, it's a program that we've developed on behalf of customers and for the market. It's just a really favorable customer experience, because it allows you to predetermine your usage of tolls as well as to have that on your bill when you turn in your vehicle. So from that standpoint, traditionally had always been a product that was mostly at the sort of off airport type brands. But now, many of our customers are bringing that online to their airport brands or the mainline brands. And so overall, it's a much better experience for customers or the renters, and therefore our customers are really pleased with that as well. So we would anticipate further penetration that as more toll roads open and more brands decide to adopt it.

That's helpful. Thank you.

Your next question comes from Keith Housum from Northcoast Research. Please go ahead.

Good afternoon, guys. Just elaborating further on the prior question. [indiscernible] emember the past discussions regarding the all inclusive pricing that perhaps will have a negative impact on margins. Can you perhaps talk a little bit about the development of that product further and do you still expect to see that upon adoption?

I'm not sure where the negative impact on margin came from Keith.

Okay. Okay. Maybe. [indiscernible].

Yes, no, it's a overall, it's a great product for customers as well as for us. The adoption is being increased because our customers are being seeing how it works well in different regions. And so they're rolling it out more. Again it's really at their discretion, not ours.

Got you. Okay. Appreciate that. Craig a little bit more on the guidance. I can appreciate the wanting to be a little bit more conservative. But can you give us a little bit idea perhaps if the [indiscernible] would come in at 100% of TSA travel versus the [indiscernible]. What's the incremental difference in terms of revenue for CS?

I think it's hard to equate those two. I hate to go to 1% gets us this Keith as I think you well know. And it's not quite that prescriptive. But if I took it forward, and I said, let's say I see the tolling and violations performance in the first quarter that I saw on the balance of the year. Now in our original plan original guidance, we assumed a little lower than 97 to 98 for the first quarter. So I don't think you'd quite be able to see what you saw for the first quarter bring it through to the back half. But it would be $5 million, approaching $10 million, potentially, if it were at that 100%. And I think what's important about that assumes that it's at the exact same mix that we saw, and there's kind of nothing else going on in the portfolio that moves the other way. So it's not enough to bring it up, I would say a factor of 10s of millions of dollars, but to the degree that we stay at exactly 100%, which, by the way, Keith that is where we closed the quarter. So from 1 to 331, that TSA throughput was exactly 100%. As I drag that forward to the end of April, it's still at exactly that 100%. So if we were to stay at exactly that level, we could potentially see some sort of upside of commercial service business.

Great. Thank you. Appreciate it.

Sure.

[Operator Instructions] Your next question comes from Louie Dipalma from William Blair. Please go ahead.

David, Craig and Mark, good afternoon.

Good afternoon.

Was the impact from the New York City speed camera program shift from 16 hours to 24 hours? Was that in line with the prior expectations that you set?

It is. So if you go back and think about total New York City revenue, and we said that be down, somewhere around $5 million to $10 million total year-on-year, the way it looks today, that's still when I see today. So and the reason that is down year-over-year Louie was because we have the difference of having product sales in 2022 is that shifted to ARR here in 2023, the timing of those things, which was offset partially by the 24/7 which went into place at the tail end of last year. So that's a slightly longer answer to your simple question. Yes, it is in and yes, it is as expected.

Great. Thanks, Craig. And, in general, were speed camera net ads during the quarter strong, even though that New York City contract has completed?

I mean are you just requesting outside of New York you mean?

Yes.

Yes. I mean, I think everything was in line with plan.

Great. And another one, switching to the commercial division. There's been a lot of initiatives for the different racks to onboard electric vehicles. Has that served as a benefit for your onboarding and title and registration businesses?

It does and as much as the fact that they're electric doesn't matter as much as if they're in board. They're sort of inflating new vehicles which does impact our ability for both from a title violations perspective and from a title and registration perspective. So yes, anytime they're adding vehicles, that's good for us.

Great. That's it for me. Thanks, everyone.

Thanks, Louie.

There are no further questions at this time. This concludes today's conference call. You may now disconnect. Thank you.