Good afternoon, ladies and gentlemen, and welcome to the Verra Mobility Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. This call is being recorded on Thursday, February 29, 2024. And I would now like to turn the conference over to Mr. Mark Zindler, Verra Investor Relations. Thank you. Please go ahead.

Thank you. Good afternoon, and welcome to Verra Mobility's Fourth Quarter 2023 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com. 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. Management may make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These factors are described in our SEC filings. Please refer to our earnings press release for Verra Mobility's complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. 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 strong fourth quarter results and key drivers. I'll then 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 2024 operating plan and build upon the foundation for the long-term outlook that we outlined at our Investor Day in July of 2022. We delivered fantastic results for the fourth quarter, highlighted by robust revenue and adjusted EBITDA. Fourth quarter revenue of $211 million exceeded our expectations and was primarily driven by strong U.S. travel and tolling trends in our Commercial Services segment. Adjusted EBITDA of $91 million for the fourth quarter was slightly ahead of our forecast despite an approximate $4 million onetime noncash charge, which Craig will elaborate on in his remarks. Our strong results are aligned with 3 macro trends across our operating segments. First, we're seeing strong travel demand by both consumers and businesses, particularly in the U.S. Recent commentary from the major airlines and our RAC partners suggest continued strong demand through at least the first half of 2024. The second macro trend is the continued push for safer roads and communities, which drives the need for investments in automated safety enforcement. We experienced a record year in 2023 with the passage of new automated safety enforcement legislation as lawmakers across the globe recognize the efficacy that automated safety solutions have in reducing traffic fatalities. And lastly, the complexity surrounding university and municipality parking create opportunities for customers to use our software-enabled parking management solutions. Now moving on to our business unit operations. The commercial services team delivered outstanding results driven by strong and durable domestic travel…

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 2023 results, followed by a detailed overview of how we're thinking about 2024. Let's turn to Slide 9, which outlines the key financial measures for the consolidated business for the fourth quarter. Total revenue increased approximately 13% year-over-year to about $211 million for the quarter, driven by strong recurring service revenue growth across the company. Recurring service revenue grew 13% over the prior year quarter, driven by strong travel demand in the GS business and recurring service revenue growth outside of New York City and the GS business. At the segment level, commercial services revenue grew 16% year-over-year. Government Solutions service revenue increased by 10% over the prior year and T2 Systems SaaS and services revenue grew 10% over the fourth quarter of last year. Product revenue was $9 million for the quarter, about $6 million of this was from T2 Systems, while $3 million was from Government Solutions, the majority of which were international product sales. From a total profit standpoint, consolidated adjusted EBITDA of $91 million increased by approximately 9% over last year. As David mentioned, we took a $4 million noncash charge in the GS business for inventory obsolescence, largely driven by supply chain optimization. Excluding this charge, year-over-year adjusted EBITDA growth would have been 14% and consolidated margins would have been about 45%, which is consistent with Q4 of 2022. We reported net income of $3 million for the quarter including the $31.5 million plus pass accrual pursuant to our legal setting, which is discussed in more detail in our 10-K. Adjusted EPS which excludes amortization, stock-based compensation and other nonrecurring items, including the plus pass legal…

[Operator Instructions]. And your first question comes from the line of Keith Housum from Northcoast Research.

David, Obviously, as you guys pointed out, last year was a great year for positive legislation movements or traffic enforcement cameras. I think last week, you guys announced the [indiscernible] of Davy win. But are there any other big wins or significant wins you perhaps point us to, to get us a little bit more excited about next year.

Yes. I mean I think David is a great sign of things to come. There are several large ones that are going to be RFP here probably keep in the next, I'd call it, 3 to 6 months. We are positioned very, very well in terms of our -- a lot of our current customers will be doing some of these RFPs as well as some potential new customers. So the thing to remember that these things take a little -- post legislation, they tend to take a while to activate. Now you've heard some in different press releases and things like that. Those are sometimes much smaller deals that we may not even bid on, but we're really excited about the ones that are going to be coming out, probably here again in the next 3 to 5 months.

Great. Appreciate it. And then I noticed there was some movement in the Board of Directors here over the past few weeks. I think Sarah [indiscernible] rolled off, and I know Raj [indiscernible] joined the Board, I guess help me understand a little bit more what Raj brings to the board and kind of complements what you guys are doing?

Yes. I mean, first, I got to thank Sarah. She was an outstanding board member and investor really, wish her the greatest of success in which she's going to be doing. For Raj, as you know, we've -- for a long time, we've been moving our business toward a portfolio company model and the likes of some of the grades like the Danahers and the Fortis of the world, which means we have great businesses connected by a common business system and we -- M&A is one of our capital deployment strategy to create value for shareholders. Raj, with his background, in particular, as a leading M&A in places like Fortive, worked at Danaher as well as DuPont, just brings a real high level of expertise and insight into how we can think about that as we continue to grow our business. So we are so excited to have him because we certainly see M&A as a part of our future, and we think he's going to bring a lot to table.

Great. Appreciate it. If I can just squeeze one more in here. Obviously, the first Hertz Italy announcement is a nice win for you guys there. I guess any -- I know the European tolling is a slow roll. But maybe perhaps any other developments you can point to you that might get us again more excited about what's happening in Europe?

Yes. I mean I think Italy is actually the point of excitement. I don't -- we don't have a sense yet that they probably haven't even installed transponders in a vehicle yet. So we'll get a sense of what the volume is going to be. But Italy is, as we mentioned, this all sort of hinges on going into a cashless environment. And Italy and places like France were very barrier-based and they're starting to make that transition plus our relationship with Telepass. So I think this is a good harbinger of things to come. Probably don't have any specific insights on what that does to accelerate just yet, but I suspect we'll have something [indiscernible] in here to give you some more insight.

And your next question comes from the line of Faiza Alwy from Deutsche Bank.

So first, I wanted to actually pick up up on the M&A comments that you just made. It sounds like that's a big focus the company. And certainly, you have some flexibility now. Could you just refresh us on how you're thinking about M&A, what we should expect in terms of the type of businesses that might fit in with Verra Mobility? Just sort of what the vision is there?

Yes, of course. And thanks for the question. So I mean, as we've always said, we look at, first and foremost, we grew our business in the core businesses. So we have businesses that win and serve our customers there. We're then going to be looking from an M&A perspective, we can attach to that looking at adjacent opportunities. So whether that's a similar product to a similar customer sometimes that's geographic expansion. Sometimes that's buying a competitor potentially -- and then we look for platforms. So the reality is it could be either of those 2. But ultimately, we are -- as we've always said, we are a cash flow buyer. We are not taking bets or risks on noncash flow generating activities, or businesses rather. And so I would say that you would see them as you go back to Investor Day, we sort of articulated these 2 segments. One was connected vehicle as well as urban mobility. And so that's a really broad and exciting category or two categories rather of where we can look in all the markets within there. So we have a great team that's doing a lot of market work so we can understand what markets are best for us to operate in. Certainly, the activity this year has picked up significantly from the tail end of last year and so we're super excited about what that can bring to us. But we're going to continue to maintain a very strict discipline in how we think about the businesses that we want to add to the portfolio.

And I would just add to that, I'd say that the only thing that's really changed on that is that the environment seems to be opening up. right. And again, I don't think, Faiza, Verra Mobility specific comment. But our capital allocation framework that we've talked about in the past is unchanged, right? So that next dollar out the door has to have the highest yield to shareholders against paying down debt, buying back shares and potentially adding to the portfolio. I just think that we're going to be operating in a different environment in 2024 than we've seen in the recent past.

Understood. And then I wanted to talk about government services, the revenue, you mentioned some of the RFPs, including the New York City RFP. So just curious about like what's embedded in the mid-single-digit growth guide? And if you can talk about the quarterly cadence of what you're expecting there? And maybe if I can just throw this one, just give us a bit more context on the charge that you talk [indiscernible].

Yes, sure. So let me start with the first one. So -- and I think I'm going to repeat these slides to make sure I've got it straight here. So the first 1 is what do we think about what's embedded in the mid-single-digit growth guide for government solutions. And it's the very high end of mid-single digits. And I will tell you, if I bifurcate that into services and product. I don't guide on these specifically, but I think this warrants this level of detail. I think products are going to be flat at best. It could be a little bit in either direction, given that while the service revenue is probably at the very low end of the high single digit, when I combine those 2 together, I get the high end of mid-single digit for the overall business, okay? So -- and if you look at the exit rate of growth on services in the fourth quarter for Government Solutions, I expect the rest of the year to look something like that. So the business is certainly not slowing down, if anything, it's speeding up. But I do expect those products to be flat at best, which is bringing down the overall growth rate. So that was the first one. And I'll stay on government a little because I'll go to your third one next. So this was a $4 million noncash charge on supply chain optimization, the easiest way to think about this without mentioning names on the open call here is we did have a supplier who's come in to attempt to be a competitor, right? So some of the inventory that we've had and we've used for years isn't going to be as usable as it once was. And we had to go across…

Perfect. And then just to clarify quickly, are you expecting and should we expect sort of service revenue growth in Government Solutions to accelerate through the course of the year?

Not really. Not really. My comment was the exit rate that we saw in the back half of the year, it's going to be the growth rate I expect for the total year at 2024. So I have it in front of me. It's a little bit variable, but it's, I would say, relatively even across the year, probably a little bit skewed to the back 3 quarters.

And your next question comes from the line of Daniel Moore from CJS Securities.

Can you hear me?

No. Sorry, Dan. I think we lost the first part of your question. We just heard Commercial Services. Do you mind starting again for us.

Okay. Yes, absolutely. Starting with Comm Services, obviously, TSA volumes now fully recovered relative to pre-pandemic. Maybe just talk about the kind of rank order the drivers that you laid out, David, embedded in the high single-digit growth expectation for this year between toll roads, miles driven, shift to cashless kind of or the biggest drivers there that you see near term.

So yes, Dan, this is Craig. I'll take a shot at that one. So if we want to break down that high single-digit growth in 2024, I would do it in 3 buckets. Roughly half of that growth is coming from secular tailwinds. And those secular tailwinds are toll roads, more toll roads than there were in the past, more cashless roads, we're only at 67% penetration here at the end of 2023. So certainly more to go there. And then, of course, the additional penetration of the all-inclusive product through Hertz and ABG. So again, out of the high single digit, about half of it is in that bucket. About 25% of that high single digit is in TSA growth. We expect that growth as a total year 2024 versus 2023 to be about 1.5% to 2%. And then the remaining 25% of the growth in that high single digit is from our growth initiatives. That's growth in Europe and growth in [indiscernible].

Very helpful. And then just going back to the enabling legislation opportunities in Government Solutions. Any additional color on potential timing? You mentioned Pennsylvania. I think you said could be an initial $50 million TAM. What kind of time frame are you looking at? And what would cause that to increase to the $100 million that you called out in your prepared remarks?

Yes. Sorry, Dan, that might have been slightly the word choice. It was -- that 50 -- that's sort of all the combined legislation that we did across all the states last year. Yes. So -- but regardless, the way to think about timing is for the ones that we did do last year you'll start -- usually, it's about a year, meaning the legislation passed along, gets signed off by the governor and then there's sort of some nuances that are adapted to each state and then RFPs start going. So I think what we'll start to see is more discussion about that in the back half of this year, probably some wins, maybe even as early as Q3 and Q4.

Perfect. And then if you gave it and I missed -- I apologize -- but just the interest expense post the refinancing that's embedded in your embedded in your '24 EPS guide, if we plug in 7%, is that the right way to think about it, Craig?

Probably yes, if I'm thinking about the top of my head, but I'll give you the number, and you can calculate it in is the P&L expense is going to be $80 million. The cash number is going to be $75 million, Dan. The delta between the cash and the P&L number is the amortization of original issue discount. So on the P&L going into adjusted EPS, 80, cash expense will be 75 and that 75 should fit out to your 7%.

And your next question comes from the line of Louie DiPalma from William Blair.

For David, was there a trial for the Hertz Italy tolling service? Or as Hertz Italy starting directly with a commercial implementation?

They're going to do a commercial implementation. Mike, I suspect that they will start -- it wasn't a trial to then decide, they've already decided, but they'll probably start with a pilot, I would almost bet.

Okay. Great. And are you able to provide an update on the status of your other trials in Europe? And is there any potential that those trials move forward to commercial implementation.

Yes. I mean some of them actually have. I think we're starting to see a broader base in Spain, and we continue to work in Ireland. But most of them have not -- I mean Ireland is obviously not a very big country nor a very big tolling opportunity. But we have had some traction there. So what I would say is that we want to get more -- France and Italy are really the ones we want to get that as they move to cashless, that's going to be our bigger opportunity. This starting kind of falling in Italy is a great sign for things to come. It's hard to pace it. So we -- as I mentioned on the earlier question, that's probably a midyear understanding of where that might lead to.

Great. And I think on one of your slides, you mentioned how the cashless tolling penetration in the United States is now 67%, and that's up from, I think, 64% 2 years ago when you showed the slide at your Analyst Day, but what is the different penetration look like in these different countries in Europe that you're targeting? And like, for instance, in Italy, like do you have any estimate on like what the penetration is there.

Yes, Louie, that penetration is U.S., that's the U.S. market, right?

France and Italy are -- they're very low, Louie.

Yes, very low. I mean maybe less than 5%.

Yes. For France, less than 5%.

And I guess, is it still possible for like the Hertz Italy, like commercial implementation to be successful if the penetration is so low. And like what penetration does Europe need to get to for like rental car tolling services to become attractive for the rental car providers to implement?

Yes. I mean we still work in a cash -- we still work in an environment where they can pull over and they can still provide value to the consumers. I think overall, it really depends on where it's kind of where are the cashless lanes, if they're and this is me guessing. I don't know the total structure of Italy off the top of my head. But if they're outside of Rome, then that still can be a good opportunity that I suspect where they're thinking about it. If it's elsewhere, then it won't make as much of a difference. So I don't have a percentage that I could give you to say that's the most valuable or what percent does that ought to be. But I think the key notion is that last year, Print started to convert some cash-based tolling to cashless. The fact that Hertz is launching in Italy means it can solve a problem for them there. And those are the markers of, hey, things are starting to go our way a little bit more. So again, it's not going to be material in the years, but it will be something that we'll be able to update, I think, in the midyear in terms of our progress.

Great. One more question. You -- I think you mentioned how, on the government systems camera side, one of your suppliers is trying to become a competitor. In general, have you seen like increased competitive activity associated with all of the new legislation like across Florida, California and Pennsylvania. And like in general, does like Verra expect to maintain its like roughly 70% market share?

Yes, we certainly do. I mean there's a with the growth opportunity here that other companies are going to try to rally to their case and try to win some, and they will. I mean, especially in smaller cities where we may not be as competitive, but we certainly are in the larger mandates, which -- and so we positioned ourself very well in Florida, very well in California, but we would certainly anticipate to maintain our position in the market, clearly.

And your next question comes from the line of Dave Koning from Baird.

Nice job. Yes, I guess my first question. Guidance calls for about 50 bps of margin expansion, which is a nice expansion here. Is that going to be pretty consistent by segment? Or maybe you can walk through maybe what the puts and takes would be by segment across margins?

Yes. In general, it will be consistent across the segments. I think CS will be on the higher end of that, Q2 really close to that and GS a little bit lower than that, but all segments are anticipated to grow a bit with about 60 basis points being the ceiling.

Yes. Got you. Okay. And then the one other thing. I noticed in the press release that the Plus Pass stuff you're going through, it included that you're going to acquire some assets from them. And I guess maybe you did that in February. But how much revenue might come from that acquisition? And I mean I assume it's pretty small. Maybe you could just walk through maybe how much you paid for it, how much revenue might come from it, et cetera.

Well, we can't -- it's all part of the negotiated settlement as a part of it, but it's mostly IP-related assets that we acquired as a part of it, not any like not a customer asset.

Those are pre-revenue assets.

Yes, that's right. We can say that.

[Operator Instructions]. There are no further questions at this time. That ends our question-and-answer session. Ladies and gentlemen, thank you all for participating. You may all disconnect.

Thank you.

Thank you.