Good afternoon, ladies and gentlemen, and welcome to the Verra Mobility Second Quarter 2024 Earnings Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mark Zindler, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Verra Mobility's second quarter 2024 earnings call. Today, we'll be discussing the results announced in our press release issued after the market close 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 risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for Verra Mobility's complete forward-looking statement disclosure. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we do not undertake any obligation to update forward-looking statements. 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 measure is included in our earnings release, quarterly earnings presentation, investor presentation, all of which can be found on our website at ir.verramobility.com. With that, I'll turn the call over to David.

Thank you. Thank you, Mark, and thanks, everyone, for joining us. We had a strong second quarter with revenue, adjusted EBITDA and earnings directly in line with our internal expectations. The businesses are performing as expected, and we're poised to have a strong second half of the year. Travel demand remains robust, and we anticipate continued strength through the balance of the year. Year-to-date TSA passenger volumes as of June 30th stands at 106% of 2023 volume for the same period, driven by strong consumer and business demand with the latter demonstrating potential for more growth. In our Government Solutions business, the bid pipeline for automated enforcement is strong and growing. Second quarter contract awards represented approximately $12 million in incremental ARR at full run rate, bringing the year-to-date incremental ARR up to $22 million. I'll explain on our awards and bid opportunities later in my prepared remarks. Transitioning back to our second quarter financial highlights. Consolidated revenue growth was 9%, adjusted EBITDA increased 8% and adjusted EPS increased 7% over the prior year period, demonstrating the predictable strength of our portfolio of businesses. Based on our year-to-date financial performance and our outlook for the remainder of the year, we are reaffirming full year 2021 guidance, which Craig will elaborate on in his remarks. Now moving on to our business unit operations. The commercial services team delivered outstanding results, driven by strong and durable domestic travel trends and our continued strong performance in the fleet management business. Second quarter revenue of $104 million grew 10% over the prior year quarter and adjusted EBITDA margins of 67% were up about 210 basis points over last year, due primarily to the strength of rental car tolling. Second quarter TSA throughput volume was about 106% of 2023 driving strong growth in adopted rental…

Thank you, David, and hello, everyone. I appreciate you joining us on the call today. Let's turn to Slide 4, which outlines the key financial measures for the consolidated business for the second quarter. We're pleased with our Q2 performance, which included 8% recurring services revenue growth and 9% total revenue. The recurring service revenue growth was driven by strong travel demand in the commercial services business and recurring revenue growth outside of New York City in the Government Solutions business. At the segment level, Commercial services revenue grew 10% year-over-year, Government Solutions Services revenue increased by 8% over the prior year while T2 Systems, SaaS and Services revenue was flat over the second quarter of last year. Product revenue increased to $10 million for the quarter, driven primarily by an increase in international product sales and Government Solutions. GS contributed $6 million and T2 delivered about $4 million in product sales overall for the quarter. Our consolidated adjusted EBITDA for the quarter was $102 million, an increase of approximately 8% versus last year. We reported net income of $34 million for the quarter, including a tax provision of about $13 million, representing an effective tax rate of 28%. This rate includes certain discrete items which favorably impacted the tax rate for the quarter. For the full year, we are anticipating an approximate 30% effective tax rate. GAAP EPS was $0.20 per share for the second quarter as compared to $0.13 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items was $0.31 per share for the second quarter this year compared to $0.29 per share in the second quarter of 2023. Adjusted EPS grew 7% over the prior year quarter despite nearly 16 million additional shares in the share count due…

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Faiza Alwy from Duetsche Bank. Please ask your question.

Yes, hi, thank you so much. So David, thanks for all the color around the incremental ARR and government solutions. I wanted to ask about competitive activity there, what type of contracts are you winning? How would you characterize sort of your win rate? Is it in line with historical level? Just give us a bit more color around the competitive landscape there.

Yes, of course. One, the competitive landscape really depends on what – where in the country or really, I guess, we're in the world, but mostly we're in the country where we are. It seems that some of our other competitors have focused more in certain areas there's a couple of competitors that have really focused on, what I would just call, generally the southeast of the United States. Others are a little bit more in the Northeast and then less so on the west and a little bit there. In general, what you would say is that our win rate, both in terms of total number of contracts as well as the dollars that we're going after, which is obviously a more important number is in line with our expectations. And similar to historic numbers overall. I would say is that our competitors are definitely fizzy. They've been doing a good job because of all the work we've done to open up the market. But in the major accounts, I feel like we've done a really good job there.

Great. And then in Commercial Services, right, you had strong growth in the quarter. It sounds like you are saying that you expect sort of strong travel demand to continue. Just talk a little bit more about your confidence there. It seems like there's some travel companies are calling out a little bit of slowing in demand. And I wonder if there are other factors that are making up for any slowing? Just – there's a little bit more concern around the consumer environment. So talk a bit more about your confidence there.

Yes. Thanks, Faiza. I think I know what you're referring to. But in general, if you look at the demand commentary coming from the airlines and quite frank with some of our largest customers, that continues to remain, right? And I think the – let's take a look at the throughput. I mean the TSA throughput is 106% year-to-date. It was 106% versus 2023. It was 106% first quarter was 106% in the second quarter. It was 106% in July, it's in around that range in August. So we have not yet seen that. So we still think that the level of travel that we've seen year-to-date is what we're going to experience go forward, and I haven't heard anything different. I think the only other thing I would add to that and it's qualitative what we have seen a return on the business travel, right? So to the degree that the consumer were to slow down a bit there is an offsetting increase in business travel that we've continued to see come through 2024. And I think that's why we've seen TSA hold really, really flat through the first seven months and change in the year.

Great. Thank you.

Thank you. Your next question is from Daniel Moore from CJS Securities. Please ask your question.

Thank, David. Thanks, Craig. Thanks for all the color. To maybe just digging on margins a little bit by segments, not necessarily this year, but commercial services, 67% margin, clearly exceptional and benefiting from seasonal strength. But just talk about sustainability of those levels as we look beyond '24, and then conversely, in Government Solutions margins come in a bit with some of the investments that you've made. You talked about the opportunity for operating leverage as we look out and some of those new enforcement programs come online.

Yes. Great. So a lot to unpack in that question. So I'll do my best. I'll start with what I think is going to happen for the year, and then I'll give you some directional indication in how we're thinking about 2025, okay? Overall, for the company for the year, I think we're going to accrete 50 basis points, which is consistent with what we said at the beginning of the year. I think CS will probably be about 100 basis points. GS is going to end the year flat, slightly down, and T2 will be up a shekel [ph] or two. So again, if you cost that out, you get up to 50 basis points. Now, the one thing on 67% for CS, remember, we're in the summer driving season. So we could see that even maybe potentially tick a bit higher in the third quarter. But that will come back in the fourth quarter. Okay. For the CS – sorry for the GS business, you're right, if you compare where we're at today year-over-year, you will see the reduction in GS that's roughly split 50/50 between us doing more product sales internationally, which have follow on service agreements which are higher margin, but they're lower margin sales upfront. That's what you're seeing journalized. And then the other side are the investments that we're making to win some of some of these new TAMs. But I think if you look at GS sequentially, one thing I'd like to point out, we're down 50 basis points sequentially in the second quarter. That's all mix driven. So as we see those investments ramp up year-over-year, we're consistent within the year. And I'm going to use that as a jumping off point. I think for the second part of your question is…

Really helpful. And then on the T2 side, you obviously continue to shift from hardware to SaaS based solutions and appreciate you calling out the maintenance work that goes along with that or the implementation work. Maybe just talk about the pipeline of opportunities one, and then two as when do you think those two sort of inflect and we might get back to more positive growth or start to drift back toward the kind of longer term expectations for that business? Thanks.

Hey Dan, it's David. Yes, great question. So what I would say is right now I think the team is really building some momentum, we're seeing a lot of traction in our permits and enforcement side of that business. As you recall, there's a university segment where we're back in software and then there a municipal segment that is more permits and enforcement and we're seeing a tremendous growth well above plane. That's a smaller portion of the business. And so what I would say is, we've obviously we're going to be adjusting ourselves to make sure we're taking an opportunity to capture that demand. I would say that as we exit the year we should probably be back on toward trajectory of getting to a higher run rate. And I would expect next year is still not going to be at the high single digits, but probably starting to get toward that toward the end of next year is probably the best trajectory and the margin to come along with that.

All right, really helpful. Last one for me is just the balance sheet guidance is to exit the full year with net leverage of 2.0 times. Is that a priority for you or you still be opportunistic looking at M&A and/or buybacks between now and year end? Thanks again.

Yes. Thanks for asking that. And the fact that you asked the question as I should have said a different in script, so double thank you. No, that's not a target. That is not our target. That will be the result, right? So the target for the company over term, I think we talked about this a quarter or two ago, Dan, is 3x net leverage. So – we are out there looking to deploy capital, but like we said, right, if we can't do that accretive way, I mean it will delever the company. But that would be the result, not necessarily a target.

Thought that was the case. Just wanted to confirm. Thanks again.

Thank you.

Thank you. Your next question is from Keith Housum from Northcoast Research. Please ask your question.

Great, thank you. Good morning, guys, or good afternoon, I should say. It's been a long day. In terms of the T2 Parking, is there any KPIs or any kind of metrics you can give us to give us some confidence that, that business is growing, understanding the shift from license to the SaaS model. But I just want to give a little more confident of that story, if we can.

Yes. I mean I won't give any specific KPIs that we manage internally necessarily. What I would say is that the revenue growth from permits and enforcement is well above plan. What I would also say is that our pipeline of new and expansion sales opportunities in our current basis is also starting to expand again. So what I would say is right now, after sort of this conversion in the market of our operator segment, we've really pivoted the business back to the core around university and small municipalities. And so what I would say is that we're probably in the bottom of the trough right now is the way I would describe the business from that and we are moving our way up the other side of that. And again, I think about this business as trajectory based. So how do we think about it as it's going to end this year? And maybe more importantly, how do we get back to that high single-digit growth rate and expanded margin opportunities toward the end of next year as well.

And let me just add to that a bit. So David did it from a product standpoint, which is good. Let me try to do it from how we go to market standpoint. So there's three things that we look at. We're not going to do this externally on a regular basis, but I think given this quarter, it warrants [ph] mentioned right is we've got true traditional SaaS revenue. We have service revenue, which are hardware-enabled services. So it's not SaaS. It's also not hardware. And then of course, we got hardware. When hardware goes – when hardware demand pulls back, which we saw happen year-over-year, it brings with it some of those services, okay? But the true value driver of T2 is the recurring SaaS part of the business. That's the part that we want to see continue to grow. That's the part becomes a larger part of the portfolio over the next handful of years is going to make this more sustainable and it's going to make it a higher margin business. We saw that part this quarter grew 5% year-over-year. So when we talk about being flat in total revenue, what we're seeing happen is the shift away from hardware, which again for us is buy resell, right? So not – we're not too sad to see it go. And some of the attached services that go along with that. But the stuff that keeps us in front of the customer and drives our 97% retention rate in this business actually grew mid-single digit even in a pressured quarter like this.

Okay. Great. I appreciate that color. Thank you. In terms of the European tolling efforts, is there any updates to report there?

Yes, nothing new from the last – from last quarter in terms of number of pilots or things like that. And off the top of my head, no new toll roads that have opened or gone cashless that would be of any note. So kind of in the same position that we were, which is we've got a couple of pilots in some key countries. We are beginning to see a bit of the thaws it relates to the barrier based tolling in places like France and Italy. And we'll just continue to monitor that and execute on the pilots that we do have.

Great. And last question for me. In terms of the Florida school zone cameras, if I remember right, you guys really are thinking that our revenue is really going to be more of a first half of 2025 versus the second half 2024 event. Is that still a line of thought?

Yes, that's correct. That's exactly right.

Great. Thanks guys. Appreciate it.

Yes.

Thank you. [Operator Instructions] Your next question is from Louie DiPalma from William Blair. Please ask your question.

David, Craig and Mark good afternoon.

Hey Louie.

Hey Louie.

Following up on the answer that you just gave, the $22 million in ARR bookings year-to-date for photo enforcement represents roughly 6% of our forecast for your government services revenue this year. And do you still expect that the ARR growth rate will accelerate in 2025 from these wins and you expecting that the acceleration will likely be like back-end loaded to the second half of the year as it generally takes time to install these cameras? Or like what are your thoughts in terms of the time of installation for these wins that you've achieved thus far?

The short answer to your question, Louie, is yes. Okay. The slightly longer answer is timing really matters here. It really matters, right? So when we're looking myopically at a 90-day cycle or a 360-day cycle, to show growth for the company. So let me bring it back for a second, and then I'll try to give you a little more detail. So bringing it back, we expect the Government Solutions business still to grow at the high end of mid-single digits this year. I don't see that changing. I don't see anything that – in the new ARR that we've been able to put under contract here. I don't see anything that's going to move back for 2024. As we go out in 2025 and those notice to proceeds are coming, couple of things happen to proceed gets awarded, right? Then the actual install happen, there's a calibration period, then the program actually starts. And it really if that last thing then the program actually starts happens in April or it happens in June, because you're going to see a materially different impact in 2025 because of that. I'll just have a better view of that six months from today. But bringing it back to the easy answer is, I do think this is, for sure, a 2025 impact most likely second half is where you'll see the most material impact, just given how long it takes the program to actually turn into revenue for the company.

Great. And does anything stand out with the New York City RFP, I think you mentioned that bids are due in October. Do you think that it's a fair RFP?

Well, what I would say is the best word I can use long, its 800 pages. It's a pretty comprehensive RFP. They did a really tough and we had – as you recall, we had expected it earlier in the year. Clearly, they were busy putting together a very, very comprehensive note. So I would say, yes, it was originally going to be due in, I think, August and has moved back now to the end of October as the current data, and I think it's been written extremely New York SI expectations and the RFP reflects that.

Great. And one final one on the tolling side, does the rollout of your and your partners all-inclusive plans, does that continue to do well? And is it continuing to expand with your partners?

It's continuing to do well, Louie. It's going to flex quarter-to-quarter depending on opt-in and counter incentives, but we're very happy with the performance. But what we're not going to see, so we've anniversaried the inclusion of – so we've anniversaried Hertz actually flipping the program on. So you're not going to see those kind of momentum year-over-year growth now that that's in the run rate. But we – the opt-in rate there continues to be exactly where we have a pet. We're very pleased.

Sounds good. Thanks everyone.

Thank you.

Thank you. There are no further – oh, sorry, we have another one that just came through. This from David Koning from Baird. Please ask your question.

Oh, yes. Hey guys sorry, I'm a little late to join. But a couple of questions. One, credit loss expense year-to-date is a little higher, both Q1 and Q2 are up about 50% compared to last year, now those aren't big numbers, so 50% move isn't that much. But is that economic related at all? Or maybe what is that?

Yes, Dave, great question. It is not economically related. Let me start with that. We did have some two contractual things that we're still quite frankly, in negotiations with to get recoveries that we booked prudently in the first quarter. As I look at our number – I'm doing this off the top of my head, Dave, so I know you'll keep you honest. But I believe the credit loss expense was something on the rounds of about $3.9 million in the second quarter of 2024. That's pretty much exactly what it was in the third quarter of 2023, right? So and if I look at it year-over-year, it's up about 25%, but my volume is up roughly half that. So what I'm seeing today is literally volume-driven. I have not seen the consumer getting any weaker in our stack – and again, I think some of that stuff that we put on the books in the first quarter, hopefully, we'll come back to you in the back half of the year and tell you that we had a favorable contractual settlement.

Got you. No, that's helpful. And then I guess the other question Avis and Enterprise, obviously doing really well Hertz, maybe answer, but Hertz was down year-over-year in the – I guess, in the quarter, maybe not surprising at all, but is that kind of expected from Hertz just given kind of where they're at?

I was surprised, too. I saw that too, David. And look, I think it just has to do with snapping the Chalk in 90 days, I can’t, my business is not necessarily a reflection totally of Hertz, right? Because Hertz does business a lot of places where my product doesn't exist because there's no toll roads, right? But as long as those numbers are directionally correct over a longer period of time, I think we're okay. If I'm not mistaken, I think Hertz rental days were about flat year-over-year. So I would shock us being down in Hertz year-over-year more to locational mix than it would any say, macroeconomic or anything going on with the customer.

Got it. Well, that’s great. Thanks guys.

Thank you.

Thanks.

Thank you. There are no further questions at this time, and that concludes the question-and-answer session for today. Ladies and gentlemen, we have reached the end of the conference. Thank you all for joining, and may we ask that you please disconnect your lines.