Good day, and thank you for standing by. Welcome to Verra Mobility's Fourth Quarter 2024 Earnings Conference Call. My name is Liz, and I will be your conference operator today. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mark Zindler, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Verra Mobility's Fourth 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 our 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'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, quarterly earnings presentation and 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, Mark, and thanks to everyone for joining us. We delivered a solid fourth quarter with consolidated revenue growth of 5%, adjusted EBITDA increased 12% and adjusted EPS increased 38% over the prior year period. Fourth quarter free cash flow of $22 million was slightly ahead of our expectations, and we ended the year with net leverage of 2.4x, while investing nearly $150 million to repurchase about 5 million shares in the fourth quarter. Moving on to the segment level financials. Commercial Services fourth quarter revenue and segment profit increased about 4% over the prior year period. Both revenue and segment profit in Commercial Services were negatively impacted by a prior year period adjustment of approximately $3 million related to tolling activity. RAC tolling, which includes this $3 million prior period adjustment, increased 3% over the prior year period, and FMC revenue grew 5% over the fourth quarter of 2023. Government Solutions service revenue increased 5% over the fourth quarter of 2023. Revenue from New York City, our largest Government Solutions customer, was essentially flat year-over-year, as we await the outcome of the competitive request for proposal for automated enforcement. Service revenue increased 9% outside of New York City, driven by expansion from existing customers and new cities implementing photo enforcement programs. Total revenue, including international product sales, were up about 10% over the prior year quarter, fueled by a $5 million increase in product sales compared to the fourth quarter of 2023. Government Solutions segment profit increased 44% or 790 basis points over last year, driven by a $4 million non-cash charge in the fourth quarter of 2023 and a reduction in credit loss expense in the current year quarter. Moving on to T2, our Parking Solutions business, total revenue declined about 13% for the quarter driven by…

Thank you, David, and hello, everyone. Appreciate you joining us on this call today. Let's turn to Slide 4, which outlines the key financial measures for the consolidated business for the fourth quarter. Our Q4 performance was on plan, which included 4% service revenue growth and 5% total revenue. The service revenue growth, which consists primarily of recurring revenue, was driven by solid fourth quarter travel demand in Commercial Services business and service revenue growth outside of New York City and the Government Solutions business. At the segment level, Commercial Services revenue grew 4% year-over-year, Government Solutions service revenue increased by 5% over the prior year, while T2 Systems SaaS and Services revenue declined 4% over the fourth quarter of 2023. Product revenue was $12 million for the quarter. GS contributed $8 million and T2 delivered about $4 million in product sales overall for the quarter. Additionally, our consolidated adjusted EBITDA for the quarter was $102 million, an increase of approximately 12% versus last year. We reported a net loss of $67 million for the quarter, which reflects the goodwill impairment charge of $97 million for the carrying value of T2 systems. The tax provision of about $11 million after adjusting for the goodwill impairment expense represents a normalized full year effective tax rate of about 30%. The GAAP EPS loss of $0.41 per share for the fourth quarter of 2024 compares to a profit of $0.02 for the prior year period. The delta between these two results was driven primarily by the $97 million goodwill impairment for T2 Systems. Adjusted EPS, which excludes amortization, stock-based compensation, goodwill impairment and other non-recurring items, was $0.33 per share for the fourth quarter of this year compared to $0.24 per share in the fourth quarter of 2023, representing 38% year-over-year growth. The…

[Operator Instructions] Our first question comes from the line of Faiza Alwy with Deutsche Bank.

So I wanted to follow up on the Commercial Services business. You mentioned maybe some volatile trends this quarter starting the year because of the weather and wildfires, et cetera. So I just want to clarify there. And I know, Craig, you gave pretty good seasonality on how you're thinking about trends. But curious if there's sort of anything else you'd like to say about the quarterly cadence around whether it's travel trends or commercial revenues in general?

Yes. Okay. Thank you, Faiza. Let me take that in two parts. So first, I think as we go into 2025, no change to what we've discussed historically, TSA is probably a good thing to look at for a business. So why don't we do a quick recap of how TSA has performed. We closed the fourth quarter of 2024 at about 103%. So that's quarter-over-quarter '24 versus '23. Coming into 2025, I expect 102.5% for the year. As I said in the prepared comments slides, I think that's a lot slower in the beginning of the year. It ramps to that 102% -- a little higher than 102.5% at the end of the year to average out to 102.5%. So that kind of says I expect 101-ish in the first quarter. Here's what it looks like as of today. We closed January at about just shy of 102%. February month to date as of this morning is right at 100%. So year-to-date, we're at 101%. The comment on the wildfires and some of the weather events is if you look at -- I gave you a 60-day rolling average. If you look at individual days and weeks, there's been quite a bit of variability from week-to-week because of some of the events. But in general, the year is starting to pan out volume-wise as we anticipated. Let me go into the sequentials for the business because I just want to make sure that we're clear on that one for the Commercial business. Here's how I would expect revenue to pace out by quarter. Versus 2024, for Commercial Services only, I expect the first quarter to be down sequentially from the fourth quarter of last year, low single digits. I expect the second quarter to be up low double digits, very similar as it was this year. I expect the third quarter to be up high single digits. And then I expect the fourth quarter to come back down high single digits. And if you average that out, you get to a high single-digit organic growth for CS overall for '25.

Great. That's very helpful. And then on the Government Services business, it sounds like you're starting to build in some revenues from the new contracts coming from the new legislation. So a two-part question on that. One, maybe update us on some of these win rates as you're bidding for these contracts? And then secondly, a similar question around how do you expect sort of revenue to build through the course of the year as again, some of the ARR converts to revenue?

Yes. I mean it's David. I mean I think we don't really talk win rates, but I think we're saying we're winning more than our fair share for sure. As we talked about in terms of the total dollar amount that we've closed over the last 6 months or the end of last year was our pent-up demand is exciting. And per the prepared remarks, it tends to take anywhere from 12 to 18 months for that revenue to build. That is just kind of a -- I would call that an industry standard. Sometimes we can get a little ahead of that, sometimes a little behind it, but that's about average. So we would expect to draw down on that backlog over the next 12 to 18 months.

And I think in terms of pacing, I would expect that service revenue. So if we go all the way back and we look at growth for overall Government Solutions, we talked about the high end to mid-single digits for the business as a whole. 40% of this business is New York City, which we're still forecasting as flat for this year and product, right, together. We're forecasting that as flat as well. So all the growth in the remaining 60% of that business, the service growth that's outside of New York City, we expect that number by, as I said, it'd be low double digit year-over-year. And if I were to look at that sequentially, that number should ramp roughly sequentially. So the service revenue should be flat to up each quarter as we go through, again, timing dependent. Where that may get a little more complicated is on the total Government Solutions revenue line. The product, we still expect somewhere in the range of last year's product revenue. That could be a little bit more episodic. So I would always think about that the growth of Government Solutions service revenue to be a sequential grower and the majority of that growth -- almost all of that growth is coming from the service line outside of New York City.

Our next question comes from the line of Nik Cremo with UBS.

David and Craig, first, I just wanted to touch on the GS business. It's good to hear that the [SF] pilot remains on track for Q1. I just wanted to check on the other cities in California that are going to be having RFPs for a similar pilot program. Have those RFPs came out yet? And when could we expect to hear back on those?

Yes. The one that's gone out that we've already responded to is San Jose. We're anticipating the others to be, I would say, any time in the next 3 to 6 months that we'll hear a couple of others in places like Oakland, L.A., Long Beach, places like that. But they're not out yet, but those are the ones we're expecting. But San Jose has already come out and has already been responded to.

Okay. Great. And then for my follow-up. Is the second quarter still the right approximate timing for when we could get some clarity on the outcome of the NYC RFP?

Yes, it's really not dependent on us. It's dependent upon the city and their decision-making. We would -- that is a reasonable guess to say sometime in Q2, but I couldn't tell you if it's the first day of the last day.

Our next question comes from Daniel Moore with CJS Securities.

This is Will on for Dan. Given that 2025 is more in investment setup here, particularly in Government Solutions, how should we think about the opportunity for margin expansion looking into 2026 and beyond?

Yes. The way I look at this is -- I'm going to give you an answer that's probably not the perfect answer, Will. But the answer is it depends. And here's why it depends. We are expanding into new geographies in '24. We're doing that again in 2025 to the degree that, that accelerates or exists into 2026. I would expect margins to look a lot like they do in '25 and 2026. So maybe said a little better. If I think about GS margins for the year for 2024, we closed at about 31%. If I think about them next year, I think we've probably got somewhere in the neighborhood of 150 to 200 basis points of pressure. Now half of that pressure is coming from the fact that we're putting in a new ERP system. So we want to think about that. And when I have growth of low double digits in service revenue in new geographies, that cost comes before that revenue and especially if it's at the quantum that we've seen in the past, I would expect high 20s to around 30%. But when my head hits the pillow, I know and I think about this as a 30% margin business.

That's super helpful. And then just a follow-up. Where are you seeing the most potential opportunity from an M&A perspective?

For M&A, I mean, we've obviously continued to be broad in our view, but I think what I would say, the activity level of assets seems to be as hot mini assets are coming to sale from private equity owners or financial sponsors, I think it has been as high as it's ever been. We have -- us not closing a deal in the last year or two is not a result of us not working deals. We just want to maintain price discipline and make sure we have good line of sight. And so I would say that there's a broad, both across connected vehicle and urban mobility, a lot of assets that we're looking at and are excited about.

Our next question comes from Louie DiPalma with William Blair.

David, Craig and Mark, does the speed camera pipeline remain as elevated as it was 2 years ago when the legislation for Florida and California came out? And I know you mentioned the new legislation that's pending in Massachusetts. But with the pipeline, should we expect similar bookings in 2025 relative to 2024?

Yes, let me take the first part first. So if I think about -- in David's prepared remarks, he talked about $185 million of TAM opening in the near term. Somewhere on the rounds of 20% to 40% of that is sitting in school zone speed. So I think the easy answer to the first part of your question, is the pipeline looking as strong as it was 2 years ago? It's an emphatic yes, okay? The second part of your question, will bookings look the way that they did as strong as they did in 2024? I simply don't know. As we look at the activity year-to-date, we feel very good about where our funnel sits. I think you could triangulate what we think on bookings. I can't give a booking number. I'll only do that on an actual basis for obvious reasons, Louie. But if you think about the fact that we're forecasting low double-digit service revenue growth outside of New York City, we would need more bookings than we had going into 2025 to get that done. So there will be some in-year revenue. So I think the overarching things that I want to communicate is the pipeline remains as strong as it's ever been, and we're really excited about our ability to execute on it.

Great, Craig. And you discussed your CapEx associated with business development and taking advantage of this market opportunity. I was wondering, what technology investments have you continued to make on the customer side in order to stay ahead of the curve in terms of the latest functionality with cameras and catering to the different needs of your very large customer base?

Yes. We have a product engineering group within the business that is always both looking at not only working with our current customers, but surveying the landscape globally as to what we can do to be more supportive and forward leaning with our customers. So we have a team that's fully deployed to do that. I don't have a dollar amount to share, but that's -- we leverage both our internal teams as well as the several partners that we use across the different camera technologies.

Sounds good. And one last one. A few years ago, David and Craig and Mark, you and your RAC partners have offered all-inclusive pricing, and there seems to be a lot of customer satisfaction. What is the penetration now of all-inclusive pricing within your customer base? Do most customers go for all inclusive? Or do they still use the per day pricing?

It's very driven by the location, Louie, because all inclusive works better in some locations than others. So we actually look at that adoption rate basically at an airport-by-airport location. And so we don't really get into any specific disclosure around the customers.

Right. The one thing on customers on that, that we will say though is that this only exists technically today for 2 of our customers. right? So enterprise does not use this on a wide basis, which is something that we thought about in the past. But this continues to be a popular product. And you're right, but we've got some really good feedback on it and it's performing well.

Our next question comes from David Koning with Baird.

Nice job. Can I just -- I guess in Commercial, I just wanted to look at the year-over-year growth in Q4. I think it was $4 million, but there was a $3 million headwind. So it should have been $7 million kind of on a core basis. But the way you're kind of guiding Q1 is for only about $1 million -- let's say, $1 million or maybe even less year-over-year growth. What's -- I guess, why the deceleration and just kind of normalized year-over-year growth?

I think that you're right on the fourth quarter, David. You're right on the $3 million. You would have to add that back. There -- I don't know that I would look at the acceleration into Q1 as being anything other than seasonal, right? And I would say that the same on a year-over-year basis. Remember, you're not looking at equivalent TSA throughput in both periods, right? So that's going to skew your results. There is more TSA growth sequentially going into this period last year under comp period that you're seeing today. That's one piece. I think the other thing, if you look at it in total, right, we still expect this to be a high single-digit grower. And if we remember back to how we talked about it last year, we talked about 50%, 25%, 25% to get to that high single-digit growth, and I talked about the three pillars. Those same three pillars are intact today. However, it's more like one-third, one-third, one-third of this year. So let me explain what that is: one-third of that is coming from GDP type travel growth. That ties to the 102.5% I mentioned in my comments; one-third of that are the secular tailwinds. David gave some perspective on how many toll roads were added here domestically and also what happened with cashless toll roads, we expect that to accelerate, that's another one-third of the growth; and then the remainder of the growth, the remaining one-third are all the other states. That's the fleet business, that's the title and registration business and our European business. So if Q1, when you're comparing nonlinear comparables year-over-year, may look a little wacky, but I think if you look at it in total, the year kind of makes sense.

Yes. No, that's a good explanation on that. And then just my follow-up. So New York, you're assuming is flat. Would you say you have confidence, like 100% confidence it's within plus/minus 5%? Or is this just your baseline expectation? And there are all sorts of scenarios that it could be down 50% or up 30%, or I'm just wondering how confident you are that flattish is kind of the right outcome.

I think where we've been really specific is that we're in an RFP time, so we're going to wait and see what the city does. And at whatever time they decide to expand with the program, that would be the time that we would be able to be more specific around that.

Our next question comes from Keith Housum with Northcoast Research.

In terms of the impairment charge and the Parking segment, obviously, you guys have a lot of confidence in the ability to turn that business around. But I guess maybe a little bit more about what gives you that confidence there? Is that -- is this a market that's growing? I mean, is everybody else growing the business but you guys aren't into it? I just want to understand a little more your confidence levels.

Yes. I think one, specifically around permits and enforcement, that continues to be a problem for cities, [indiscernible] universities that we've seen by watching both our competitors and maybe more uniquely the dollars of private equity capital that are flowing into this category is pretty significant. We've seen a lot of M&A activity, which -- and we can see some of the other -- some of our competitors and what their growth is. We've only just had our own sort of execution issue. So there's a lot of data pointing to the growth and that this can be a significant contributor to the company. So that's part of the data that we're using as well as our own ear to the ground and our own pipeline development since we brought in new leadership.

Okay. Appreciate that. And I understand the challenges in the M&A environment now how competitive it is. If 2025, from an M&A perspective, is much like 2024, do you anticipate another round of significant share repurchases to kind of use your free cash flow?

Yes. There's -- our strategy for that has not changed at all. We -- because of the incredible cash flow generation of the company, we're able to make those sort of decisions pretty much every quarter. We'll look at our M&A pipeline where we are in different deal processes versus what we're looking at in terms of our intrinsic value and the trading of stock, and we'll make the decision every time. So it's really most -- would we continue to be opportunistic on share repurchase, absolutely. But that's contingent upon our M&A pipeline.

Our next question comes from the line of James Faucette with Morgan Stanley.

This is Shefali Tamaskar asking a question on behalf of James. I just wanted to touch on international markets. I wanted to see if you've seen any change in trends towards more cashless adoption in Europe specifically? And if there's anything to call out in terms of new wins there or visibility into international for 2025?

Yes. The only thing I would say is there's definitely been several toll roads in France and a couple in Italy that have gone cashless. Those are a couple of the mini toll roads that are in each of those countries. I would also say that we've renewed several of our customers that we started with pilots over the last -- course of last year because they have found the value in the program, especially when they're working in places that have more [indiscernible] like Spain or Portugal. So I would just say that the trend is definitely moving forward to positive and up into the right, it's just remained slow because the total authorities will also have to change to allow that to accelerate.

Okay. Great. Good to hear on that. And then just in government, I wanted to touch on any recent trends you've been seeing in terms of specific demand? I know you've previously called out more strength and I think what you've called, purpose-built enforcement. And I want to see if that's still the case in terms of where demand is from a legislation perspective and any change in kind of how the economics compare across like red light and the bust arm and all the different types of offerings you have?

Yes. I would say the demand is effectively the same that the real shift is still toward specific areas where there is precious cargo, which is in and around schools and school buses, that those are still what I would say, by far and away, the larger demand drivers. And the economics around that [indiscernible] our capabilities to increase certain things through our technology deployment and remain, I think, effectively the same.

With no more questions in queue, this concludes today's call. Thank you for participating. You may now disconnect.