Good day and thank you for standing by. Welcome to Verra Mobility's First Quarter 2025 Earnings Conference Call. My name is Michelle, 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 First Quarter 2025 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 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, everyone, for joining us. We delivered a strong first quarter with all key financial measures ahead of our internal expectations. Total revenue for the quarter increased 6% over the same period last year to $223 million, driven by outperformance in all three business segments relative to our internal plan. Adjusted EPS increased 11% over the prior year period given our operating performance, recent share repurchases and the reduction in our interest rate on our term loan debt. Before I elaborate further on our financial performance, I am pleased to report that the New York City Department of Transportation identified Verra Mobility as the vendor to manage New York City's automated enforcement safety programs for what is expected to be a 5-year period after the company's current contract expires in December 2025. We are honored by the opportunity to continue serving as New York City's trusted technology provider on a world-class transportation safety program. This remains an active procurement as we are currently engaged in contract negotiations with the New York City Department of Transportation. As such, we do not intend to make any additional disclosures about the program until the contract is finalized. Moving on to the segment level financials. Commercial Services' first quarter revenue and segment profit increased about 6% and 4%, respectively, over the prior year period. RAC tolling increased 6% over the prior year period, driven by a modest 1% increase in TSA travel volume, increased product adoption and higher tolling activity compared to the first quarter of last year. Additionally, FMC revenue grew 12% compared to the first quarter of 2024, primarily due to the increased vehicle enrollment as well as higher tolling activity. Looking ahead, we anticipate that FMC growth rates will moderate due to tougher comps over the balance…

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 first quarter. Our Q1 performance exceeded internal expectations, which included 5% service revenue growth and 6% total revenue growth year-over-year. The service revenue growth, which consists primarily of recurring revenue was driven by a modest increase in travel volumes, increased product adoption and higher tolling activity in the commercial services business as well as service revenue growth outside of New York City, the Government Solutions business. At the segment level, Commercial Services grew 6% year-over-year. Government Solutions service revenue increased by 4% over the prior year and T2 Systems SaaS and services revenue was essentially flat compared to the first quarter of 2024. Total product revenue was $11 million for the quarter. Government Solutions contributed roughly $8 million, and T2 delivered about $3 million in product sales overall for the quarter. Additionally, our consolidated adjusted EBITDA for the quarter was $95 million, an increase of approximately 3% versus last year. We reported net income of $32 million for the quarter, including a tax provision of about $12 million, representing an effective tax rate of 28%. GAAP diluted EPS was $0.20 per share for the first quarter of 2025 compared to $0.17 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items was $0.30 per share for the first quarter of this year compared to $0.27 per share in the first quarter of 2024, representing 11% year-over-year growth. The adjusted EPS growth was driven by an increase in adjusted EBITDA, a sustained reduction in interest expense driven by our prior year debt repricing efforts and our share repurchases in 2024. Cash…

[Operator Instructions] And our first question comes from Nik Cremo with UBS. Your line is open.

Thanks for the great update and all the incremental color here. First, just a quick one on the New York City contract. I realize you guys can't share any real details, but what's the expectation as to when this contract will be finalized and when we'll have greater clarity on the impact on your business?

Yes. Good -- Nik, it's David. I would say probably in the next 60 to 90 days is probably a reasonable bet.

Thanks for that. And then I was hoping just to get a little incremental color on the attractive pipeline that you referenced in the prepared remarks that you have coming in Q2? And then also just any updates on the city-level RFPs going on in California, if there was any updates there? Thank you.

Yes. I think what we've seen is the activation of the TAM that we've worked really hard to do is translated to pipeline. We've been -- I think we are well ahead of where we hope to be from a pipeline, and now it's really just the translation of that pipeline to revenue. So our bookings are headed -- are running ahead of our internal plan. California is going very well. We are waiting right now for some final updates from a couple of RFPs that we've submitted for San Jose and for Oakland. And so -- but overall, we feel very good about our position there.

Got it. Thanks very much.

Thank you. Our next question comes from Daniel Moore with CJS Securities. Your line is open.

Thank you Dav and Craig. Good afternoon, thanks for taking the questions. Maybe -- I think you probably covered this, but just parsing the updated commentary around guidance. Are you seeing Travel and Commercial Services revenue slow in real time, and that's causing you to point to the low end? Or is it more just the anticipation of softer volumes perhaps in the back half of the year given some of the revised outlooks from the airlines?

Hey Dan, thanks for the question. This is Craig. I see exactly where you're coming from. And I think it's more of the latter than the former, but let me contextualize it this way. As we exited -- well, let me tell you how we planned. We expected the year when we talked last time, it'd be somewhere in the 102%, it's a 2% growth versus last year, if we look and level it over the year. As I look out today, we ended the quarter Q1 at about 101%. April was right around that level. May is trending a bit lower. So the short answer, I would say is we're starting to see a very small decline, but not big enough to anything that I would call material. So as I think about the back half of the year, though, we look at some of our peers and some of the other market participants that David mentioned in his prepared remarks, and we don't exactly know what we don't know. So the way that we've thought about the guide is, we're okay at, call it, flattish type demand from this point forward to the balance of the year and maybe even a point or 2 worse than that. But if it goes further than that, we'll have to come back to you. And I think that's really in line with what we've seen year-to-date and what we've heard from other market participants.

No, that helps. Certainly. And then your RAC tolling revenue specifically, growth continues to comfortably outpace TSA volume growth and I recognize that travel volumes might be a little lower, but is that a trend you expect to continue for the balance of the year that sort of outperformance versus the market?

That's always a tough one. And I fully appreciate the question. I understand what you're getting out there. And here is the reason, is there could be a disconnect between how our business performs versus how the TSA performs for the simple reason that TSA covers the entire country and the entire country doesn't have toll roads, right? So I think, as I've said before, 5 states make up 2/3 on some quarters as high as 80% on other quarters of our revenue. So it's all about if that travel is going to be down or up in the areas where Verra Mobility does the most business. So I have to take that kind of as it comes. I can't look forward and anticipate that at this time.

Understood. One more, and I'll jump back in queue. Government Solutions, obviously, nice to see the continued growth in RFPs in the pipeline. This has been a little bit of an investment or setup year in that business. How should we kind of think about the opportunity for margin expansion, maybe not specifically 2026? I know you don't want to get into that, but beyond over the next, call it, 1, 2, 3 years. And thanks again for the color.

Yes. I mean, I think what you see is with all of the TAM that we mentioned, and that's with just the pilot in California was $185 million, I think, just in the last couple of years going up to $300 million. So you would say that relative to a tailwind, but that is about as good of a tailwind you can have inside of that business, which is we have a market leadership position and an expanding market with new opportunities as well as expanding use cases. So I would say that the next couple of years based upon both the pipeline as well as the work we've done to sort of lay the groundwork at the -- from a legislative perspective sets us up really, really well in that business.

Thank you. Our next question comes from Louie DiPalma with William Blair. Your line is open.

David, Craig and Mark, congrats on the preliminary New York City renewal.

Thanks, Louie.

For David, as you are well aware, one of the major autonomous vehicle fleet operators has a major facility in your neighborhood of Mesa. It seems autonomous vehicles have been making significant strides recently on different earnings calls and rollouts in different cities. For the long-term, what are your thoughts on driverless fleet operators being like potential like tolling partners of yours?

Yes. So yes, if you drive around the city of Phoenix, you'll definitely see some unique camera-laden cars that are no driver and people in the back. I think one is while there is certainly some -- I think autonomy has actually made some nice traction in the last couple of years after being really silent or not growing to what people had thought. You still have over 200 million vehicles in the United States that are being driven today that do not have any autonomy. So I still think that's a longer way out relative to a significant impact. In the short term, relative to partnerships, we're really focused on developing partnerships with the car manufacturer so that we can embed our technology with them. And so that -- I would say that as we think about the longer-term future, it's probably in partnership with the manufacturers.

That makes sense. And secondly, you have disclosed the camera photo enforcement bookings for the past five quarters. And I was wondering how should we think of how your camera backlog has built in terms of cameras that are under contract that are awaiting installation? And related to this, how should we think of like any potential churn, whether temporary or permanent that may have taken place such as trying to connect the dots between all the ARR that you've added and your future revenue?

Yes, Louie, this is Craig. I'll take a crack at that one. I would think of that camera backlog a lot like we talk about the ARR backlog. And the one thing I would remember on that one is it takes 12 months to 18 months for that to translate into revenue. But if you take even the longer end of short term or the shorter end of medium-term view, that's a great way to think about it. So I think the number that we kicked out in the prepared remarks was $52 million of ARR growth over the TTM period. And then if you kind of compare that to the overall consolidated revenue, of Government Solutions, you get an idea of what that revenue looks like. And if anything, we continue to see that accelerate.

Okay. And so are you -- is one able to just add that $52 million of ARR to your current ARR to get your future ARR?

Short answer is yes. The slightly longer answer is, you can't do it for the next 90 days or for the next 12 months, specifically. But over the next 12 months to 18 months, that's what that reported number means. That is over the last 12 months, we've signed up new customers that will generate a $52 million of annual recurring revenue. And I think on your -- the second question -- I want to make sure I come back to answer exactly what you asked. On the second question, in terms of churn, this is a 97%, 98% renewal business. It's been that way for quite some years and it stayed that way today. So our stick rate on these cameras is very, very high.

Great. A third potential question, if I may. You mentioned how there could be a recession; a lot of analysts also think that. How does that influence your thinking on your long-term leverage target, Craig?

Yes. I'd say the best indication of that is let's look at what happened in the past, right? So when we went out for Investor Day and wow, I guess it was 2022, that's incredible. Four years ago, is we were 3.5 times net levered was the target leverage for the company. And as we looked at interest rates ran from that point, credit markets froze up a little bit, we brought that down to 3 times net leverage. I still think 3 times net leverage for a company that generates low to mid-40% conversion of free cash flow to adjusted EBITDA still makes sense. But we will absolutely resnap that chalk line in response to wherever the -- wherever the macro environment is at the given time. We've done in the past, and we would do it again. We're not in that space today, Louie, but certainly it's something that we'll keep an eye on.

Great. Thanks for all the questions. Thanks everyone.

Thank you. Our next question comes from David Koning with Baird. Your line is open.

Yes, hey guys. Great job. And I guess, first of all, Commercial Services, the presentation shows guidance still high single-digit growth. And I'm wondering if that does weaken towards the low end of total guidance, do you still mean for that to be the lower end of high single digits? Or if it weakens, would it be a little less than high single digits?

I think it'd be a little less than high single digit, Dave, is my guess today. It's -- right where we sit today, we're on the cusp. So if travel were to slow and it were to slow in the states that are most material to Verra Mobility, then that would likely drag that growth rate down with it.

Yes. Okay. And then secondly, it seems like super high-quality earnings this quarter. You look through the press release, you didn't add hardly anything back anymore in terms of like transition costs. And it looks like you called out on the call something that shows up in the cash flow statement, about $8 million of bad debt expense, I think that you like included in your numbers, I believe. And just maybe talk through that and maybe what that was? And then it seems like next year is setting up well because you won't have the ERP, you won't have this most likely, etcetera.

Yes. So the one that we called out -- thank you for that observation. The one that we called out in our script was simply some aged bad debt at commercial services. This was more an accounting reconciliation thing than anything else. I wouldn't equate it to current operations in any way, shape or form, and it was relatively small. One thing we've really tried to do is we're really sparse on what we spike out here, right? And we have a lot of internal processes to make sure what ends up on our adjusted list is something that is commonly adjusted for other places in the market. So I appreciate you calling out that it's clean. Remind me, I'm sorry, Dave, what was the second part of your question?

Yes. Just next year, it seems like some things like the ERP conversion, maybe some of this bad debt expense, et cetera, falls off and sets up for a nice expansion.

It should, it should. It all depends. We've got a contract negotiation ongoing. As David mentioned in his prepared remarks, we'll see what travel does here in the back half. Still looks like it's okay right now, but for sure, we've got a handful of millions of dollars that we spent on the ERP this year, which again, is going very well. That will not be there next year, right? So all else being considered constant, I would say you're right.

Yes, great. Thanks guys, good job.

Thank you.

[Operator Instructions] Our next question comes from Keith Housum with Northcoast Research. Your line is open.

Hey guys, thanks for taking my questions. This is Rodney McFall on for Keith Housum today. So I'm just curious what initial steps you guys are taking in T2 to improve that business since the management change? And did that contribute to growth at all in the quarter? Thanks.

Yes, it did. I mean, it was a small growth, but it was definitely in the right direction. I think what the management team has done, has really gotten their arms around the business and the customers. We have reinvigorated our commercial leadership as well as our execution there. I think by using the Verra Mobility operating system to help to deploy some really good metrics and KPIs and kind of a cadence of discipline behind it, it's really turned into a good story, one that we're really excited about for the future.

Got it. Got it. And then just a quick follow-up. Looking at the potential for lower travel demand, is there any color around how exposed you are to international travel versus domestic travel? Like, I mean, I'm assuming that most of the benefits that you guys get from travel is domestic, but just curious if you guys had any color on international travel as well. Thanks.

Yes. It's really -- we probably look at just sort of gross TSA numbers as our real barometer. I mean, certainly, it coming down will have some impact, but we sort of look more domestically, because, principally, there's about 5 states where all the tolling activity is, and we really are looking at travel inside those states, not necessarily people coming from out of the country to someplace else.

That's right. Rodney, I would just add one thing on that. When you are in the market, listening to other market participants, a lot of time, especially airlines -- like say airline is when they talk about international travel, a lot of times that commentary is on the outbound international travel. For Verra Mobility, it would be more on the inbound international travel, right? So -- but at the end of the day, as we think about travelers, we are agnostic to where that traveler actually came from. It's just our folks at the airport because that translates to folks at the car rental counter.

Got it. Understood, thanks. That’s all the questions I have.

Thank you. I'm showing no further questions at this time. This does conclude the question-and-answer session. Thank you for your participation. You may now disconnect. Everyone, good day.