Good day, and thank you for standing by. Welcome to Verra Mobility's Second Quarter 2025 Earnings Conference Call. My name is James Reyes, 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 over the conference to your speaker today, Mark Zindler, Vice President of Investor Relations.

Thank you. Good afternoon, and welcome to Verra Mobility's Second 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'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, everyone, for joining us. We delivered a strong second 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 $236 million, with all three business segments meeting or exceeding their respective internal plan. Adjusted EPS increased 10% over the prior year period, driven by our operating performance, recent share repurchases and the reduction in our interest rate on our term loan debt. Moving on to segment level financials. Commercial Services second quarter revenue and segment profit increased about 5% and 4%, respectively, over the prior year period. RAC tolling increased 4% over the prior year period, driven by increased product adoption and higher tolling activity compared to the second quarter of last year. The growth in RAC tolling was partially offset by a decline in FMC revenue of about 2% compared to the second quarter of 2024, primarily due to a combination of customer churn as well as a modest weakness related to enrolled vehicles and tolling activity in early 2Q attributable to macroeconomic factors. We expect incremental weakness in the third quarter and to stabilize and grow from that new level. FMC continues to be a core focus area, and we remain very optimistic about solid growth prospects in this business area. Additionally, as we noted in our press release in early July, Stacey Moser has joined our executive leadership team and will lead Commercial Services. Stacey is a commercially focused executive, bringing strong experience in sales leadership, product development and international expansion and will be instrumental in leading Commercial Services into its next phase of growth. Next, moving on to the macro environment and the implications for our Commercial Services business. With consumer confidence levels improving amidst increased…

Thank you, David, and hello, everyone. We 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. Our Q2 performance, which included 5% service revenue growth and 6% total revenue growth year-over-year exceeded our internal expectations. The service revenue growth, which consists primarily of recurring revenue was driven by increased product adoption and higher tolling activities in the Commercial Services business as well as service revenue growth outside of New York City in the Government Solutions business. At the segment level, Commercial Services revenue grew 5% year-over-year Government Solutions service revenue increased by 7% over the prior year and T2 Systems SaaS and services revenue was essentially flat compared to the second quarter of 2024. Total product revenue was a little over $12 million for the quarter. Government Solutions contributed roughly $9 million in Q2 delivered about $3 million in product sales overall for the quarter. Additionally, our consolidated adjusted EBITDA for the quarter was $105 million, an increase of approximately 3% versus last year. We reported net income of $39 million for the quarter, including a tax provision of about $14 million, representing an effective tax rate of approximately 27%. GAAP diluted EPS was $0.24 per share for the second quarter of 2025 compared to $0.20 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items, was $0.34 per share for the second quarter this year compared to $0.31 per share in the second quarter of 2024, representing a 10% year-over-year growth. The adjusted EPS growth was driven by the increase in adjusted EBITDA, a sustained reduction in interest expense driven by our prior year debt repricing efforts in our share repurchases in 2024.…

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

Great. So I wanted to just flesh out some of your commentary around Commercial Services. And it sounds like there's a few moving parts. First, just on travel, just want to put a finer point on. Are you essentially run rating sort of where Q2 travel funds were or sort of where you -- maybe where you exited 2Q? So just give us a better sense of what you're assuming for travel in the back half. And then secondly, you mentioned -- okay, I'll let you answer that, then I'll follow up.

Yes. Thanks. I'll do the first part first. Faiza, first of all, we had a little technical issue at the beginning of the call. Can you hear me okay? It's, Craig.

Yes.

Excellent. Okay. So if we back up to the end of the first quarter, I'll get to your question, but I want to start with a little context, right? So last time we were on the call, we talked about the guide for the company would still stand if TSA volumes stayed at around flat to last year to down a handful of points, okay? Now bringing that forward 3 months, we're still in the exact same place. What we saw in the second quarter, the TSA throughput was about 99%, that stepped up and got a little better in July at just north of 100%. And if you look at it, as David said in his script, on a year-to-date basis, we're right at about 100%. So that's the state of play. I think the other thing that's different is the backdrop or the sentiment on travel is stronger than it was 90 days ago. I think we all heard that from the airlines and the hotels. So now to your question. What we've done for demand go forward is we've taken in essentially the 2Q exit rate, which is somewhere between 99% and 100% and left that as the throughput rate for the back half of the year, which still puts us within the range of guidance that we set at the beginning of the year, and that's what it looks like the consensus is for travel in the near term in the market today.

All right. Understood. Makes sense. And then just on some of the other moving parts, right? Like you mentioned fleet management, some maybe macroeconomic factors and churn. So give us a sense of, I mean, it seems pretty small given the revenue amount that you gave us, but -- like is this going to get worse in 3Q? And just give us a bit more color on sort of how -- what needs to happen for things to stabilize in 4Q?

Yes, sure. I think you said it well, Faiza. So yes, there -- we saw a small decrease in our 2Q results. So it was only $300,000 or about 2%, and that was the result of some macroeconomic headwinds and some churn. Now that is going to accelerate as we get into the third quarter. So we expect that to be fully baked into our run rate by the third quarter. So we'll be down again here in the third quarter. And then I think from a total demand standpoint, that will be the base from which we will then again grow.

All right. Great. And then just my sort of second question was really around -- it sounds like -- so you raised the guide for Government Solutions. Just give us some color on like what got better. Is it just better or earlier execution or conversion of the -- some of the ARR to revenue? Or is it something else?

I'm sorry, Faiza, are you asking about the commercial activity?

No, I was asking about the Government Solutions and the slight guidance raise there. And if you were seeing faster conversion from ARR to revenue or if it was something else that was driving the increase?

Yes. As I think about it, there's really broad-based strength, it's across both. So product is going to be higher than we anticipated at the beginning of the year. And that's a bit of a positive and negative, right? So that's positive on the revenue line. If I look at the mix of that business, that's going to be a little bit dilutive on the margin line. You could see that in the results in the second quarter, not materially 100 basis points in the quarter, but still you'll see it. And as we go forward and look at the demand for photo enforcement, that honestly has done nothing but accelerate -- throughout the year. So when we started the year, we said high single digits is pretty much what we thought the non-New York City service revenue would grow. We feel comfortable today saying that's going to be in the low double digits. So the short answer is both of those things. And I think the final piece to that is, if we think about the commercial activity we talk about it in terms of loosely define this backlog or what is that ARR that we've built up in the last trailing 12 months. That number is sitting at $61 million. The TTM basis of that 6 months ago was in the 40s or 50s, right? So we continue to see this bow wave of the move to photo enforcement continue to move in the company's favor and we've been capitalized.

Our next question comes from Daniel Moore from CJS Securities.

Congrats another solid quarter. I wanted to pull on the string of margins in Government Solutions a little bit. You just gave good color regarding the mix pressure in the quarter. How much setup costs are in that and are sort of in the guide as we think about some of these new opportunities, you generally have to invest a little bit ahead of revenue. So what I'm getting at is sort of as we think about full year margins, whether that's a new baseline from which will be flat to up or expand from as we think about kind of fiscal '26 and beyond in the Government Solutions piece of the business?

Yes. Thanks, Dan. It's Craig again. Let me answer with a very detailed answer for the quarter and then give you an idea how I think this looks, okay. So, a, if I just look at year-over-year, we're down 250 basis points. So if you look at that on the face of it, that's a rough number, but let me break it down, about 100 basis points of that is simply mix. That is we are up 46% in product sales to international customers year-over-year. I love that. It's just lower margin and it's just lower margin that hit the quarter. So we kind of take that away from the 250. Another 100 basis points, now we've built up 200 of the 250 is from the ERP cost that we incurred in the second quarter. That's going to hit both CS and GS. That was the thrust of the activity. So now we've got 50 basis points left, which is exactly what you asked, that is the incremental, if you will, set up cost. Now I hesitate to go up to 2026 simply because we are not yet through contracting with New York City. Once we're done contracting with New York City, I think we can lay all of that out. But what I will tell you to hopefully help you a little bit farther down the path is if we kind of set New York City to the side for a second, the way we think about this is if the business continues to grow outside of New York City at low double digits, that will probably be slightly margin dilutive until we get most of the way through 2026. And what I mean by that is if we go back to the last 12 to 18 months, we talked about the platform consolidation that's going on in GS. That's still going up. We're still investing in that, not a material year-over-year amount of money, but it's not live yet. So the confluence of that against the low double-digit growth will help us be able to accrete and grow our revenue and maintain margin until that point, I can get there. That's the temporary answer. Obviously, we'll reset the whole mark once we have the view with where New York City is going to be.

Perfect. Really helpful. I'm sure the answer is no comment, but any update just in terms of timing around the New York City renewal? Or the finalization metric.

Dan, it's David. And no comment seems a bit rude given our long-standing relationship. But what I would say is that we honor the state of the contract that is with our customer. And so we're working toward a resolution. So obviously, sooner than is better, but we'll just -- as soon as it is done, we will announce it and give all relevant information to the market.

I look forward to the call. Lastly, obviously, the balance sheet continues to improve. Leverage ticking down towards 2x. Maybe just touch on M&A pipeline and borrowing position, given more likely to pick up the pace of share buybacks rather than let leverage continue to tick lower below the kind of low end of your target range?

Yes. Thanks, Dan. I don't think anything has changed in our strategy that we've laid out, which is we still think to 3x is the level of flight plan for the company. We've got an open share repurchase. We're going to be opportunistic with that. But I would just say that M&A activity has really started to pick up. And so we continue to look at really interesting businesses across multiple segments. And so we'll continue to play our strategy, but only -- we're only going to do a deal when it makes sense for our shareholders. So if not, we'll always go back to investing in the business or potentially buying back shares. So we're going to kind of keep doing exactly what we've been doing.

Our next question comes from Keith Housum from Northcoast Research.

David, I think it might be in the first quarter, I recall European operations being called out in CS. And then, of course, you guys had a press release announcing an agreement with [ 6 ] during the quarter, I believe it was with Italy. Perhaps maybe you can dimensionalize about some of the success you're having with Europe. I understand it's still early stages, but perhaps the contribution and how you think about that over the next year or so.

Yes. Thanks, Keith. I actually just got back from there a couple of weeks ago and was meeting with customers. And what I would say is, as you've been with us for a while, you know about the ice thawing. And I would say that there's water on the side of the glass is maybe the best way I describe it is that we are definitely, we are starting to roll out in Italy with some of the customers like Avis Budget. The value proposition is compelling to our customers. And so I think it's starting to move up. Again, it's not going to be material. I think next year, we'll probably be able to dimensionalize that in terms of total contribution, but we are starting to see multiple deployments in multiple countries. And so it's actually getting pretty exciting. And the greatest part of that, obviously, Keith, is the customers are telling us that they really like it.

Yes. Congratulations. I know it's been a long haul, and you guys have been working hard on that. So good to see. Outside of Italy, is there any other countries that are getting close to doing it as well or as far as long as Italy.

Yes. So we have -- I believe it's 7 countries total. Italy is -- you really wanted Italy, one of the bigger ones because it was -- it's moving to cashless. And because of our Pagatelia asset we're able to do transponders in Italy as well as others. So that's part of it. We are also -- France is the other big one. But we also work in Portugal, Spain, Ireland, France, Italy. So those are the ones that we're working in today.

Okay. And I've got to ask this question more just to make sure we're covering our basis here. But as you guys are adding new cameras to the portfolio here, there's no tariff issues or obligations that we have to worry about impacting costs going forward, do we?

Would you drill that in a little bit more, Keith, in terms of what kind of costs you're talking about?

Yes, I'm sorry. In terms of purchasing cameras for the photo enforcement program, as you've been adding new agencies here, are there any tariffs that perhaps will reduce your profit on the cameras?

No, I don't think so. I mean if anything, I like where we're heading on the volumes. And I think the other piece is, when we talk about platform consolidation is a multiyear project that's going to bear some fruit for us here in the back half of next year, which is going to work really well with the generation of cameras that we've been buying. So I think, I'll say what I said a little bit earlier, Keith, because I think it bears repeating is, if the business continues to grow in the low double digits, which let me be crystal clear, I've every intention that it will. I certainly hope it does. We are going to continue to see those installation costs, small incremental installation costs come ahead of revenue, especially in the greenfield area. So we talked about, David mentioned, Colorado and Nevada, I believe, earlier. But outside of that, I don't see anything structural coming down the pipe.

Our next question comes from Louie DiPalma from William Blair.

You have discussed over the past several years, and everybody has witnessed the TAM or the photo enforcement market expanding. And I was wondering, could you provide some commentary on the pipeline in that you announced very strong bookings this quarter and strong bookings over the past trailing 12 months. And -- but in terms of your bids outstanding and some of the newer markets, are -- how does the RFP process? And do you have more bids outstanding today than you did a year ago? And how is everything translating in terms of bookings converting into actual revenue?

Yes. So I think Craig had said that we had $60 million of ARR run rate that we've added. So a big picture, Louie, is it's going very well. I think California is sort of our great sign of -- we laid out a playbook. We talked about opening legislation, we were able to support the state and enabling that legislation at a pace that was higher than we would have anticipated. We've been able to work with great cities, including San Francisco and Oakland and some of the others. And so I would say that all those are starting to translate. They are moving toward revenue recognition reasonably well, but that also speaks to the issue that Craig was talking about just a moment ago where we -- when they say go, we start working as fast as we can, but the revenue doesn't start until the cameras turned on. So that's part of that reality. So we're seeing very, very strong pipeline movement, very strong conversion in our win rate, and all that's going to flow down to revenue and the $60 million is certainly an indication of that.

Fantastic. And for the Commercial Business, you discussed the slowdown in travel. And I was wondering, as it relates to the overall algorithm with all things being equal, can investors assume a general 5% alpha outperformance of your revenue growth above travel volumes. As Craig and David and Mark, you previously discussed how, in addition to travel volumes, there's other variables such as the shift to cashless more toll roads, total inflation and the bundled pricing. But has there been any other slowing for those other secular trends in terms of the shift to cashless or increased toll roads? Or are those other secular trends healthy?

Louie, they are. So let me try to answer your question that you started with, succinctly as I possibly can. But I love the way you framed it, can I put a 5% alpha on travel demand and say, run macro, and that's going to go forecast on Commercial Services. What I would tell you is for this year, that's going to hold. It might not next year. It might be bigger, it might be smaller. So I would say that's the state of affairs where it is today. And let me equate that back to what we talked about 2 quarters ago and last quarter, right? We talked about growth in this business as 1/3, 1/3, 1/3. 1/3 of that growth to get to high single digits, right? 1/3 of that growth was GDP-ish travel growth. If we have 99% to 100% in the back half of the year, we did 99% in the second quarter, a little over 100% in the first quarter, you average that out, it looks a lot like 100%. So I don't have that 2.5% this year, right? So I see how you're getting there. I would say that -- and all of those secular tailwinds that we've talked about in the past, they are absolutely still occurring. Absolutely, the trend is unmistakable. However, sometimes there's fits and starts, right? Sometimes it grows a little faster, sometimes it grows a little slower. So that growth will be there, whether it will be a 5% alpha in 2028, I can't sit here and definitively tell you that.

Our next question comes from David Koning from Baird.

Good job. And I guess, first of all, I wanted to just look at CapEx. It was like clockwork kind of $10 million to $15 million a quarter for many quarters kind of through really 2022 through 2024 mostly. And then by late 2024 and into this year, it's, I'd say, over doubled. And I know that's in preparation for demand but it's not like revenues doubled yet. And just I'm wondering like what's the relationship there? Like if it's double, why shouldn't revenue be double? Or is it just a shorter-term kind of build and then 6 months from now, we'll see better growth? Like how should we think of that relationship?

So I get it, Dave. Thanks for the question. So a couple of things, right? Is that CapEx tends to -- while the depreciable life of that CapEx is 5 to 7 years, the useful life to that CapEx could be 10 plus. So I think just from linear mathematics, we're going to have -- always going to have a disconnect on that piece. The second thing I would say is when -- you're right, right, that grew like $15 million to $18 million like clockwork, you nailed it. At time, the growth rate of the business was in the mid-single digits, especially outside of New York City, it might have been closer to low single digits. That today has grown at 12%, and that 12% is compounded on double-digit growth last year, right? So the vast majority -- so that's a buildup. Now let me go and kind of tear it down from the top down. If you think about a roughly $100 million capital expenditure for the business, you take out the ERP, the platform consolidation, you're going to end up with -- we're going to spend somewhere between $60 million to $80 million. I know that's a big range, but the business is really moving quick right now, $60 million to $80 million worth of CapEx into the Government Solutions business, which is roughly 2.5x what it was in the past, and the business could be that size with this kind of growth 5 to 7 years from today. That's how I look at it.

Yes. No, that makes sense. And certainly, leading to better -- to good growth, better growth, it's great. And then my follow-up, big kind of nerdy question. D&A has been running $28 million, $29 million a quarter in the last couple of quarters. Full year guidance, I think, is $110 million, that implies lower back half D&A unless I'm looking at something wrong.

I think -- I don't think you're looking at something wrong, what you're starting to see, that's not on the D side, it's on the A side, right? So what we're starting to see is, look is, this is something else we talked about earlier in the call, right, with the company hasn't done a deal in 3 years plus years. So some of the amortization from the deals that we did in the late teens and even into 2020, that the customer list amortization noncash expenses are starting to run off. And if you take a look at -- I know you do, if you look at our Q and our K, you could see the useful life of those are starting to get down to low single digits where a couple of years ago, they were 5, 6, 7 years.

I'm showing no further questions at this time. So this concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.