Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's Third Quarter 2025 Earnings Conference Call. My name is Towanda, and I will be your conference operator today. This call is being recorded. [Operator Instructions] I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please go ahead, Mr. Zindler.

Thank you. Good afternoon, and welcome to Verra Mobility's Third Quarter 2025 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. Management may make forward-looking statements during the call regarding future events and expectations, 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 our cautionary note on forward-looking statements. 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. Before I dive into our consolidated financial results, I'll start with an update on our automated photo enforcement contract with the New York City Department of Transportation, which will help contextualize our third quarter financial performance and our revised guidance for the year. We are actively working with the New York City Department of Transportation to finalize the new automated enforcement contract, which was announced at the end of March 2025. As we work to finalize the new contract, we are now in a position to share the key financial expectations. We expect that the new contract will have a 5-year term, with an option for a 5-year renewal and an estimated total contract value of $963 million. We expect annual service revenue to grow from about $135 million in 2024, to a range of $165 million to $185 million by 2027. Furthermore, the New York City Department of Transportation has elected to purchase its own equipment, which is expected to add $20 million to $30 million in product revenue in both 2026 and 2027. Craig will cover additional financial details in his prepared remarks. In parallel with working to finalize the new contract, the New York City Department of Transportation has instructed Verra Mobility through a change order process to install up to 250 red-light cameras by year-end 2025, as a part of the legislatively authorized expansion. The new red-light cameras are expected to generate approximately $30 million of revenue in 2025, of which about $10 million is expected to be product revenue and $20 million is expected to be installation services revenue. The red-light camera expansion program started in the third quarter, and consequently, we generated $17 million of revenue in conjunction with the red-light camera installations in the…

Thank you, David, and hello, everyone. We appreciate you joining us on the call today. We'll turn to Slide 4, which outlines the key financial measures from the consolidated business for the third quarter. Our Q3 performance, which included 12% service revenue growth and 16% total revenue growth year-over-year exceeded our internal expectations. Service revenue growth, which consists primarily of recurring revenue, was driven by the change order for New York City red-light expansion program and service revenue growth outside of New York City in the Government Solutions business as well as increased revenue from RAC tolling and European operations in the Commercial Services business. At the segment level, Government Solutions service revenue grew 19% year-over-year. Commercial Services revenue increased by 7% over the prior year. In T2 Systems SaaS and services revenue increased 3% compared to the third quarter of 2024. Total product revenue was about $19 million for the quarter, Government Solutions contributed roughly $14 million with $6 million coming from the New York City red-light expansion and $8 million from international product sales. T2 delivered about $4 million in product sales overall for the quarter. On the profitability side, our consolidated adjusted EBITDA for the quarter was $113 million, an increase of approximately 8% versus the same period last year. We reported net income of $47 million for the quarter, including a tax provision of about $18 million, representing an effective tax rate of approximately 28%. GAAP diluted EPS was $0.29 per share for the third quarter of 2025, compared to $0.21 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items was $0.37 per share for the third quarter of this year compared to $0.32 per share in the third quarter of 2024, representing 16% year-over-year growth. The…

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

Thank you so much for giving us all that detail around the New York City contract, really helpful, and just giving us a longer-term view there. I guess I wanted to double click on the margins, as you can imagine. So Craig, you pointed to a few different things. It sounded like there were some start-up costs that you're incurring this year. And then it sounds like there are some continuing costs next year and beyond and you mentioned the subcontracting with the minority and women-owned businesses. So I guess, just parse that out to the extent you can further quantify how much of this might be onetime versus continuing. That would be really helpful.

Yes, you bet. So let me start first with 2025. So when we talk about those onetime readiness costs, that truly is one time. And the scope of that is approximately $5 million to $10 million depending on where it shakes out. And that's all baked into the guidance. But I think the crux of your question is let's move into 2026. So at the total Verra Mobility level, I expect margins to come down about 250 to 300 basis points, okay? And there's three buckets I want you to think about there. The first bucket is the portfolio mix, which simply means that the GS business, which is a lower-margin business than CS, as you well know, is growing faster than CS in 2026 as compared to '25. That's about 25 basis points at the consolidated level. That's negative. Then we pick up about 25 to 50 basis points on the positive between two things. Number one is our CS business. We'll still have volume leverage and accrete margins as we've talked about. I don't see any change there. And also, the ERP spending, as we've discussed in the past, the thrust of that spend will be behind us. So we'll get some benefit there. So I get 25 to 50 basis points back. And then the New York City renewal in totality, I expect to be a 250 to 300 basis point reduction in 2026, and that's really two pieces. The first is the price normalization. This was a competitive contract, as everyone well knows. And then the second piece is the cut in of the minority and women-owned business requirements. Now those minority and women-owned business requirements is a recurring cost and that will be to the tune of $20 million to $25 million per year that we did not have previously as we look out for the life of contract.

Understood. And just a clarification, are you going to see -- is there an incremental CapEx spend that's maybe coming from purchase of these cameras? Or does that go through the income statement?

Let me be really clear on this one, Faiza, it's a great question. Absolutely not. Absolutely not. So the expectation here is that New York is once again going to purchase their own capital as they have in the past.

Okay. Got it. And then just a follow-up on this point right around the competitive process and the margin dilution that you're seeing from this contract. I know you have previously talked about, as the TAM has increased, you've made some investments in the business. Like are you seeing a similar outcome with some of these other contracts that you're signing with other municipalities or district -- or jurisdictions? And like how should we think about margins overall beyond just the New York City impact in the Government Solutions business?

Yes. I would say -- this is David. I would say that New York City, obviously, given its size and scale makes it -- the impact there is significantly higher. Two, I would say that in general, we are competing at very similar levels across the board that we had in the past. And then what I would say is outside of New York, only a few other major metropolitan areas at this time have the same level of requirements around the use of, for example, for minority and women-owned businesses. So we're not seeing that pop up all across the country and things like that. So I would look at New York City as a bit of a -- as it always has been a bit of a unique one.

And I would add on to the end of that, as you asked about go-forward margins, I think we said on this call a couple of times that the GS business is a high 20s, 30% margin business. Clearly, it's not going to be that in 2026, and we know that. But that has not changed. That has not changed. So the investments that we've made in previous years and a little bit this year to consolidate our platform and I wanted to give some updated perspective on what that is today called MOSAIC will get us back to that level of profitability. So we feel very good about that.

Our next question comes from the line of Keith Housum with Northcoast Research.

Appreciate the color on New York City here. Any color you can provide on '26 for the cadence of the cameras? Will they be pretty even throughout the quarter -- through the year or you guys need to build off throughout the year?

It's -- we don't know yet. I mean, we'll get to the end of the year and do the planning with it, but it will probably be relatively smooth throughout the year, but there's always fits and starts depending on weather and other things that may go along within the city.

And I think the only thing I would say is that is if we look across all of the years, the thrust of the installs will be done by 2027, is our current -- is where we are currently with a few trickling into 2028. But yes, as David said, we're not at that level of detail where I could kind of give you a view by quarter.

Got you. And then Craig, you might have just mentioned it, what do you anticipate the benefit being from MOSAIC in 2027 and beyond?

I think that we will -- for the...

Say, 2025, not 2026.

Yes, he said '27 and beyond, right? I mean the '27 and beyond you are asking.

2025, sorry.

Yes.

Yes. Here's how I think about that is, I'm actually going to back it up to 2026. I think this is about 1.5 points to 2 points of margin in the GS business alone until we get to, I'll call it, the level altitude here, which is probably out in the end of 2028. So when you look at the New York City slide that I put and you kind of look in the upper right, the major driver of bringing the GS margins from the low to mid-20s back up to those high 20s, approaching 30% by 2028 is MOSAIC. So I would level load it across that time period.

Okay. That's helpful. Appreciate it. In terms of the share repurchases, you guys have had a share repurchase outstanding $100 million out there previously for a while. But it sounds like you guys are ready to act on the combined 250 years shortly, correct? As opposed to previously you guys were more opportunistic and you hold for dry powder.

The short answer is yes. The slightly longer answer is we always have to say, obviously, subject to market conditions. But we feel pretty good about taking an active role on that, Keith.

Our next question comes from the line of Louie DiPalma with William Blair.

Congrats on inching closer to the finalization of the contract. I was wondering what remains in terms of establishing the definitive contract? And do you have a sense of the timing?

At this point, what I would call it is primarily administrative working inside of the process that the city has laid out for contract approval. There's not really any significant terms and conditions that we're working through at this point. I would expect it relatively short order.

And for Craig, you provided great detail on the 3-year Government Systems revenue and EBITDA outlook. I think, it implies a 3-year government systems EBITDA growth CAGR of approximately 7%. I was wondering what does the 3-year outlook assume for CapEx? I don't think you provided any CapEx assumptions, but anything regarding CapEx or the total company free cash flow conversion in 2028 would be helpful.

Yes. I won't go into 2028 free cash flow conversion just yet, Louie. We're still kicking around a potential date for an Investor Day, which will probably be a great time to do that. But as I think of 2026, I think the CapEx spend looks a lot like it did in 2025. And I got to say, I'm really proud of that because we're going to have another year of -- in 2026 for non-New York City high single-digit growth, and I think we'll have a CapEx total that looks a lot like the one that we put in front of investors this year. So as we continue to go out, all I would say is directionally, I expect that our CapEx as a percentage of service revenue, both for the company and for GS, everything I see today, we should have hit the high watermark here in 2025. That's the view I have today. Obviously, when I learn more, I can tell you a little bit more.

Great. And another New York City related question for David or Craig, you both discussed installing 1,000 incremental cameras over the next 2 years. Does that total include all of the upgrades for the existing cameras. And do you still plan on upgrading the entire fleet of existing cameras? Or does that 1,000 include everything?

Well, Louie, I can give you most of that. It does not include the upgrades. That 1,000 does not include the upgrades. However, when I went into the financial, we kind of did the CAGR discussion just a minute ago, that does include the upgrade. So those upgrades will be more. In terms of a number, I really want to see a final contract from New York because that's really at the customer's option. But the 1,000 does not include upgrades. It also doesn't include relocations of cameras from one spot to another.

Okay. And one final one. From a high level, how does the functionality of the new cameras compared to the cameras that you've been -- you were installing 5 years ago. Are there like many new features with the cameras? And is there the potential to add on like new revenue lines. And I'm not talking specifically about the New York market, but even for other markets, like what's the additional functionality with the latest generation of cameras?

I would say primarily two things. One is obviously the resolution and the quality of the image detection gets much higher. So think of your iPhone 17 versus the iPhone 12 or whatever, just the quality of the images and video is significantly better. That's number one. The ability to shoot across other lanes. I would say a lot of the investment we made is into the platform that Craig had mentioned MOSAIC, which is functionality that will deliver a much more seamless, much more efficient capability for our customers, look at data, data dashboards, making decisions. But the third point is, yes, in the world of cameras, that is the direction, which is a single camera that can do 5, 6 or 7 things, not just one thing. And that's what we would anticipate moving with that type of technology going forward.

Our next question comes from the line of David Koning with Baird.

I guess I was wondering, I was looking at the government revenue, if you take total less the New York, so total service less New York service, and when you do that, next year's growth is good, 7%, 8% when you just kind of take your numbers. The year out is really good. It's like 16% in that acceleration -- okay. I guess what's behind that? I mean, that's an amazing acceleration. And is that part of the EBITDA margin expansion because your higher margin work, assuming -- I assume, is going to be accelerating into '27.

Yes. I mean, so the growth -- that's exactly right. So if you think -- that's why we -- in my remarks, Dave, we talked about there's a little bit of a reset because yes, because of the size and what's happening in New York, which is awesome, awesome stuff, it's just going to have a bit of a drag next year. But past that, when you get past the implementation of our technology upgrades as well as all of the winning that we have been doing in the marketplace, our win rate has been significantly higher over the last 12 months that was previously we basically won all of the opportunities so far in California. We're winning great opportunities in school bus. So what I would say is -- but remember, there is a time to book and then a time to realize revenue, which does take a little bit. So what you're seeing is all of the winning in the backlog turning into revenue as we get into early or mid-part of next year, that translated into real growth in '27.

Got you. Okay. No, that's great to see. And then I guess my follow-up, in commercial, you had the second toughest comp of the year, yet you accelerated growth despite the fleet management headwind, and so I'm wondering how you had the best growth for the year so far in Q3 despite both the tough comp and the fleet management. It seems like something is going really well there.

Yes. David, you get annoy with me here on fleet. I'm going to tell you again, it wasn't as bad as I thought. And basically, what that means is tolling activity outside of the churn that we talked about last quarter was as high as we've seen probably in the last 5 or 6 quarters. So the churn didn't have as large of an impact. Let's put it that way. And I do not expect that will be the case as we go into the fourth quarter. So if you remember, when we were -- all of us, if we remember, 90 days ago, we talked about, I expect that fleet business to have a mid-teens year-over-year negative [ beat ]. I do expect that to come in the fourth quarter. And quite frankly, I expected in the third quarter. However, that tolling activity picked up. But the RACs have been strong. Sitting here today, we are at -- we had a good solid Q3 in TSA throughput at [ $101 million ]. On a year-to-date basis, we're just north of [ $100 million ]. And then the month of October has been really strong. Last I looked on a month-to-date basis, it was plus 4%. So I feel pretty good about how the business is performing. But that fleet -- that fleet thing is going to show up in the fourth quarter, a little bit more than the last quarter.

Our next question comes from the line of Chris Zhang with UBS.

So I wanted to double-click on California a little bit, and I appreciate the legislative update, and the updates across different cities and especially congrats on the San Jose Award. I'm just wondering from the 2026 guidance perspective, is it fair to think that anything from what you've been awarded, including San Jose in the guide, whereas the upcoming pilots or especially -- specifically Los Angeles, Glendale, and Long Beach, those are not in the guidance yet. And can you give us a sense of what's your overall scale in California and what are the potential opportunities you have visibilities to especially those private cities?

Yes, Chris, first of all, welcome. Second of all -- yes. This is Craig. I'll give you the financial piece of that, and then I'll let David talk about the commercial motion that we've seen in California. So the ones that you just spoke of are pilots, right? So those pilots, I think, in totality for the state of California, all the pilots amount to about $10 million of ARR, and roughly half of those have only gone out for RFP. So to the degree that we won 100% of the pilots that have come out to RFP, as David just talked about, yes, that's in our guide, but it's not a significant amount of money. The other thing is, when you're talking about a new modality even in a state that's an existing customer, typically the time from winning of the contract or the award of the contract to revenue is 12 to 18 months. So even if those had been bigger numbers, the answer would be implicitly, it's in the guide, but it's not a really big number. But outside of that, with the red-light, I think, maybe, Dave, do you want to talk about that?

Yes. I mean I think as I mentioned in my remarks, we still have a couple of pending from the school zone speed program, which we will anticipate first part of next year. The red-light is significant. So we're the largest provider of red light in the state of California currently. But historically, it had always had some unique administrative challenges to a way that it would fully -- with multiple different challenges that I mentioned some in my remarks that I won't go back into. But -- so we just look at that as an opportunity to reshape the way that we're serving customers already. And because they've removed some of the administrative barriers, we would anticipate some of those programs to expand. We feel like we're in -- California is really something that we've worked really, really hard on as an organization, an enormous amount of focus, partnering with our government relations as well as our local teams as well to produce what we consider is going to be a great outcome for many, many years to come.

Thank you. Ladies and gentlemen, that brings our Q&A session to the end. And that concludes today's conference call. Thank you for your participation. You may now disconnect.