Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's Fourth Quarter and Year-End 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 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 Fourth Quarter and Full Year 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. We closed 2025 with strong execution and momentum across our 3 business segments. Total revenue for the fourth quarter increased 16% from the fourth quarter of 2024, exceeding our internal expectations, while adjusted EBITDA and adjusted EPS were generally in line with our internal expectations. Looking ahead to 2026 and beyond, we are executing against a focused value creation strategy designed to strengthen our core, enhance profitability and position Verra Mobility for durable long-term growth. In the near term, we are driving operational discipline, sharpening our portfolio focus and anticipate expanding margins in 2027 and beyond. We are allocating capital and prioritizing resources against the highest return opportunities. Our priorities are clear, deliver predictable, profitable growth while strengthening margin performance over the long term. At the same time, we are investing with intent to extend our leadership and unlock long-term value. We are modernizing our technology platforms, including advancing MOSAIC, our secure cloud-based end-to-end automated enforcement solution and Government Solutions and accelerating development of our connected vehicle platform and Commercial Services. The future of mobility is safe, smart and connected. Cities and fleets are moving in that direction, and we are building the capabilities to lead that transition. These investments are disciplined, aligned with customer demand and designed to drive durable competitive advantage and sustained shareholder value. Before I transition to our operating results, I'll start with an update on our automated photo enforcement contract with the city -- with New York City Department of Transportation. I'm pleased to report that we signed and registered our contract at the end of 2025 -- at the end of December 2025. The total contract value now stands at $998 million over a 5-year period and includes an option for a 5-year renewal. Under…

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 fourth quarter. Our Q4 revenue performance, which included 14% 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 the 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 21% year-over-year. Commercial Services revenue increased by 10% over the prior year and Parking Solutions SaaS and services revenue increased 2% compared to the fourth quarter of 2024. Total product revenue was about $18 million for the quarter. Government Solutions contributed roughly $14 million with $8 million coming from New York City Red-Light expansion and $6 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 $102 million, roughly flat compared to the same period last year, largely due to the investments made in New York City. We reported net income of $19 million for the quarter, and GAAP diluted EPS was $0.12 per share for the fourth quarter of 2025 compared to a loss of $0.41 per share for the prior year period. GAAP results included approximately $16 million of nonrecurring expenses, about $6 million related to our fourth quarter debt refinancing and $10 million related to fixed asset write-down expenses due to our exit from Ontario, Canada. Adjusted EPS, which excludes amortization, stock-based…

[Operator Instructions] And our first question comes from Faiza Alwy with Deutsche Bank.

I guess, first, just a follow-up for Craig on the quarterly cadence that you mentioned. I think you said first quarter, you're expecting flat revenue and then it kind of builds up from there. So it would be really helpful just to address kind of what's driving that and what's going to drive the improving revenue through the course of the year.

Yes. Great. Well, thanks for the question, Faiza. So let me just recap at the beginning what the kind of the guide was. So if we talk about it from a revenue perspective, to your question, we expect it to be flat, then we expect on a year-over-year basis to be up high single digits in Q2 stand-alone and then mid-single digits in Q3 and Q4 stand-alone. That gets you to mid-single digits for the year. And then on the margin side, we expect to be, again, for the total company in the first quarter in the mid-30s, getting up around 40% in the second quarter and a little north of 40% in the third and fourth quarter to get you to the 40% for the year. So here's the why, I think myopically on the first quarter. Some of it's the weather, some of it's -- some other things that are going on, but I'll break it down by business. So on the commercial side, we expect commercial to be relatively flat. A big piece of that is the FMC churn. So this is what we talked about in the second quarter of last year. It's particularly acute in the first quarter because we had a strong first quarter in 2024. So that churn is a big piece of it. The other piece in Commercial Services is the pacing of travel and some of the inclement weather that we've seen. I know you live in New York, Faiza, so you probably know this outside your window that we've seen kind of for the last 7 weeks. If we think about today, the quarter-to-date TSA throughput went down about 80 basis points last night, just based on the Northeast kind of being snowed. So if I combine those 2 things, the pacing of the increase in travel year-over-year, which I expect to be back-end weighted anyway, I think being a little bit slower here starting off the first quarter in the FMC churn, it's been roughly flattish on the commercial side of the house. Now let me go to the government side. Also flattish there. The first piece of this is the price normalization. We talked about this in the competitive -- the competitive procurement that we did for the contract, that hits us starting on 1/1 of 2026. Now we had expected that to be offset by some volume. But again, going back to inclement weather, we can't set concrete unless it's been above freezing for 24 hours. In New York City, we've had a lot more days underneath freezing than we anticipated at this point. So I still think that all of that install volume is safely within 2026. It's just going to be a little bit more bunched up in the back 3 quarters. So if I look at FMC, the pricing and then the weather, those 3 things kind of come together to give us a flattish Q1. That's my best view as of today, Faiza.

Understood. Makes sense. And then I just wanted to ask about the political environment around automated photo traffic enforcement. I think, David, you touched on this just a little bit in your prepared commentary. I know there's been some noise coming out of D.C. and the Trump administration and -- just curious like what you're seeing on the ground in terms of new RFPs coming out? Just would love to hear more -- your perspective around that.

Yes. Great question. I think one point to start is, as I say, there's nothing new under the sun, and that includes any sort of comments in the press related to automated enforcement that's been going on for 18 years. So that's something very normal. It has moments where it's a little higher volume like it is right now. But then I would just point to the state legislatures that have opened up the $350 million of TAM that we talked about in the last 3 years. So I think that's where the market stands. And so I think we continue to be in a really good place. I think because the industry has done a really good job of pivoting to very specific, what we call purpose-built use cases, in places like school zones and work zones and school buses. Those are what I would just consider "more popular and I think draw less sort of feedback." so overall, I feel like we're in a good place. This is nothing that is new to Verra Mobility or to the industry, and it's something that we just handle as it comes.

And our next question will come from Tomo Sano with JPMorgan.

Could you talk about the -- with the new New York City contract finalized, would you be able to quantify the impact of price normalization and MWBE requirements on margins? And if you could discuss your expectations for the pace of margin normalization from 2027 onward, please?

Yes. The best way, Tomo, I could think to answer that. I got to be careful from a competitive standpoint, of course. But if you compare the new contract with the old contract, right? So as you know, Tomo, we've had this contract in some form or fashion for quite some time, this is the latest iteration of that significantly expanded. I'd like to talk about it in terms of margin dollars. So there's a couple of things going on in this contract. The first thing is there's several thousand camera expansion, okay, depending on use cases. That's margin dollars into the contract. There's also new scope in the contract that we're doing things we didn't do before for the city, that's margin dollars into the contract. And then there are things that we used to do kind of, call it, at breakeven that now we do at a slight margin, so that's margin dollars into the contract. And then you've got the price, which is the modernization, I would say, of the revenue per approach. As you combine all of those things over the life of this deal, which is a 10-year deal, 5-year within a renewal, so let's say, a 5-year deal, you get to roughly even margin dollars. That's the way to think about it. The investment that Verra is making into the project or what's causing that and the $22 million to $24 million I mentioned in my script, that is us using the minority and women-owned subcontractors in the state of New York. So the way to think about that, that's work that we used to do in-house that now we're subcontracting out to those folks that are based in the five boroughs. That's the investment in the contract. Does that make sense from a margin standpoint?

Yes, it's clear. And just wanted to get a follow-up on the AI questions. From a long-term perspective, how do you [indiscernible] and opportunities that advances in AI present for your business model, including the potential for rental car companies to develop their own AI-driven solutions and your own efforts to differentiate and create the value through AI, please?

Yes. I mean I think -- I don't think there's a public company CEO that wouldn't say, yes, AI is going to have some impact on their business at some point. What I would say is we're going to be on offense on this, not on defense, which is we have already deployed AI into some of the technology we've deployed today. We're using it regular in our software development. And as I mentioned in the closing part of my remarks, we really feel that AI and autonomous vehicles create a really great lane of potential future growth for us. Specifically -- but as you go back to your specific question is the AI also -- we still continue to work with tolling authorities and some technology that's probably a little less AI-oriented. So we continue to find new ways to integrate with them as well as we're always pushing on with our customers, how can we add more value? What are new products and services that we can deploy? And you see that in our connected vehicle platform, which I think is sort of where the next generation of tolling will occur, which is inside of a connected vehicle. It's still a ways away. I don't think it's anytime soon, but we've already made inroads with folks like Stellantis to help create that platform. So I think we feel pretty good about where we sit today.

And the next question is going to come from Daniel Moore with CJS Securities.

Just wanted to ask on the cash flow. Just I think your CapEx expectation is $125 million. The guidance includes $22 million of collections that kind of spilled over. So just wondering kind of what the working capital embedded in the guidance and when we might get back to a more normalized level of conversions when you sort of factor that good guy that's helping the guidance in '26.

Yes, yes. No, you bet. Great question. So I would say that this is close to normal. So working capital, let me answer your question directly, is $20 million investment year-over-year that I think that's on Slide 11. So that will be there to look at for your model later. And that is what I always call a right just use of working capital. The vast majority of that is as we grow our commercial services business, which is we expect mid-single-digit growth this year, that's more funds on deposit that we put with the 54-plus toll authorities in the United States. So as that business grows, working capital should always be a little bit more of a use. I think as you pace that out and you picked out exactly the right pieces, the reason why that $22 million that I got in '26 that I expected in '25 didn't push that number north is because CapEx is a little higher than I thought. So if we go back a couple of quarters, I don't know if it was you that asked it and someone said, what is -- what do you think about for 2026 CapEx? And the number I had was not as high as the $125 million that we've got in the box and in the guide today. So had that number been the lower number I thought a few months ago, we would have had higher conversion. Now that's kind of the bad news on conversion. The good news is the reason why it's higher is because we continue to win on the Government Solutions side of the house. I'm sure you saw the Hawaii announcement that went out not too long ago, and we've got a few more in the late funnel that I can't quite talk about yet that we expect to go here in the year. So when I think about our Government Solutions business on a non-New York City basis, service revenue growing high single digits approaching double digits, free cash flow conversion getting around 40% is probably the right level for that.

All right. That's helpful, Craig. And then you actually just touched on it, the Hawaii contract. Just talk a little bit about kind of the cadence of revenue, how we should think about the ramp in that $160 million over the next few years?

Yes. This one -- this is a big deployment in a small area. So you think it go fast, but actually, it's kind of the opposite. I expect to see this over the next several years, right? So this is typically, I'd say, 12 to 18 months. I think this one is probably more 36 months, maybe a little bit north of that. And we've got a pretty big geographical area to cover here even though there's not a lot of land mass. So very exciting win for us, great partnership with the state. We're super pleased about it. It's going to be a little slower on the rollout, but good news all around.

[Operator Instructions] The next question comes from David Koning with Baird.

Nice job. I guess my question is around the government business, ARR growth, the backlog, really good again. And I guess my question, is that better than you expected? And do you still feel like the '27, '28, '29 expectations you gave for government revenue hold the ones you gave last quarter, do those still hold? Or are those even a little better now with some of the new signings?

I would say -- thanks for the question, David. I would say hold. Those are -- they still hold to what we talked about last time. And the one that we talked about last time specifically was does 2027 feel like double digits. And I still see a path to that today. So maybe just one more level of detail on that. When we talked last quarter and we gave that view out to 2028, I believe that we had non-New York City growing in the high single digits, which is from an organic perspective, which is exactly what we've got in the guide today. So I don't -- I'm a little closer to it, and [ I still am ] as confident as what I said it last quarter that '27 looks especially good.

Okay. And then as a follow-up, it sounds like you're going to exit this year in the mid-20s margin within the government segment. Is that a fair kind of starting point as we think in the out years that we know you can get back to at least the mid-20s and hopefully get back to 30% over time?

Yes. I think we're going to exit. I'm going to [indiscernible] consult my notes here, give me one second to make sure. Yes, we're going to exit with GS, I think, a little lower than the mid-20s this year. We should be on the lower end of the 20s, which is, again, consistent with last quarter. But does that path still exist to get up to the mid- to high 20s by 2028 going into 2029? And the answer is yes. And the path to that is volume leverage and first of all, and second of all is MOSAIC.

And our next question will come from James Faucette with Morgan Stanley.

This is Shefali Tamaskar on for James. So you gave some really helpful commentary around AI, specifically around increasing R&D and how you view AI as a lane for potential future growth. So I wanted to better understand how you think about the trade-offs between building out technology related to AI internally versus partnering or potentially acquiring targets with AI capabilities.

Yes. Great question. I think the way I would describe my answer is it's both and not either/or, meaning we probably see that relative to AI impacting transportation, it's going to be showing up in autonomous vehicles, and there's going to be a slightly slower bend toward that over the next decade or 2 as more autonomous fleets get proliferated, the legislation gets set. There's a lot to be worked out. And so there's both arms and legs component of that, and then there's also an AI and software development side. So I would say that we're open to partnering and have already started conversations. And actually, the Stellantis conversation is a really good one where we're partnering with them. That's not explicitly AI, but it is software delivered in a connected vehicle case, which is good. So I would say we will be more than open to partnering with -- but first and foremost, we want to find the use cases and the problems that are most impacting the current customers we have and really go hard at the hoop to solve those. And we'll do that with our own capital, our own innovation. We can do it through potentially capabilities through acquisition and/or partnership.

And I am showing no further questions in the queue. This concludes today's conference call, and thank you for participating, and you may now disconnect.