Greetings and welcome to the Verra Mobility Second Quarter 2019 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marc Griffin, Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Verra Mobility's Second Quarter 2019 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed. With me on the call this afternoon is David Roberts, Verra Mobility's Chief Executive Officer; and Tricia Chiodo, Chief Financial Officer of Verra Mobility. They will begin with prepared remarks, and then we'll open up the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the full year of 2019, our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers and other statements regarding our plans and prospects. Forward-looking statements may be identified with words such as we expect, we believe, we anticipate or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our annual report on Form 10-KA as filed with the SEC, all of which are available on the Investor Relations section of our website at ir.verramobility.com and on the SEC's website at sec.gov. Finally, during the course of today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the close of market today, which is located again on our website at ir.verramobility.com and on the SEC's website at sec.gov. With that, let me turn the call over to David.

Thank you, Marc, and thank you to everyone for joining us on the call today. Verra Mobility reported another strong quarter with Q2 exceeding expectations across all key operating metrics. The macro drivers of our business such as the increase in toll roads and the transition to cashless tolling continue to provide a powerful tailwind that supports the momentum of our business. Ongoing increases in rental car billable days alongside increases in tolling usage are driving our Commercial Services segment, while the expansion of speed enforcement in New York City is driving our Government Solutions segment. The strength of our core business as well as some of our longer-term smart city innovation initiatives give us confidence in our ability to maintain momentum for the remainder of fiscal 2019 and support our vision as a global leader in smart transportation. As Tricia will discuss in detail later during this call, our second quarter revenue grew 12% year-over-year to $109.6 million, and our adjusted EBITDA came in at $59.7 million, up 9% year-over-year. Our Commercial Services segment comprises our toll management to rental car companies and fleet management companies in North America, which generated 62% of revenue in the quarter. During the second quarter, the Commercial Services segment grew revenues 14% year-over-year to $68.1 million and reported adjusted EBITDA of $44.1 million, up 11% year-over-year. The momentum in the quarter was driven by our continued collaboration with our customers to enhance penetration and adoption of tolling programs through both product and operational innovations. Additionally, there has been a positive increase in overall toll activity and usage, which is providing a nice tailwind to our commercial business. Over the past few quarters, we have made tremendous headway in creating the operationalization of our European product. After creating a subsidiary in the Netherlands, we…

Thanks, David, and good afternoon, everyone. I'll provide a more detailed overview of the second quarter 2019 financial performance, and then we'll open up the call for your questions. We've provided a short earnings deck on our website that has reconciliation from GAAP to the non-GAAP results we'll be discussing today. If you're following along on that earnings deck, I'm on Slide 3, which outlines revenue and adjusted EBITDA performance by business segment. Let's start with our Commercial Services segment, which delivers tolling violation processing, title and registration services to rental car companies and fleet management companies in the U.S. and processes violations in Europe. Their total revenue grew 14% to $61.8 million (sic) [ $68.1 million ] in the second quarter of 2019, up from $59.8 million in the same quarter of the prior year. In the current quarter, we saw increasing numbers of billable days across our 3 largest rental car companies and higher levels of tolling activity across our entire product portfolio. We expect demand for tolling products to continue to be strong in the back half of the year. As you look forward for this business segment, keep in mind that Q3 of last year is a difficult comp, and the year-over-year growth rate for that quarter may be lower. Adjusted EBITDA of $44.1 million in the second quarter of 2019 grew $4.4 million or 11% year-over-year from $39.7 million in Q2 of 2018. Our strong EBITDA performance is driven by continued revenue growth combined with the impact of well-executed integrated -- integration synergies. Adjusted EBITDA margin for Commercial Services continues to be strong at 65%, topping the 61% in the first quarter of this year. Our strong margin performance is net of the investments we're making to accelerate our expansion in direct tolling in Europe…

[Operator Instructions] The first question is from Jim Schneider of Goldman Sachs.

Congratulations on those strong results. I was wondering if you can maybe give us a little bit of a sense, after you get the 300 cameras installed in New York City, what you kind of expect the run rate or annualized recurring revenue to be from that program.

Sure. So if you think about just that 300 camera base, our average across our speed portfolio of service revenue is right about $3,800 per month. So if you take that times 12 and then multiply it by the 300 cameras, your go-forward run rate revenue from that first installation should be about $13.7 million.

Revenue run rate for -- on an annualized basis, right? Okay. That's helpful. And then maybe one for David. On the M&A front, I was wondering if you can maybe give us a little bit of color as we go forward, your updated thoughts on where you might see kind of attractive opportunities for M&A and kind of at what point you might see the earliest opportunity to actually take advantage of that and how -- kind of how you feel about the capital structure and where you'd like to get down to before you initiate something like that.

So the final question being, I think, a leverage question, so I'll land on leverage. So I think that per our call, I said we hired a new head of M&A, Mike McMillin, he's been doing a great job. We put into the investor deck just some framing perspective of how we're going to think about M&A so that investors and analysts can get a view as to how we're thinking about deploying capital. What I would say is that relative to timing, we are looking for things that help us accelerate our growth strategy. That would include what can we do in Europe to make it go faster in Europe because we're very committed to Europe and know that over the long haul, that's a really great opportunity for us. So businesses that have unique capabilities in Europe like EPC would be things that are interesting to us. In addition, we would look at things that are diversifying. So if you look inside of the United States, in our Government Solutions business, we have 200 customers that we principally sell 1 product to because we have only provided previously photo enforcement. That being said, we have great relationships with a lot of these major cities. And as they look to smart city initiatives, we could -- we are a de facto partner that could be working with them. So things that might diversify our products to those customers would be another category. What I would say in a sense of timing is that the pipeline is very full. But at the same time, valuations are also quite full so we continue to look broadly. But I would think that once -- I think that within the next 6 months, you'll definitely hear some things from us related to M&A. And then finally, if you think about capital, we generate a fair amount of cash, as you can see, even in the quarter. I would say that we are very comfortable we're going to be at a -- our leverage is estimated at the end of the year to be -- what?

Well, we anticipate that we delever very quickly. You can see the step function and how we're delevering as we progress about each quarter. Our cash flow generation and conversion could take us to leverage ratios that are right about 3.2x by the end of the year.

Yes. And so I think that we're comfortable up in the 4 range. So we're pretty comfortable with that for the time being. At least for now, the opportunity to grow through M&A is more attractive than sort of restructuring the capital structure of the business.

The next question is from Ashish Sabadra of Deutsche Bank.

This is Alexis on for Ashish. Congrats on the quarter. So I just wanted to talk about the update on the progress for the European opportunity. And can you just clarify the timing of the program and when you expect to plan to roll out to Spain and Portugal? And also if you've announced any partnerships with European RACs or if there has been any discussion with the ones in the States.

Yes. So the timing is -- for the note that we just shared is that we're anticipating a pilot to launch sometime in Q4. We're -- I think from our last call, we've been pretty slightly behind our plan but recognizing that building something from scratch that we do so in the U.S. is going to take some time and operating in Europe is clearly more complex. That being said, we did sign an agreement with APRR, which gives us the ability to do tolling in France. We have gotten our shield box approved, which sounds like a small deal but it's actually a really big deal, which is where the transponder goes inside of a rental car vehicle. And we are in active discussions with multiple RAC customers that would include the customers that we serve here but also additional rental car companies and large fleets, remembering that there's fleet management companies in Europe just as well that are interested in our program. So we anticipate a more robust update in Q3 or certainly Q4 related to who those are and clearly when we are actually moving forward. I suspect we would announce that separately.

Great. And then one more on the -- so the demand for the school zone safety cameras, and any color on opportunities in other cities that may follow? Basically, just what the addressable market looks like. And if you can just comment on your moat around the business that you have in the government space.

Yes. So right now, the moat, I would think, is a couple of things. One is market share. We have greater than 50% market share in North America for photo enforcement. Number two is if you look at large cities, so the larger cities in the country, we are sort of the gold standard if you look at the New Yorks and Chicagos and Seattles and San Franciscos of the world, that we have a great reputation with our customers, and I think that's one of our moats alongside the efficacy of our -- both the programs that we implement and the technology that we deploy. In terms of TAM, we did -- as we mentioned earlier in the call that we did open up the state of Georgia 1.5 years ago now for school zone speed, and that was approximately a $50 million TAM. We are turning our sights now to other states, which have yet to be identified in terms of that opportunity. I would say that school zone speed is a very -- you can't see the air quotes but I'm putting air quotes -- popular program because it's -- while certainly people have disagreements about the use of photo enforcement, it's hard to argue that people should be speeding in school zones, and photo enforcement is a very, very proven method by which to change that behavior. So we anticipate continued growth in speed for several years to come.

And I would add to that, David. We talk about our New York expansion opportunity and the 300 camera order that we have in hand. But that program in and of itself has a long runway just on its own. They -- the legislation allows them to move into an additional 600 school zones, of which we put 2 cameras in every zone. So there's a long runway just in New York itself.

The next question is from Daniel Moore of CJS Securities.

Sorry to review, but I just want to make sure I get the numbers right. 59 cameras in Q2, 40 a month for the rest of the year is what we're thinking about for New York?

Yes, except don't think about installation in December. So December -- yes, New York City generally won't let us to be on the street in December. So if you sort of do that quick math, you're talking about an additional 200 cameras in the back half of the year.

Very helpful. And maybe talk about -- is that expansion driving or leading to accelerated conversations in other metros on that side of the business?

Yes. I think there's always a trickle effect. So when New York was the first to -- and Dan, make sure I'm answering question, but when New York adopted Vision Zero 5 or 6 years ago, I think now, that was -- they were the first, and then other cities like Seattle and San Francisco took that on. So I think that as you think about companies -- or rather cities transitioning to smart cities and looking for ways to improve safety as well as finding self-funding mechanisms that photo enforcement, and especially purpose-built inside of schools, is going to be something that you will start to see it. And I think we saw the first sort of echo of that when the state of Georgia opened up legislation enabling the state there.

Helpful. And Trish, any directional at least ability to sort of break out EBITDA margins within Government Solutions between product sales and services?

You can actually derive it from our financial statements because we do provide a product sales line and a cost of product sales line. And you figure that the majority of our OpEx and SG&A is related to the service side of the business. So that's the easiest way to get to it. I can just tell you they are healthy.

On both sides, absolutely. This is a speculation question, but based on what you know about the New York City RFP for congestion pricing, what's your sense of the likelihood that it gets modified? I know you're not going to participate as it's written today, but any thoughts there?

Yes, not really only because it's pure -- I would just say that, look, congestion pricing is not common. It's -- there's only so many cities that actually have it around the globe, and New York is a big, big complex city. I suspect as they -- after this -- I think they're going to be selecting a partner here in the next 2 to 3 weeks, if I'm not mistaken. I'm assuming that they'll have to come to some terms as a part of the RFP process to modify to make some things a little bit easier. But New York City has some very clear demands that they're looking to extract, and I'm assuming these partners are willing to sign up for it. So it will be a little bit of let's see what happens.

Understood. Lastly for me, a tag-on to the M&A question. Just as you think about both internal and growth via M&A, areas of opportunity, any specific examples as you're -- related to the long-term smart city initiative? What are some of the other types of services that you can envision providing? And are there companies out there that you're actually looking to buy in the next 6 to 12 months?

Let the record show that I'm not committing to any of the following, but I'll give you some examples, Dan, to help you out. So there's 2 categories -- or maybe 3 categories that are probably pretty interesting to us. Actually, maybe 4. One is we do have a title and registration business that we really like and we think that in the future could be a unique position, as we've always said. All the -- whether it's autonomous connected or normal or electric or what have you, it still needs a title and a tag, and that's something that we do and we do quite well and there's probably a future there. As we think about smart cities, though, there's a couple of areas that we are kind of interested in. We like the parking space. We like congestion pricing despite the decision to no bid. That was just a focus and a delivering for our customer decision as much as anything. And congestion pricing entails a lot of other things like sensor technology as well as traffic management. So all of those kind of come together as what I would call very broad categories that we're looking at and looking at them both in the U.S. and abroad.

Helpful. Congrats on the progress in the quarter. Appreciate it.

The next question is from Dave Koning of Robert W. Baird & Co.

I guess, first of all, you made a comment about how Q3 of last year presents a little bit of a tough comp. And I'm just wondering, in the -- that's in the Commercial Services business. And I'm wondering, what's the normal cadence sequentially of the year. Last year, obviously, Q3 was so much stronger. Is there a summer driving season that we should still normally see a pretty nice sequential pickup in Q3?

Yes. You should see a nice sequential pickup in Q3. But I think last year, as we moved from Q2 to Q3, that pickup was $12 million. And there were some reasons for that. There were some delays in tolls from the Florida -- from FDOT, the Florida Tolling Administration, that moved revenue from Q2 to Q3. We can't recognize the revenue unless we receive the toll file, and they just stopped sending toll files. So you're going to see that there's still -- there should still be a sequential bump as we go into Q3, but it's not going to be $12 million, which it was last time. So as you -- you're going to see the same levels, but sort of that muted bell curve is going to run over the top.

Okay. Okay. Great. And secondly, margins in Government sequentially were up, which, to me, seemed pretty encouraging given you added all the product revenue that you didn't really have in Q1. You added it sequentially. That should come on at, I would think, a lower margin. So for the rest of the year, can margins stay reasonably high even with all that product revenue?

Yes, they can. So our product revenue is actually for the first -- for this quarter came in at really nice margins and obviously higher than the business segment as a whole. But we also installed the fastest and easiest cameras that we could in that quarter using existing poles where we could. You might -- what you might see is that I think those product margins are going to remain above the average for the business segment throughout the rest of the year. So I think that's probably a good assumption, Dave.

And I just -- if I can sneak one quick one in. EPC, we don't get to see the revenue. It's not in your press release just given you anniversaried it. But I think in the year-ago, it was $2.4 million. Is that growing still like 40%, 50% year-over-year in Q2?

For EPC? No. EPC hasn't been growing at that pace.

It was never growing at that pace. Yes, the...

Oh, I think what you're talking about...

I'm thinking of Europe. I messed up.

No. I think you're -- if you're looking at what our Q1 financial results were, I think that we had a huge bump in growth in Q1 for title and registration. And it normalized for Q2, which is what we also said there. So title and registration in Q1 was like 48% up quarter-over-quarter. That was really timing. We expect that to be sort of a run rate basis of closer to 10%. So I think that might be what you're thinking about from our Q.

Yes, I think that's right. Yes. No, I appreciate it.

The next question is from Louie Dipalma of William Blair.

This is Rohan Piska on behalf of Louie. Congrats on the solid quarter. In regards to the HTA acquisition closed last March, we were under the impression that you recently still are operating separate tolling networks for American Traffic Solutions and HTA. At the end of the second quarter, have all of the revenue and cost synergies been fully achieved?

I -- so as far as closing -- as far as the tolling system, we are -- we do have different computer systems serving each of our 3 largest customers that are on there just because they are our 3 largest customers and we want to make sure that we -- that they're stable and it doesn't change their integration. That, we never intended to change, so if you're talking about systems. But the majority of our back-office integration as well as our revenue synergies would have been achieved. We started rolling those out probably this time last year, so we've crossed over the majority of them.

The next question is from Chris Sinnott of Cowen.

I'd like to go back to the New York City congestion pricing issue, if we could. If you could just help me understand whether this decision was purely about the timing constraints that were imposed or if there were other technological or logistical issues presented that would have still been issues regardless of the time to implement.

Yes. It's a fair question. I think the reality is it will be, by all accounts, the largest congestion pricing scheme in the world in one of the most unique cities in North America to be sure. And all of that -- getting that started from scratch with the addition of a short time frame only increases the complexity. So there's definitely complexity with installing cameras in New York City, integrating with Peasy. There's a lot of work to be done, but the time frame certainly made it challenging. And based upon the RFP, the city is very, very serious about that time frame and being ready to go in January 2020.

Got it. That's helpful. If I could throw one more in there on Peasy. You had mentioned signing up with this rideshare partner. Does this imply that really getting Peasy to scale is going to involve potentially some more similar type of corporate partnerships and things of that nature that they're going to really get this to grow rather than just the app itself on its own? Or should we look to see more of these type of things signed up?

That's exactly right. And that was actually always the original thesis was the -- we have the capability to offer direct-to-consumer model and we wanted to build that brand, but at the same time, we knew that we often fit better behind the scenes than we do out in front and then offering our data and our platform to others that might want to leverage their customers. So what we did with GasBuddy earlier in the year as an example, where distributing the technology through others is probably a better way to go and leveraging the platform, the data that we have, and looking for ancillary revenue was exactly what we did with the rideshare company. So whether it's the GasBuddy or whether it was with Arrive, which is the parking company that we did a partnership with, all of those are looking for accelerated ways to distribution versus a direct-to-consumer model.

The next question is a follow-up from Daniel Moore of CJS Securities.

Just a quick one on cash generation. I'm wondering if the uptick in product revenue had any impact on receivables. Is there any meaningful delta in collection terms between product sales and service revenue?

Yes. There shouldn't be a meaningful difference, but it definitely had an impact. The -- and the invoice that we sent out for, I think, all 59 of the installations for New York went out on June 3. So that's a part of the uptick in our receivables that's there, but it shouldn't slow the collection cycle. We generally get paid within 30 to 45 days, or we should, from New York City, so I'm not expecting that to be a longer cycle.

There are no further questions at this time. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.