Verra Mobility Corporation (VRRM) Q3 2019 Earnings Report, Transcript and Summary

Greetings. And welcome to the Verra Mobility Corporation Third Quarter 2019 Financial Results Call. At this time all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. [Operator Instructions]As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Marc Griffin, Investor Relations. Thank you. You may begin.

Thank you. Good afternoon. And welcome to Verra Mobility’s third quarter 2019 earnings call. Today, we will be discussing the results announced in our press release issued before the market opened.With me on the call this afternoon is, David Roberts, Verra Mobility’s Chief Executive Officer; and Tricia Chiodo, Chief Financial Officer. They will begin with prepared remarks and then we will 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 also be identified with words such as we expect, 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 quarterly report on Form 10-Q or 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 will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued before the market open today, which is located on our website again at ir.verramobility.com and 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 joining us on the call today. Before we update everyone on our Q3 results, I want to take a moment and celebrate Verra Mobility’s one-year anniversary as a public company.In October of 2018, Verra Mobility made the leap to public markets and by most accounts we have had a phenomenal first year. Today’s environment for newly minted public companies has been challenging, especially for those that have combined with special purpose acquisition companies.We believe Verra Mobility has been an exception, because we laid out a strong growth strategy 18 months ago before going public and we have continued to execute against that plan. It has not been without its challenges and some of our new initiatives, but we have adapted and continued to overcome.Over the course of our first year, we have continued to grow our Commercial and Government Solutions businesses, while making strong progress on our European growth initiatives. All of which has resulted in enhanced shareholder value.We owe a great deal of thanks to our shareholders for their trust and commitment, our Board of Directors for their wise counsel and guidance, and all our employees for their continued focus and dedication to serve our customers at the highest point of need.We are very pleased with the company’s performance in the third quarter, which resulted in financial results that exceeded expectations across all key operating metrics. As Tricia will discuss in detail later during this call.Our third quarter revenue grew 19% year-over-year to $128.2 million and our adjusted EBITDA came in at $70.8 million, up 14% year-over-year. The strength of our core business and 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.Our Commercial Services segment grew revenues 8% year-over-year to $77.6 million and reported adjusted EBITDA of $51.1 million, up 3% year-over-year. Overall, we are very pleased with the strong and consistent growth of this segment.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.We continue to make adjustments to our product offerings from usage day to all inclusive which optimize not only the revenue opportunity but enhances the renter experience. Additionally, there has been a positive increase in overall toll activity and usage, which is providing a nice tailwind to our Commercial business.During 2019 we continued to make tremendous headway in creating and operationally -- operationalizing our European product. As we have stated organizationally we are set up in the Netherlands and are progressing in our relationship with APRR.We are actively engaged with several rental car companies and large fleet on creating pilot programs. While we have not yet launched any full-fledged product programs, we are in conversations with multiple potential customers and expect to launch a pilot in France by year end or early next year. We remain confident in our European opportunity, which leads me to the discussion related to our recent acquisition of Pagatelia.Over the years we have voiced that M&A would be an important and strategic part of our growth strategy. We remain diligent in our process and are excited to have announced the acquisition of Pagatelia, which closed on October 31st. Pagatelia embodies the type of strategic tuck-ins that can accelerate our leadership in the smart mobility solution space.Based in Madrid, Spain, Pagatelia provides electronic toll management services to consumers, financial institutions and OEMs. The company has built a strong network of toll authority relationships across southern Europe including Spain, Italy, Portugal and France.Pagatelia is expected to accelerate our European expansion strategy by bringing in an interoperable solution to our customers. The company is small but profitable and most importantly, Pagatelia has a strong relationships which we intend to leverage. As you know integrations are critical to our success and we couldn’t be more excited to welcome the company and its employees to Verra Mobility.We remain very excited about the opportunities for our Commercial segment, the strong macro drivers of increased toll roads in North America and the ongoing conversion to cashless lanes this year leads us to remain confident in our ability to maintain our momentum for the balance of the year.Our Government Solutions Segment grew revenues 42% year-over-year to $50.6 million and reported adjusted EBITDA of $19.8 million, up 58% year-over-year. Growth in the Government Solutions Segment this quarter was primarily driven by hardware sales to New York City as Government Solutions Service revenues excluding hardware was flat year-over-year.As stated earlier in the year, New York State passed legislation that will increase the number of schools zone speed enforcement areas and we are very excited for the opportunity to expand an important safety program, which we have been an integral part of for over 10 years.Earlier this year, we received an order for 300 cameras and have been aggressively executing on that order through our partnership with the New York City Department of Transportation. As of September 30th, we have installed 237 cameras or about 40 per month. Our current plan has us installing the remainder of the 300 cameras in -- the camera order in Q4.In May of this year, New York Mayor Bill de Blasio announced a plan to activate new camera installations at a rate of 60 per month in 2020. Recently Verra Mobility received a notice to proceed for 720 additional schools zone speed cameras to help fulfill this pledge.We are excited about the opportunity to continue executing on this important public safety initiatives and appropriately scaled our operations to meet this demand. We are striving to increase our implementation schedule from 40 cameras per month to 60 cameras per month during 2020, but recognizing we may not meet that level every month due to factors that are out of our control such as weather.We also maintained our consistently high renewal rates again in Q3. During the quarter, we renewed key customers -- customer programs in Austin, Texas, Orange County, Florida, Boulder, Colorado and Bellevue, Washington to name a few.We are also currently negotiating contracts for multiple school zone speed programs in Georgia as a follow on to the enabling legislation that was signed into law last year. Overall, we continue to execute on our strategic initiatives for 2019 and are very pleased with our traction during the third quarter.In summary, we are very pleased with our third quarter results and continue to execute on our initiatives, which will drive a strong 2019.With that, let me hand it over to Tricia to walk through our financials in more detail.

Thanks, David, and good morning, everyone. I will provide a more detailed overview of our third quarter 2019 financial performance and then I will open up the call for questions. We have provided a short earnings deck on our website that has reconciliations from the GAAP to non-GAAP results we will be discussing today. If you are following along in the earnings deck, I am on slide five, which outlines revenue and adjusted EBITDA performance by business segment.Let’s start with our Commercial Services segment, which delivers violation processing, title and registration services to rental car companies and fleet management companies in the U.S. and processes violations in Europe.Total revenue grew 8% to $77.6 million in the third quarter of 2019, up from $72 million in the same quarter of the prior year. Billable days across our three largest rental car companies were flat, but we saw higher levels of tolling activity across our entire product portfolio, and a shift from -- shift in product mix that positively impacted revenue.The flatness of billable days was not unexpected. If you recall a computer system change within a large tolling authority in Florida delayed receipts of tolls from Q2 to Q3 of 2018, creating a very difficult comp. We believe a growth in this segments to continue to be strong and land somewhere in the low teens throughout the year.Adjusted EBITDA of $61.1 million in the quarter of 2019 grew $1.7 million or 3% year-over-year from $49.4 million in Q3 of 2018. Last year our EBITDA performance was benesided -- benefited by the one-time shift of revenues from Q2 into Q3, which fell directly to the bottomline.Adjusted EBITDA margins of commercial Services showed continued strength at 66%. Keep in mind that these margins are net of investments we are making to accelerate our expansion into RAC tolling into Europe.Moving to our Government Solutions segment, which operates photo enforcement programs for municipalities and school districts with an end-to-end solution. Their total revenue of $50.6 million in the third quarter grew 42% year-over-year from $35.6 million in the third quarter of 2018.Total revenue was comprised of service revenue. That’s the monthly fee we generate from the operation of photo enforcement program and product revenue, which results from the selling and installation of camera system. Service revenue for the quarter was $33.1 million, roughly flat on a year-over-year basis.If you recall, Texas banned red light photo enforcement earlier in the year, resulting in an $11 million annual reduction of revenue, which will impact us for the next three quarters. As a result, red light service revenue was down approximately $2.8 million for the quarter, an additional decline of $750,000 came from the sunset of our Street Light Maintenance program earlier this year.Conversely, our speed program continues to gain momentum, more than offsetting the red light cameras service revenue losses in the quarter. Moreover, the speed camera installations in 2019 will add more than $13 million to our annual recurring service revenue.Product revenue of $17.5 million for the quarter was up from $2.4 million from the same period last year. The increase was primarily driven by the installation of 176 school zone speed cameras for the city of New York. As David mentioned, we continue to execute against the existing order of 300 camera systems and expect to fulfill that order by the end of the year.Q3 2019 adjusted EBITDA of $19.8 million increased approximately $7.2 million or 58% from $12.5 million for the same period in the prior year. Adjusted EBITDA margins for this business segment were 39% up from 35% in the prior year. The large increase in product sales is benefiting both the top and the bottomline of this business segment.Turning to the next slide, we show our consolidated results for the quarter. The combined results of the business segment that we just discussed generated total revenue of $128.2 million for the third quarter and grew $20.6 million or 19% from $107.6 million for the prior year, based primarily on product revenues.Adjusted EBITDA of $70.8 million increased by $8.9 million or 14% from adjusted EBITDA of $61.9 million in the prior year. The third quarter adjusted EBITDA margins remained strong at 55.2%, improved from 54.5% margin reported in the second quarter of this year.The company reported net income of $17.8 million in the quarter, compared to $6.5 million in the same period in the prior year. EPS for the current quarter was $0.11 per share, compared to $0.09 per share in the same quarter of 2018.Tax expense for the quarter was $6.7 million, representing an effective tax rate of 27.4%, which is in line with where we believe it will be for the full year.The company generated $95.6 million in cash flow from operating activities during the nine months ended September 30, 2019, compared to generating $46.1 million for the same period in the prior year. The improvement is directly related to improved net income.We spent $17.5 million on CapEx in 2019 year-to-date period, compared to $19.6 million in the prior year. Free cash flow, which we defined as cash flow from operations less CapEx was $78.1 million in the year-to-date period. Cash flow from the third quarter benefited from higher net income and the flattening out of the accounts receivable balances.As of September 30, we had total debt of $897 million and cash on hand of $136 million, for a net debt of $762 million, which was 3.3 times trailing 12 months adjusted EBITDA of $228.6 million.With these positive results, in summary, we continue to execute well, delivering strong top and bottomline results, and we believe that Verra Mobility remains well-positioned to maintain this momentum and operating discipline throughout 2019.Based on our performance year-to-date, we are raising our revenue guidance to the range of $440 million to $448 million. This is a $7 million improvement over our recently increased guidance. Our guidance for adjusted EBITDA is unchanged at $235 million to $240 million.As we stated last quarter, we made the decision not to cut cost in the Government Solutions segment with the immediate loss of Texas revenue, understanding that school zone speed revenue will ramp up over the back half of the year.This decision put short-term pressure on margins, but insures quality of product delivery and service to our clients. We are -- we have installed 237 schools zone speed cameras to-date and anticipate installing the remaining 63 in the fourth quarter.Thank you for taking the time for joining us on the call today. And with that, we would be happy to take your questions now.

Thank you. [Operator Instructions] Our first question comes from the line of Louie DiPalma with William Blair. Please proceed with your question.

Good morning, David, Tricia and Marc.

Hi. Good morning.

Hi.

The Government segment and the Commercial segments, both performed very well. There has been a lot of investor focus on Europe and I was just wondering what has caused the delay in the France trial launch relative to your previous timeline?

Yeah. Hey. It’s David. So, I mean, really it just comes down to timing, if you think about it this way. While we are offering a similar product to customers we offer here, given the fact that this is basically a new to the world offering inside of Europe. It does take some level of time, as well as we approach these companies they have some technology development that they have to do on their side, which means we have to fit into there already dedicated technology resources, which sometimes can be slightly challenging.I would also say that, overall, the European -- just Europe does move at a slightly slower pace on these types of decisions that what we have seen here in the U.S. That being said, I remain 100% bullish on the opportunity, and again, as I said in my comments, we would anticipate a pilot some time later in the year or the first of next year.

Okay. And secondly, the New York City speed camera contract is massive. To put it candidly, is there any risk of formal protests since the contract never went up for bid or is it such that once those cameras are on the light polls that it’s basically irreversible?

Well, I mean, I guess, that I would not say irreversible, but I think the way that the city has their contract written is in such a way that they are not required to go to RFP. I think that creates an ease of transition for them just to maintain with regular vendors.But given that we just always have to perform on behalf of the city to make sure that we are keeping up with their expectations, and therefore, as long as we continue to do that, we don’t anticipate it having to go to -- there is no sort of process or anything like that coming down the pipe.

Thanks.

Thank you. Our next question comes from the line of Ryan Cary with Bank of America. Please proceed with your question.

Hey, guys. Thanks for taking the question. I was hoping you could talk a little bit more about the profitability of the latest New York City camera win. I believe in the past you said you are in about $70,000 to install each camera and $38,000 per month per camera. So first, is there any change in the economics in the latest NTP, and second, can you give us a little more sense about the margins on both the hardware and services side, we are just trying to get a sense of how much the latest win could move the needle in terms of EPS?

Yeah. So your first question regarding is the pricing on the next order the same as the last one and I am going to say, no, it will be a little bit lower. We are working very closely with our customer. We want to make sure that any discounts we get from our supplier we are passing through to them. So you can expect that the product sales will be a little bit lower on the next 720 cameras than they were in the first 300.When we talk about -- we don’t take about pricing for any specific customer, but what we do talk about is across our product portfolio and our schools zone fee program does generate about $3,800 per month per camera across our entire portfolio.So that is the recurring revenue going forward. So you would anticipate that that first 300 cameras that we installed would generate about $13 million in annual recurring revenue and that each camera after that would produce about $46,000 per year. So that’s how you should think about the economics of it.

Great. Thank you. And just moving to Europe, I know that you have made a number of acquisitions and announced a partnership with APR in France. Given you have the scale now to expand more organically or do you expect you have to do further M&A just kind of more tuck-ins to get where you need to be in Europe?

Yeah. I think, at this point, we feel pretty good about doing a lot of it organically, which we were going to do regardless. Pagatelia was just a great opportunity for us, given the integrations they have with critical toll authority. So they will be an accelerator. But we would have done it organically without them.So, I think, what you will anticipate next year is that, again unless there is a great opportunity for something within inside of Europe that you would see pretty much everything being grown organically at that time.

Got it. And just last one from me, staying on Pagatelia, is there anything embedded in the guide for the acquisition. I am just hoping you can give us a sense of the revenue of the business on a standalone basis, I am trying to think about how it could impact numbers kind of going forward primarily into 2020? Thanks.

Yeah. That is not impacting our guidance at all. The revenue for this acquisition is sub $5 million annually. This was really a strategic play.

Got it. Thank you for taking my questions.

Sure.

Thank you.

Thank you. Our next question comes from the line of Anish Sabadra (sic) [Ashish Sabadra] with Deutsche Bank. Please proceed with your question.

Thanks for taking my question and congrats on such a solid result. I see you have highlighted us pretty good growth in commercial business, talked about looking good there and as we look at several tolls in seven states including Maryland, Northern Virginia, Pennsylvania and Washington converted to electronic or cashless tolling. So my question is, as we saw this more and more toll road have been converted to all electronic or complete cashless tolling. How should we think about the toll wins in the commercial business or growth in the commercial business going forward?

Yeah. So I think you broke up just a little bit there, but I think you are asking, as we see a greater conversion of more cashless lanes and other types of toll like opportunity, how do we see that impacting our business going forward.

Yeah.

Is that the correct summary?

Yeah. Yeah. That’s right, David. Yes.

Okay. Great. Yeah. I mean, I think, we have always said that that’s always been a tailwind. I think we have been saying that every quarter since we have been doing a public company. It’s -- candidly, it’s a little hard to put the exact pin and exactly what the influence is.But what you -- Tricia said earlier as well, billable days were relatively flat, we saw an increase in toll activity, which would give you the indication that there are also more toll roads and more cashless, which is good for us.We have always described that as a -- we have used the analogy of baseball to describe what inning do we think we are in, meaning, eventually all roads will be cashless and where are we? And we said that we are in the, call it, the seventh inning.And but what I would tell you is that, this is much like the world series games and it will take a very long time to get in the ninth inning because of the pace at which toll authorities go. So you would anticipate that we could see some continued incremental tailwinds from that conversion for, I think, the next couple of years.

No. That’s very helpful. Thanks, David. And then maybe a question on the government side, New York City also passed a recent legislation for school bus cameras. Can you talk about that opportunity, the school bus camera opportunity and any color on -- any progress on that front?

Yeah. So that’s was another great win in the State of New York for us in terms of the legislative front. I think we are still assessing the opportunity. But, clearly, we feel like we are in a good position to compete for the school bus opportunity as it expands in New York.What I would probably anticipated is a better insight into that, given that it’s relatively recently and those things don’t convert very, very quickly. That will start to see more of that in our -- as we go into next year.

That’s helpful. And maybe just if I can sneak in one more question, and this is on congestion pricing, and they recently appointed even consultants to evaluate congestion pricing and there are several other cities, which are evaluating congestion pricing. I was wondering if you can talk about, have you had any conversations on that front or how do you think about that opportunity going forward?

Yeah. So congestion pricing is, I think, we have spoken pretty clearly that we are very interested in it, we think it’s something that would be a clear and present strategic fit for us. I think that what we are waiting for is to see how the demand continued to manifest itself in the U.S. post in New York opportunity.There are other cities that are considering opportunities Philadelphia, D.C., Seattle, I think, there is certainly other city that would benefit from the -- that type of a program. But those rollout very slowly and they rollout out over time.So we are just going to continue to remain vigilant in our core business and be prepared to act when the right opportunity comes through and that would clearly be an opportunity where you may see us look at M&A as a way to accelerate as we see the demand start to turn into something that’s slightly more consistent than the way it is today. It’s also a global opportunity. It’s not just the U.S. opportunity. So it is an exciting one.

That’s great. Congrats once again.

Yeah. Thanks.

Thanks.

Thank you. Our next question comes from the line of Steven Ward with Morgan Stanley. Please proceed with your question.

Hey. Good morning. So, just -- maybe just a quick one to start off on the ticky-tacky stuff, on the guidance and the calculation, I think, you guys only adjusted the adjusted EPS number for tax related items. I just want to confirm that that was the only moving part there in terms of the restatement? And then separately on the revenue piece, I think, it seemed like just mathematically you are implying no impact from the 300 of originally approved new cameras in December. Just want to make sure that that was confirmed, because I think there were some conflicting comments previously about whether there will be in December or not?

Yeah. So two things on there. Yes. We did and this is on the EPS calculation. What we did is, there was some confusion because we weren’t tax affecting the adjustments that we had put back when we did adjusted EPS.So we did go back and historically restate, saying if we had tax adjusted them, how would they compared to where we are today, so that is the change there in the prior periods and how we are looking at that number.And then on the second question, as far as your guidance, what we have said is that, we will complete the next 63 cameras that we have in order to complete the first 300 order in Q4. So whether they are in November or December, we will complete them all within the Q4 time period.

Got it. Okay. And then just maybe higher level on the margin, obviously, understanding that the cameras come with a little bit of a lower margin and with the boost into next year from the Government Solutions side somewhat being a little bit dilutive there, it sounds like that was the major impact, if I am catching that, plus Texas. But as we think about the goal, I think, previously you guys had talked about 55% plus margin over time to be realized, any adjustments that you would make to that following the development in New York?

Yeah. I think, if you look at our -- if you -- what we have said over time is that our margin, I think, our margins over time we actually said we are 54% is where we intended them to be and if you look at the midpoint of our guidance that we just put out, it’s going to come in at plus 53.5%, so we are pretty close in line with that.And at this point in time, we are still investing in the European expansion well ahead of the revenue cycle. So given the investment we are making in future growth and we are still right in line with where we said we would be.

Got it. Yeah. Okay. I was thinking more a longer term, I know you said, 54 previously. Okay. Fair enough. And then just maybe one higher level one on the European opportunity, I think, you guys had talked about that being a $300 million opportunity to be recognized over the course of, let’s call it, upwards of 10 years. David, I know your comments talked about accelerating that, any sense of how much that could be accelerated by Pagatelia, I know that sounds like it’s a relatively smaller, but more strategic deal. But any sense of what you are seeing there to accelerate that opportunity?

Yeah. The -- what the critical thing what impacted Pagatelia that is so important for us is the integrations and the relationships with toll authorities that we didn’t have. So if you go back to the history of our company, it took us 10 years collectively to build out the relationships within the United States. So you could imagine that as you do that to create a Pan European solution that could take a very, very long time.And then, in addition, if you look at the density of tolling, you would look at Southern Europe as really the area that has the highest level of density of tolling across Europe and so for the ability to in one acquisition put together not only enhance the relationship we already have in France, but also to add, Spain, Portugal and Italy.That’s a really exciting opportunity for us to be able to accelerate something that could have taken five years to eight years to just try to get that done because of the nature of the type of relationship that’s existing. So, I think, it will be definitely accelerating.I also think that it will be that much more, hopefully, it will be that much more enticing for customers, because now we have the ability to have an interoperable solution within the countries that I listed, which is a win for our rental car company. So we believe it will be an accelerant. But, again, we are recognizing that we do need to get the first couple of pilots going as quickly as possible to prove that out.

And just for clarification to listeners, I want to just say, you may indicated that you thought that our revenue would be $300 million within that timeframe, $300 million is a total addressable market, not what we have put out to be what Verra Mobility revenue would be.

Okay. Maybe just to quickly follow up on that, with this $300 million being the total addressable market, presumably a lot of that can be captured by Zara given the lack of an alternative or lack of a major player in the space, it’s doing what you are trying to do already. But just any sense on how much you think you could be taking of that pie longer term, that you have clarified it?

Yeah. I would say that would be a tough -- that’s the tough estimate to give you at this point. We are clearly confident in our position, but we also need to get some pilots going to improve that out. So let us do that and we will come back to you in a year from now with a better estimate.

All right. Great. Thanks for taking the questions.

Yeah. No problem.

Thank you. Our next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your questions.

David and Tricia, good morning, and I guess, happy anniversary is warranted.

Yeah. Thank you. Good morning.

Thanks. Good morning.

Congrats on the nice set of results obviously. In terms of New York City for next year, I know the goal is 60 per month. Do you expect to hit the ground running in January at that rate, just maybe any color on cadence of first half versus second half? And then, secondly, in the tolling business, obviously, some tougher comps in the first half of the year, that mid-to-high single-digit organic growth, do you expect to achieve that through the year or any cadence. I know you don’t want to get into too deep in the weeds on 2020 guidance, but any color would be helpful?

Yeah. Let me take the first part of that, which is, yeah, we will be fully ready to go with New York City, basically, we are -- we have already got cameras, we are ready to go, we have got all the supply chain things kind of worked out. It really just comes down to the availability of the site and especially in the beginning part of the weather, so that’s why we sort of caveat.While the goal is 60 and we certainly have the capacity to do 60. There may be months where it’s 50 or and there may be month where it’s more. But the target is 60 and we are fully ready for that. I don’t know if you want to talk to the second part of that.

Yeah. And Dan, on the second part, we think that there is a long tail that we have within Commercial Services in the move to cashless tolling that will give us an opportunity for growth. But I am not going to put out numbers that are talking about what their expected growth is going to be for 2020 just yet. We will certainly do that as we do our Q4 call for you.

Understood. And then going back to the opportunities around safety zone enforcement, David, you gave some color for some other cities. But any update on the level of dialogs you are having, be it with Georgia or other locations given the visibility of this New York City deal?

Yeah. I mean, I think, certainly, New York City creates a bit of a tailwind for other cities or states to consider accelerating their work. I mentioned that we have got several open proposals out inside of Georgia and that’s very consistent with the timing. It usually takes about a year or so once you get legislation passed to start to see the first few.So we anticipate hopefully closing -- hopefully closing some of it at end of the year if not the beginning of next year. Other states might start considering that starting in 2020, but most of the legislative sessions are not going right now. So we will have a better pulse of that as we head into next year.

Got it. And then lastly any, sort of looking on [inaudible] any other new products, apps, technologies working on that you think might move the needle as we look further down the path now over a two-year to three-year timeframe?

No. I mean, I think, we have got a strong portfolio as we sit, but we are always going to be opportunistic. I think that you would anticipate us not doing as many launching of new products, so as you might think about sort of buying new products. So I think that’s -- we will continue to hang our hat on M&A and what we have done there with the success of Pagatelia and looking for more opportunities like that.

Very good. I appreciate the color.

Yeah. Thanks so much.

Thank you. Our next question comes from the line of Mark Palmer with BTIG. Please proceed with your question.

Yes. Good morning. Looking at your net leverage as of September 30th, it was down pretty significantly from the second quarter, which is a function of the company’s ample free cash flow. I mean at this pace the company’s leverage is going to be well below 3 times without significant M&A activity. So I just want to get a sense of where your priorities lie with regard to M&A, I know you have talked about areas such as title and registration, and perhaps, ticket less parking, but where does all that stack up in terms of your priority list?

Yeah. I great question, Mark. So, again, we will continue to leverage our balance sheet to accelerate growth and diversification. So that’s point number one. Point number two is, we look at the world of growth through the lens of adjacencies, which is how do we take what we are already doing and expand that.So when you look at Europe a year and a half ago when we bought EPC, it was to create a bridge into Europe, so that we could offer a very similar product to a very similar set of customers in a geography that was untapped.So that’s a type of ones that we are looking at. So if you look more broadly, we would say, hey, what are the areas that we could think about related to expansion growth and maybe even more importantly diversification.So if you look at our Government Solutions side, you would say things like parking or things like traffic management, and even the world of congestion management, all of those would be pretty adjacent to what we do today and so we would look for opportunities that we could accelerate that, whether that be in the U.S., ideally in the U.S., because we have the leverage and synergy with our current customers.We are also going to continue to accelerate that’s where we need to. So if you look at Europe, Pagatelia was exactly that, where we are going to be accelerating something that we have already made. So if there were other deals that we are able to do that, we would clearly want to go there.But, I think, in general, we are going to be looking things that are highly adjacent within the category of smart transportation that help us either accelerate current bets, keep our current momentum going or potentially taking a swing at diversification of revenue for the long term as well.

Thank you.

Yeah.

Thank you. Our next question comes from the line of Lance Vitanza with Cowen & Company. Please proceed with your question.

Hi. Thanks, guys, congratulations on the quarter. My question is just going back to the Government Service -- Government Solutions side with the incremental margin. I wanted to just try better understand the incremental margin on the $46,000 per year as you install new cameras. So is there anything you can discuss there that would help me quantify what the incremental costs either paid or amortize that we should think about as we model cash flow and EPS from that recurring portion of the revenue stream?

Yeah. There is no amortization costs associated with it, because there is no CapEx on our part for that additional revenue. However, we are continuing to install camera systems across our other client base where we do have CapEx involved in that.We have said that the margins of this business are going to go forward at about the same rate that they are currently once the product sales subside. So once we are just in a recurring -- just on the service revenue.Your margin should be between 35% and 38% on a go forward basis for that business. There is a lot of work that goes into producing that service revenue that does take incremental cost, people and processing time that we have.

Okay. Thanks very much. I appreciate it.

Yeah.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines and have a wonderful day.