Greetings, and welcome to the Verra Mobility Corporation First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Sajid Daudi Vice President, Investor Relations. Thank you, Sajid. You may begin.

Thank you, and good afternoon, and welcome to Verra Mobility's First Quarter and 2021 Earnings Call. Today, we'll be discussing results announced in our press release issued after the market close. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Tricia Chiodo our Chief Financial Officer. David will begin with prepared remarks, followed by Tricia 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 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 often be identified with words such as we expect, we anticipate or upcoming. These statements reflect our view only as of today, May 17, 2021 and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise any 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-K/A, and quarterly reports Form 10-Q, which are available on the Investor Relations sections of our website at ir@verramobility.com, and on the SEC's website at sec.gov. Finally, during 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 after the market close today, located again on our website at ir@verramobility.com and on the SEC's website at sec.gov. And with that, let me turn the call over to David.

Thanks, Sajid, and thank you to everyone for joining us on the call today. We delivered solid first quarter results that exceeded our expectations as we continued to navigate through a challenging economic environment. However, with more than one in four American vaccinated and improving March and April TSA Traveler Throughput Data, the trends are promising. As the U.S. economy reopens, we see improving metrics across both our business segments. Our Government Solutions business saw solid service revenue contribution driven by the expansion of the New York City school zone speed program in 2020 and our Commercial Services segment showed improved demand at the big three rental car companies. Adjusted EBITDA came in at approximately $40 million or 45% of revenue exceeding our internal expectations. During the quarter, we optimized our debt capital structure to address our short-term capital needs and strengthened our balance sheet to address for future growth including funding the purchase of Redflex Holdings, which has now received shareholder and court approval. We ended the quarter with approximately $250 million in cash and have additional liquidity through our revolver which remains undrawn with clarity on our outstanding New York City receivable, which I will detail shortly; we expect to maintain a healthy cash balance throughout the calendar year. Now I will move into our Q1 results by segment. Our Government Solutions segment delivered revenue of approximately $44 million and generated approximately $18 million in adjusted EBITDA with a healthy margin of roughly 40%. Service revenue grew approximately 15% during the first quarter, driven by solid contribution from our fixed-speed portfolio, partially offset by our variable programs, which remain impacted by the pandemic. Our speed portfolio is now our largest product line representing approximately 49% of Government Solutions service revenue. The most significant contributor to our speed portfolio…

Thanks, David, and good afternoon, everyone. I'll provide a more detailed overview of our first quarter financial performance, and then we'll open up the call for questions. We’ve provided a short earnings deck on our website that provides some insight to the quarter and some reconciliations from our GAAP to any non-GAAP results. Before I get into the quarterly results, I wanted to provide a quick update on the status of restatement that we announced on May 7 and filed with the SEC after market on Friday. On April 12th, the SEC issued a statement regarding the accounting treatment of warrants highlighting the potential accounting implications of certain features of the warrants commonly issued in transactions involving SPACs. As a result of the SEC’s statement, we reevaluated our accounting treatment of our warrants and concluded that our 13.3 million public warrants were properly classified as a component of equity. However, our 6.67 million private placement warrants should be and should have been previously classified as a liability measured at fair market value with the non-cash fair value adjustments recorded in earnings at each reporting period. We filed the restatement on Form 10-K/A reflecting the private placement warrants as a liability from the inception of our business combination in 2018 and reported the market-to-market adjustments to the fair market value of that liability as a gain or loss on the P&L for all subsequent reporting periods. In general, as the stock price increases, the fair value of the warrant liability and the company – as the stock price increases, so does the fair dot value of the warrant liability and the company recognizes additional non-cash loss in its statement operations with the opposite of effect happening when the stock price declines. This can create a lot of volatility in our net…

[Operator Instructions] Your first question comes from Justin Forsythe from Crédit Suisse. Please go ahead.

Hi, David, Trish, Sajid, how are you?

Good.

Good. Hi, Justin.

Great. Well, I wanted to dig into the NYC opportunity a little bit and congratulations on that win. So, I know, we had talked previously about a ceiling of roughly 1500 cameras in NYC meaning coverage of two cameras per school. And just wanted to dig into that. By my math, it seems like, you’ve actually exceeded that number. So was there more coverage per school zone? And is there incremental upside to numbers in that perhaps expansion of the contracting further?

Well, the second half of that, this is the limit of what the legislation allows for. So there won’t be more cameras past the new 720. But the number is higher than what we thought.

Okay.

Yes, actually – I think there actually can be, originally, what they had said was they were going to expand it to certain number of school zones that that number was 750 which were already in a 150.

Sure.

So, then you’d say 600 schools zone from two cameras should get us to about 1200. That being said, sometimes the school zones can expand around the corner or something like that. So, we installed 300 cameras under the legacy contract in 2019. The emergency order that we are currently operating under now actually has 1687 cameras available for installation on it, of which, this order gives us the second – that 1440. So, there is little bit more run.

I see, I see. Got it. But you’ll be – like you said, you’ll be bumping up against the high end of that. So, there is not to be expected any incremental additions on top of this?

Yes. And I think we’ll keep that exactly like we’ve always done it. When we get the order to proceed, we’ll let you guys know.

Sure. Sure. And regarding the economics there, is there anything different on the service revenue side? It sounded like from your guide for product revenue, you are about in line with perhaps that last order was on the product revenue side, but is there anything different on the service revenue side?

Not at all. So, it would be about the same as we’ve been talking about for the total monthly fee, which I think we said that the portfolio in general averages about $3800.

Got it. Got it. Super helpful. And I guess, one brief follow-up, wanted to dig into the London opportunity a little bit. And you mentioned this recent win there where you are providing the overweight shipping program there. And I think you had some operations there and contracts with EPC historically. Just curious if you could provide some color around how that will benefit you perhaps selling other solutions into London, which seems to be one of the kind of leading photo enforcement type of cities probably after New York?

Yes. This is less around photo enforcements. All they do have that in the UK, this is more around sort of like road user charging and some of those types of events. So, to me it’s a great adjacency. We worked with TSL for some time on other initiatives. This was an opportunity to expand, the platform that they had already been using into another area. So, it’s not a huge opportunity, but it is something that just shows kind of the efficacy of both the platform and the relationship that we have with TSL.

Got it. Alright. Thank you both. Appreciated.

Thank you.

Thank you.

Thank you. Your next question comes from Daniel Moore from CJS Securities. Please go ahead.

Yes. Good afternoon, David and Trish. Thanks for taking the question.

Hey, Dan.

Maybe just talk a little bit about, if travel and therefore rental demand continue to recover and based on bookings, certainly things were looking up as we look into the summer and fall. What’s your visibility or confidence that they are actual hub sufficient fleet sizes to get back to 2019 levels, that maybe early 2022 as you described in terms of your outlook.

So, the best – I think they went actually quite public about the fact that they have had some concerns related to new vehicles. And so, certainly the ones that we know about publicly are entering into the sort of – we might call the newly used car market to try to round out their fleets. But I think, they have been relatively clear about that there would be an expectation that the demand will outstrip supply at least for some period of time as we head into the back part of the year. And so, the OEMs and the chip – really the chip manufacturing can get back into a place where they can fill up that demand. Hard to guess, like what the lagging effect of that is, but it’s certainly – they are certainly anticipating some slowness on that aspect.

Got it. But we are talking likely months or quarters as opposed to materially longer than that, understood. And then, just in terms of the – you mentioned the contracts in Ireland, as far as your discussions with RACs, are they kind of ready to start talking again about expansion services into Europe as they get their own ducks in a row here? Any update in terms of the timing and the opportunity around there would be great. Thanks.

Yes. I think it’s going to be – well, not a tale of two cities, but a tale of two countries which is the sort of significant increase in travel-related opportunities here in the U.S. is outpacing Europe, but it continues to grow, but why, because there is still some restrictions inside of Europe. So, I think what, the rental car companies would say is that, they are hopeful that by the end of the year, that the vaccination efforts inside of Europe are pacing with the U.S. and that would allow them to sort of see that travel demand pickup. I know certain countries are definitely trying to target the ability to have more travel come summer. So, I suspect it will be – it will still be reasonably delayed until the vaccination progress makes some more headway inside of Europe.

Very helpful. Last one, and then I’ll leave it. But, I believe you said, Georgia, additional 50 cameras or so. Any product revenue associated with that? Or is it more typical at least agreements?

Yes. I think, they are standard operating procedures that are usual kind of lease agreements to your point.

Great. Thank you.

Thank you. Your next question comes from James Faucette from Morgan Stanley. Please go ahead.

Thank you very much and thanks for the color on at least some of the puts ad takes as you think about the rest of this year and where you can get back to some of the key metrics or at least compared to 2019. I am wondering, if you can help us bracket though where kind of what bottom versus top end would be in – or what would be the drivers in variants going forward? It seems like, I think kind of as you suggested, we should be seeing pretty consistent sequential improvement on as long as the world continues to reopen et cetera. So, just looking for a little incremental clarification there.

So, I mean I fully understand the question. So, if you think about what are the – maybe the - when you say puts and takes, James, you sounded like, what are the things that sort of influence to go up and the influencers to go down like what are things technically.

Yes, exactly.

Yes. So, I think in general, you’ve got a commitment from New York City, which gives us a really strong sort of right down in the middle of the road. It’s going to be very, very consistent with previous practice in terms of the way we think about growth. But we still have variable programs and in particular ones that are in school zones or in particular school zone or crossing guard which is our school bus program. The – right now, we would think that those would be “turn back on” come fall and kids are back in school. But there still could be a – to your easier word a take on that, meaning they can get the way, they could be led, they could maybe hybrid learning situations that could potentially impact. And so, up until we are back to full sort of recovery any invariable program I think will have some level of pressure on it. And so, we are hoping that, by going into next year, that that we are back to a normalized runrate. And it would be the same, obviously, the big driver in Commercial Services is, on the tolling side, which we talked about is hoping to get back to that 2019 levels we believe this year. But the variability of things like the cars available as well as any sort of potential setback in the concept of opening or reclosing your vaccination or anything like that could potentially be a take on that. And then, Europe is one that we are still it’s unclear as to when that’s going to start to hit its critical mass because of the current stance of the countries there is certainly more conservative here in the U.S. and until that gets clarified, I don’t think we’ll have quite the same level of ability to predict what we think it’s going to be.

Got it. Got it. And then, just back on the cash flow and the receivables from New York, et cetera. Do you hear that there is progress being made on that? Can you, anyway you can help us on anticipate what you think the timeframe is, before they get fully up to date on that. I can appreciate there are some different issues at play there. But just trying to get a general sense as to when you get caught up or when they get caught up there?

Yes. And I really have no way of predicting what this city is going to do. What I can tell you is what, what we’ve modeled internally. So, internally, we have modeling that they will continue to add to their receivable on the service revenue side by about $7.3 million a month. And then, we have them starting to pay. So whatever is current, plus about $10 million in backlog starting in, call it, like July. So that we would catch up $60 million from the old receivable and remain current like that from what they were going on. That would still mean at the end of the year they’d still owe us close to $60 million if that were the way that that money flowed. But once again, I –that is just what we are modeling which is probably trying to be conservative. But we would hope that especially on the installation of product that they would be able to catch up quickly. Because I believe that those monies are satisfied for those infrastructure products.

Got it. That’s useful. Thanks guys.

Thank you.

Thank you. Your next question comes from David Koning from Baird. Please go ahead.

Yes. Hey guys. Thanks. I guess, first of all, I was just kind of going through the 10-Q and when we look at the top three RACs, they all got nicely better in terms of growth in Q1 obviously than Q4. But the other revenue, if we take total segment revenue less those top three, that declined I think by more than any quarter of last year was down like 34% year-over-year. So just wondering what happened to the fleet part or other part of that commercial business?

I would know, you are going to be the one reading through the 10-Q. Yes, so, as I led through there, it is that we are still getting really strong revenue from the RACs tolling side, let me pull up the other ones and I can tell you where we are from their viewpoint. And you are looking at quarter-over-quarter, is that right? Are you looking sequential?

I am looking, yes, compared to the first quarter of last year, year-over-year? And I know, enterprise is really good, right? I mean, it actually grew by Q1. I mean, that’s pretty impressive. But the other – of the non-top three was the part that declined by more.

Yes. And we are seeing – we are seeing a bigger decline, like a 20% decline on a quarter-over-quarter basis from the SMCs or violations business, so, in the U.S. declined by - well, this is actually U.S. and Europe declined by about 28%. So we are seeing declines in those. And then, we had a fairly big drop off also 43% in our title and registration business from those comparative timeframe. So, and that’s really volume-driven of what’s moving through those. So, but we are seeing sort of that that rebound from the RAC. And I think what happened in those other businesses, is they got lagging revenue. So, even though, we started to see the shutdown in March of last year it really didn’t impact those businesses, SMCs and titles and registration until later. So, we should see growth in all of these products as we go through into the next quarter.

Gotcha. Okay. So that’s the good news there, if that's just lagging, it just means that we are going to get nice recovery just maybe a quarter or two later than some of the RACs?

Yes.

Yes. Okay.

That's exactly right.

And then, the only other one just in government, obviously, New York is going to progress, both lines will be good nice sequential growth, I would imagine both cameras and service revenue, but then the rest of the business, the non-New York part, the last few quarters has been nicely stable or even growing. I think this quarter maybe was down slightly sequentially, but if - basically, it's been pretty stable. Is that going to start to grow too? I know you talked about Georgia and other things, but you just expect sequential progression?

Yes, you would anticipate one of the major things that, David, drive that as just government decision-making and obviously during the pandemic, there weren't a lot of new awards that were given and not a lot of decisioning around those types of things, as local governments were highly focused on obviously, the pandemic. So, now that you can start to see these counties and cities are starting to kind of pull themselves out, you saw some decisions in Georgia. You would hope to start to see some of those other decisions getting made here. The summer may slow it down a little bit as it would normally would relative to selling, but then you would start to see a pickup in the back part of the year.

Yes. Gotcha. Alright. Thanks, guys.

Yes. Thank you.

Thank you.

Thank you. Your next question comes from Louie DiPalma from William Blair. Please go ahead.

Good afternoon, David, Tricia and Sajid.

Hi.

Hi.

What are your high-level thoughts on the proposed infrastructure bill? And how that could benefit Verra Mobility as a transportation infrastructure provider? Do you think that as a result of this bill, there will be more tolling infrastructure, road user charging systems, and in general, speed cameras that could lead to more demand for your systems?

Well, certainly, so, I think any investment in infrastructure is good for our business, clearly. That as they look to modernize and upgrade that's going to be overall that halo effect should be good. I think in addition, there is also been more conversation. We certainly did a press release a couple weeks ago around sort of a broader view of photo enforcements and having that as a standard play in transportation across the country versus today, where it is a state-by-state decision and thinking perhaps there might be an opportunity for more of a Federal playbook, if you will. And again, that's not pending. That's just conversation at this point. So all that with – but tolling is a proven way to both increase the efficacy of travel time, as well as to raise revenue. And so, the – you would anticipate that over time, there should be more toll roads. And so at the infrastructure bill - again, I am not betting on when that's going to get complete, because I suspect it's going to be quite some time. But that that would still be positive for our business as a whole.

Great. And regarding the pilot that you mentioned in Ireland, is that with a new RAC partner?

It would be with a current customer that has operations in Ireland.

So, would it be with your current European partner or one of your current North American partner?

It would be with a customer that's not already in Europe.

Gotcha.

Yes.

That's it for me. Thanks, everybody.

Yes. Thank you.

Thank you.

Thank you. Your next question comes from Keith Housum from Northcoast Research. Please go ahead.

Good afternoon, guys. I appreciate it and congratulations on New York City. In terms of the remediation efforts you guys have had it put in over the past, however long it's been, could you provide a little bit of context in terms of the impact it had on profitability for how longer part of you sell?

Yes. We had - we had estimated the expenses in relation to remediation to be about $3 million the majority of which had been accrued for by the end of the year. And then, obviously, the settlement of $1.3 million, which was in the current quarter. So, if you think about this is $4.3 million, $4.5 million, that's right around where – what it cost us.

Gotcha. And was that – you said you already accrued about $3 million. Did you accrue for that last year? Or was that this quarter perhaps?

No, the majority of it was accrued for last year. And – but we expended the cash this quarter. But we did a lot of the work this quarter, but it was accrued for at the end of the year.

Got it. Appreciate it. In terms of – and then, the color about the school bus cameras opportunity for 6,500 school bus cameras, I am sorry, I didn't catch all the details there. If you can you perhaps review some of the context there for us?

For the 6,500, so that is multiple counties. So New York State has enabling legislation for school bus cameras. The 6,500 is a collection of multiple counties that have sort of signed on for the ability to go and deploy those cameras. It doesn't mean that they will deploy all 6,500, but they certainly have the – over time they will start to pilot and deploy those over the course of the next several months and probably over the next year or so. We mentioned that in the statement that we are starting to install for Broome County with 200 cameras, and we would hope to anticipate more installs here over the summer as schools start to realign on getting back – kids back in buses and back to school in the fall.

Got it. Appreciate it. So, it really is a hunt – life is a hunt for you guys to go out and get new guys in?

Exactly.

Yes, well said.

Gotcha. Okay. And then, if I can squeeze one more in here. In terms of the commercial business, have you guys noticed an increased penetration rate or adoption rate of the total transponders with movement toward cashless collections?

No. What we are seeing is more – we are seeing more billable days per rental agreement. So you could say that that could be in relation to sort of the take rate of the product or it could be that those rental agreements are lasting longer. So they are hitting more tolls along the side. But, if you think about the RACs being down 40% year-over-year on their volume, we are not down by that much. So we are sort of buoyed up by the fact that we are seeing more billable days per contract, for which we have our product in it. We are seeing more toll usage per contract, all of which is helpful for us.

Great. Thank you.

Thank you. Your next question is a follow-up question from Jason Forsythe from Credit Suisse. Please go ahead. Pardon me.

I apologize, I was on mute. I am sorry. Wanted to jump back in queue. I just had a quick follow-up regarding something you hinted at. But maybe wanted to dive in a little more and it's regarding capacity constraints, potentially at the big three RACs. And it seems like, obviously, there is a lot of pent-up demand in certain RACs, you could even see potentially positive growth. But, how do you see that playing out? And do you think they are prepared to go into this travel season with sufficient capacity? Or do you think that could potentially kind of limit upside going forward this year and then perhaps, kind of catching up in 2022?

Well, certainly, the statements in plenty of articles on major news publications regarding the issue and pictures of people standing in empty lots at airports waiting for a car to get return. So they can get in because there are no vehicles. It's certainly not an issue related to the rental car companies, because they are very quick and consistent orders from OEMs. It's the OEMs and the inability to get their appropriate chips that run the vehicles that they would like to purchase. So, it's a global supply chain issue that is having this downstream effect. My understanding, again from publicly related conversations with people that work for the RACs is that they are looking at going into the used car market that, which they were just in selling, they are now going back to buy. Their buyers in the used car market are probably the more newly used. So, knowing them and given the year that they have before, I suspect they're going to be pretty scrappy in finding way to make sure that they can fill out that demand, which obviously ends up being a good thing for our business, as well.

Got it. Right. And I think you mentioned this, but it sounded like demand and you saw it, and I think they comment on their calls as well that demand have been pretty robust through April. And so, that kind of would be expected to expand into the summer months?

Yes, there is - I think it's coming back ahead of what many of us would have thought.

Yes.

Depending on where we were in vaccinations. But I think the openings and the new guidances from CDC and things like that are all boding well for a lot of people ready to get out of their house.

Got it. Got it. And just a minor housekeeping one here, the $50 million to $55 million in product revenue, I assume that does not include any potential addition from Redflex.

No. No, that's just us.

Alright. Awesome. Thank you very much, guys. Appreciated.

Thank you.

Thank you. Your next question comes from Sameer Kalucha from Deutsche Bank. Please go ahead.

Hi. Thanks for taking my question. What I was wondering is, with the remediation measures that you've put in, or you went through for the NY dot or NYC dot contract, I am wondering if that impacts any economics going forward? That's one. And number two, what kind of mitigation strategies you are putting in to make sure that that you don't run into those issues going forward?

Yes. There have been – so, we don't – there are some operating procedures that we are going to take on going forward. But most of those – we discovered this issue in the end of 2019. So, most of those we already had in play for all of 2020. So really what it is, it's a method by which we install and how we take pictures of the contracts and there are certain sort of procedures that we and the city have agreed to that we’ll go forward – that we'll use on a go-forward basis. But many of those had been in play at the installation site for 2020 or at least we had step function towards them. So I don't think it's going to be a big lift from that perspective.

Great. Thank you. Seems like things are progressing well on other fronts. Congrats. Thank you.

Yes. Thank you.

Thank you.

Thank you. There are no further questions at this time. That does conclude our conference. You may disconnect at any time. Thank you for participating.