Good day, and welcome to the Verra Mobility Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Zindler, Vice President, Investor Relations. Please go ahead sir.

Thank you. Good afternoon and welcome to Verra Mobility's second quarter 2022 earnings call. Today, we'll be discussing the results announced in our press release issued after the market closed. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. During the call, we'll make statements related to our business that may be considered forward-looking, including statements concerning our expected future business and financial performance, our plans to execute on our growth strategy, the benefits of our strategic acquisitions, our ability to maintain existing and acquired new customers, expectations regarding key operational metrics, 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, August 3rd, 2022, 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 and our Form 10-Q for the first quarter 2022, 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 today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, which can be found on our website at ir.verramobility.com and on the SEC's website at sec.gov. With that, I'll turn the call over to David.

Thank you, Mark and thanks everyone for joining us today. We've had a very busy and productive second quarter as well as the first few weeks of the third quarter, including our recent Investor Day. I'll spend a few minutes recapping these events and then turn to the trends that are influencing our strong results in each of our business segments. I'll begin with a brief recap of our Investor Day on July 19. First, we announced an increase to our guidance for total revenue and adjusted EBITDA based upon our performance to date and outlook for the remainder of the year. Following that announcement, we had what we believe was a successful, well-attended Investor Day, which we articulated our long-term growth strategies, provided a deep dive into each of our business segments, discussed our M&A criteria, and concluded with our long-term financial outlook and capital allocation priorities. The event also provided the opportunity to communicate our long-term vision of operating in the broader connected fleet solutions and urban mobility markets and how these emerging opportunities provide upside to the long-term outlook provided by Craig in his presentation. My goal is to leave investors and analysts with one key message, Verra Mobility is a great business with a bright future, and our results and outlook validate that message. If you weren't able to attend Investor Day in person or virtually, I encourage you to review the presentation materials and webcast replay available on our Investor Relations website. Prior to Investor Day, we announced several key developments in commercial services. As you'll recall, when we announced first quarter earnings, we signed a five-year contract extension with Hertz for our US operations, and also signed a contract with Hertz Spain for a new European tolling pilot. Moreover, immediately leading up to Investor…

Thanks David. Good afternoon and thanks to everyone for joining us on the call. First, I'll start off by providing an overview of our second quarter 2022 results, then provide commentary on our current financial guidance, followed by a recap of our Investor Day. Let's turn to slide six, which outlines revenue and adjusted EBITDA performance for the consolidated business. Total revenue increased approximately 46% year-over-year to about $187 million for the quarter, driven by strong operating performance across the company and the inclusion of Redflex and T2 Systems in our financial results. As a reminder, we closed the Redflex and T2 Systems acquisitions in June and December of 2021, respectively. So, Q2 2021 is not a full quarter from Redflex compares. Q2 service revenue grew about 50% over the same period last year, of which 26% was organic growth. This growth was attributable to several factors. First, commercial services revenue grew 28% year-over-year. Second, government solutions service revenue increased by about 50% over the prior year, of which 23% was organic growth. And finally, Redflex and T2 Systems contributed $17 million and $15 million of service revenue, respectively. Product revenue was $13 million for the quarter, of which $6 million was from Redflex and T2 Systems. Finally, from a profit standpoint, consolidated adjusted EBITDA of $89 million increased by approximately 29% over last year. Moving to commercial services on slide seven, we delivered revenue of about $85 million, increasing $18 million or 28% year-over-year. The improvement was driven by continued strong demand for travel, particularly in the U.S. and the resulting increase in demand for rental cars. As David mentioned, while rental car volumes remain below pre-pandemic levels, the percentage of cashless tolls, toll rates, and billable days are all increasing. In addition to continued strength of the rental…

Thank you. [Operator Instructions] We'll go ahead and take our first question from James Faucette with Morgan Stanley. Please go ahead.

Hey, guys. This is Jeff Goldstein on for James. Just thinking about your revenue growth by segment in the back half, should those growth rates generally line up with your Investor Day guidance around long-term growth maybe if we strip out the New York City benefit to the government business. I'm just trying to understand if there's kind of other factors in play right now that would cause you to under or over-perform those long-term targets right now.

Yes, there's a couple of things. When you look at -- so this is Craig, by the way, thanks for the question. When you look at Verra Mobility, you can't really look at the back half and compare it to an annual target. For the reason is that our -- each of our quarters are so different. So, the business grows sequentially with Q1 being the lowest quarter, they'll grow sequentially to Q2. 3Q is the highest quarter, and then fourth quarter is the second lowest quarter. So, you can't really take the highest quarter and second lowest quarter and compare it to an annual target. What I would say is as we look at the back half of the year, the rental car business continues to surprise us with how strong that's been. One way to think about that is to kind of take a look at the TSA throughput. If you look at how the TSA throughput has behaved in the first half versus the second half of the year, maybe even better, let's drill in on the first to the second quarter, back pre-pandemic in 2019, that was a 17% grower from Q1 to Q2 of 2019. As we come into 2022, that same metric is a 27% grower. So, as I look at the back half of the year, I haven't brought in all that favorability yet because I want to look for another 60 days and see if it actually comes through the top line. So, what I would say is we have -- we do have growth in the back half of the year. What we have in there from a total revenue standpoint today grows in the third quarter, again, shrinks in the fourth quarter as it has historically. But we'll probably take another look at guidance if the rental car strength continues to be as strong as it was in the second quarter.

Got it. Okay. That was all very helpful. And then as my follow-up, you talked a lot about at your Investor Day, the bus-stop camera opportunity. So maybe you can just remind us of how much revenue you're currently doing there and how you view the pipeline. Is that a six to 12-month opportunity to move the needle or more like a four to five-year opportunity?

The -- and you said bus stop, just to clarify, we're talking about CrossingGuard, which is our school bus stop arm. Is that -- we're talking the same thing?

Yes.

Okay, great. Okay. Yes, so that's a business that's really been in recovery because as you can imagine, during the pandemic, it effectively went to zero because of the school isn't around and things like that. So, it's actually growing right now. And I would anticipate that, that -- the business is performing well. We're continuing to see opportunities, especially kind of up in the Northeast category. So, I think it's not a large, large business for us. So, what I would say is that over the next two to four years is probably where we'll see the optimization of that business.

Okay, fair enough. Thanks, guys.

Yes.

Yes. Thank you.

Thank you. We'll take our next question from Dan Moore with CJS Securities. Please go ahead.

This is Stefanos Crist calling in for Dan. Thanks for taking our questions.

Sure.

Could you just talk a little bit more about T2, maybe about the integration so far to date and maybe some updates on cross-selling opportunities you expect to achieve?

Yes. So, as a reminder, the integration for T2 is actually very, very light. We look at it as a portfolio company, not something that's going to be sort of brought into any of our other businesses at this time. And so outside of some of the costs that we burdened onto the business that Craig mentioned in his remarks related to SOX and sort of public company costs. It's continuing to grow. We're seeing a good recovery of that business coming again, out of the it was a business that was also pretty severely impacted related to the pandemic, and so we're seeing strong recovery. What I would say right now is that large parking opportunities are not necessarily super quick in the manifestation of those. So, they're building a pipeline now and there's a lot of collaboration between the businesses to help generate those opportunities. We don't have a marker as of yet that we can point to that, that was the one. So, we're still in the early phases of that.

Got it. Thanks. And then just in terms of your RAC customers, what are you hearing about their willingness and just ability to grow their fleets looking out to 2023, 2024 and then beyond?

Yes. I mean I think the best -- we try to not comment on those companies in terms of their specific plans because we want to -- two of them are publicly traded. There's plenty of information available to them. What I would say is that they're being super responsive to the demand, and they are continuing to be very active and re-fleeting. They are as of yet, not back up to 2019 levels. That has not impacted our business at all, but I would say the trajectory is to continue to get to align those assets to the demand as quickly as possible.

Perfect. Thank you so much.

Yes. Thank you.

Thank you.

Thank you. We'll take our next question from Faiza Alwy with Deutsche Bank. Please go ahead.

Yes. Hi. Thank you. I just wanted to touch on government solutions. Could you just remind us of the puts and takes around service and product revenues, at least for the rest of this year. And what the margin implications of that might be as we look at the back half for Government Solutions?

Yes, sure. So, this is Craig. I'll try to take that one piece by piece. So, we talked about installations or fixed speed installations for the business being 265 units for the year. And let me -- and this is the product piece of government solutions, the legacy business. I'll go into the international piece in a second. So, let me pace that out for you. On that $265 million, we've done roughly one half of those in the first half of the year. The remaining half are going to be done in the third quarter. So, as you look ahead to the third quarter for government solutions, you're going to see another strong quarter of product sales. When you think about that from a margin standpoint, the core business is at about -- it's in that mid to high 30s. And I think it will be there for the third quarter pretty flat into the fourth quarter as well, maybe a small pullback in the fourth quarter. The product sales that I just talked about are slightly incremental from a margin standpoint, but not materially, not enough to move the entire segment by more than one point. Does that help, Faiza, with some endpoint business.

Yes, yes. That does help. And then just as it relates to T2 margins, I know you talked about it being mostly allocation. Like are we -- is this sort of I know this quarter is a little bit different because you didn't get the full revenue. But how should we think about margins for T2 sort of exiting the year? Like are you able to offset some of these costs? I mean I imagine it should benefit -- if it's just allocation, it should benefit some of the other segments because you're allocating lower cost to those segments then. Maybe just walk us through like how we should think about T2 margins from here?

Yes. Yes, I think I know -- Craig, again, I think I know where you're going with that one. So, when we think about the T2 business on a fully allocated basis, including the cost that we talk about, you think about something around 20%. Especially in the back half of the year, and I think that's the number you're looking for, for the exit rate of 2022. This business is a sequential grower, and to the point where our revenue in the fourth quarter is 75% more than it was in the first quarter. And the composition of that revenue starts to favor the higher-margin products. And this is a trend that's held for a few decades. It starts to favor the higher-margin things that are -- that we sell in the bag in the back half of the year. So, if you look at the revenue trajectory here in the first half of the year, this is still on plan. We expect the back half of the year to be materially higher it may be the high teens, very high teens or around 20%, but we expect to exit the year at 20% for T2.

Great. Thank you so much.

You bet.

Thank you. We'll take our next question from Louie DiPalma with William Blair. Please go ahead.

David, Craig and Mark, good evening.

Hi, Louie.

Hi, Louie.

Rental car providers, and David, you just mentioned two of them are publicly-traded, they have reported record revenue and this record revenue is partially as a result of the travel rebound and also partially a result of price increases. I was wondering, is there an opportunity for the $5.95, like, daily fee that's charged to use your tolling service, is there the chance that could be like increased in the future?

I mean, potentially. What I would say though is that the pricing of what goes to the end renter is completely 100% set by our customers. We are not -- we don't provide any influence on that whatsoever. So, if they believe that, that is a better -- if the value proposition and sort of match to the cost and everything else, I think they would make those types of decisions. They certainly have made increases in the past. But I would just say that we're not necessarily the one to drive those decisions.

Great. And when you say it's been increased in the past, has it been increased in the past 12 months such that has any of your really strong growth over the past year from rental car tolling, has it come from like price increases? Or has that come from the factors that you referenced at the Analyst Day in terms of the volumes and the shift to electronic tolling?

Yes, the answer -- the direct answer is no. And just as a reminder, that pricing is very geographically dependent and it's also product dependent, meaning if it's an all-inclusive in the Northeast, it's significantly different than an all-inclusive in Florida. So, it really is very dependent upon the -- both the product, the brand, the location. And so there isn't -- as an example, there's not one -- you don't just do a $1 increase across all products. That's not how the business works for our customers.

Right. That makes sense. And another question, David. Thanks for that. Two days ago, the New York City school zone speed camera program, went into effect 24/7. Does this have any impact on your contract for that program? Or should we expect there to be any impact in the future associated with this?

Yes. I mean we're -- we'll be the one that's operating the cameras 24/7. So, it wasn't comprehended in the initial contract. So, we're just going through the process to make sure that it gets appropriately papered.

Great. So, would that have, I guess, a positive impact? And is that positive impact already in your guidance?

It would have -- we don't have the pricing yet. So I honestly don't know, and we haven't -- as David said, we haven't finalized the contract. So, I'm assuming it would have a positive impact. It's not in there today.

Great. That is all I have. Thank you, guys.

Thank you, Louie.

Thanks Louie.

Thank you. [Operator Instructions] We'll here next from Keith Housum with North Coast Research.

Good afternoon, guys. I appreciate the opportunity. Craig, can you walk us through the ASR and you're kind of like being in terms of the timing of that -- the life in the third quarter. And if we understand it right, you've got 2.7 million shares that came out of diluted share count in the second quarter, does the balance of that come out in the third quarter?

Yes. Yes. So, the short answer is yes. So, let me give you the top of the waves here. Again, Keith, as it -- as I read what I prepared today, maybe I gave a little too much information, it wasn't super clear. So, the ASR was $50 million. And the way that an ASR works is they're funded upfront at 80% of the value and then the remaining 20% settles later, right? So, what was captured in the second quarter was the 80% of the value. So, it was actually was a $50 million check that the company grow, but it was $40 million worth of shares retired. And when our Q comes out, you'll see that we did that at $14.60. So that's the 2.7 million shares. There is another piece that will be trued up here for the remaining 20% or another $10 million in the third quarter. That's the ASR. Is that one clear, Keith?

Yes. And that $10 million that average value of the shares from the debt you guys entered into whenever concludes on some maybe it's 60 or 90 days. Is that a fair assumption?

You got it, that's exactly correct.

Okay, cool. Appreciate it. Just as a follow-up. In the commercial services segment, you've got obviously the three segments, the toll management, the violations and title registration business. Can you kind of unpack how each one of those three verticals did?

In terms of the quarter?

Yes, I mean, obviously, I'm assuming total management was obviously the biggest driver of the growth here based on the size and success, but how the violations and total registration do?

We don't have -- we don't give details at the product segment level within each of our business units. But obviously, the principal driver of our growth has been the commercial services on the RAC tolling, but the other businesses are continuing to perform as well.

Great. Fair enough. Appreciated it. Thank you.

Thank you. And this time, there appears to be no additional questions in the queue. That does conclude today's conference. We did thank you all for your participation and you may now disconnect.