Verra Mobility Corporation (VRRM) Q4 2023 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Verra Mobility Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. This call is being recorded on Thursday, February 29, 2024. And I would now like to turn the conference over to Mr. Mark Zindler, Verra Investor Relations. Thank you. Please go ahead.

Thank you. Good afternoon, and welcome to Verra Mobility's Fourth Quarter 2023 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. Management may make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These factors are described in our SEC filings. Please refer to our earnings press release for Verra Mobility's complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, 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. For today's call, I'm going to first provide a high-level discussion on our strong fourth quarter results and key drivers. I'll then move on to a discussion of several key trends that are shaping the smart mobility market before closing with our strategic priorities that will influence our 2024 operating plan and build upon the foundation for the long-term outlook that we outlined at our Investor Day in July of 2022. We delivered fantastic results for the fourth quarter, highlighted by robust revenue and adjusted EBITDA. Fourth quarter revenue of $211 million exceeded our expectations and was primarily driven by strong U.S. travel and tolling trends in our Commercial Services segment. Adjusted EBITDA of $91 million for the fourth quarter was slightly ahead of our forecast despite an approximate $4 million onetime noncash charge, which Craig will elaborate on in his remarks. Our strong results are aligned with 3 macro trends across our operating segments. First, we're seeing strong travel demand by both consumers and businesses, particularly in the U.S. Recent commentary from the major airlines and our RAC partners suggest continued strong demand through at least the first half of 2024. The second macro trend is the continued push for safer roads and communities, which drives the need for investments in automated safety enforcement. We experienced a record year in 2023 with the passage of new automated safety enforcement legislation as lawmakers across the globe recognize the efficacy that automated safety solutions have in reducing traffic fatalities. And lastly, the complexity surrounding university and municipality parking create opportunities for customers to use our software-enabled parking management solutions. Now moving on to our business unit operations. The commercial services team delivered outstanding results driven by strong and durable domestic travel trends and our continued strong performance in the fleet management business. Fourth quarter revenue of $95 million grew 16% over the year -- the prior year quarter and adjusted EBITDA margins of 66% were up about 570 basis points over last year due to the strength in rack tolling and prior year FMC growth investments. As we disclosed in an 8-K and you'll see discussed in our earnings release and Form 10-K, we entered into a business arrangement with plus pass, which fully and finally resolve all litigation and disputes between the parties and pursuant to which we acquired certain assets from plus pass. We accrued $31.5 million for this matter at December 31, 2023, and the resulting payment will be made during the first quarter of 2024. Transitioning back to the business fundamentals. Full year 2023 TSA volume was about 101% of 2019 volume and about 113% of 2022 volume. Track tolling revenue increased 23% over the prior year quarter due to increases in adopted rental agreements, the increased adoption of all-inclusive pricing plans and a durable trend of longer car rentals. Additionally, our FMC business generated 24% growth over the prior year quarter, primarily driven by enrollment of new vehicles and tolling growth from existing customers. The FMC business delivered $63 million of [indiscernible] full year growth and outstanding accomplishment. I'm incredibly proud of our team's execution efforts. Looking ahead, as I've discussed previously, we expect FMC revenue growth to slow to mid- to high single digits, primarily as a result of tougher comps in 2024. I'm also pleased to report the launch of Hertz Italy in the fourth quarter of 2023. We're excited to support our partner in the rollout of their tolling program and Italy in a market with strong and growing cashless tolling trends. Lastly, the secular trends underpinning these business drivers continued conversion to cashless tolling and new toll roads continue to positively impact our business. Cashless or all electronic toll roads reached approximately 67% penetration this year -- this past year and 9 U.S. toll roads were completed in 2023 as well including in the metropolitan Washington, D.C. area, Denver, Colorado and Orange County, California. As we look forward, CS is positioned as a high single-digit grower, driven by strong and durable travel trends, continued growth in cash flow tolling and new toll roads. The transition to all-inclusive pricing plans, segment expansion and a nascent, but attractive connected vehicle opportunity. Moving on to Government Solutions. Recurring service revenue, which reflects 97% of total revenue for the quarter grew 10% over the same period last year. The recurring service revenue growth was driven by program expansion from existing customers and new cities implementing photo enforcement efforts to improve road safety. To this point, outside of New York City, we drove strong revenue growth due to our existing customers' demand to expand their programs. From a profitability standpoint, Government Solutions adjusted EBITDA declined 22% compared to the prior year due to a noncash charge I mentioned earlier and the platform investments that we're making in the business. Looking forward, in addition to the new legislation passed in Florida, Connecticut, Colorado, Washington State and California, Pennsylvania signed new automated enforcement legislation into law in the fourth quarter. The legislation enables new use cases in select cities, including school zone speed management and school bus stop arm safety. It also extends and expands existing use cases for work on speed management and highway speed management. The passage of this new legislation resulted in a significant TAM expansion, which we currently estimate at about $50 million and potentially growing to approximately $150 million annually within the next few years if the legislation allows. Moving forward, we're now focused on the next steps in the procurement process. In Florida, procurement processes are ramping up. And in California, we may see RFPs as early as the second quarter continuing into the second half of the year. In Colorado and Washington State, we have had success expanding existing programs enabled by the new legislation, and we have won several new procurements. Additionally, in the international side of the business, we are experiencing attractive award activity in our expansion efforts in New Zealand as well as expansion in new business awards across several provinces in Canada. In New York City, we are awaiting the issuance of the RFP for the city's automated enforcement renewal contract. The timing of the RFP is uncertain, but we are working hard to position ourselves for a successful outcome more to come as this process moves forward. Now stepping back and looking at the big picture, GS is currently positioned as the mid-single-digit grower on the basis of our existing portfolio, improving net retention rates. We are operating in a very favorable environment to states continue to demonstrate confidence and optimism, enabling various use cases to automate traffic safety and make mobility safer and easier. Moving on to T2 Systems. Fourth quarter total revenue increased 13% over the prior year quarter, driven by strength in software services revenue. Adjusted EBITDA of $5 million was in line with our expectations and reflects year-over-year SaaS and services revenue growth. We expect Q2's growth rate to moderate to mid-single digits in 2024, but over the long term, we continue to see T2 growing at a high single digits driven by the strength and focus on SaaS and the introduction of transactional revenue pricing opportunities. Additionally, hardware, particularly pay stations, will likely become a smaller percentage of revenue as the market transitions away from hardware and continues to move towards software and mobile solutions. Turning to the balance sheet and capital allocation. Over the course of 2023, we fully leased back in our fifth year of being a publicly traded company. I am pleased to report we've lowered net leverage, nearly a full turn over the course of 2023, ending the year at 2.5x adjusted EBITDA. In addition, we purchased $100 million of shares over the course of 2023 and in November, as we previously reported, our Board of Directors authorized a new share repurchase program for $100 million. Overall, 2023 [indiscernible] all-time highs in revenue, adjusted EBITDA and adjusted EPS. We benefited from the record airline passenger traffic with 2023 TSA volume at 101% of 2019 levels. And in Government Solutions, we experienced highly favorable legislative environment resulting in a long-term total addressable market expansion of up to $150 million. Next, I'm pleased to report that we recently published our inaugural corporate responsibility report, which outlines how our core values, purpose, vision and operating system form the foundation of our corporate responsibility strategy. We believe that our technology helps make the world safer and a better place and are committed to being good corporate citizens and supporting the communities in which we and our customers live and work. Now I will turn to our top strategic priorities in 2024. Over the past 2 years, we have implemented the Verra Mobility Operating System, or VMOS, a robust standard business system that drives growth, efficiency and talent development. At the heart of VMOS are 3 strategic pillars: Drive core business outcomes, build the Verra Mobility of the future and create engaging and fulfilling workplace experience. As you'll see on Slide 5, in 2024, we established key objectives for each of these pillars focusing on financial execution of the 2024 annual plan, leverage recent investments to capitalize and expanded TAM and drive operating efficiencies, pursuit of accretive expansion opportunities, accelerating our portfolio model adoption and making Verra Mobility a best place to work. Through execution of our 3 strategic pillars, we are poised to deliver superior long-term value creation for all stakeholders. Next, I'll drill down a layer and focus on key priorities for each of our business segments as described in more detail on Slide 6, 7 and 8. In commercial services, where we benefit from strong secular tailwinds, including increased adoption of cashless tolling, new toll roads and a transition to all-inclusive pricing models, we are focused on growing the core while simultaneously capitalizing our numerous expansion opportunities. Our top priorities include execute the core business while investing in growth continued segment expansion in fleet management and European tolling enforcement and violations and laying the foundation to capitalize on next-generation connected vehicle opportunities. In Government Solutions, where we benefit from an expanding addressable market for automated enforcement, our top priorities are to win our share of new contract awards in Florida, Colorado, Washington, California, Canada and New Zealand position ourselves to retain the New York City at contract renewal and leverage 2023 and 2024 investments in our software platform to enhance our strategic advantages. And finally, in T2 Systems, where we have significant runway for continued growth and profitability in the university segment as well as our focused efforts to penetrate the municipality segment, our focus is on the following priorities: continue to focus on growing our high-margin core permits and enforcement business, successfully launch new products to drive transactional revenue growth and investments in our software platform to further enhance strategic position. These are our top priorities as we execute our strategy in 2024. As I've said previously, this is a great business with a bright future, and I look forward to sharing updates on our progress as we execute our plan in 2024. Craig, I'll turn it over to you to guide us through our financial results and 2024 guidance.

Thanks, David. Good afternoon, and thanks to everyone for joining us on the call. I'll start out today by providing an overview of our fourth quarter and full year 2023 results, followed by a detailed overview of how we're thinking about 2024. Let's turn to Slide 9, which outlines the key financial measures for the consolidated business for the fourth quarter. Total revenue increased approximately 13% year-over-year to about $211 million for the quarter, driven by strong recurring service revenue growth across the company. Recurring service revenue grew 13% over the prior year quarter, driven by strong travel demand in the GS business and recurring service revenue growth outside of New York City and the GS business. At the segment level, commercial services revenue grew 16% year-over-year. Government Solutions service revenue increased by 10% over the prior year and T2 Systems SaaS and services revenue grew 10% over the fourth quarter of last year. Product revenue was $9 million for the quarter, about $6 million of this was from T2 Systems, while $3 million was from Government Solutions, the majority of which were international product sales. From a total profit standpoint, consolidated adjusted EBITDA of $91 million increased by approximately 9% over last year. As David mentioned, we took a $4 million noncash charge in the GS business for inventory obsolescence, largely driven by supply chain optimization. Excluding this charge, year-over-year adjusted EBITDA growth would have been 14% and consolidated margins would have been about 45%, which is consistent with Q4 of 2022. We reported net income of $3 million for the quarter including the $31.5 million plus pass accrual pursuant to our legal setting, which is discussed in more detail in our 10-K. Adjusted EPS which excludes amortization, stock-based compensation and other nonrecurring items, including the plus pass legal settlement, was $0.24 per share for the current quarter compared to $0.25 per share in the fourth quarter of 2022. The primary driver for the reduction compared to the prior year was the $4 million pretax inventory write-down in the GS segment and our increased share count resulting from the exercise warrants and the issuance of earn-out shares in the second and third quarter of this year. As David mentioned earlier, the company is fully leaseback with no remaining warrants or earn-out shares. We delivered $19 million of free cash flow for the quarter, which resulted in meeting our annual guidance of 40% full year conversion rate, but was below our recent quarterly run rate, largely driven by timing. The primary factors driving our performance were $14 million in accounts receivable we expected to collect in December, which shifted to early January and about $4 million of incremental CapEx relative to quarterly trends. When comparing to the fourth quarter of 2022, in that period, we generated a source of working capital, about $16 million higher than normal, driven by increased collections and higher accounts payable balances. Moving forward, I expect to return to an approximate $40 million free cash flow run rate, subject to historical seasonality in our CS business. Turning to Slide 10. We generated about $372 million of adjusted EBITDA on approximately $817 million of revenue for the full year, representing a 45% adjusted EBITDA margin. Additionally, we generated about $149 million of free cash flow or a 40% conversion of adjusted EBITDA, representing $0.93 of free cash flow per share for full year 2023. Moving to Commercial Services on Slide 11. We delivered revenue of about $95 million in the fourth quarter, increasing $13 million or 16% year-over-year. Rack tolling revenue increased 23% or about $12 million over the same period last year, driven by robust travel demand and increased rental volume. Additionally, our FMC business grew 24% or about $3 million year-over-year as our growth initiatives continue to produce the intended results. Fourth quarter adjusted EBITDA in Commercial Services was $62 million, representing 27% year-over-year growth. Adjusted EBITDA margins of about 66%, a 570 basis point increase over the fourth quarter of last year were largely driven by the continued strength in rack tolling and execution of our growth initiatives. For the full year, Commercial Services generated $373 million of revenue or 14% growth over last year. Adjusted EBITDA of $242 million resulted in margins of about 65%, a 100 basis point improvement over the prior year driven by volume-based operating leverage. Let's turn to Slide 12, and we'll take a look at the results of the Government Solutions business driven primarily by growth outside of our largest customer, New York City, service revenue increased by $8 million or 10% over the same period last year to $91 million for the quarter. Product revenue was about $3 million for the quarter and was driven by internationally -- was primarily driven by international programs. Adjusted EBITDA was $24 million for the quarter, representing margins of 26%. The reduction in margins versus the prior year is due to the $4 million inventory obsolescence write-down I previously discussed and increased spending on platform investments and business development efforts. For the full year, Government Solutions generated $358 million of total revenue, a 6% increase over 2022 and adjusted EBITDA was $114 million for the year, effectively flat with the prior year. Let's turn to Slide 13 and take a view of the results of T2 Systems, which is our Parking Solutions business segment. Revenue of $23 million and adjusted EBITDA of approximately $5 million were in line with expectations for the quarter. Software and services sales increased 10% over the prior year quarter and product revenue increased to $6 million for the quarter. This sequential increase is consistent with historical seasonal trends. For the full year, T2 delivered revenue of $86 million or approximately 9% growth over last year and adjusted EBITDA of $15 million. Okay. Let's turn to Slide 14 and discuss the balance sheet and take a closer look at leverage. As you can see, we ended the year with a net debt balance of $918 million, resulting in net leverage of 2.5x at year-end as as well as significant liquidity with our undrawn credit revolver. The primary drivers of the reduced leverage for strong free cash flow and the exercise of warrants, which yielded approximately $160 million in cash proceeds during the second and third quarter of 2023. Through year-end, we paid down approximately $180 million of floating rate term loan debt. Our gross debt balance at year-end stands at about $1.1 billion, of which approximately $700 million is floating rate debt. With a notional hedge of approximately $675 million, we have hedged about 95% of our current floating debt total with a float for fixed rate swap. This hedging instrument fixes the SOFR portion of our Term Loan B at a rate of 5.2% for 2 more years with a monthly option to cancel that began in December of 2023 that we can execute in the event that interest rates move in our favor. In addition, subsequent to the end of the fourth quarter, we completed a successful repricing of our $700 million term loan B. Our offering was materially oversubscribed, and we achieved a 50 basis point reduction in the coupon rate and also eliminated a historical 12 basis point credit spread adjustment to currently. The transaction yields about $16 million in cash savings, net of fees over the remaining life of the debt. On our total debt stack, this lowers our weighted average cost of debt to about 7%. The fourth quarter marks our second closing period and first year-end under our new engagement with Deloitte as our independent accounting firm. The partnership has been excellent and our audit, while compressed from a time line perspective was thorough and well executed. In our 10-K, you will note that we have disclosed several deficiencies regarding IT general control gaps, which aggregate to a material weakness for 2023. It is important to note there were no errors in our current or past financial results as a result of these controlled findings. We've already identified a detailed path to correct these gaps and remediate this material weakness in 2024, and we will update you regularly on our progress. Now let's turn to Slide 15 for a discussion on 2024, which we expect will be another strong year for the company. We expect total revenue in the range of $865 million to $880 million, representing approximately 6% to 8% growth over 2023, consistent with the long-term outlook we shared at our Investor Day in July of 2022. We expect adjusted EBITDA in the range of $395 million to $405 million, representing approximately 8% growth at the midpoint over 2023. This represents an adjusted EBITDA margin of about 46% or about 50 basis points of margin expansion year-over-year. In Commercial Services, we expect high single-digit revenue growth driven by increased TSA volume and product adoption. In addition, we are expecting increased FMC revenue at a growth rate in line with the overall CS business. Consistent with historical trends, first quarter is forecast to be our lowest revenue-generating quarter followed by a sequential -- followed by sequential revenue increases in the second and third quarters, followed then by a decline in the fourth quarter as the summer driving season comes to a close. As a reminder, all revenue in this segment is service revenue. Government Solutions is expected to generate the high end of mid-single-digit total revenue growth driven by the expansion of camera installations with existing customers and new customers awarded in fiscal year 2023. We expect annual product revenue in the GS segment to be comparable to 2023 levels. As we previously discussed, we are anticipating a planned increase in CapEx to support GS long-term growth, which I will elaborate on shortly. Lastly, Parking Solutions revenue is expected to deliver mid-single-digit total revenue growth. The temporary reduction in revenue growth -- this temporary reduction in revenue growth is driven by strong demand in SaaS and services growth offset by a reduction in onetime product sales as the industry transitions to a focus on software and mobile solutions. As David mentioned, over the long term, we expect parking to return to high single-digit growth as we execute our SaaS and transactional revenue growth strategies. For the company as a whole, we are guiding to a 2024 non-GAAP adjusted EPS range of $1.15 to $1.20 per share. Adjusted free cash flow is expected to be in the range of $155 million to $165 million, representing a conversion rate of about 40% of adjusted EBITDA. Adjusted free cash flow excludes the after-tax plus past legal settlement, which was accrued in 2023 and will be paid in 2024. The 40% free cash flow conversion rate is below our long-term guidance due to our plan to spend an incremental $30 million to $35 million in 2024 CapEx. The vast majority of the CapEx will be spent in Government Solutions to enhance and consolidate our software platform and for revenue-generating cameras contingent on winning procurements during the year. We also anticipate spending about $4 million in corporate CapEx to upgrade our current ERP system. Lastly, based on the adjusted EBITDA and free cash flow guidance and excluding capital allocation investments, we expect to reduce net leverage to about 2x by year-end 2024. Other key assumptions supporting our adjusted EPS and adjusted free cash flow outlook can be found on Slide 16. In summary, we generated strong fourth quarter and full year results, and I'm confident in our ability to deliver on our 2024 outlook. We're operating in attractive end markets with strong secular tailwinds, and I believe we're making the right investments to continue to drive growth and margin expansion throughout the company. This concludes our prepared remarks. Thank you for your time and attention today. At this time, I'd like to invite Ina to open the line for any questions. Over to you, Ina.

[Operator Instructions]. And your first question comes from the line of Keith Housum from Northcoast Research.

David, Obviously, as you guys pointed out, last year was a great year for positive legislation movements or traffic enforcement cameras. I think last week, you guys announced the [indiscernible] of Davy win. But are there any other big wins or significant wins you perhaps point us to, to get us a little bit more excited about next year.

Yes. I mean I think David is a great sign of things to come. There are several large ones that are going to be RFP here probably keep in the next, I'd call it, 3 to 6 months. We are positioned very, very well in terms of our -- a lot of our current customers will be doing some of these RFPs as well as some potential new customers. So the thing to remember that these things take a little -- post legislation, they tend to take a while to activate. Now you've heard some in different press releases and things like that. Those are sometimes much smaller deals that we may not even bid on, but we're really excited about the ones that are going to be coming out, probably here again in the next 3 to 5 months.

Great. Appreciate it. And then I noticed there was some movement in the Board of Directors here over the past few weeks. I think Sarah [indiscernible] rolled off, and I know Raj [indiscernible] joined the Board, I guess help me understand a little bit more what Raj brings to the board and kind of complements what you guys are doing?

Yes. I mean, first, I got to thank Sarah. She was an outstanding board member and investor really, wish her the greatest of success in which she's going to be doing. For Raj, as you know, we've -- for a long time, we've been moving our business toward a portfolio company model and the likes of some of the grades like the Danahers and the Fortis of the world, which means we have great businesses connected by a common business system and we -- M&A is one of our capital deployment strategy to create value for shareholders. Raj, with his background, in particular, as a leading M&A in places like Fortive, worked at Danaher as well as DuPont, just brings a real high level of expertise and insight into how we can think about that as we continue to grow our business. So we are so excited to have him because we certainly see M&A as a part of our future, and we think he's going to bring a lot to table.

Great. Appreciate it. If I can just squeeze one more in here. Obviously, the first Hertz Italy announcement is a nice win for you guys there. I guess any -- I know the European tolling is a slow roll. But maybe perhaps any other developments you can point to you that might get us again more excited about what's happening in Europe?

Yes. I mean I think Italy is actually the point of excitement. I don't -- we don't have a sense yet that they probably haven't even installed transponders in a vehicle yet. So we'll get a sense of what the volume is going to be. But Italy is, as we mentioned, this all sort of hinges on going into a cashless environment. And Italy and places like France were very barrier-based and they're starting to make that transition plus our relationship with Telepass. So I think this is a good harbinger of things to come. Probably don't have any specific insights on what that does to accelerate just yet, but I suspect we'll have something [indiscernible] in here to give you some more insight.

And your next question comes from the line of Faiza Alwy from Deutsche Bank.

So first, I wanted to actually pick up up on the M&A comments that you just made. It sounds like that's a big focus the company. And certainly, you have some flexibility now. Could you just refresh us on how you're thinking about M&A, what we should expect in terms of the type of businesses that might fit in with Verra Mobility? Just sort of what the vision is there?

Yes, of course. And thanks for the question. So I mean, as we've always said, we look at, first and foremost, we grew our business in the core businesses. So we have businesses that win and serve our customers there. We're then going to be looking from an M&A perspective, we can attach to that looking at adjacent opportunities. So whether that's a similar product to a similar customer sometimes that's geographic expansion. Sometimes that's buying a competitor potentially -- and then we look for platforms. So the reality is it could be either of those 2. But ultimately, we are -- as we've always said, we are a cash flow buyer. We are not taking bets or risks on noncash flow generating activities, or businesses rather. And so I would say that you would see them as you go back to Investor Day, we sort of articulated these 2 segments. One was connected vehicle as well as urban mobility. And so that's a really broad and exciting category or two categories rather of where we can look in all the markets within there. So we have a great team that's doing a lot of market work so we can understand what markets are best for us to operate in. Certainly, the activity this year has picked up significantly from the tail end of last year and so we're super excited about what that can bring to us. But we're going to continue to maintain a very strict discipline in how we think about the businesses that we want to add to the portfolio.

And I would just add to that, I'd say that the only thing that's really changed on that is that the environment seems to be opening up. right. And again, I don't think, Faiza, Verra Mobility specific comment. But our capital allocation framework that we've talked about in the past is unchanged, right? So that next dollar out the door has to have the highest yield to shareholders against paying down debt, buying back shares and potentially adding to the portfolio. I just think that we're going to be operating in a different environment in 2024 than we've seen in the recent past.

Understood. And then I wanted to talk about government services, the revenue, you mentioned some of the RFPs, including the New York City RFP. So just curious about like what's embedded in the mid-single-digit growth guide? And if you can talk about the quarterly cadence of what you're expecting there? And maybe if I can just throw this one, just give us a bit more context on the charge that you talk [indiscernible].

Yes, sure. So let me start with the first one. So -- and I think I'm going to repeat these slides to make sure I've got it straight here. So the first 1 is what do we think about what's embedded in the mid-single-digit growth guide for government solutions. And it's the very high end of mid-single digits. And I will tell you, if I bifurcate that into services and product. I don't guide on these specifically, but I think this warrants this level of detail. I think products are going to be flat at best. It could be a little bit in either direction, given that while the service revenue is probably at the very low end of the high single digit, when I combine those 2 together, I get the high end of mid-single digit for the overall business, okay? So -- and if you look at the exit rate of growth on services in the fourth quarter for Government Solutions, I expect the rest of the year to look something like that. So the business is certainly not slowing down, if anything, it's speeding up. But I do expect those products to be flat at best, which is bringing down the overall growth rate. So that was the first one. And I'll stay on government a little because I'll go to your third one next. So this was a $4 million noncash charge on supply chain optimization, the easiest way to think about this without mentioning names on the open call here is we did have a supplier who's come in to attempt to be a competitor, right? So some of the inventory that we've had and we've used for years isn't going to be as usable as it once was. And we had to go across our global inventory stocks and make the appropriate accounting adjustment for that. And that really happened here in the back half of 2023. So that's nonrecurring, $4 million noncash and then the final piece is the overall cadence for the company. So let's take GS, set it aside, go back to total Verra Mobility. If you were to take the fourth quarter actuals, 2023 for Verra Mobility and sequentially look at how that's going to pace out, by quarter, it's going to look something like this. The first quarter of 2024, I expect to be down mid-single digits. I expect the second quarter again sequentially now from high single digits. I expect the third quarter to grow again incrementally mid-single digits. And then I expect the fourth quarter to come back low single digits go down. So it's that same trend for the company that we talked about, I would say, a year ago on the call. The difference is we're seeing the summer driving season in the CS business, start a little earlier in the second quarter than we probably did pre-COVID. So that's why the high single-digit growth into the second quarter and then on down from there to the fourth.

Perfect. And then just to clarify quickly, are you expecting and should we expect sort of service revenue growth in Government Solutions to accelerate through the course of the year?

Not really. Not really. My comment was the exit rate that we saw in the back half of the year, it's going to be the growth rate I expect for the total year at 2024. So I have it in front of me. It's a little bit variable, but it's, I would say, relatively even across the year, probably a little bit skewed to the back 3 quarters.

And your next question comes from the line of Daniel Moore from CJS Securities.

Can you hear me?

No. Sorry, Dan. I think we lost the first part of your question. We just heard Commercial Services. Do you mind starting again for us.

Okay. Yes, absolutely. Starting with Comm Services, obviously, TSA volumes now fully recovered relative to pre-pandemic. Maybe just talk about the kind of rank order the drivers that you laid out, David, embedded in the high single-digit growth expectation for this year between toll roads, miles driven, shift to cashless kind of or the biggest drivers there that you see near term.

So yes, Dan, this is Craig. I'll take a shot at that one. So if we want to break down that high single-digit growth in 2024, I would do it in 3 buckets. Roughly half of that growth is coming from secular tailwinds. And those secular tailwinds are toll roads, more toll roads than there were in the past, more cashless roads, we're only at 67% penetration here at the end of 2023. So certainly more to go there. And then, of course, the additional penetration of the all-inclusive product through Hertz and ABG. So again, out of the high single digit, about half of it is in that bucket. About 25% of that high single digit is in TSA growth. We expect that growth as a total year 2024 versus 2023 to be about 1.5% to 2%. And then the remaining 25% of the growth in that high single digit is from our growth initiatives. That's growth in Europe and growth in [indiscernible].

Very helpful. And then just going back to the enabling legislation opportunities in Government Solutions. Any additional color on potential timing? You mentioned Pennsylvania. I think you said could be an initial $50 million TAM. What kind of time frame are you looking at? And what would cause that to increase to the $100 million that you called out in your prepared remarks?

Yes. Sorry, Dan, that might have been slightly the word choice. It was -- that 50 -- that's sort of all the combined legislation that we did across all the states last year. Yes. So -- but regardless, the way to think about timing is for the ones that we did do last year you'll start -- usually, it's about a year, meaning the legislation passed along, gets signed off by the governor and then there's sort of some nuances that are adapted to each state and then RFPs start going. So I think what we'll start to see is more discussion about that in the back half of this year, probably some wins, maybe even as early as Q3 and Q4.

Perfect. And then if you gave it and I missed -- I apologize -- but just the interest expense post the refinancing that's embedded in your embedded in your '24 EPS guide, if we plug in 7%, is that the right way to think about it, Craig?

Probably yes, if I'm thinking about the top of my head, but I'll give you the number, and you can calculate it in is the P&L expense is going to be $80 million. The cash number is going to be $75 million, Dan. The delta between the cash and the P&L number is the amortization of original issue discount. So on the P&L going into adjusted EPS, 80, cash expense will be 75 and that 75 should fit out to your 7%.

And your next question comes from the line of Louie DiPalma from William Blair.

For David, was there a trial for the Hertz Italy tolling service? Or as Hertz Italy starting directly with a commercial implementation?

They're going to do a commercial implementation. Mike, I suspect that they will start -- it wasn't a trial to then decide, they've already decided, but they'll probably start with a pilot, I would almost bet.

Okay. Great. And are you able to provide an update on the status of your other trials in Europe? And is there any potential that those trials move forward to commercial implementation.

Yes. I mean some of them actually have. I think we're starting to see a broader base in Spain, and we continue to work in Ireland. But most of them have not -- I mean Ireland is obviously not a very big country nor a very big tolling opportunity. But we have had some traction there. So what I would say is that we want to get more -- France and Italy are really the ones we want to get that as they move to cashless, that's going to be our bigger opportunity. This starting kind of falling in Italy is a great sign for things to come. It's hard to pace it. So we -- as I mentioned on the earlier question, that's probably a midyear understanding of where that might lead to.

Great. And I think on one of your slides, you mentioned how the cashless tolling penetration in the United States is now 67%, and that's up from, I think, 64% 2 years ago when you showed the slide at your Analyst Day, but what is the different penetration look like in these different countries in Europe that you're targeting? And like, for instance, in Italy, like do you have any estimate on like what the penetration is there.

Yes, Louie, that penetration is U.S., that's the U.S. market, right?

France and Italy are -- they're very low, Louie.

Yes, very low. I mean maybe less than 5%.

Yes. For France, less than 5%.

And I guess, is it still possible for like the Hertz Italy, like commercial implementation to be successful if the penetration is so low. And like what penetration does Europe need to get to for like rental car tolling services to become attractive for the rental car providers to implement?

Yes. I mean we still work in a cash -- we still work in an environment where they can pull over and they can still provide value to the consumers. I think overall, it really depends on where it's kind of where are the cashless lanes, if they're and this is me guessing. I don't know the total structure of Italy off the top of my head. But if they're outside of Rome, then that still can be a good opportunity that I suspect where they're thinking about it. If it's elsewhere, then it won't make as much of a difference. So I don't have a percentage that I could give you to say that's the most valuable or what percent does that ought to be. But I think the key notion is that last year, Print started to convert some cash-based tolling to cashless. The fact that Hertz is launching in Italy means it can solve a problem for them there. And those are the markers of, hey, things are starting to go our way a little bit more. So again, it's not going to be material in the years, but it will be something that we'll be able to update, I think, in the midyear in terms of our progress.

Great. One more question. You -- I think you mentioned how, on the government systems camera side, one of your suppliers is trying to become a competitor. In general, have you seen like increased competitive activity associated with all of the new legislation like across Florida, California and Pennsylvania. And like in general, does like Verra expect to maintain its like roughly 70% market share?

Yes, we certainly do. I mean there's a with the growth opportunity here that other companies are going to try to rally to their case and try to win some, and they will. I mean, especially in smaller cities where we may not be as competitive, but we certainly are in the larger mandates, which -- and so we positioned ourself very well in Florida, very well in California, but we would certainly anticipate to maintain our position in the market, clearly.

And your next question comes from the line of Dave Koning from Baird.

Nice job. Yes, I guess my first question. Guidance calls for about 50 bps of margin expansion, which is a nice expansion here. Is that going to be pretty consistent by segment? Or maybe you can walk through maybe what the puts and takes would be by segment across margins?

Yes. In general, it will be consistent across the segments. I think CS will be on the higher end of that, Q2 really close to that and GS a little bit lower than that, but all segments are anticipated to grow a bit with about 60 basis points being the ceiling.

Yes. Got you. Okay. And then the one other thing. I noticed in the press release that the Plus Pass stuff you're going through, it included that you're going to acquire some assets from them. And I guess maybe you did that in February. But how much revenue might come from that acquisition? And I mean I assume it's pretty small. Maybe you could just walk through maybe how much you paid for it, how much revenue might come from it, et cetera.

Well, we can't -- it's all part of the negotiated settlement as a part of it, but it's mostly IP-related assets that we acquired as a part of it, not any like not a customer asset.

Those are pre-revenue assets.

Yes, that's right. We can say that.

[Operator Instructions]. There are no further questions at this time. That ends our question-and-answer session. Ladies and gentlemen, thank you all for participating. You may all disconnect.

Thank you.

Thank you.