Q1 2022 Verra Mobility Corp Earnings Call
[music].
Please standby.
Good day and welcome to the Verra Mobility Corporation first quarter 2022 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Mark Zingler. Please go ahead.
Thank you good afternoon, and welcome to Verra mobility first quarter 2022 earnings call today, we'll be discussing the results announced in our press release issued after the market close.
With me on the call are David Roberts, Verra mobility, as 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 acquire 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 may nine 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, which are available on the Investor Relations section of our website at IR dot their mobility dot 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 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 Dot verra mobility dot 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 for everyone for joining the call today.
I'll start with general commentary on the business as a whole, including several exciting announcements and then turn to the trends that are influencing our strong results in each of our business segments.
I am very pleased with the great start to the year. It was driven by strong performance across the company and notably commercial services delivered exceptional results driven by significant increase in travel in the U S. Throughout the first quarter.
We experienced healthy bookings in both government and parking both in terms of new contracts and contract renewals and we're seeing healthy increases to our business development pipelines in both of these segments.
Greg will elaborate further in his remarks about our financial performance, but I am very pleased with the results to date.
Based on our first quarter performance and our outlook for the remainder of the year, we expect to generate revenue and adjusted EBITDA at the high end of our guidance range.
I'm also pleased to report that our board of Directors has approved a stock repurchase program, which authorizes the company to repurchase up to $125 million of its class a common stock over the next 12 months.
This share repurchase program follows the completion of the share repurchase program announced in August 2021.
Through which we repurchased approximately $6 8 million shares for $100 million.
Through a privately negotiated transaction representing about 4% of the outstanding shares.
Stock repurchase program demonstrates the confidence that management and the board of directors continued to have in our strong fundamentals and the free cash flow generation of the business.
And the growth opportunities, we see over the long term our strong free cash flow generation provides us with the financial flexibility to invest simultaneously across all aspects of our capital deployment plan, including continuous innovation organic growth strategic M&A and providing returns to shareholders via share repurchase programs like the one just authorized.
At current valuations, we believe the repurchase of our shares represents an attractive investment opportunity to redeploy excess capital and enhance long term shareholder value creation.
Next I will turn it back to our first quarter performance and our business segments in more detail beginning with commercial services. The team had an incredible quarter, taking full advantage of the favorable macro trends shaping the business shaping that business customer.
Customer adoption and billable days continued to increase which are the key variables driving our strong performance in that segment revenue of approximately 73 million for the quarter.
With a 61% increase over last year and compared to pre pandemic levels, we achieved 17% growth over the first quarter of 2019, absolutely a tremendous accomplishment for our commercial services team.
Moreover, I'm very excited to report that we have renewed the hertz tolls and violations contract for a five year term.
On economic terms that are materially consistent with our prior agreement as it relates to anticipated revenue to verra mobility.
This was a great accomplishment driven by our exemplary efforts by our team and our partners at Hertz.
In addition to the Hertz contract renewal, we also signed a contract with her Spain for a new European tolling pilot following the end of the first quarter.
This is the country's first N vehicle toll payment feature for rental cars, demonstrating a strong commitment by hertz to expand toll payment services in Europe with a trusted partner.
The joint pilot, we'll provide more insights and proof points as we continue our European expansion efforts with key partners.
Moving to our government solutions business, we generated solid volume on bookings both in the U S and in our international markets in general the market for photo enforcement appears to be increasing any faster pace, presumably after many municipalities slow down their procurement activities during COVID-19.
We are seeing increases to transaction volume bookings dollar volume and sales pipeline development, all very encouraging leading indicators of growth.
First we renewed a major photo enforcement contract with a top 10 tier one metro customer valued at approximately $7 million over the 24 month contract renewal term is.
Additionally, we won new automated works on speed enforcement contract estimated at $7 million of annual revenue for both contracts. We currently do not have permission to disclose further contract details.
However, these are solid wins for our team and demonstrate how redflex enhance our competitive position through their significant experience and subject matter expertise with operating large statewide mobile speed enforcement programs, including work on efforts on multi agency programs, notably with tender in New South Wales. This experience and subject matter expertise have positioned verra mobility.
Well for a wide variety of mobile programs in our pipeline.
In addition, we had several important U S awards in key markets and in total are expected to deliver about $4 million of recurring annual revenue.
Furthermore, we booked several international awards, which are expected to deliver $4 million of product revenue and roughly $2 million of recurring revenue the latter of which is expected to commence in the second half of 2022.
These wins are additive to the previously announced win in the Netherlands as well as the legislative expansion announced in Washington State So great quarter, all around for the government solutions team.
Next I'll provide commentary on the newly formed parking solutions segment, which was made possible by the acquisition of <unk> systems in December 2021.
We're excited to add the two systems business to our portfolio for the full quarter of results in Q1 for some background <unk> system has been in business for more than 27 years and started as a company focused on permit and parking management solutions for the University market segment.
We have more than 2100 current customers a very diversified portfolio of business from a customer perspective, with an active user community, helping us drive roadmap of innovation.
Thanks to the acquisition activity over the last three to five years Q2 has expanded their solution portfolio to include multi space Playstation meters and up safety and enforcement solutions targeted to municipal customers.
Critical factors for the tissue business, our renewal rates in the University segment portfolio and new logo acquisition in the municipal market segment space.
Moving onto their operational and financial results <unk> had a strong quarter and is performing at or slightly better than our expectations. When we completed the deal both in terms of financial performance as well as from a business development perspective.
Bookings were about $9 million, which was in excess of their plan and they booked several large university renewals valued at over $3 million for the quarter. We saw healthy increases to the sales pipeline and closed 16, new logo customers 12 of which are in the municipality space with our permits and enforcement solution, which is growing market, which is a growing market area.
Q2 portfolio.
While these 12, new logo customers will not drive material revenue in the near term they will support the long term vision of cross selling opportunities with our government solutions business and ultimately serve as the foundation to build the curbside management business area.
Before I conclude I want to again, welcome Craig and John Baldwin to bear to Verra mobility. These two leaders have immediately stepped into their roles and are making meaningful positive impacts to the business. It's great to have them onboard. Many of you have already met Greg and John will be presenting at our Investor Day on Tuesday July 19 at the NASDAQ market site in New York, So it'll be a.
Great opportunity to meet John and all the others members of the executive leadership team. We're really excited about this is that it will be a great opportunity to share our views on the long term strategy and financial outlook, along with our capital allocation strategy. Additional events details are provided in the Investor Relations section of our website.
Now I'll turn it over to Craig to guide us through our financial results.
Thanks, David.
Afternoon, and thanks to everyone for joining us on our call I'd like to provide an overview of our first quarter 2022 results followed by a discussion of 2022 guidance.
Let's start on slide four which outlines revenue and adjusted EBITDA performance for the consolidated business totaled.
Total revenue increased approximately 90% year over year to about $170 million for the quarter driven by strong operating performance across the company and the inclusion of Redflex in tier two systems in our financial results.
Service revenue grew about 80% over the same period last year of which 45% was organic.
This growth was attributable to several factors commercial services revenue grew 61% year over year and government solutions service revenue increased by 66% over the prior year of which 28% was organic growth.
Redflex two systems contributed $17 million and $14 million of service revenue respectively.
Product revenue was $9 2 million for the quarter of which $6 million was from redflex into two systems.
Adjusted EBITDA of $75 million also increased by approximately 87% over last year for the same reasons as revenue.
Moving to commercial services on slide five we delivered revenue of about 73 million, increasing 28 million or 61% year over year.
The improvement was driven by increased demand for travel, particularly in the U S and the resulting increase in demand for rental cars.
As David mentioned rental car companies experienced a significant increase in demand in the first quarter relative to both the fourth quarter of 2021, and the first quarter of last year.
While rental car volumes remain below pre pandemic levels the percentage of cashless tolls toll rates billable days and customer adoption trends are all increasing.
Adjusted EBITDA was $47 million for the quarter, leading to an overall commercial services margin of 63%.
Turning to slide six we'll review the results of the government solutions business.
Driven primarily by the New York City photo enforcement expansion efforts revenue increased by 35 million to $79 million for the first quarter.
Service revenue for the first quarter was $73 million, which grew $29 million or 66% year over year.
Organic service revenue growth, excluding red flags was approximately $12 million or 28%, which was primarily driven by the expansion of schools on speed programs mentioned earlier.
In addition, adjusted EBITDA grew 43% year over year to approximately $25 million per quarter.
On slide seven we've outlined the performance for a newly created parking solutions segment as David mentioned this represents the acquisition of <unk> systems, which closed in December 2021.
Revenue of $18 million and adjusted EBITDA slightly over $3 million was directly in line with our expectations for the quarter.
While we don't typically provide guidance at the segment level I mentioned that we expect Q2 to drive sequential revenue and adjusted EBITDA growth through the balance of the year and anticipate low double digit growth for their topline and bottom line results for the total year.
In addition, we expect <unk> to generate margins in the low 20% range modestly lower than their pre acquisition results due to allocations for costs, including audit and Sox fees D&O insurance and other corporate public company costs that the business would not have incurred prior to our acquisition.
The company reported net income of approximately $10 billion in the quarter compared to a net loss of $8 9 million for the same period of 2021.
Adjusted EPS, which excludes amortization and stock based compensation as well as other noncash and nonrecurring items was <unk> 20 per share for the current quarter compared to <unk> 12 per share in the first quarter of 2021.
The tax provision for the quarter was about $7 million, representing an effective tax rate of 40%.
As a reminder, our tax rate is impacted by permanent differences related to mark to market adjustments for our private placement warrants.
Moving forward I am confident we will demonstrate solid earnings power as we continue to drive growth and scale the business.
Moving to cash generation and working capital management, we generated approximately $31 million in cash flow from operating activities for the first quarter. The use of working capital for the quarter was volume driven and attributable to the strong growth in commercial services.
This growth in commercial services for the quarter was backend weighted which resulted in higher accounts receivable balances at quarter end.
We believe this is purely a timing issue and consequently expect to see sequential increases in cash flow from operations in the second and third quarters with a slight leveling off in the fourth quarter.
Also of importance the receivables balance for New York City was $50 million at the end of the first quarter of $13 million decrease compared to the balance of year end 2021. Additionally, the balances decreased further to less than $40 million as of the end of April .
As you'll note on slide eight we ended the first quarter with a $93 million cash balance and a total debt balance of about $1 2 billion, resulting in net leverage declining to three eight times for the quarter.
As we previously mentioned, we expect to generate strong free cash flow over the balance of the year as underscored by the $125 million share repurchase program authorized by our board of directors as David detailed earlier.
Next I'll move on to our 2022 guidance, which can be found on slide nine.
During our fourth quarter earnings call on April 21, we reiterated guidance as follows.
Total revenue in the range of 694% to $715 million product sales in the range of $59 million to $63 million in adjusted EBITDA in the range of $312 million to $322 million.
Based on our first quarter results and our outlook for the remainder of the year. We're now expecting to deliver results at the high end of the range for both revenue and adjusted EBITDA.
The macro trends that helped drive the outperformance in commercial services significantly exceeded our expectations entering the year.
The trends continue in the second quarter will most likely raise our guidance assuming the rest of the business performs consistently with our plans.
Additionally, we continue to anticipate revenue and adjusted EBITDA to increase sequentially in the second and third quarters, followed by a modest reduction in the fourth quarter, all of which is consistent with historical seasonal trends.
Finally based on our based on our assumption that we will achieve the high end of the adjusted EBITDA guidance and expected free cash flow conversion rate of at least 50% of adjusted EBITDA, We expect to reduce net leverage to approximately three five times by year end 2022. This result includes the stock the stock repurchase program.
Discussed today.
Before we open the call for Q&A I'd like to take a brief moment to address the material weaknesses discussed in her tenure with.
We take these items very seriously and we're committed to a culture of continuous improvement around Sox controls, we are taking the necessary steps as an organization and around a viable path to remediate all material weaknesses by year end potentially sooner.
We'll continue to provide updates throughout the year.
And with that I. Thank you for your attention and I'd like to open the line for questions.
Thank you if you would like to signal with questions. Please press star one.
On your Touchtone telephone if you're joining us today use a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again star one if you would like to signal what question Star one.
And our first question will come from Daniel Moore with CJS Securities.
Thank you. Thank you David Thank you Craig for all the color and taking the questions.
Let me start with the guidance you've just touched on this in near last couple of comments, but yes Q1 on commercial services. As you mentioned was up about 17% or so versus Q1 19.
The guidance that even the high end of the range would.
Indicate a significantly lower or a compression in growth for the remainder of the year I'm. Just wondering if you're just being conservative or if there's anything that youre seeing that would you know.
Cause they'd likely deceleration.
Yes, Dan. Thanks. Thank you for the question, it's a great question and to be completely candid.
We are being a little bit conservative here, but let me let me tell you why so if we look at the way the market played out in the first quarter, we did see a dip in the beginning of the first quarter and a very sharp acceleration in revenue and billable days at the back half of the first quarter and that kind of call it that kind of make.
It makes sense when you look at how <unk> rolled through the population here in order for us to take another look at this and potentially raise guidance forward. We wanted to see a couple of things number one we want to see that exit rate velocity. We saw in Q1 continue into Q2, we're still going through April data now to see if that actually started I think the second piece is.
And the advent of the summer driving season, which is just about the start we wanted to see what the impact of those higher fuel costs could be on the summer driving season. So if we continue to see the short answer is if we continue to see the trends that we saw exiting the first quarter and another couple of months here I do believe we would raise guidance for the balance of the year.
Perfect and then.
Maybe just one more on parking solutions I think you've talked when you acquired them.
Yeah T two about getting that business to double digit growth at least on the services side talk about the cadence you expect over the next year or two and what kind of timeframe would you expect to achieve that sort of growth over time. Thanks.
Well I can tell you from a.
2022 perspective, we do expect to see double digit growth versus where we landed in 2021 and the one thing that we put in the script and hopefully that came out in our comments. This business grows sequentially with <unk> being the lowest quarter in the fourth quarter being the largest quarter. So as you see those actuals come through.
Especially in the second quarter in the third quarter I think that trend.
We'll make a little more sense and David gave some gave some facts that the pipeline for the business is even stronger than we thought when we bought the business. So I think we're pretty good shape, particularly.
Perfect I'll jump back with any follow ups. Thanks.
Thank you.
Thank you. Our next question will come from Keith <unk> with Northcoast research.
Good morning, guys are actually good afternoon, sorry, just following up on the last question there.
In terms of the pipeline and the bookings for <unk> could you kind of walk us through in terms of the revenue recognition for our though is this all you expect to turn that into revenue this year or is that carry out into future years.
Right Yeah, Great question. So when we look at something like bookings right. So when we give our bookings number and I think we said $9 million if I'm not mistaken in script today, that's going to turn into booked revenue, 75% of that will convert within the next quarter and then the balance by the end of the year. So the way we would think about it that bookings.
Our that pipeline number that goes from the sales pipeline into an actual booking will convert within about a year call. It three quarters of that number in the next 90 days.
Great I appreciate that color and then in terms of the.
New York City contract.
Additional I think it was 204 is going to be rolled out I believe in 2022. So it looks like we don't have much that was done in the first quarter can you give us a little bit of a cadence of what we should expect for the rest of the year on that.
Yes sure.
The largest part of this will be installed in the third quarter and it will be the 240 will be materially done by the end of the third quarter. So I'd say a piece of it here in <unk>. The largest majority in Q3, and then no fixed bead installs as we see it today in the fourth quarter of this year.
Great. Thanks, Craig I'll get back in the queue.
Thank you.
Thank you.
As a reminder, if you would like to signal with questions. Please press star one on your Touchtone telephone again that is star one if you would like to signal with questions at this time.
Our next question will come from James Fawcett with Morgan Stanley .
Hi, This is Marilyn for James.
Going back to I think on the opportunity you had mentioned the ability to leverage your existing government relationship.
The accelerated.
Revenues in <unk>. So just curious what the timeline for that is and the magnitude of that opportunity.
Yes. Good question Thats certainly part of the thesis is that we have relationships with larger municipalities and.
Teachers are generally sort of played into smaller markets. So.
That market takes a little bit of time to activate so what I would suspect is we're already in the process of cross selling and sort of what I would call pipeline development I would anticipate that you would start to see some of those things closing at.
Closing once of Cigna more significant size toward the back half of the year.
Okay, and then just as an update on how you're thinking about M&A and what kind of deals you guys may be looking at.
After some of the recent acquisition thank.
Thank you.
Yes, I mean, I think we're gonna obviously, we've always been pretty active in the market. We continue to look across the ecosystem of smart mobility.
We've I think one is anything that we can continue to look at that would bolster.
Our commercial fleet business in terms of others more connected vehicle plays that are relevant to fleets not only today and in the future.
And then obviously continuing to look for the next set of technologies that are going to help cities drive safety into their community. So those are kind of two of the broader categories.
<unk> is always active.
And we will and I think we're going to continue to do so obviously the stock repurchase is something that we can do now as a part of our capital we have a broad based capital one strategy. So.
We're able to not only due to the stock repurchase plan, but still feel confident about the ability to close deals of size. This year.
Opportunity presents itself.
Okay. Thank you.
And our next question will come from Daniel Moore with CJS Securities.
Thank you again.
As far as Hertz is concerned it's great to see obviously, a five year agreement provides a lot of a ton of visibility.
Just do you expect that to be the norm going forward do we sort of go back to longer term contracts in terms of renewals I know that's a crystal ball.
But more importantly, I think you mentioned there was essentially no change from a revenue perspective is that over the five year timeframe, and what kind of growth or fleet growth or overall market growth does that imply.
I'm, just trying to narrow that down a little bit to nail that down a little bit further thanks.
Yeah, I mean, I think I think as you know Dan each of the rental car companies.
<unk> strategies as they look at the types of contracts that are willing to do so hertz doing a five year was.
Just a really great solidification of our relationship. So I don't know that I could use them as any way to speak to any other of the other rental car companies, but.
Obviously, our goal has always been is to maximize the length of contracts to the extent that that makes sense for both us and our partner.
And to the comment was that it's materially the same and it and the <unk>.
So that includes.
And what I would say is that just for the length of the contract, but obviously everything comes down to volume and the as you all know related to how the overall business is performing.
But it does obviously indicate at some point that the fleet, we'd get back to a larger fleet and they've already indicated that they are buying the vehicles that they can to get that fleet up the fall to fulfill.
Perfect No that's helpful. Thanks again.
Yep.
And our next question will come from Keith Howlett with Northcoast research.
Thanks again guys.
Hey, David if you could perhaps provide a little color on the take rate I know you guys have been talking I think the second quarter ROE about that take rate at the rental car customers has been higher than what it's been the past any color you can provide in terms of like <unk>.
<unk> numbers or percentages that we can get.
Grip on the business a little bit more.
Yeah, I don't know that we've ever given out the specific take rate by customer or anything like that so what I would I think what we're seeing is.
A trend.
What I can let me give you color on the trend the trend is that the vehicles are being rented longer than before 2019.
And that is sort of colliding with if you will not a good time for a car rental sorry about that but regardless it.
There's still the opportunity for them to run.
More told as they rent longer and renting in areas that have more coal. So I think that trend right now seems to be holding strong I would certainly anticipate it going through the rest of this year.
And obviously you know as we get into next year, we will have a better sense of load balancing the demand but.
That take rate has been clearly and not only that we've also done a lot of stuff on the court with our customers to increase changing some of the programs more advertising and training at the counter so there's there is a combination its very difficult to pinpoint, which one but clearly the longer rental duration is one of the major drivers of the uptick.
Got it I appreciate it and then just looking at the guidance for the rest of the year in terms of the impact on adjusted EBITDA. It kind of appears that the cadence of hiring will increase as the year goes on as you guys make some targeted investments or is that a correct assumption.
Yes, that's correct.
Okay.
Great. Thank you.
Yes. Thank you.
Thank you that does conclude the question and answer session I will now hand, the conference back over to you for any additional or closing remarks.
Well. Thank you very much we appreciate your support.
Thanks for calling in and if you have any questions. Please reach out to the company we're happy to help thank.
Thank you.
Well, thank you and that does conclude today's conference. We do thank you for your participation have an excellent day.
Okay.