Q3 2022 Verra Mobility Corp Earnings Call
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Good day and welcome to the Verra mobility third quarter 2022 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Mark Sadler Vice President Investor Relations. Please go ahead Sir.
Thank you good afternoon, and welcome to Verra mobility is third 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, Dave.
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 expectation.
Regarding key operational metrics and other statements regarding our plans and prospects forward looking statements may often be identified words, such as we expect we anticipate or upcoming these.
These statements reflect our view only as of today November <unk> 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.
We're 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.
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-Qs for the first and second quarters of 2022, which are available on the Investor Relations Investor Relations section of our website at IR Dot verra mobility.
Dot 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 dot their mobility dot com and on the SEC's website at SEC Gov with that.
Now I'll turn the call over to David.
Thank you Mark and thanks for everyone for joining the call today before I discuss our results I'd like to take a minute to acknowledge our employees customers and vendors in Florida. The impacts of Hurricane Ian were significant and I hope that you and your loved ones are safe and moving towards a level of normalcy during these challenging times.
For today's call I'm going to focus primarily on our third quarter results, but first I'd like to start with a brief discussion to contextualize. These results by looking at the trends driving the two broader smart mobility markets in which we operate.
We delivered an outstanding quarter highlighted by strong revenue and adjusted EBITDA growth and solid free cash flow generation.
These results are underpinned by two key macro trends across our operating segments continued travel demand by consumers and businesses and strong and growing interest in automated enforcement for road safety.
To better understand the significance of these macro trends I'll take a minute to discuss the two broader markets that we serve connected fleet solutions in urban mobility we.
We provided a thorough discussion of these market at our Investor day in July and it's important to understand how our business unit support these markets.
The connected fleet end markets consistent technology solutions to improve process efficiency and optimize vehicle asset utilization, our commercial services business unit serves customers in the connected fleet market with three primary solutions tolling management violation management and title and registration services.
We expect a 7 billion dollar market to grow to $27 billion by 2030, driven by growing vehicle fleet sizes, increasing complexity of the services and new use cases focused on vehicle connectivity.
Our government solutions and parking solutions business units reside in the broader urban mobility market, which is primarily focused on safety sustainability and increasing efficiency for use of existing infrastructure and cities of all sizes.
This is an $18 billion market the industry analysts expect to double over the next 10 years, driven by road safety initiatives and growing city population, necessitating congestion and parking solutions.
With that as a background I'll move on to our results. We had an outstanding third quarter highlighted by strong revenue growth.
Growth in margins and solid free cash flow generation.
Factors influencing our performance are largely unchanged from recent quarters.
Starting with commercial services. The team again delivered strong performance revenue of approximately $86 million for the quarter represented an 11% increase over the same period last year and compared to pre pandemic levels. We also achieved 11% growth over the third quarter of 2019.
The key drivers have been consistent throughout the year.
Travel demand remains strong despite rising inflation and fuel prices.
As we have discussed previously TSA throughput has been tracking upward throughout 2020 to first quarter 2022 was a little less than 85% of 2019 levels second quarter was approximately 90% of 2019 and third quarter came in slightly above 90% of 2019 red.
Revenue is far exceeding 2019 due to the growth in cashless tolling and increased number of toll roads in the U S and the longer duration of rentals, which drives more billable days increased toll margin revenue.
Moving to our government solutions business, we generated a total of $90 million, representing eight representing growth of 6% over the same period last year. In addition, we all but completed a 265 camera install commitment for New York City I would like to thank both our customer and the verra mobility operations teams for making this happen.
A testament to your dedication and steadfast results enrich lives by making mobility safer and easier.
I'm also pleased to report that we were awarded a pilot project for a 12 month automated works on speed enforcement program in Connecticut. The revenue contribution from the pilot program is not material, but serves as a potential steppingstone for permanent legislation and future long term full scale works on speed programs in Connecticut.
Moreover, we recently executed a contract modification with New York City for the transition to 24 by seven camera operations and we expect these changes in operations to contribute to 2023 revenue growth.
Finally, <unk> systems delivered $22 million of revenue for the quarter in line with our internal expectations and on track to deliver double digit growth over full year 'twenty one results.
In summary, Q3 was another strong quarter of growth in free cash flow generation the secular trends driving our performance are durable and we continued to experience strong operating momentum in each of our business segments now I'll turn it over to Greg to guide us through our financial results.
Thanks, David and good afternoon, and thanks to everyone for joining us on the call I'll start out today by providing an overview of our third third quarter 2022 results followed by some commentary on our current financial guidance and I'll conclude with a brief discussion and expected free cash flow generation and the resulting net leverage target to close out 2022.
Let's turn to slide four which outlines revenue and adjusted EBITDA performance for the consolidated business.
Total revenue increased approximately 22% year over year to about $198 million for the quarter driven by strong operating performance across the company and the inclusion of <unk> systems in our financial results.
On an organic basis, we grew more than 8% year over year.
Q3 service revenue grew about 27% over the same period last year of which 15% was organic growth.
This growth was attributable to several factors first commercial services grew 11% year over year second government solutions service revenue increased by about 20% over the prior year and finally T. Two systems contributed about $17 million of service revenue.
Product revenue was $17 million for the quarter of which about $5 million was from <unk> systems.
Finally from a profit standpoint, consolidated adjusted EBITDA of $91 million increased by approximately 11% year over year.
Moving to commercial services on slide five we delivered revenue of about $86 million increased $9 million or 11% year over year. This improvement was driven by continued strong demand for travel, particularly in the U S as well as the resulting increase in demand for rental cars as David mentioned, while rental car volume remains bill.
Low pre pandemic levels, the percentage of cashless tolls and toll counts are increased.
In addition to the continued strength of the rental car market, our ongoing growth initiatives within the commercial fleet space drove an approximate 15% increase in totally related revenue versus prior year levels.
Adjusted EBITDA in commercial services was $56 million, representing 10% year over year growth adjusted EBITDA margins of about 65% continued to benefit from volume leverage which is consistent with seasonal trends.
Let's turn to slide six and we will take a look at the results of the government solutions business.
Driven primarily by our New York City photo enforcement expansion efforts total revenue increased by $5 million or 6% over the same period last year to $90 million for the third quarter.
Service revenue for the third quarter was $77 million, which grew $13 million or about 20% year over year.
Product revenue declined $8 million to about $12 million for the quarter, which is in line with expectations as we effectively completed the New York City School zone speed installation program.
Going forward, we expect the government solutions quarterly product revenue run rate to be approximately $3 million per quarter, and primarily driven by international programs adjust.
Adjusted EBITDA was roughly flat with prior year at $30 million for the quarter adjusted EBITDA margins of 34% were in line with expectations.
Let's turn to slide seven and we'll take a look at the results of <unk> systems, which is our parking solutions business segment.
Revenues of $22 million and adjusted EBITDA of approximately $4 million were in line with our expectations for the quarter.
As I mentioned in our previous discussions we expect Keytruda drive sequential revenue and adjusted EBITDA growth through the balance of the year and anticipate double digit revenue growth versus 2021 levels.
In addition, we expect <unk> to generate margins in the low to mid 20% range in the fourth quarter.
Overall total verra mobility reported net income of approximately $25 million in the quarter, which compares to net income of $27 million in the same period in the prior year.
Adjusted EPS, which excludes amortization stock based compensation and other nonrecurring items was 27 per share for the current quarter compared to <unk> 26 per share in the third quarter of 2021.
The tax provision for the quarter was about $8 million, representing an effective tax rate of approximately 25%.
$190 million is floating rate debt.
At the end of June we locked in LIBOR at about 285% and in the beginning of January of 2023, when we next lock in LIBOR will evaluate locking it in at either a one month three months or six months.
Next I'd like to give you a brief update on the share repurchase program. The Companys Board of directors authorized in May 2022 for up to an aggregate amount of $125 million over a 12 month period.
As we previously disclosed we repurchased over 3 million shares in the second quarter through an accelerated share repurchase program for a total purchase price of $50 million.
In addition, we've repurchased about 446000 shares through open market transactions through September 30 for a total purchase price of about $7 million.
The company elected to discontinue open market repurchases during the third quarter of 2022 in favor of an ASR for the remaining availability under the share repurchase program.
During the third quarter of 2022, we repurchased three 3 million shares for $68 million through the second ASR program.
The settlement is expected to occur during the fourth quarter of 2022 at which time a value.
<unk> weighted average price calculation over the term of the ASR agreement will be used to determine the final number and average price of shares repurchased and retired.
At this time, we expect the final outcome of the full $125 million share buyback program to result in the repurchase of approximately 8 million shares.
As I discussed earlier, we ended the quarter with net leverage of three five times trailing 12 months adjusted EBITDA.
This is flat versus the second quarter due to the decision to execute and fund the second ASR in the third quarter.
Yes.
Next let's take a look at our current guidance on page nine.
During our second quarter call on August 3rd following an increase in guidance at our July 19th Investor Day, We reiterated guidance as follows total revenue in the range of $720 million to $740 million.
And adjusted EBITDA in the range of $325 million to $335 million.
Based on our year to date results and our outlook for the remainder of the year. We're now expecting to deliver results at the higher end of this range for revenue and adjusted EBITDA.
Our revenue guidance incorporates a modest reduction in <unk> totaling we typically experienced in the fourth quarter, which is consistent with historical trends.
We have also factored in an approximate $3 million impact from toll roads suspensions across 13 counties in Florida over an approximate 18 day period following hurricane Ian.
In addition, we have also factored in an approximate $2 million headwind related to foreign exchange currency exposure in government solutions, primarily related to the depreciation of the Australian dollar.
These revenue impacts are partially offset by sequential service revenue growth in government solutions, primarily driven by the New York City School zone speed camera installations and expansion of photo enforcement operation outside of New York City.
In addition, our parking solutions business is expected to generate sequential revenue growth as the fourth quarter is typically the strongest revenue generating quarter in that business due to university spending cycles.
Finally based on achieving the higher the higher end of the adjusted EBIT guidance range and an expected free cash flow conversion rate of about 50% of adjusted EBIT for the year, we expect net leverage to be three four times or less by year end 2022.
The expected net leverage target reflects a reduction of nearly a full turn of net leverage over the past year, including the completion of the $125 million stock repurchase program. We feel this performance highlights strong free cash flow generation capabilities of our company.
This concludes our prepared remarks. Thank you for your time and attention today at this time I would like to invite Jenny to open the line for questions Jennifer over to you.
Thank you.
I'd like to ask a question. Please signal by pressing star one on your telephone keypad and if you're using a speaker phone. Please make sure. Your mute function is turned off to like a signal to reach our equipment again press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Well go to our first question from Daniel Moore with CJS Securities.
Thank you good afternoon, thanks for taking the questions.
I'll start with it sounds like <unk>.
In terms of consumer behavior on the commercial services side Contra.
Contract lengths in terms continue to be elongated relative to pre pandemic levels are you seeing any.
A normalization back towards historic levels or is that something that appears to be more sticky at this point.
Yes, I think.
I think we're still sort of absorbing generally the same trend.
It's certainly not gone back to what we had seen previously in 2019.
So far so good in terms of that trend remaining durable through the end of the year.
Got it really helpful. And then David you gave great color.
About.
The kind of the macro strategy.
Just talk about the.
Some of the dialogues that you're having regarding capabilities in terms of congestion pricing dynamic parking pricing solutions with some of your municipal customers as you integrate <unk>.
Obviously, you can't name names, but it's.
Just seeing more organic opportunity, there and whats the timeframe to kind of monetize that.
Yes, I think.
Just on the part of your question on congestion pricing. We don't at this point, we don't have a solution related to that we continue to monitor that segment and feel like it's a it could be but.
As you recall, New York was the first to implement well sorry, the first to adopt congestion pricing is yet to be implemented in the United States and so far as I understand it won't be until 2024. So we're kind of just watching from the sidelines and we'll jump in when appropriate.
What we have been doing is seeing.
We are excited about the Q2 momentum as we head towards the back end of the year, we're sort of starting to observe some of the competitive trends are the larger municipalities Q2, historically is operating very small urban environments and so we're looking at the sort of upper level ones and.
So I would anticipate to start to see that happening probably based upon RFP cycles for those probably in the second half of next year would be the time when we'd start to see some real pull through.
Got it.
Yes.
Is there how should we think about the incremental revenue opportunity in 2003.
Transitioning to 2000 square of monitoring in Myc is it meaningful to your growth rate.
Yes, I think so Dan this is Craig thanks for the question. So I do think it's meaningful to size that.
We sized that at approximately 5% of total New York City revenue. So if you were to look at total New York City revenue for 2022, or if you were to take 2021 and growth at our growth rate into 2022, it should be about a 5% at around that on a total year basis.
Great and then last for me I appreciate the color on the product.
Revenue in government T twos product revenue has that been lumpy historically like your like Yours has I think you said it was $5 million in the quarter.
Just what's kind of typical pattern, how should we kind of think about that going forward. Thanks.
Yes, there's a.
A little bit of Lumpiness to it but I think that the overarching trend is it really its a sequential grower right. So if you were to look at total product sales for just about any period that we've seen both under our ownership period and before it tends to be the lowest in the first quarter to grow sequentially with fourth quarter.
<unk> being the highest number and really as I said in the prepared comments, Dan that really points back to the university, but the EDI universities buying cycle, which.
Has been our largest channel for those products.
Very good I'll jump back in queue with any follow ups. Thank you.
Thank you.
And we'll go next to a question from.
Thanks Alan.
Okay, So Ali with Deutsche Bank.
Yes, hi, thank you so much.
I guess Oh.
Ask a big picture question, because I'm guessing you're in the midst of your planning process for 2023.
And during Investor Day, you laid out some long term targets.
I was hoping you could give us some early read on how where we should ground ourselves.
As we look ahead to 2023 is there anything.
Should we expect growth sort of in line with those long term targets or is there anything.
Do you think we should we should keep in mind.
Yeah Faiza. This is Craig thanks for the question I understand exactly where you're going and I think the first part of your question kind of is the answer is we're really in the middle of that right now.
So we'd like to come back to you on our next call, we'll certainly have a.
Better view of that.
So unfortunately, we're going to have to we're going to have to punt that one to the next call we'll be happy to walk walk through it at that time.
Okay understood.
Is there anything you can share I know youre doing the share repurchase program.
Maybe can you share more about your capital allocation philosophy entering 2023.
Maybe how we should think about interest expense in a rising rate environment and just your approach a little bit more color around how you guys think about capital allocation.
Yes sure sure. So there is always three legs to the stool at least from the verra mobility standpoint, and thats going to be any kind of accretive M&A right and I think we can all understand what the market may look like there, but those opportunities tend to be a little bit idiosyncratic. So they come when they come.
The other one is share repurchases. So just to make sure in my prepared remarks case. It wasn't it wasn't clear the $125 million authorization that we have for the board of directors will be effectively complete here in the fourth quarter. So that should be about 8 million shares coming back.
Kind of year over year, and then the third leg of the stool.
Is is potential debt pay down and when we were at Investor Day, I think it's fair to say that the debt pay down was probably a little bit lower on the list, but if you'd see the news that came out today.
And where that may be heading that's something that we'll look at on a quarterly basis.
As we close the year here I don't think were going to make a big move I think we're going to let our what our cash beyond the balance sheet that should be a cash very similar to what you've seen with that we've closed with in the second quarter into third quarter.
But we continue to evaluate buybacks on an intrinsic value discounted intrinsic value.
On a monthly basis, and we continue with our our floating debt is payable dollar for dollar at our option. So it's real easy to kind of toggle between those two and what the best use of capital is so that will continue to be a dynamic decision for the business going forward.
Alright, great.
At this point.
I would say its very positive I mean, I think overall, we're seeing a recognition of the benefit of having those types of the types of programs that we offer.
The pipeline is continuing to get more and more coal than we would anticipate.
Heading into next year with the with really strong momentum.
Across the country.
Great. Thank you.
And we'll hear next from Dave Koning of Baird.
Yeah, Hey, guys. Thank you and nice job.
And I guess, yeah, Yeah, I guess my first question. So usually in commercial services sequentially. In Q3, it's often up I don't know $8 million to $10 million or something like that and this year it wasn't up as much.
Was there any kind of one off things that maybe benefited Q2, a lot that then just created a sequential drag on Q3 or just kind of describe kind of what happened sequentially.
Yeah sure so Craig again on this one.
Exactly I think what you surmise is what happened what we saw maybe.
I'll do it quantitatively first then we'll go into the quantitative answer so qualitatively what we saw was the summer driving season came a little earlier than it does typically so in previous years, you would see that you would see that large spike in the third quarter. We actually saw in the late second quarter and I think that was evidenced as well when you listen to what the racks.
Last quarter in terms of how they manage their fleet size a lot of those cars came onto the loss in the second quarter, hence were rented out.
So you are right. If you look at commercial services in totality sequentially. The business grew 1% and usually it grows more than that but I will say on a year to date basis. Our growth is right on what we expected. So if we back up for a second to the second quarter. The second quarter, usually grows between 5% and 10% second quarter of 2020.
Two grew 16.
So that hit to the hit to areas of the business. The first area was on rack totaling so there are more cars on the road totaling in the second quarter sequentially than they were already there in the third quarter. So thats why you can see the growth and then on the other piece of it I'll talk about as much but it's also the title and registration business right. So we as the racks.
Without their fleets in the second quarter, a lot of those title and registration work came through very mobility. So that was completed in the second quarter now typically from the second quarter to the third quarter.
Is either flat or sequentially down a little bit in that business. This time, it was sequentially down quite a bit again, because it was all done in the second quarter. So nothing to do with the third quarter summer driving season, and briefly and it came a little bit earlier in the year. This year than it has in the past and our year to date basis, we're right where we expected.
Yep Yep, it looks like a year to date I mean, youre still so far ahead of TSA level. So that's.
And then I guess my follow up just because it's our first year kind of looking at tier two is this quarter was up a lot sequentially like I know what you said the sequential pattern like I think Q2 was up 5% give or take sequentially Q3 up like 15 or something in a big Big number is that just truly just.
Patterns that are normal.
And maybe why would that happen and is it actually some cross selling that's starting to happen just that youre fundamentally making that business better.
Yes.
I'm sure it is.
It's a bit of all three of those but I think the bigger one is this is fundamentally how the buying cycle works right. The back half of the year always this business has been around since the early 1990 still 60% of the business or more depending on the year. It sells into the University segment. The University budgets are such that a lot of the procurement happens in the back.
Half of the year third quarter right towards the students come back and then at the end of the fourth quarter before it flips into the new fiscal year.
No.
That is normal for the business and we will see it grow again going into the fourth quarter.
Got it great. Thanks, good job.
Thank you. Thank you.
As a reminder, you May press star one on your telephone keypad. If you have a question at this time.
We will go next to Keith Hoffman with Northcoast research.
Good afternoon, guys. Thanks for the opportunity here.
Dave.
Expansion on our Connecticut pilot, if we could have that could you talk about perhaps a little bit of the background there.
<unk> come to you guys in terms of doing the pilot I think that what I heard is that it will decide how it goes.
If it will be enacted into legislation, perhaps just give them their background. There and then outside of that is there other opportunities like that you guys are working on behind the scenes around the country.
Okay, Yes.
Answer to the last part is yes.
Connecticut has worked so speed is what I would call a.
An emerging trend as people start to look for a purpose built use cases for photo enforcement similar.
Similar to the concept of school zones, it's very difficult to argue that we should not be able to protect people in harm's way when they are out doing work on our highways or specific routes.
Places like Pennsylvania have this program and actually one of the nice things about and so Connecticut.
Well, what I would say is we've partnered with local legislators to help create this pilot program. It has not been active as of yet so that will sort of do a wait and see over the next couple of years to see how the program works and then they can choose if they want to put this into permanent legislation or not.
The nice part is these are this is a nice combination of the legacy Redflex organization that we bought it because it was a combination of best of both to go and win this type of opportunity.
Great I appreciate it and then there's been some interesting news lately in terms of New York City using Postbank cameras can you, perhaps provide a bit color on how verra mobility is playing in that program.
Yes. So we are the back end processing for that so we are software not dissimilar from the other software programs. We use for other forms of photo enforcement is doing the processing in the violations for that.
A different party.
Providing the cameras for that specific initiative.
Great I appreciate it thank you.
Mhm.
Our next from Louie Dipalma with William Blair.
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David and Greg Good evening.
Hi, how are you.
You mentioned, the pilot and Connecticut, which sounds promising at your analyst day, you also referenced potentially passive potentially positive legislation and I think it was California and Florida for speed cameras are there.
Things moving forward in those states as well.
Yes, those cycles, obviously have ebbs and flows and this would be the period of and Ed I guess, because we're going into a voting cycle next week. So what I would say is.
I think we had some good traction in California.
But what I would say is those things all always not this isn't unique to this year that they always get placed on hold related to kind of who who's on the who is sitting in what share. After the election. So we'll obviously come back to the legislators upon understanding had been any material changes have been made in the legislative body that we're pursuing legislature.
Net.
Great.
And for either David or Craig them.
I think you mentioned that.
There was an amendment to the New York City vision zero contract associated with expanding the hours of operation.
Is that amendment is it should we think of it as material to your government service revenue for 2023.
Yes, yes Louie.
I would say so I mean, so the way to think about it on a total year is about about 5% of total New York City revenue. So if you were to look at total New York City revenue, whether it is in 2021 and you grow that to 2020 to look at 2022 in totality.
About 5% at around that total for our total year.
Great. Thanks, Thanks, Craig.
One final one.
Is there any update on how well the the European rack tolling pilots are are going I know you have I think enterprise in Ireland.
And in Spain.
And Brent to current in France are those going well.
Yes, the one in Ireland has recently been extended so the pilot that we're doing there has been extended.
I don't know the timeframe I believe through end of the year, but something around that time frame and then we're sort of just getting started in Spain and then we're also continuing to look for other pilots in other parts of Europe as well. So those are those are moving at a pace that we are comfortable with and we're still trying to add more more pilots to the mix.
Great. Thanks, everyone.
Thank you.
Okay.
And that concludes today's question and answer session and this concludes today's call. Thank you for your participation.
May now disconnect.
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