Q4 2022 Verra Mobility Corp Earnings Call
Speaker 1: Good afternoon ladies and gentlemen and welcome to Veropmobility's Focquarter 2022 earnings conference call. My name is Julie and I will be your conference operator today. This call is being recorded.
Speaker 1: I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Vera Mobility. Please go ahead Mr. Zindler.
Speaker 2: Thank you. Good afternoon and welcome to Vera Mobility's 4th quarter 2022 earnings call. Today we'll be discussing the results announced in our press release issued after the market close.
Speaker 2: With me on the call are David Roberts, Vero Mobility's Chief Executive Officer, and Craig Conte, our Chief Financial Officer.
Speaker 2: David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. Our next trend is to discussHHINK Intro Region and
Speaker 2: 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, and the benefits of our future business.
Speaker 2: operational metrics and other statements regarding our plans and prospects.
Speaker 2: These statements reflect our view only as of today, March 1, 2023, and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise any forward-looking statements.
Speaker 2: 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.
Speaker 2: For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our annual report on Form 10-K and our Form 10-Q s filed during 2022, which are available on the investor relations section of our website at ir.veromobility.com.
Speaker 2: and on the SEC's website at sec.gov. Finally, during today's call, we'll refer to certain non-GAAP financial measures.
Speaker 2: 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.bearmobility.com and on the SEC's website at sec.gov. With that, I'll turn the call over to David.
Speaker 3: foreclosing with our strategic priorities that will influence our 2023 operating plan and build upon the foundation for the long-term outlook we outlined at our Investor Day in July 2022.
Speaker 3: We delivered fantastic fourth quarter results highlighted by robust revenue and adjusted EBITDA generation and strong pre-cash flow. Fourth quarter revenue of $186 million exceeded our expectations and was primarily driven by strong tolling trends in our commercial services segment.
Speaker 3: adjusted EBITDA of $84 million for the fourth quarter also exceeded our forecast driven by volume-based operating leverage in both commercial services and government solutions.
Speaker 3: Our strong results are aligned with two macro trends across our operating segments. First, we're seeing continued strong travel demand by both consumers and businesses, particularly in the U.S. The major U.S. airlines have cited strong or significant bookings in their recent quarterly earnings announcements. The U.S. airlines have cited strong or significant bookings in their recent quarterly earnings
Speaker 3: The second macro trend is the continued push for safer roads and communities, which drives the need for investments in automated safety enforcement.
Speaker 3: Traffic fatalities in the U.S. reached a 16-year high in 2021, and while early estimates are showing a very slight improvement in 2022, these numbers are simply unacceptable.
Speaker 3: Transportation officials, elected officials, and safety advocates will be looking for technology solutions that can save lives and make transportation more efficient for everyone. Starting with commercial services, the team again delivered strong performance. Revenue of approximately 82 million for the quarter represented a 14% increase over the same period last year.
Speaker 3: And compared to pre-pandemic levels, we achieved 20% growth over the fourth quarter of 2019. There were several factors driving this performance. First, TSA throughput continued to approach pre-pandemic volume reaching 94%, 2019 levels were the fourth quarter.
Speaker 3: In addition, key performance indicators included adopted rental agreements and rental duration experience growth over the same period last year. Lastly, the secular trends underpinning these business drivers continued conversion to cashless tolling, rack refleeting, and new toll roads continue to positively impact our business.
Speaker 3: cashless tolling reached 64% this past year, and six new US toll roads were implemented in 2022 as well.
Speaker 3: In addition, Florida and Georgia recently announced significant investment plans to expand toll lanes over the next three to five years.
Speaker 3: Moving to our government solutions business we generated total revenue of $85 million with $82 million being recurring service revenue.
Speaker 3: Service revenue increased 19% over the fourth quarter of the last year, driven by the completion of the New York City School Zone Speed Installation.
Speaker 3: Government solutions margins were about 36% in the fourth quarter basically flat with the prior year. T2 systems delivered revenue of $20 million with adjusted EBDA of $4 million in the for the full year revenue of $79 million and adjusted EBDA of $14 million. Full year revenue growth was about 11% which was slightly below our expectations.
Speaker 3: SAS and service revenues were in line, however, hardware sales were slightly below expectations for both the fourth quarter and the full year due to customer requested installation timing. Craig will further elaborate, including actions being taken in his prepared remarks.
Speaker 3: The secular trends driving our performance are durable and we continue to experience strong operating momentum in each of our business segments. Turning to the balance sheet and capital allocation and please report that we lowered net leverage a full turn over the course of 2022 ending the year 3.3 times adjusted EBITDA. In addition, we repurchased 125 million.
Speaker 3: Furthermore, we also remediated all material weaknesses reported in our 2021 Form 10-K . This is a significant accomplishment by the entire organization. Thank you to all the employees that drove this change in implementation of our new controls and processes. Compliance is critical to our company, our customers, and our shareholders, and we take it very seriously.
Speaker 3: significant business momentum in each of our segments underpin by strong secular trends.
Speaker 3: Tribal demands remain strong and durable. TSA throughput in the first quarter of 2023 is currently exceeding 2019 levels and forward-looking travel demand as communicated by US major US airlines remain strong. Second, we continue to experience a shift in cashless tolling across the US in an effort to improve efficiencies and reduce congestion. For example, in the second half of 2022, both the Lincoln Tunnel.
Speaker 3: and George Washington bridge transition completely to cashless tolling. With that all bridge or tunnel crossings into New York City have eliminated toll boost for payments. We expect the automated payments trend to continue on more toll roads across the country.
Speaker 3: Third, we expect the C-Cities place a renewed focus on vision zero safety programs which includes investments in automated enforcement to reverse a troubling trend of traffic related fatalities. And lastly, over the longer term, we expect the C-Cities make efforts to improve urban mobility in their communities through investments in curb management solutions and automated bus lane enforcement, which are parking and government platforms are well positioned to serve.
Speaker 3: With that as a background, I will turn to our top strategic priorities in 2023. Over the past year, we have implemented what we call the VARIMOBILITY operating system, or VMOS. It's a robust standard business system that drives growth, efficiency, and talent development.
Speaker 3: At the heart of the MLS are three strategic pillars, drive core business outcomes, build the verimability of the future, and create an engaging and fulfilling workplace. As you'll see on slide 6 in 2023, we have established key objectives for each of these three pillars focusing on financial execution of the 2023 annual plan, furthering our position in core markets.
Speaker 3: pursuit of a creative expansion of opportunities, accelerating our portfolio model adoption, and making VARIA Mobility the best place to work.
Speaker 3: Through execution of our three strategic pillars, we are poised to deliver superior long-term value creation for all stakeholders. Next, I'll go down a layer and focus on key priorities for each of our business segments as described in more detail on slide 7, 8, and 9.
Speaker 3: In commercial services where we benefit from strong secular tailwinds, including increased adoption of cashless tolling, new toll roads and a rack-refleeting, we are focused on growing the core while simultaneously capitalizing on numerous expansion opportunities. Our top priorities are renewing our agreement with enterprise.
Speaker 3: adjacent expansion opportunities primarily focus on fleet management, expansion and European growth, and laying the foundation to capitalize on next-generation connected fleet opportunities.
Speaker 3: In government solutions where we benefit from a strong and growing interest in automated enforcement for road safety and improved traffic, where our top priorities are opening new cities and states through enabling legislation.
Speaker 3: continued investments in our industry leading software platform and pursuing emerging opportunities across urban mobility for strategic M&A and partnerships.
Speaker 3: And finally, in T2 systems where we have significant runway for continued growth and profitability in the university segment, as well as our focus efforts to penetrate the municipality segment, our focus is on the following priorities. Pursuit of new logo business and increasing share of wallet with existing customers, expansion and to mid and large scale municipalities.
Speaker 3: and investments in platforms to drive new revenue streams with dynamic pricing as an example. As we execute our strategy in 2023, and I'm incredibly excited about the business, the fundamentals are strong and durable. We have the right management team in place and approve and operate in a model to create significant value. Before I turn things over to Craig, I want to close with a message about our July 22 investor day and the long-term outlook we provided.
Speaker 3: I am pleased to report that the fundamentals we contemplated in our long-term outlook have not changed. And we remain up to meet about it meeting or exceeding the financial forecast we provided. Craig will further elaborate in his prepared remarks. Craig, I'll turn over you to guide us through our financial results in 2023 guidance. Thanks, David. Good afternoon. Thanks to everyone for joining us on the call.
Speaker 4: I'll start out today by providing an overview of our fourth quarter of full year 2022 results followed by our 2023 financial guidance and I'll conclude with discussions on science, capital allocation, and our long-term outlook. Let's turn to slide 11, which outlines revenue and adjusted EBITDA performance for the consolidated business.
Speaker 4: Total revenue increased approximately 9% year over year to about 186 million for the quarter, driven by strong operating performance across the company and the inclusion of T2 systems and our financial results for a full year.
Speaker 4: On an organic basis, in excluding the New York City hardware sales, we grew 16% year-over-year.
Speaker 4: Expanding on this point, given the prior year included an incremental 21 million of product sales from the New York City Camera Installations, Service Revenue Growth is the best proxy for our performance.
Speaker 4: Q4 service revenue grew 24% over the same period last year of which 16% was organic growth. This growth was attributable to several factors. First, commercial services grew 14% year over year.
Speaker 4: Second, government solution service revenue increased by about 19% of the prior year. And finally, T2 systems contributed about 15 million of service revenue.
Speaker 4: As a reminder, we closed the T2 systems acquisition in early December 2021, so only three weeks of T2 revenue was included in the prior year quarter.
Speaker 4: Product revenue was $7 million for the quarter of which $5 million was from T2 systems.
Speaker 4: Finally, from a total profit standpoint, consolidated adjusted EBITDA of $84 million increased by approximately 5% over last year. On an organic basis, excluding T2 systems and New York City product sales, adjusted EBITDA growth was approximately 14% versus 2021.
Speaker 4: total profit standpoint, consolidated adjusted EBITDA of 84 million increased by approximately 5% over last year. On an organic basis, excluding T2 systems in New York City product sales, adjusted EBITDA growth was approximately 14% versus 2021. Turning to slide 12.
Speaker 4: For the full year we delivered total revenue of $742 million and adjusted EBITDA of $339 million resulting in margins of about 45.6%. All of which exceeded our most recent financial guidance provided during our third quarter birlikte.
Speaker 4: From a free cash flow perspective, our conversion rate from adjusted EVA to 50% resulting in 170 million of free cash flow for the year consistent with our expectations.
Speaker 4: Moving through commercial services on slide 13, we delivered revenue of about 82 million in the fourth quarter, increasing 10 million or 14% year-over-year.
Speaker 4: RAPTOLing increased 9% over the same period last year, driven by robust travel volume, increased product adoption, and a slightly smaller impact in Florida from Hurricane Ian that we originally anticipated.
Speaker 4: Our non-RAC fleet expansion efforts continue to pay off with FMC revenue increasing 18% over the prior year quarter. The FMC business is now a $50 million annual revenue stream for the company and growing. Fourth quarter of just the EBITON commercial services was $49 million.
Speaker 4: representing 12 million of 12% year-over-year growth. Adjusted EBITDA margins of about 60% reflected normal sequential seasonality and were down slightly compared to the fourth quarter of last year primarily due to growth investments.
Speaker 4: For the full year, commercial services generated 326 million of revenue or 25% growth over last year.
Speaker 4: A Justin EBITDA of $209 million resulted in margins of about 64 percent. A 250 basis point improvement over a prior year driven by volume-based operating leverage.
Speaker 4: Let's turn to slide 14 and we'll take a look at the results of the government solutions business. Driven primarily by our New York City photo enforcement expansion efforts.
Speaker 4: Service revenue increased by 13 million or 19% over the same period last year to 82 million for the fourth quarter. Due to the completion of the New York City camera installations, Q4 2022 product revenue of 2 million declined by about 21 million compared to the fourth quarter of last year.
Speaker 4: Service revenue increased by 13 million or 19% over the same period last year to 82 million for the fourth quarter. Due to the completion of the New York City camera installations, Q4 2022 product revenue of 2 million declined by about 21 million compared to the fourth quarter of last year. This was completely in line with our expectations.
Speaker 4: 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. Adjusted EBITDA was 31 million for the quarter, representing margins of 36 percent roughly flat with a prior year quarter. For the full year, government solutions generated 337 million of total revenue.
Speaker 4: A 19% increase over 2021 and adjusted EBITDA was 116 million for the year, a 7% increase over last year. Full-year revenue and adjusted EBITDA growth were driven by New York City installations and a full year of red flags included in our financials.
Speaker 4: Let's turn to slide 15 and we'll take a look at the results of T2 systems, which is our parking solutions business. Revenue of 20 million in adjusted EBITDA of approximately 4 million were slightly below expectations for the quarter due to customer requested installation timing on certain product sales.
Speaker 4: We're very pleased with the levels of software and service sales. These were in line with expectations, but hardware sales proved to be slightly chopier than we had anticipated. We are leveraging the verimobility operating system to drive initiatives to build and strengthen the quality of the pipeline and to improve the forecasting process. For the full year.
Speaker 4: T2 delivered revenue 79 million or approximately 11 percent growth over the last year and adjusted EBITDA of $14 million.
Speaker 4: Okay, let's turn to slide 16 and take a look at reported income and leverage. In Q4, we reported net income of approximately $28 million for the quarter, which compares to net income of $19 million in the same period of the prior year.
Speaker 4: A adjusted EPS, which excludes amortization, stock-based concitation and other non-recurring items, was 25 cents per share for the current quarter, compared to 24 cents per share in the fourth quarter of 2021. For the full year, we generated net income of approximately 92 million, including a tax provision of 35 million.
Speaker 4: representing an effective tax rate of 27%. Adjusted EPS was $1.02 for the year, a 29% increase over fiscal year 2021. $ mountains weged Xi Jinping, also attempted to help insurers, in terms of technical and legal justice schools, get a free of interest.
Speaker 4: On the right-hand side of the page, you can see that we ended the year with a net debt balance of about 1.1 billion, resulting in net leverage of 3.3 times for the year.
Speaker 4: This is down from 4.3 times net leverage at the close of 2021. The gross debt balance at quarter end was slightly over $1.2 billion, of which approximately $886 million was floating rate debt.
Speaker 4: During the fourth quarter, we entered into an interest rate swap agreement to hedge approximately 80% of our floating rate debt with a float-per-fixed rate swap.
Speaker 4: The floating portion of our LIBOR plus 325 basis point term loan B will be fixed at a rate of 5.2% for three years with a monthly option to cancel beginning in December of 2003 that we can exercise in the event rates move in our favor.
Speaker 4: Moving on to cash, we generated approximately $70 million in cash flow from operating activities resulting in $57 million of free cash flow for the quarter.
Speaker 4: For the full year we generated 170 million free cash flow or 50% conversion of the Justin EBITO which represented $1.07 free cash flow
Speaker 4: During the fourth quarter, we completed the final settlement of our $125 million share to
Speaker 4: In total, we repurchased approximately 8 million shares under the program. In addition, our board of directors authorized a new $18-month $100 million share to be able to pay a repurchased program in November of last year.
Speaker 4: We will provide quarterly updates that to the repurchases made under this new authorization. Now let's shift gears a bit and talk about our views on 2023, which is looking like it will be another solid year for the company. Let's turn to slide 17.
Speaker 4: As you can see, we have brought in the financial measures we are guiding to in fiscal year 2023 to better align with our shareholder creation of shareholder value creation objectives, which we laid out at our investor day less over. We expect total revenue in the range of 780 to 800 million, representing approximately 5 to 7% growth over 2022 on a constant currency basis.
Speaker 4: The growth is adjusted upward to a range of 68% consistent with the long-term outlook we shared at our investor day in July . We expect adjusted EBITDA in the range of 360 to 370 votes, representing approximately 8% growth at the midpoint over 2022.
Speaker 4: We expect an adjusted EBITDA margin of about 46% representing approximately 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 increased product adoption. In addition, we are expecting increased FMC revenue. Consistent with historical trends.
Speaker 4: First quarter is forecast to be our lowest revenue generating quarter, followed by a subquential revenue increases in the second and third quarters, followed then by a revenue decline in the fourth quarter as the summer driving season comes to a close.
Speaker 4: As a reminder, all revenue in this segment deserves revenue. Government Solutions is expected to generate high single digit service revenue growth driven by prior year completion of the New York City camera installations. The shift to 24-7 monitoring in New York City, the expansion of camera installations with other existing customers and new customers.
Speaker 4: almost 10% year-over-year. Total 2023 New York City revenue will decline by about $6 million due to the decline in product revenue versus 2022.
Speaker 4: For government solutions overall, we're expecting low single digit total revenue growth over last year. However, on a constant currency basis, government solutions is expected to drive mid-single digit growth consistent with our investor day long-term outlook. Lastly, parking solutions revenue is expected to deliver high single digit total revenue growth.
Speaker 4: driven by strong demand and a continued shift to SaaS and services with a lower weighting of hardware and the revenue contribution. Consistent with T2's historical trends, anticipate revenue, adjusted EBITDA, and margins to ramp sequentially throughout 2023.
Speaker 4: For the company as a whole, we are guiding to a 2023 non-GAP Adjusted EPS range of $1 to $1.10 in the key assumptions supporting this outlook can be found on slide 18. Most notably, total interest expense.
Speaker 4: including non-cash charges is expected to increase about 96 million in is expected to increase to about 96 million in fiscal year 2023 up from 69 million in the prior year due to the cost of the floating rate term loan debt.
Speaker 4: As I previously discussed, beginning in 2023, we entered into an interest rate swap agreement which fixes the cost of the floating term rate loan debt at about 5.2% plus the 325 basis point spread with a monthly option to cancel beginning in December of 2023.
Speaker 4: Expanding on the balance sheet and our capital allocation priorities, I'm pleased to report that we paid down $50 million over our floating rate debt during the first quarter of 2023.
Speaker 4: This action, combined with the interest rate swap I detailed earlier, demonstrate our commitment to a balanced capital allocation approach and managing interest rate risk, consistent with the press release we issued on November 21 last year. To that end, the $1 to $1.10 adjusted EPS range provides, provided assumes a balanced approach to paying down debt and share repurchases and includes the $50 million debt repayment I've just.
Speaker 4: We expect to generate a range of free cash flow of approximately 135 to 155 million or a conversion rate of about 40% of adjusted EBITDA.
Speaker 4: The difference between the 40% conversion rate and our 50% long-term target is primarily attributable to higher interest payments in 2023, as well as increased cash taxes driven by reduced NOL utilization in 2023.
Speaker 4: Lastly, based on the adjusted EBITDA and free cash flow guidance, we expect to reduce net leverage to about three times by year-end 2023.
Speaker 4: In addition to our 2023 financial guidance, we also reconfirmed our long-term financial outlook and I'm pleased to report that we remain on track as you can see on page 19. In addition to meeting or exceeding all of our 2022 commitments, we see no changes to the fundamentals of our business performance and while we expect to see pressure on our 50% free cash flow conversion target in 2023 and 2024 do the interest rates.
Speaker 4: We are confident in reaffirming our 2026 financial assets. Lastly, as David briefly mentioned, we are pleased to report that we have fully remediated all of the material weaknesses disclosed in our 2021 Form 10K. As a reminder, those material weaknesses were focused on the evaluation and monitor of accounting activities associated with our acquisition of Red Flest International, including revenue recognition and the valuation of acquired assets and the control environment surrounding our use of a third-party software application. In 2022,
Speaker 4: We hired additional resources and successfully instituted new controls to support purchase accounting activities and to more substantively monitor the ongoing activities of a acquired company. We also took corrective actions to address our reliance on the third-party software application by implementing a process to validate and reconcile the underlying data used by the application. This concludes our prepared remarks. Thank you for your time and attention.
Speaker 1: Your first question comes from Daniel Marr from CJF Securities. Please go ahead.
Speaker 3: Thank you. Good afternoon, David. Good afternoon, Craig. Thanks for taking the questions. Let me start. Just kind of high-level, remind us where we are on the curve as far as the shift to cashless tolling at this stage. How much of a tailwind do you expect that to be and how long is that likely to last? In the remarks we talked about that we were about 64 percent of the total cashless tolling.
Speaker 3: I'm curious, David, in terms of Europe , what are your goals for Europe for 23? What kind of milestones would you consider a successful year, whether that be revenue, new agreements, just general progress, anything that would be helpful for us to track? I don't think we're... I mean, while we have... Obviously, we're internally working toward revenue. I think we're still in the place of, hey, do we have enough vehicles?
Speaker 3: with current customers and enough locations that we can say we're finalizing proof of concepts, improving the value to customers. So I think it's a bit of a combination, meaning we sort of look at enrolled vehicles on the program as the primary driver, that's kind of the unit economic view. If we get that through one customer or several customers, that's fine, but we would also like to have a distributed view, meaning multiple countries.
Speaker 3: understood, really helpful. And then just maybe talk a little bit about the government services side. You know, the level of dialogues regarding vision zero initiatives is it relatively steady or is it actually picking up given the traffic fatality numbers that you described there? What I would say is even...
Speaker 3: What I would say as the traffic fatalities numbers were being reported and occurring there was already a pretty significant increase or certainly in the countries that were providing services and related to newer programs expansions of current programs and even looking at other use cases So I think it's um, I think that business has a very very strong outlook for the next
Speaker 5: Go ahead. Yeah, hey guys, great job.
Speaker 4: Thanks. Yeah, I guess my first question, I often think about a government's solution. The service is revenue kind of in the three parts. The New York service, other service, and then red flags. And they're about a 30th red flags. I think it's a little less than that. How did each of those do it in the quarter? Because it seemed like that that continues to do it.
Speaker 4: You know, we talked about the total business. If you take out New York City and just look at GS, right? This is a double digit grower. New York City services in the fourth quarter continue to grow. It's going to continue to grow next year. We talked about that, you know, in terms of being plus 10%. Red Flex service, we continue to see mid single digit growth there as you anticipate. And really as you look at GS year over year, I think the one thing that you have to take out is you have an efforts. Those are to replace any class because every class has its own direction there that you trust. Whatever.
Speaker 4: dollar a year. So the business continues to perform well. We're seeing growth across the board.
Speaker 4: So the business continues to perform well. We're seeing growth across the board. The real idiosyncratic piece there is the New York City install ending in 2022. So yeah, okay.
Speaker 4: Okay, that's good. And then I guess the parking business, you talked a little bit about Q4. I think you said the product was a little below your expectations. It has T2 overall, you've had it for just about a year now. Has that overall been in line and did you say all through the year you should have sequential growth in 23? I would say, yeah, David, it's a yes to both of them. Right? It has continued to perform to our expectations. And the equipment thing really was a delivery, acceptance of delivery in the last couple days of the quarter. So when we talk about choppiness.
Speaker 4: I'm talking about three or four deals that will end up getting I think here in 2023. So it's continued to perform well. As we look at this business next year, we're looking at somewhere of an 80-20 split with 80% of SaaS and service and in 20% of equipment. And that's exactly where we want that business to be. So we're very pleased.
Speaker 1: All right, thanks guys, good job. Thank you. Thank you. Your next question comes from Faiza Hallwee from Durchebank. Please go ahead. Yes, hi, thank you. So I wanted to pick up on T2. Yes, give us a bit more color in terms of where you're seeing the most traction. You know, I'd invest your day, you talked about.
Speaker 3: You know, adjacent categories you talked about, how your market share is, you know, lower with tier 2, tier 3. You talked about, you know, additional sort of large cities. So give us a bit more color in terms of, you know, what you're expecting for 23 from Yeah, I mean, I would say right now the strongest is still in their home turf, which is in the university segment is strong and continuing to grow. They have an outstanding track record of not only keeping customers on for long term, you know, 10 years of a long term contract in addition to that extending related services to that. So what I would say is that's still the core of...
Speaker 4: just to justify this attack on a yes, that we are expecting high single digit organic growth on a T2 next year. We expect margin, we expect margin expansion of about a point from where they landed this year. So business is on a good trajectory. No.
Speaker 1: Great. My next question was going to be on margin. So thank you for giving that color on T2. I was going to ask about, you know, the margin expansion that you expect from each segment. You know, for commercial services, especially I feel like, especially on a quarterly basis, like the quarterly cadence hasn't always been.
Speaker 1: across the other two segments. And to the extent you can give us some thoughts around quarterly payments of margins.
Speaker 4: Yeah, sure, I'll unpack both of those for you. So I think going forward into 2023, we expect the crop, I'm going to start at the portfolio, if I can drive it and drill down. Okay. We're expecting about a half a point of margin expansion across the portfolio, which is consistent with what we said, an investor day that we'd expect on an annual basis. So we feel good about that.
Speaker 4: If I look at how that shakes down, this is just for the total year, I'll get to the quarterly in a second in terms of volume. So for the total year, I expect the CS business to be up about 50 basis points. A lot of that's volume leverage, right? As that business continues to grow, it scales really well. And that's a high single digit grower for us next year. I expect the GS business to be down slightly anywhere from 10 basis points to 30 to 40 basis points year over year. And really that does have anything to do with product mix, what that has to do with some investments.
Speaker 4: that we're making in the platform to make sure we can continue to grow at scale, both domestically and internationally, and in the next half a decade or so. So about flat, slightly down in GS, and like I just said on T2, I expect that to be up about a point. Couple things there, we continue to win business, and as I mentioned, I expect that, I expect that mix of business to start favoring SaaS and service to an 80% of the total.
Speaker 4: which is more than we saw in 2021 and certainly more than we saw in 2022. So that factors out to about a half the point for the company. Now if you're going to look at trending, I'm going to tell you what the CS trending looks like. Because I think that'll probably make a little bit more sense and I'll be happy to tell you how that kind of adds up for our verimobility. And the reason why I make the distinction is commercial services.
Speaker 4: grows through the third quarter, steps back in the fourth quarter, which is, you know, 45% of the business, but 10% plus of the business is T2, which sequentially grows from the first quarter out to the fourth quarter. So it gets a little muddy at the total company level.
Speaker 4: So let's go through CS first. I expect the first quarter to look a lot like the fourth quarter. It'll be down a little bit. Typically the first quarter is our lowest revenue quarter of the year, but it'll be relatively similar to the fourth quarter, I think, of 2022. Then we'll grow high single digit to low double digits and to the second quarter as we typically do.
Speaker 4: We'll grow again into the third quarter. I would say low single digits to mid single digits and then we'll step back in the fourth quarter.
Speaker 4: call it mid single digits and that that that that trajectory that I just gave you is what we're planning for 2023 and is also spun on to the arithmetic average of the three normalized years or history.
Speaker 4: So that's CS, did that track? Yes, that's very helpful. And then if you go and look at Vera and Total, right? So we're going to, the trend is the same, but it's a little bit muted. So I'll be down in the first quarter. A few ticks lower than I will be for just CS. Again, it's the lowest revenue generating quarter of the year. We'll grow, I'd say, high single digits in the second quarter.
Speaker 4: We'll grow again mid single digits or so in the third quarter, and then we'll step back mid single digits in the fourth quarter, which is that the end of the three-queue summer driving season and CS, circulating all the way through to consolidate the company results. Great, that's all. That's really appreciate all the follow. Just my last question, I think you mentioned as part of the commercial services growth drivers. You mentioned improving TSA volumes. Great.
Speaker 4: So, just wanted to just clarify that. Are you expecting, you know, growth? I mean, the way I've been looking at it is really TSA volumes as the percentage of 2019. Are you expecting the volume sort of get back to those pre-COVID levels in 2020? The short answer to your question is yes, that is what we're expecting. I think the way I have the plan done right now, I think the second half of the year looks like 2019, the first half kind of ramps to get there.
Speaker 4: But I, you know, in all fairness, as I have to compare that to where we are in a February or a year-to-day basis, where at 102% through February . Now, this is not an exercise in false precision here. I do think over 29, I would look at 2023 as a percentage of 2019, and in general, we expect to get back to 2019 levels, and that's where we have the business plan today. Excellent. Thank you so much. Sure. Your next question comes from Louis de Palma from Williams.
Speaker 6: to be growth in those services as well coming off. What appeared to be a pretty solid 2022.
Speaker 4: You know, in totality, the answer is yes, we don't spike those out specifically in terms of growth rates. But I could tell you that if you look at the consolidated growth of the business, the rack tolling piece is going to grow faster than the combination of the ones that you just mentioned, but yes, there will be growth here.
Speaker 6: Great. And for David or Craig, in January you announced your Zero In initiative. I know it's early, but what has been the initial feedback? Do you expect other municipalities to follow the lead of New York City and Oslo?
Speaker 3: Yeah, I mean, I think that's already been happening. Other cities have adopted that globally. I think what we were just trying to do is to make sure, wanted to draw attention that it's still relevant, so important, and that we don't want to anyone to not stay focused on that given the increase in traffic fatalities over the last year or so. So.
Speaker 3: Yeah, we believe a key driver of government solutions over the long term is an increased attention to traffic safety and congestion. Great. Another one on the Government Services Division. David, you indicated that you're investing in software. What does that new software enable strategically for you? Yeah, I mean, I guess what I would just say is...
Speaker 3: The software that we have has been the original software that the business was founded on. So we're just modernizing both the architecture as well as building a new capability and functionality to streamline the way that it's both built, coded and serviced. So just think of it as a bit of an update. Now with that, well obviously that will be our in the cloud web-based platform that we'll be using for the future that will also host new functionality as we provide it in the years to come.
Speaker 6: Great. And are there any, I guess, new features that you're able to implement with your existing cameras with the software such that I remember a few years ago for your red light cameras, you indicated that in certain situations, law enforcement would have the ability to tap into your feeds for your red light cameras or for your...
feed cameras and right now there seems to be a major focus on school safety and you have a big network of cameras around schools. So I'm wondering if there's any type of school public safety services that you could cross out or add on top of your existing services with your network of cameras. Yeah, I mean I guess.
Point one is yes, our customers have access to and local police and actually federal police have the ability to look into the cameras to look at video. That's a service that we provide as a part of the total package for our customers today. And two, we certainly are looking to the same extent that as we started off with schools on speed, we added school bus. There's obviously a portfolio solutions that we could add there that don't necessarily have to be automated and forced. And they could be other sort of related types of technologies. I won't disclose anything specific, but just rest assured that's certainly one of the categories that we're looking at.
Sounds good. Thanks, David. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question, some Keith Oussam from North Coast Research. Please go ahead. Good afternoon, guys. I appreciate your opportunity. David, we're looking at some of these legislators front out there, especially with the data that cannot reach me in terms of the.
And so I wouldn't say that I have a specific one that I would lean into, but obviously we're continuing to look at key critical states such as California and Florida and others we've also opened up, I think last year that we opened up legislation in Washington State as well. So we're always on both.
We're always on offense on that and we're looking, but nothing that I would report to is specifically right now and wouldn't do so until those laws are passed. Appreciate it. I think that was last quote you guys talked about, opportunities in the construction zone camera space and a few large projects and perhaps are out there close to being signed. Any additional thoughts or context in the share in terms of the construction zone area? Well, we have two working currently.
school zone speed or school bus, which is it's a pretty rational belief that workers and work zones should have the opportunity to work so safely and that these types of tools are force multipliers and enablers of affecting that outcome.
I appreciate it if I can sneak one more in here. You know, last year there was some discussion that you had not yet wanted but those potential for the 150 fixed-pusting cameras in New York City. Is that included in your guidance or is that the potential upside for the year?
I appreciate it. If I could sneak one more in here. You know, last year there was some discussion that you guys not yet wanted, but there was potential for it. The 150 fixed-busting cameras in New York City. Is that included in your guidance, or is that the potential upside for the year? It is not included in our guide.
Look how their report is upside to potential upside. Great. Thanks guys. Good luck. There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. You may now disconnect. Thank you. Thank you.