Q2 2023 Verra Mobility Corp Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to D J.
Mobility second quarter 2023 earnings conference call.
At this time all lines are in listen only mode and following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
Call is being recorded on Wednesday.
On Thursday August nine 2023, I would now like to turn the conference call over to Mr. Mark <unk>, Vice President of Investor Relations. Please go ahead.
Thank you.
Good afternoon, and welcome to Verra mobility second quarter 2023 earnings call today, we'll be discussing the results announced in our press release issued after the market close.
Along with our earnings presentation, which is available on the Investor Relations section of our website at IR Dot verra mobility Dot com.
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 but not limited to statements concerning our expected future business and financial performance, our plans to execute on our growth strategy. The.
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.
These statements reflect our views only as of today August nine 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.
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 a discussion of material risks and other important factors that could affect our actual results. Please refer to those contained in our 2022 annual report on Form 10-K, and our 2023 quarterly reports on Form 10-Q, which are available on the Investor Relations section of our website at IR Dot verra mobility Dot com and.
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 Darrow mobility dot com and on the SEC's website at SEC Gov with that I'll turn.
On the call over to David.
Thank you Mark and thanks, everyone for joining us we delivered an outstanding second quarter highlighted by 9% year over year revenue growth of which 96% with recurring service revenue Mauro.
Moreover, we delivered adjusted EBITDA growth of 7% over last year and converted 54% of adjusted EBITDA to free cash flow for the quarter.
Starting with commercial services, we delivered 11% revenue growth driven in large part by an exceptionally strong start to the spring and summer travel season. Additionally.
Additionally, FMC revenue grew 17% over the same period last year aided by the growth initiatives that we have been executing in the businesses.
Underpinning. These strong results are several key macro drivers.
Travel demand remains robust with year to date TSA TSA volume at approximately 100% of 2019 and about 115% at 200 to 2022 volume.
From a qualitative standpoint.
Regarding the strength of travel from the major Airlines hotel change and rental car companies remained strong through the remainder of this year aided by the continued pickup in business travel.
We are also seeing continued growth in cash flows to use toll roads, which is an important secular tailwind for our commercial services business through.
Through the first half of 2023, four new cashless toll roads or bridges for constructed including the I 70 Express lanes in Denver, Colorado. In addition, the Virginia Dulles toll road outside of Washington D. C converted fully to cashless tolling.
As you know our enterprise agreement is up for renewal and well underway. The contract initially expired at the end of May and we are operating on one month extensions, while the parties work on the contract renewal I anticipate the agreement being completed this month.
In addition, as I mentioned earlier, we have further strengthened our FMC and direct fleet business driven by the investments we've made in expanding customer relationships with fleet management companies and the addition of the direct sales function.
It has been an outstanding job of offering a suite of our tolling title and registration and violations management solutions to provide a customizable and value added proposition to our customers.
Over the first half of this year, our focus on FMC relationships and the Buildout of a direct sales team has resulted in significant growth in combined vehicle solutions, we deliver to our customers. Moreover, the FMC and direct fleet business will exit the year on a $60 million run rate a low double digit growth rate over last year and going for.
We would expect the business to deliver growth consistent with the overall commercial services long term growth rate.
Moving onto government solutions, our revenue grew 6% over the same period last year.
Which 96% with recurring service revenue.
<unk> sales growth is benefiting from the prior year completion of the New York City, Buildout and the city's decision to transition to 24 by seven monitoring as well as program expansion with existing customers and new camera installations with new customers.
Looking at the Big picture in government solutions, we're operating commenced the most favorable legislative environment I have experienced in my nine years with mobility.
States are increasingly turning toward enhanced automated enforcement to increase traffic safety for their citizens and the second quarter alone significant positive legislative actions were taken in Florida, Colorado and Connecticut.
<unk>, Florida legislation authorizing automated speed enforcement in school zones and school bus enforcement was signed by the Governor base.
Based on prior experience in other states. It typically takes about six to 12 months before Rfps are issued for bidding.
In Colorado legislation, expanding and creating added efficiencies for automated speed enforcement was signed into law.
It can also pass legislation authorizing automated speed in led light enforcement.
We expect the potential revenue opportunities.
Excuse me.
We expect a potential revenue opportunities across the three states will be an approximate 50% to $60 million run rate once fully implemented its too early to estimate the specific revenue cadence, but in our experience. These programs typically ramp up across the municipalities choose to launch enforcement programs over a period of one to three years.
In addition, although it is still early in the process. We're seeing continued positive momentum in California, and Pennsylvania, and we're excited about helping governments meet constituents' demands to help keep children children drivers pedestrians cyclists and workers safer on the road.
With respect to contract signings during the second quarter, we renewed a top five their mobility safety enforcement customer contract or customer renewed their base business relationship with us for a two year contract term with three one year option periods.
In addition to this base business renewal our customers selected us for additional expansion opportunities among red light speed and school bus stop arm enforcing which has the potential to more than double our existing run rate with the customer.
Additionally, we successfully rolled out the Connecticut works on speed program supporting their pilot program.
The execution by the implementation team is fantastic and the program is driving the intended driver behavior changes cannot indicate are seeking.
We believe that we have hit an inflection point in automated photo enforcement, where citizens are demanding safer roads and governments are responding with enhanced automated solutions.
Our technology, we are helping governments quickly and efficiently deliver tangible results for their communities plainly speaking. These automated safety programs are highly effective we and our customers see demonstrated lower speeds your red light running collisions and a general adherence to road safety and traffic laws.
End result, being a measurable and sharp reduction in crash related fatalities and injuries.
Across the board. This is a truly exciting time for our company and for all those who are passionate about public safety.
Now, let's discuss T. Two systems, we delivered revenue growth of 14% year over year with 76% being recurring subscription and service revenue importantly, the continued growth in TTS SaaS and services with a key influencing factor in our decision to acquire this business in the fourth quarter of 2021 and no.
<unk> T to SaaS and service revenue grew 11% over last year, a key performance metric try in future.
Margin expansion in the business.
However, we expect to see a higher rate of growth in SaaS and services during the second half of this year.
Q2 systems also closed a large new customer in the University space that included our flex enterprise software solution as well as our gated facility solution on.
On the municipal front Pizza closed 15, new municipal counts in the tier two and tier three municipalities face and we continue to gain traction, adding new logos in that segment.
In summary, I'm incredibly pleased with our operating performance in our App and I'm optimistic about the future industry trends as I said previously we have a great business with a bright future the underlying kpis driving our commercial services business are strong and durable and we have an incredibly favorable favorable legislative environment with more and more cities.
States, gaining conviction around keeping roadway se, which will drive the future of our government solutions business and the complexities surrounding University municipality parking represent prime opportunities for the future growth and profitability of the <unk> business.
Greg I'll turn it over to you to guide us through our financial results and current year outlook.
Thanks, David Good afternoon, and thanks to everyone for joining us on the call I'll start out today by providing an overview of our second quarter results followed by our 2023 financial guidance and I'll conclude with a brief discussion on capital allocation.
Let's turn to slide four which outlines revenue and adjusted EBITDA performance for the consolidated business total revenue increased approximately 9% year over year to $204 million for the quarter driven by strong operating performance across the company <unk>.
Excluding domestic government solutions product sales in the second quarter of last year total revenue grew 13% year over year.
Recurring service revenue grew 12% over the prior year quarter, driven by strong travel demand and the expansion of the New York City School Zone speed program at.
At a segment level commercial services revenue grew 11% year over year government solutions service revenue increased by 14% over the prior year and teaching system service revenue grew 11% over the second quarter of last year.
Product revenue was $8 million for the quarter about $5 million of this total was from T. Two systems, while 3 million was from international product sales within government solutions.
From a total profit standpoint, consolidated adjusted EBITDA of $95 million increased by approximately 7% over last year. The core business defined as excluding onetime domestic government solutions product sales generated adjusted EBITDA growth of approximately 10% versus the second quarter of 2022.
Turning to slide five we've generated about $357 million of adjusted EBITDA on approximately $780 million of revenue on a trailing 12 month basis, representing a 46% adjusted EBIT margin.
Over the same term, we've generated about $174 billion of free cash flow or 49% conversion of adjusted EBITDA, representing $1 13, a free cash flow per share.
Moving to commercial services on slide six we delivered revenue of $94 million in the second quarter, which is an 11% year over year increase.
<unk> tolling revenue increased 16% over the same period last year, driven by robust traveled by robust travel volume and increased rental volume.
Additionally, our FMC business grew 17% year over year as our growth initiatives continue to produce the intended results.
Second quarter adjusted EBITDA in commercial services was $61 million representing.
Representing 8% year over year growth.
Adjusted EBITDA margins of about 65% reflected normal seasonality and were down slightly compared to the second quarter of last year due primarily to growth investments in our FMC business.
Let's turn to slide seven and we'll take a look at the results of the government solutions business.
Driven primarily by New York city's photo enforcement expansion efforts service revenue increased by $10 million or 14% over the same period last year to $85 million per quarter.
With New York City School Zone speed now fully implemented product revenue of about $3 million was driven by international adjusted.
Adjusted EBITDA was 30 billion for the quarter, representing margins of 34% essentially flat with the prior year. Despite the platform investments we're making.
Quickly turning to slide eight we had a solid quarter and parking solutions and remain on plan for the year.
Revenue of $22 million and adjusted EBITDA of about $4 million were directly in line with expectations. In addition, the mix of hardware service and SaaS revenues were largely as expected.
Moving to slide nine we'll take a look at reported income and leverage.
We reported net income of $19 million for the quarter, including a tax provision of about $13 million, representing an effective tax rate of 40%.
As a reminder, our tax rate is heavily impacted by permanent differences related to mark to market adjustments for our private placement warrants adjusted.
Adjusted EPS, which excludes amortization stock based compensation and other nonrecurring items was 29 per share for the current quarter, which is <unk> <unk> per share higher than the second quarter of 2022.
On the right hand side of the page you can see that we ended the second quarter with a net debt balance of $949 million, resulting in net leverage of two seven times for the second quarter.
The primary drivers were strong free cash flow debt repayments and the cash exercise of about $13 8 million warrants, which yielded approximately $106 billion in cash proceeds during the second quarter.
At the end of the second quarter, we have paid down approximately $80 million of floating rate term loan debt on a year to date basis, our gross debt balance at quarter end stands at about $1 2 billion of which approximately $809 million was floating rate debt.
Moving on to cash we generated approximately $63 million in cash flow from operating activities, resulting in $51 billion of free cash flow for the quarter.
Okay, Let's turn to slide 10, and have a look at the full year 2023 guidance based on our year to date results and our outlook for the remainder of the year, we are increasing our guidance for revenue to an updated range of between 808 hundred $10 million.
We are guiding to the upper end of the previously communicated ranges for both adjusted EBITDA and free cash flow.
And finally, we are maintaining the existing adjusted EPS range, primarily driven by increased share count, which I will discuss next.
As of today's call both the third and fourth earn out share tranches, which were $2 5 million each were issued to platinum equity the company's former private equity owner. The third tranche was triggered in the second quarter and the fourth tranche was triggered subsequent to the end of the quarter.
Our weighted average fully diluted share count of 162 million shares for total year 2023, contemplates 5 million newly issued shares as well as the impact of the warrant exercises I discussed earlier.
In terms of cadence for the remainder of the year, we anticipate both revenue and adjusted EBITDA to increase in the third quarter with low single digit sequential growth.
This is due to the dynamic in which a higher percentage of leisure travel is occurring in the second quarter compared to pre COVID-19 seasonality.
Consistent with historical trends, we would then expect a modest reduction to revenue and adjusted EBITDA in the fourth quarter.
Our commercial services outlook contemplates PSA volumes in that 99% of 2019 volume range for the remainder of the year.
As a reminder, in government solutions for the second half of 2023, we expect the year over year decline in product sales and the service revenue comps will be tougher due to the installation timing of New York City cameras last year and the anniversary of the transition to $24 seven camera monitoring.
Our increased guidance also contemplates increased one time operating and SG&A costs and commercial services focused on growing our FMC business as well as product innovation to support new lanes of growth going forward.
In addition, we anticipate increased operating cost in government solutions for engineering staffing and technology development in the back half of the year supporting the platform investments we have discussed previously.
Specifically these investments will support enhanced compliance data security and tools to enable onboarding new clients more efficiently.
All of the all of these investments are focused on driving future revenue growth.
Moving now to our capital allocation plans for the remainder of the year.
As of today's call, we have processed the exercise of approximately $17 3 million warrants in exchange for the exchange for the issuance of approximately 15 million shares.
Warrant holders have redeemed approximately $14 million of the $17 3 million total warrants on a cash basis, which has yielded about $161 million in cash proceeds to date.
As a reminder, we issued 20 million warrants in conjunction with our IPO in 2018.
As of today about 87% of those warrants are now retired and verra mobility is rapidly moving towards a fully <unk> capital structure.
For the remainder of 2023, we plan to pursue a balanced approach to capital allocation through paying down debt and executing share repurchases.
To this point, we have paid down an additional $100 million of floating rate debt in early August , bringing our total debt pay down for the year to about $180 million as.
As we discussed previously we have hedged approximately $675 million or about 95% of our current floating debt total with a float for fixed rate swaps.
This hedging instrument fixes the sulfur portion of our sulfur plus 325 basis point term loan b at a rate of five 2% for three years with a monthly option to cancel beginning in December 2023 that will be able to execute in the event interest rates move in our favor.
Under this balanced capital allocation approach and combined with our free cash flow estimate for the remainder of the year, we expect net leverage to land around two five times by year end 2023.
In summary, we are excited about where the company is currently positioned and are confident we are well set up to execute into the future.
This concludes our prepared remarks, thank you for your time and attention today at this time I'd like to invite Kelsey to open the line for any questions Kathy.
Thank you ladies and gentlemen, we will now begin the question and answer session.
Please press the star followed by the one and you touched on.
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One moment please state your question.
And your first question comes from.
Is that from.
Lewis.
Bank. Please go ahead.
Yes. Thank you so much.
Hi, everyone. So I wanted to ask about commercial services margins.
And I'm wondering if there was any impact from the all inclusive pricing that you talked about or is it is it mostly just the investments in fleet management that you mentioned.
And maybe if you can disaggregate.
The impact from from those investments and how we should think about that in the back half of SCR.
Yes sure.
For the question.
I mean, the way, we think about it I think the commercial services business is going to be flat to slightly up from a margin standpoint year over year.
So we are certainly seeing the margin uplift both from the strength that we continue to see coming out of TSA as we've talked about in previous quarters and the strength of the all inclusive product when I talk about those investments I think it'll be easier if I talk about it from a total company level. So those investments are approximately $5 million to $7 million in the back half.
Of the year and I think the easy way to think about that is if you take the increased guidance that we set for revenue and you held margin constant would EBITDA would you get to be a little higher than the EBITDA range that we have the delta between those two is that one time investment. So I think I got the first part of your question. The second part of your question is out.
Of that $5 million roughly half of that is in the commercial services business. So without that investment we would see a little margin of course year over year, we wouldn't see that great 17% growth we saw in the FMC business in second quarter.
Understood. Thank you and then just secondly on the government solution side, there's obviously been a lot of legislation that we've been following that you talked about.
I'm curious sort of your.
You, you've talked about $50 million to $60 million overdone, rather new to talk about.
Big picture sort of how you get there what are some of the what do you assume in terms of market share. What's the what are the competitive dynamics like and help us help us think through the revenue benefit of that as you look out over the next two to three years.
Yes. Thanks. Good question the way, we think about it is one we felt that $50 million to $60 million Tam is probably as I mentioned earlier the largest one year opening that I've seen in nine years and so we think that favorability is going to be with us for a while because more and more people are getting.
Used to enforcement as it continues to be around year over year, and two the benefits or just sort of unquestionable.
With that being said, we certainly have competitors and some of that some of that is depending on the product or the use case. So.
Different from Red light versus speed versus.
Bus enforcement.
Sometimes its geographic but.
We continue to compete and win well with if you look at Rfps and our overall win rate is still remains very high and we would anticipate the way we think about as we would like to win.
Over the next probably three to five years, because it does take a little bit of time for some of these states to activate somewhere close to our overall market share.
Great. Thank you so much.
Okay.
Thank you and your next question comes from Nick <unk> from Credit Suisse. Please go ahead.
Yes, congrats on the strong quarter and thanks for taking my question.
Firstly I just wanted to.
Hum.
Get a little more color on what's driving the high revenue growth in the fleet management business then.
Why you would expect our revenue growth to slow down next year, just kind of given all the growth investments you're making this year and then for my follow up wanted to ask if you think that there is potential for the government solutions business overall to grow.
Grow above the mid single digits.
Medium term guidance you provided last year at your Investor Day.
Maybe like 25 2025 through 2027, just given the favorable legislative backdrop that you're seeing today.
Thank you.
Yes, sure Nick Let me, let me try to unpack that so for the.
The first one on the FMC business I think the business started growing also in the back half of last year. So there is a little bit of a.
Comp dynamic in the back half of the year I can't continue to grow the business at 16 or 17% year over year.
I think that that growth rate gets into the high single digits to approaching let's call. It the high single digits in the back half of next year, and that's where I expect it to be.
Sorry, the back half of this year, that's where I expect that going into next year I think the simple answer of how we got there as we resource.
We've got some really good commercial talent that we brought in that was phase one phase two is developing tools that are going to help us onboard.
Clients much more effectively so effectively army that commercial talent that we brought in with tools to grow the market and so thats, where kind of in phase one we're spending on phase two I liked the return on phase one I'm excited about what we can accomplish in phase two so I think thats fleets.
When we think about government solutions, not ready to say that yet.
Like here's why financial Okay.
As David went through in really good detail I Love, where we are in terms of call. It.
The motion and the regulation here, what we haven't yet seen is how that moves from a statewide law to an actual RFP and there is a process that goes in between there and that tells US a couple of things number one is how much we're going to play in that area and I think the second thing is going to be at what pace that comes in.
If I were sitting here a year ago, I would say I feel more confident about the growth that I did a year ago for sure, but I'm not ready to kind of go up from the mid single digit organic growth just yet.
Great. Thanks for all the color.
You bet.
Thank you.
Ladies and gentlemen, as a reminder, if you have a question. Please press the star followed by the way.
Next question comes from Daniel Moore from CJS Securities. Please go ahead.
Thank you good afternoon, David Craig Thanks for taking questions.
Maybe we covered a lot.
Maybe drill in a little more in Q2, obviously really solid growth on the SaaS side, you know just talking to the opportunity.
You know the opportunity funnel, what that looks like both near term and longer term relative to.
Maybe your initial expectations when you acquired it.
Yeah. Thanks, Dan for the question what I would say is what we're seeing right now is kind of exactly what we would want to see which is increasing.
Increasing growth in the SaaS portion of the business.
That's kind of the that's the best part of what the TT business brings to offer and part two is sort of as we're starting to see them win more within the municipality space that was kind of a hypothesis number.
Two behind the acquisition and Theyre starting to do that they have are really what I would call world class platform for permits and enforcements and we're starting to see that really catch on when we say tier two or tier three that's just the size of the municipality and.
And so if you look at that what I might just call. It more broadly the middle market municipalities. We've got a real strong program.
In hardware to support it as well so I would say right now we're very excited about the trip.
The trajectory of the business.
Very helpful and maybe one more.
I appreciate the color Craig.
Obviously, the progress you made not only from a cash flow perspective, but also on the warrants.
You know over 90, well over 90% of your debt now fixed.
Fixed or hedged and leverage ticking down towards two five times is it time to go on offense, a little bit more and maybe talk about what the M&A pipeline might look like.
I'll take the I'll take that question yes.
We have.
We're not sitting on the sidelines I can assure you that we're definitely on offense. So we continue to manage what we would consider as a very thoughtful approach.
As Craig mentioned earlier, we're also making some investments in the business into some new products and some commercial resources across the portfolio. Because we are seeing traction that we think we can accelerate just in the products and services that we have today.
Plus some related adjacencies to those core businesses. So that's part one and then part two we continue to maintain a robust M&A pipeline, but at the same time, we also maintained high bars as to how we think about that.
So I think you would still anticipate us to be very very active in the back half of this year first part of next year, but in the meantime, we will continue to allocate capital in a very systematic way, which is in the best use of shareholders consistent with our pattern and practice a pass at the past.
And the last one and I'll jump out but on the guidance I think you indicated.
It implies about 99% a TSA level relative to pre pandemic for the back half of the year do you expect.
A little bit of a tick lower or is that sort of building in conservatism.
Yes.
Looked at it this morning on a year to date basis, Dan I'll give you. The exact total is 100.0% I think year to date through August at 99%. So I don't.
We're not going to call it that fine. So I just think that the 99%. We took where we are through August I don't have any indication I think on a more macro level I don't have any indication that we're going to see.
Any softening in the near term horizon. So.
We're pretty confident with that number and what we see today.
Okay. Thank you.
Thank you.
And your last question comes from.
De Palmas from William Blair. Please go ahead.
David Craig and Mark good afternoon.
Hey, Louie.
David you referenced the legislative momentum for our schools on speed cameras on the New York City schools on speed camera vision Zero program I believe.
And in 2020 due the statistics overwhelmingly show that the cameras have been effective at reducing <unk>.
<unk> is an accident.
In general.
Across the United States. Our city is looking at the New York City program as a blueprint for success at this initiative.
Yeah, Great question. So I think what we've been able to show not only in speed, but also and crossing guard as well as in Red light that.
The cameras work they are designed to change driver behavior and they do if you look at the average speed in school zones pre camera versus post camera. They go down precipitously.
Excellent rates go down all of the all of the markers that you would look for work and it is doing so in a force multiplier environment.
Meaning that you're not having to use.
Police force to go out and enforce that we're doing it automatically so.
What we're seeing is I think that New York has been a real trailblazer on this and certainly other cities look to New York and the results that they're getting while they may deploy in a slightly different way depending on the legislation or are there kind of local environment. We would say that New York has been a trendsetter in that way and we will continue to look to them.
To the future they look at other use cases for enforcement.
Okay.
All of these products.
Okay.
Some cities have shut down red light camera programs for various <unk>.
Political reasons.
Is it possible that some of these same cities they were.
Opposed to Red light camera programs are more willing to adopt the schools on speed camera programs.
In like Florida, or other cities that recently have the positive legislation.
Yeah, I totally agree with that.
We've been using the terminology is.
As you know call purpose built which is.
Where before Red light camera was the first use case of enforcement in the United States.
The market is really listen to what our customers are telling us and starting to say hey, we have these very specific needs can you create elegant technology solutions to solve them and we have so schools on speed was probably what I might call.
And that use case number one.
And that started with fix and then we went to mobile and then we went to portable.
And then you start to look at work zones.
I'd say that cities.
When I say, hey, how do we still have this problem, maybe we don't like Red light, but these are really these are precious cargo areas in our city, we want to make sure that they're protected so I would say, yes, you would start to see adoption there.
Great and last one for Craig with the expected renewal of <unk>.
Enterprise is there expected to be any material changes from prior agreement.
No we don't we don't expect that.
I don't expect that at all.
Excellent. Thanks, that's it for me.
Thank you thanks a lot.
Thank you.
And there are no further questions at this time Mr. Zinner you may begin.
Thank you everyone for your participation today.
Have a great day, thank you everybody.
Ladies and gentlemen, this concludes your conference call for today, we thank you very much for participating and ask that you. Please disconnect your lines.
Thanks.
Yeah.
The conference is no longer being recorded.