Q1 2024 Verra Mobility Corp Earnings Call

Operator: Good afternoon, ladies and gentlemen, and welcome to the Verra Mobility first quarter 2024 earnings call. At this time, all lines are in a listen-only mode.

Good afternoon, ladies and gentlemen, and welcome to the Vera Bradley Chief first quarter 'twenty 'twenty four earnings call. At this time all lines are in a listen only mode.

Operator: Following the presentation, you 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. This call is being recorded on Thursday, 2nd May, 2024. I would now like to turn the conference over to Mark Zindler, Vice President of Investor Relations. Please go ahead.

Operator: Following the presentation, we will conduct a question and answer session.

Speaker Change: At any time during this call you require immediate assistance. Please press star zero for the operator.

Mark Zindler: This call is being recorded on Thursday second of May 'twenty 'twenty four I would now like to turn the conference over to Mark <unk>, Vice President of Investor Relations. Please go ahead.

Mark Zindler: Thank you. Good afternoon, and welcome to Verra Mobility's first quarter 2024 earnings call. Today, we'll be discussing the results announced in our press release issued after the market closed, along with our earnings presentation, which is available on the investor relations section of our website at ir.verramobility.com. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer, and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A.

Mark Zindler: Thank you good afternoon, and welcome to the <unk> first quarter 2024 earnings call today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations Relations section of our website at IR dot their mobility dot com.

Mark Zindler: With me on the call are David Roberts, Verra mobility, as Chief Executive Officer, and Craig <unk>, Our Chief Financial Officer.

Mark Zindler: David will begin with prepared remarks, followed by Craig and then we'll open up the call for Q&A.

Mark Zindler: Management may make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company. However, we caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These factors are described in our SEC filing. Please refer to our earnings press release for Verra Mobility's complete forward-looking statement disclosure.

Mark Zindler: Management may make forward looking statements during the call regarding future events anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.

Mark Zindler: Actual results may differ materially from those projected in the forward looking statements due to a variety of factors. These factors are described in our SEC filings. Please refer to our earnings press release for Verra mobility is complete forward looking statement disclosure.

Mark Zindler: We do not undertake any obligation to update or look and state. Finally, during today's call, we'll refer to certain non-GAAP financial missions. A reconciliation of these non-gap measures to the most directly comparable gap measure is included in our earnings release, which can be found on our website at ir.verramobility.com and on the SEC's website at sec.gov. With that, I'll turn the call over to David. Thank you, Mark, and thanks.

Mark Zindler: We do not undertake any obligation to update forward looking statements.

David: Finally during today's call, we will refer to certain non-GAAP financial measures a reconciliation of these non-GAAP measures.

David: Most directly comparable GAAP measure is included in our earnings release, which can be found at our website at IR Docs verra mobility dot com and on the Sec's website at SEC Gov.

Mark Zindler: With that I'll turn the call over to David.

David Martin Roberts: Thank you, Mark, and thanks to everyone for joining us. We had a strong start to the year with revenue, adjusted EBITDA, and earnings exceeding our internal expectations for the first quarter. Moreover, all three business units met or exceeded our internal expectations for adjusted even done for the quarter. Through our customer-oriented solutions and execution strength guided by the Verra Mobility Operating System, or VMOS, we are consistently delivering strong financial performance. Consolidated revenue growth was 9%, adjusted EBITDA increased 6%, and adjusted pre-cash flow increased 57% over the prior year period, demonstrating the predictable strength of our portfolio business.

David: Thank you Mark and thanks, everyone for joining us we had a strong start to the year with revenue adjusted EBITDA and earnings exceeding our internal expectations for the first quarter.

David Martin Roberts: Moreover, all three business units met or exceeded our internal expectations for adjusted EBITDA for the quarter.

David Martin Roberts: Through our customer oriented solutions and execution strength guided by the verra mobility operating system or a b M. O S. We are consistently delivering strong financial performance.

David Martin Roberts: It's all dated revenue growth was 9% adjusted EBITDA increased 6% and adjusted free cash flow increased 57% over the prior year period, demonstrating that predictable strength of our portfolio of businesses.

David Martin Roberts: Based on the first quarter's financial performance and our outlook for the remainder of the year, we're increasing our full year 2024 guidance, which Craig will elaborate on in his remarks. Now, moving on to our business unit operations.

David Martin Roberts: On the first quarter financial performance and our outlook for the remainder of the year, we're increasing our full year 2024 guidance, which Craig will elaborate on in his remarks.

David Martin Roberts: Now moving onto our business unit operations.

David Martin Roberts: The Commercial Services team delivered outstanding results driven by strong and durable domestic travel trends and our continued strong performance in the fleet management business. First quarter revenue of $96 million grew 12% over the prior year quarter, and adjusted EBITDA margins of 63% were up about 90 basis points over last year due primarily to the strength of RAC tolling. First quarter TSA throughput volume was about 106% of 2023, driving strong growth and adopted rental agreements and tolls incurred, all of which resulted in a 10% increase in rack tolling revenue.

David Martin Roberts: Commercial services team delivered outstanding results, driven by strong and durable domestic travel trends and our continued strong performance in our fleet management business.

David Martin Roberts: First quarter revenue of $96 million grew 12% over the prior year quarter and adjusted EBITDA margins of 63% were up about 90 basis points over last year due primarily to the strength of Iraq totally.

David Martin Roberts: First quarter TSA throughput volume was about 106% of 2023, driving strong growth and adopted rental agreements and tolls incurred all of which resulted in a 10% increase in rack tolling revenue.

David Martin Roberts: Additionally, our FMC business generated revenue of $17 million for the quarter, representing 25% growth over the prior year period, primarily driven by enrollment of new vehicles and increased tolling from FMC customers. Looking ahead, over the course of 2024, we expect continued strength in rack tolling revenue due to strong travel bookings based on commentary from the major airlines and hotel chains. In our FMC business, we are anticipating a modest pullback in relative growth rates over the balance of the year due primarily to tougher comps this year.

David Martin Roberts: Additionally, our FMC business generated revenue of $17 million for the quarter, representing 25% growth over the prior year period, primarily driven by enrollment of new vehicles, an increase totaling from FMC customers.

David Martin Roberts: Looking ahead over the course of 'twenty 'twenty four we expect continued strength in rack tolling revenue due to strong travel bookings based on commentary from the major Airlines and hotel chains.

David Martin Roberts: In our FMC business, we are anticipating a modest pullback in relative growth rates over the balance of the year due primarily to tougher comps this year.

David Martin Roberts: The underlying strength of commercial services, and particularly the strong travel outlook, were the key factors influencing the decision to raise full-year guidance. Moving on to government solutions, recurring service revenue, which reflects 96% of total revenue for the quarter, grew 8% over the same period last year. The recurring service revenue growth was driven by program expansion from existing customers and new cities implementing photo enforcement efforts to improve road safety. To this point, outside of New York City, we drove 15% revenue growth due to our existing customers' efforts to expand their safety programs. Total revenue, including international product sales, was up about 10% over the prior year quarter.

David Martin Roberts: The underlying strength of commercial services, and particularly the strong travel outlook or the key factors influencing the decision to raise full year guidance.

David Martin Roberts: Moving onto government solutions recurring service revenue, which reflects 96% of total revenue for the quarter grew 8% over the same period last year.

David Martin Roberts: The recurring service revenue growth was driven by program expansion from existing customers and new cities implementing photo enforcement efforts to improve road improve road safety.

David Martin Roberts: To this point outside of New York City, we drove 15% revenue growth due to our existing customers efforts to expand their safety programs.

David Martin Roberts: <unk> revenue, including international product sales were up about 10% over the prior year quarter.

David Martin Roberts: As we discussed in our last earnings call, we are seeing RFPs and award activity continue to ramp up in Florida. I am pleased to report that, year-to-date, we have executed contracts for school zone speeding, school bus stop arms, and red light programs that, in the aggregate, represent potential recurring revenue of up to $7 million per year. Additionally, on the international side of the GS business, we were awarded an extension of our National Highways Maintenance Contract in the United Kingdom for our Variable Speed and Lane Closure System.

David Martin Roberts: As we discussed in our last earnings call. We are seeing Rfps and award activity continued to ramp up in Florida I am pleased to report that year to date, we've executed contracts for schools on speed School bus stop arm and Red light programs that in the aggregate represent potential recurring revenue of up to $7 million per year.

David Martin Roberts: Additionally, on the international side of the business, we were awarded an extension of our national highways maintenance contract in the United Kingdom for our variable speed and lane closure systems. This contract award will drive an approximately $2 million of our increase in the current revenue run rate.

David Martin Roberts: This contract award will drive an approximately $2 million ARR increase in the current revenue run rate. We're also very pleased to report that in the state of Washington, legislation was passed for the expansion of speed programs, bus lane automated enforcement, and other beneficial reforms. Overall, we had a strong first quarter from an awards perspective. We're highly competitive in the market and winning our fair share of deals, which for the quarter represent up to 10 million dollars of incremental full run rate ARR potential. Moving on to the New York City Automated Enforcement Renewal Contract, the city recently published a notification indicating its intention to release the RFP in fiscal year 2024, possibly late in the second quarter of this year.

David Martin Roberts: We're also very pleased to report that in the state of Washington legislation was passed with the expansion of speed programs bus lane automated enforcement and other beneficial for forums.

David Martin Roberts: Overall, we had a strong first quarter from an awards perspective, we're highly competitive in the market and winning our fair share of deals which for the quarter represented up to $10 million of incremental full run rate or our potential.

David Martin Roberts: Moving on to the New York City automated enforcement renewal contract. The city recently published a notification, indicating its intention to release the RFP in fiscal year 2024.

David Martin Roberts: Essentially late in the second quarter of this year, we expect this to be a competitive procurement and believe we had a strong combination of best in class technical solutions and market experience to compete effectively for this program.

David Martin Roberts: We expect this to be a competitive procurement and believe we have a strong combination of best-in-class technical solutions and market experience to compete effectively for this program. Next, a brief update on T2 Systems. We generated total revenue of approximately $20 million for the first quarter, as we anticipated one-time product revenue declined by about $1 million compared to the prior year quarter due to a structural transition away from hardware and towards software and mobile solutions. As product revenue decelerates, we also experience a decline in one-time ancillary installation and maintenance services revenue.

David Martin Roberts: Next a brief update on teaching systems, we generated total revenue of approximately $20 million for the first quarter as we anticipated one time product revenue declined by about $1 million compared to the prior year quarter due to a structural transition away from hardware and toward software and mobile solutions.

David Martin Roberts: As product revenue Decelerates. We also we also experienced a decline in onetime ancillary installation and maintenance services revenue.

David Martin Roberts: Recurring SAS revenue was up 5% over the prior year quarter. Adjusted EBITDA of $3 million for the quarter was primarily driven by year-over-year SAS revenue growth. For the full year, we continue to expect T2Systems to deliver mid-single-digit revenue growth and return to high-single-digit revenue growth over the long term, driven by the strength and focus on SaaS and the introduction of transactional revenue pricing opportunities. Turning to capital allocation, we further reduced net leverage to 2.4 times, providing optionality for future capital deployment.

David Martin Roberts: Recurring SaaS revenue was up 5% over the prior year quarter, adjusted EBITDA of $3 million for the quarter was primarily driven by the year over year SaaS revenue growth.

David Martin Roberts: For the full year, we continue to expect teacher assistant to deliver mid single digit revenue growth and returned to high single digit revenue growth over the long term driven by the strength and focus on SaaS and the introduction of transactional revenue pricing opportunities.

David Martin Roberts: Turning to capital allocation, we further reduced net leverage to two four times provide.

David Martin Roberts: Providing optionality for future capital deployment with respect to M&A. The pipeline is growing we've been disciplined around valuation, but remain active in our evaluation of opportunities. Additionally, we have an open authorization for a $100 million stock buyback.

David Martin Roberts: With respect to M&A, the pipeline is growing. We've been disciplined around valuation but remain active in our evaluation of operations. Additionally, we have an open authorization for a $100 million stock buyback. Through the first quarter, we have sought to increase cash on the balance sheet, but the open buyback continues to be a viable option for capital deployment.

David Martin Roberts: Through the first quarter, we have sought to increase cash on the balance sheet, but the open buyback continues to be a viable option capital deployment.

David Martin Roberts: Lastly, I'll provide a brief update on the company-wide implementation of the Verra Mobility Operating System, or VMOS. Two years ago, we set out to build the future of Verra Mobility. We knew that to deliver unparalleled value to our customers, empower our employees, and maximize returns for shareholders, we needed a unified and standardized approach to continuously improve the critical areas of our business. We established the Verra Mobility Operating System, a dynamic set of mechanisms and tools designed to drive operational excellence and spark continuous improvement across all parts of Verra Mobility.

David Martin Roberts: Lastly, I'll provide a brief update on the company wide implementation of the verra mobility operating system for BMO Pos.

David Martin Roberts: Two years ago, we set out to build the future of air mobility, we knew it to deliver unparalleled value to our customers empower our employees and maximize returns for shareholders, we needed a unified and standardized approach to continuously improve the critical areas of our business.

David Martin Roberts: We established that verra mobility operating system, a dynamic set of mechanisms and tools designed to drive operational excellence and spark continuous improvement across all parts of air mobility.

David Martin Roberts: Since then, we have deployed VMOS mechanisms and core focus areas, including operating reviews, strategic planning and deployment, problem solving, and sales funnel management. As an organization, we are building muscle memory around leveraging VMOS to drive operational excellence across these areas. Finally, as we announced in our press release last month, I'd like to formally welcome and congratulate Kate Prescott on her appointment as Executive Vice President and Chief People Officer. Kate's HR experience and leadership expertise will be instrumental in shaping our organization and HR strategy. Welcome to Team Tate. Craig, I'll turn it over to you to guide us through our financial results and the 2024 guidance update. Thank you.

David Martin Roberts: Since then we have deployed bmo's mechanisms in core focus areas, including operating reviews strategic planning and deployment problem solving and sales funnel management as.

Craig: As an organization we are building the muscle memory around leveraging BMO is to drive operational excellence across these areas.

Craig: As we announced in our press release last month I'd like to formally welcome and congratulate Kate Prescott on her appointment as executive Vice President and Chief people Officer.

Craig: Its HR experience and leadership expertise will be instrumental in shaping our organization and HR strategy welcomed to the teen cases.

Craig: Greg I'll turn it over you to guide us through our financial results into 2024 guidance update.

Craig C. Conti: Thank you, David. Good afternoon, and thanks to everyone for joining us on the call. I'll start out today by providing an overview of our first quarter results, followed by an updated overview of how we're thinking about full year 2020. Let's turn to slide four, which outlines the key financial measures for the consolidated, [inaudible] Total revenue increased approximately 9% year-over-year to $210 million for the quarter, driven by strong recurring service revenue growth across the year.

Craig: Thank you David Good afternoon, and thanks to everyone for joining us on the call I'll start out today by providing an overview of our first quarter results followed by an updated overview of how we're thinking about full year 2024.

Craig C. Conti: Let's turn to slide four which outlines the key financial measures for the consolidated business for the first quarter.

Craig C. Conti: Total.

Craig C. Conti: <unk> increased approximately 9% year over year to 210 billion for the quarter driven by strong recurring service revenue growth across the company recurring service revenue grew 10% over the prior year quarter, driven by strong travel demand in the SCS business and recurring service revenue growth outside of New York City and the G. S.

Craig C. Conti: Recurring service revenue grew 10% over the prior year quarter driven by strong travel demand in the CS business and recurring service revenue growth outside of New York City in the GS business. At the segment level, commercial services grew 12% year-over-year, government solutions service revenue increased by 8% over the prior year, and T2 system SaaS and services revenue grew 5% over the first quarter of 2014. Product revenue was $7 million for the quarter. About $3 million of this total was from T2 systems, while $4 million was from government solutions, the majority of which were international products.

Craig C. Conti: At the segment level.

Craig C. Conti: Commercial services grew 12% year over year government solutions service revenue increased by 8% over the prior year and key to system SaaS and services revenue grew 5% over the first quarter of 2023.

Craig C. Conti: Product revenue was 7 million for the quarter about $3 million of this total was from key two systems, while 4 million was from government solutions, the majority of which were international products.

Craig C. Conti: From a total profit standpoint, Consolidated Adjusted EBITDA of $93 million increased by approximately 6% over last year. We reported net income of $29 million for the quarter, including a tax provision of about $10 million, representing an effective tax rate of 25%. The tax rate includes certain discrete items which favorably impacted the rate for the court.

Craig C. Conti: From a total profit standpoint, consolidated adjusted EBITDA of $93 million increased by approximately 6% over last year.

Craig C. Conti: We reported net income of $29 million for the quarter, including a tax provision of about $10 million, representing an effective tax rate of 25%.

Craig C. Conti: The tax rate includes certain discrete items, which favorably impacted the rate for the quarter for the full year, we are anticipating an approximate 30% effective tax rate.

Craig C. Conti: For the full year, we are anticipating an approximate 30% effective tax rate. Adjusted EPS, which excludes amortization, stock-based compensation, and other non-recurring items, was $0.27 per share for the current quarter, compared to $0.26 per share in the first quarter of 2020. Adjusted EPS grew 4% over the prior-year quarter, despite nearly 16 million additional shares in the share count due to the completion of our DSPAC process in the second and third quarters of 2023.

Craig C. Conti: Adjusted EPS, which excludes amortization stock based compensation and other nonrecurring items was 27 per share for the current quarter compared to 26 cents per share in the first quarter of 2023.

Craig C. Conti: Adjusted EPS grew 4% over the prior year quarter, Despite nearly 16 million additional shares and the share count due to the completion of our piece back processed over the second and third quarters of 2023.

Craig C. Conti: We delivered $42 million of adjusted free cash flow for the quarter, which includes a $22 million adjustment for the resolution of the PlusPass matter at an after-tax cost. The 45% conversion of adjusted EBITDA was driven by strong operating performance at over 10 million collections that were received in early January in lieu of December. Turning to slide five, we've generated $376 million of adjusted EBITDA on approximately $835 million of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin.

Craig C. Conti: We delivered $42 million of adjusted free cash flow for the quarter, which includes a $22 million adjustment for the resolution of the plus past matters on an after tax cost base.

Craig C. Conti: A 45% conversion of adjusted EBITDA was driven by strong operating performance and over $10 billion of collections that were received in early January and look December last year.

Craig C. Conti: Turning to slide five we generated $376 million of adjusted EBITDA at approximately $835 million of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin.

Craig C. Conti: Additionally, we generated $164 million of adjusted free cash flow, or a 44% conversion of adjusted EBITDA, representing $1 of adjusted free cash flow per share on a trailing 12%. Moving to commercial services, in slide 6, we delivered revenue of about $96 million in the first quarter, increasing $10 million or 12% year-over-year. RAC tolling revenue increased 10% or about $6 million over the same period last year driven by robust travel volume and increased... Additionally, our FMC business grew 25% or about $3 million year-over-year, driven by the enrollment of new vehicles and tolling rules for the existing system.

Craig C. Conti: Additionally, we generated $164 million of adjusted free cash flow or a 44% conversion of adjusted EBITDA, representing $1 of adjusted free cash flow per share on a trailing 12 month basis.

Craig C. Conti: Moving to commercial services on slide six we delivered revenue of about $96 million in the first quarter, increasing 10 million or 12% year over year rack tolling revenue increased 10% or about 6 million over the same period last year, driven by robust travel volume and increased rental model.

Craig C. Conti: Additionally, our FMC business grew 25% or about $3 million year over year, driven by the enrollment of new vehicles and tolling growth with existing FMC customers.

Craig C. Conti: First Quarter Adjusted EBITDA in Commercial Services was $61 million, representing 14% year-over-year growth. Adjusted EBITDA margins of about 63%, a 90 basis point increase over the first quarter of last year, were largely driven by the continued strength of rack tolling and execution of our growth. Let's turn to slide 7 and we'll take a look at the results of the government's, driven primarily by growth outside of our largest customer, New York City. Service revenue increased by $7 million, or 8%, over the same period last year to $90 million for the quarter. Product revenue was about $4 million for the quarter and was driven primarily by international programs.

Craig C. Conti: First quarter adjusted EBITDA in commercial services was $61 million, representing 14% year over year.

Craig C. Conti: Adjusted EBITDA margins of about 63%, a 90 basis point increase over the first quarter of last year were largely driven by the continued strength of rack tolling and execution of our growth initiatives.

Craig C. Conti: Let's turn to slide seven and we'll take a look at the results of the government solutions business.

Craig C. Conti: Driven primarily by growth outside of our largest customer New York City <unk>.

Craig C. Conti: Service revenue increased by $7 million or 8% over the same period last year to $90 million for the quarter.

Craig C. Conti: Product revenue was about $4 million for the quarter and was driven primarily by international programs.

Craig C. Conti: Justin Ivedo's revenue was $29 million for the quarter, representing margins of 31%. The reduction in margins versus the prior year is primarily due to slightly increased spending on business development efforts, as well as a $2 million one-time benefit for a contract amendment in the first quarter of 2021. Let's turn to slide eight for the results of T2 Systems, which is our parking solutions business set. We generated revenue of $20 million and adjusted EBITDA of approximately $3 million for the quarter. Software and Services Sales increased 5% over the prior year quarter, slightly offset by a $1 million year-over-year reduction in product revenue for the quarter.

Craig C. Conti: Adjusted EBITDA was 29 million for the quarter representing margins of 31%.

Craig C. Conti: The reduction in margins versus the prior year is primarily due to slightly increase spending on business development efforts as well as a $2 million one time benefit for a contract amendment in the first quarter of 2023.

Craig C. Conti: Let's turn to slide eight for the results of <unk> systems, which is our parking solutions business segment.

Craig C. Conti: We generated revenue of $20 million and adjusted EBITDA of approximately $3 million for the quarter.

Craig C. Conti: Software and services sales increased 5% over the prior year quarter slightly offset by a $1 billion year over year reduction in product revenues for the quarter.

Craig C. Conti: This decrease was expected based on the transition we're seeing from hardware to software and mobile solutions. Before I close out the financial review of the quarter, I'd like to give you an update on where we stand on the material weakness we described in our 2023-10. In our 10k, we described several deficiencies regarding IT general control gaps, which aggregated to a material weakness last year. While our remediation work is nearly complete, the new controls are required to operate for a sufficient length of time and will undergo additional testing to ensure that they are operating at We will continue to keep you updated on our progress, and we remain confident in our correctness.

Craig C. Conti: This decrease was expected based on the transition we're seeing from hardware to software and mobile solutions.

Craig C. Conti: Before I close out the financial review of the quarter I'd like to give you an update on where we stand on the material weakness. We described in our 2023 10-K.

Craig C. Conti: In our 10-K, we described several deficiencies regarding I teed general control gaps, which aggregated to one material weakness last year, while our remediation work is materially complete the new controls are required to operate for a sufficient length of time. It will undergo additional testing to ensure that they are operating at.

Craig C. Conti: We will continue to keep you updated on our progress and we remain confident in our corrective measures.

Craig C. Conti: Okay, let's turn to slide nine and discuss the balance sheet and take a little bit closer look at leverage. As you can see, we ended the quarter with a net debt balance of $903 million, resulting in net leverage of 2.4 times at quarter end. We have maintained significant liquidity with our undrawn credit revolvers. Our gross debt balance at year-end stands at about $1.1 billion, of which approximately $700 million is floating rate debt.

Speaker Change: Okay, let's turn to slide nine and discuss the balance sheet and take a little bit closer but look at leverage.

Craig C. Conti: As you can see we ended the quarter with net debt balance of $903 million represent resulting in net leverage of two four times at quarter end, we have maintained significant liquidity with our undrawn credit revolver.

Craig C. Conti: Our gross debt balance at year end stands at about $1 1 billion of which approximately $700 million is floating rate debt.

Craig C. Conti: As we've discussed in the past, our notional hedge of approximately $675 million covers about 95% of our current floating debt total, with a float-for-fixed-rate swap that is cancelable at our option. Before I move on to 2024 guidance, I wanted to provide a brief update on our thinking around long-term leverage. We have revised our long-term net leverage target from the prior 3.5 times to an updated target of three times net leverage, recognizing that in periods of M&A activity, we may temporarily and modestly exceed that level.

Craig C. Conti: Before I move on to 2024 guidance I wanted to provide a brief update on our thinking around long term leverage targets.

Craig C. Conti: This updated view is consistent with our commitment to deliver value to our shareholders through a disciplined and flexible capital allocation strategy, and we believe this new lower leverage target level is more contemporary with current market trends. Okay, let's turn to slide ten and have a look at full year 2020 floor guidance.

Craig C. Conti: This updated view is consistent with our commitment to deliver value to our shareholders through a disciplined and flexible capital allocation strategy and we believe this new lower leverage target level is more contemporary with current market trends.

Craig C. Conti: Based on our first quarter results and our outlook for the remainder of the year, we are increasing our revenue guidance from the prior range of $865 to $880 per year to the upper end of that. We're increasing our adjusted EBITDA guidance from the prior range of $395 million to $405 million to the upper end of that curve. We are increasing our adjusted EPS guidance from the prior range of $1.15 to $1.20 per share to the upper end.

Craig C. Conti: And lastly, there is no change to our prior adjusted free cash flow guidance of $155 million to $165 million or our expected net leverage at year-end. The primary influencing factor to raise guidance after the first quarter was a strong travel outlook from the Mayor. Year-to-date TSA volume has been about 106% of 2023, and we are anticipating strong spring and summer travel.

Craig C. Conti: In terms of cadence for the rest of the year, we continue to anticipate revenue and adjusted EBITDA to increase sequentially in the second and third quarters. However, as we experienced in both 2022 and 2023, we expect the strongest sequential growth in the second quarter, with slower sequential growth in the third quarter due to travel demand shifting forward in the. Consistent with historical trends, we would then expect a modest reduction to revenue and adjusted EBITDA in the. Adjusted even and margins are expected to follow sequential revenue trends. Commercial services, having the largest influence on the sequential growth rates, will follow the same trends as the consolidated.

Craig C. Conti: Government Solutions, we expect modest sequential revenue growth over the balance. Lastly, Parking Solutions revenue is expected to deliver mid-single-digit total revenue growth, as we discussed in our fourth quarter earnings. Temporary revenue growth decline is driven by strong demand for SaaS and services, offset by a reduction in one-time product sales as the industry transitions to a focus on software and mobile services.

Operator: We expect comparable adjusted EBITDA margins in the second quarter as compared to the first quarter, followed by an increase in second half margin. Over the long term, we expect parking solutions to return to high single-digit growth as we execute our SaaS and transactional revenue growth strategy. Other key assumptions supporting our Adjusted EPS and Adjusted Free Cash Flow Outlook can be found on the slide. In summary, we had a strong start to the year, and I'm confident in our ability to deliver on our increased 2024 guidance.

Operator: We have strong operating momentum in the business, enabled by secular growth drivers and favorable conditions. We're focused on execution and operational excellence to deliver continued solid performance. This concludes our prepared remarks. Thank you for your time and attention. At this time, I'd like to invite Constantine to open the line for any questions. Over to you, Constantine.

Operator: Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any key. Your first question comes from the line of Faiza Alwy from Deutsche Bank. Please go ahead.

Faiza Alwy: Yes, hi. Thank you so much.

Craig C. Conti: So, first, I just wanted to talk about the raised guidance. Craig, I know you mentioned sort of the travel outlook, and that was a factor in the raised guidance, but then you also mentioned sort of additional potential contracts on the government side. So, just want a little bit more color in terms of how we should think about the raised guidance and whether or not we should expect any incremental recurring revenue on the government services side as well.

Craig C. Conti: Yeah, sure. Thank you, Faiza.

Craig C. Conti: So I think I'll give you a little more detail on how we think about that. So if you take it, let's just use revenue for simplicity. If we look at the midpoint of the previous guidance going to the high end of that range, that's an increase of, you know, half of five to $10 million. Okay.

Craig C. Conti: The vast majority of that increase in guidance is in commercial services due to the increase in travel. Right, we saw that come through as TSA came in a couple points higher than we anticipated in the first quarter. As we take that out for the remainder of the year, you know, I think that raises our full-year outlook on TSA throughput by about a point and a half to two points somewhere in that.

Craig C. Conti: GS is pretty much on the service side in the same spot that we talked about last time, which I do think we're going to see the low end of high single-digit growth for GS service this year. And as for what we talked about in terms of ARR, we continue to see great progression in the state of Florida and overall. It's all about when that revenue actually occurs, so we don't have a lot of notice to proceed with those.

Craig C. Conti: That revenue will come into the business, either in the late, very late part of this year or potentially into 2025. That's why it's not necessarily a factor in increasing the revenue guidance for 2024, but I think it's a very good indication of what the business can deliver going forward.

Craig C. Conti: Great, that's very helpful. Thank you.

Craig C. Conti: And then just a question on capital allocation, you know. You did lower your leverage target, and you mentioned the opportunity to potentially buy back stock. So just want to understand, you know, do you need to reach that target first before you buy back stock? Or should we expect you to be actively buying back stock at this point, and you sort of want to get to that leverage by the end of the year?

Craig C. Conti: Yeah, thanks again for the question, Faiza. The way that we think about it, we're going to remain balanced as we've been in the past. You know, we have that open authorization, which is there for a reason.

Craig C. Conti: When we look at, what I can say on the M&A side, as we look out at the market today, there are certainly more processes and more assets that are actually showing up on screen than there were. So it's really hard to kind of dial in on that, on which one would come first. If I guessed, I had a 50% chance of being wrong, so I won't do that.

Craig C. Conti: If I guess I got a 50% chance of being wrong. So I won't I won't do that but what I would say is as we looked at it in totality and the three five times net leverage was very contemporary view for the company two years ago, right and as we look out today with what we've seen in rates and how we've seen that perform and also what we're seeing on the screen in terms of M&A.

Craig C. Conti: But what I would say is, as we looked at it in totality, the three and a half times net leverage was a very contemporary view for the company two years ago. And as we look out today with what we've seen in rates and how we've seen that perform, and also what we're seeing on the screen in terms of M&A, we think that three times is the right leverage for the company. And remember that three times is a long-term target. So hopefully, it will come out in the prepared remarks. We could still go over that for a period, but as we've talked about in the past with the cash generation of the company,

Craig C. Conti: We think that three times is the right leverage for the company and remember that that three times is a long term target. So hopefully it came out in the prepared remarks right. We still could go over that for a period, great, but as we've talked about in the past with the cash generation of the company, we have the ability to delever over a period of quarters and come back to that.

Craig C. Conti: Level point now being three versus three and a half that we talked about maybe two two and half years ago.

Faiza Alwy: Got it. Thank you so much.

Speaker Change: Got it thank you for March.

Operator: Your next question is from the line of Daniel Moore from CJS Securities. Please go ahead.

Daniel Joseph Moore: Thank you, and thanks to the caller, David, and Craig. Maybe drill down on commercial services a little bit, and not necessarily in the quarter, but just, you know, the multiple quarters now, another double-digit quarter, double-digit growth quarter on top of a tough, difficult comp. Clearly, we've cycled past, you know, the pandemic-related recovery. So, obviously, TSA volumes help quite a bit. Just when you think about the algo, you know, what continues to outperform expectations?

Daniel Joseph Moore: Maybe to.

Daniel Joseph Moore: Another double digit quarter double digit growth quarter on top of it.

Daniel Joseph Moore: Difficult comp clearly, we cycled past the pandemic related to recovery. So obviously TSA volumes help quite a bit just when you think about the algo what continues to outperform expectations as the attachment rates or uptake.

Daniel Joseph Moore: Is it attachment rates? Is there uptake on your services, on rental contracts, more toll roads, a shift to cashless? What sort of, you know, maybe trending better than maybe a single-digit algo would indicate? Right, right. So I

Daniel Joseph Moore: Your services on rental contracts more toll roads shift to cashless, what sort of you know.

Daniel Joseph Moore: Maybe trending better than.

Daniel Joseph Moore: Maybe they're single digit algo would indicate.

Craig C. Conti: Right, right. So I still think, totally understand what you're asking. So let me start by saying that high single-digit is still the growth target even with the increased guidance for commercial services. And I think that that rubric looks a lot like it did when we talked last quarter, right?

Craig C. Conti: So about half of that, half of that high single-digit growth, let's build it from zero, is coming from secular tailwinds. So this is toll roads; these are the transition from, sorry, additional toll roads, transition from barrier-based to cashless roads, predominantly in the United States, and then continued rollout of all-inclusive pricing. And then the other half of that growth is split between two pieces, that's the growth initiatives side. And we've talked about the strength in the FMC business, mostly coming from increased utilization at the fleet, and then some growth in Europe as well.

Craig C. Conti: And then the remaining 25% or half of the half is coming from TSA growth. That's what we said three months ago. I think maybe today it's a little bit more towards TSA than the growth initiatives, just given the outperformance in the first quarter. But that rubric, about 50% for the tailwinds, and then the other 50% split between TSA and growth initiatives, remains intact from what we discussed last week.

David Martin Roberts: make sense. And then on the government solution side, I think I could back into the math, but just any more color on some of the investments you're making in terms of the, you know, enhancing customer-facing platforms, more generally, what it is you're looking to accomplish, and then, you know, how much, how long will that incremental expense last? Or is it sort of a one-time thing? Thanks.

David Martin Roberts: Yeah, Dan, it's David. So basically, we're really excited about the government solutions business. There's a lot of really great things going on that are being buoyed by an ongoing sort of legislative opening across the country and by the investments, which is our platform. You know, over the history of the company, we've done lots of acquisitions. And when you do that, you end up with multiple platforms. And so this is an opportunity to, one, consolidate from several platforms to one or two, and two, to modernize that and reduce our ongoing cost of ownership of the platform so we can be really much more scalable in the future. And that's going to be ongoing. We would anticipate that it's going to be pretty much the bulk of this year, and it has been, and probably go into maybe the first part of next year as well.

Daniel Joseph Moore: Perfect. I'll jump back with any follow-ups. Thank you.

Operator: Your next question comes from the line of Keith Sohn from North Coast Research. Please go ahead.

Keith Michael Housum: Great, thank you. Congratulations guys on a good quarter. In terms of the government solutions segment, perhaps talk a little bit about the outperformance in the quarter. I'm assuming this is unrelated to the positive legislative developments that we had last year, but are these a mix of smaller engagements, or are they weighted down by just a few different agencies?

David Martin Roberts: I think it's not as much from the TAM that we just opened, but we are starting to win some of those, which is really exciting, especially in Florida. But the tail of that is going to be a couple of quarters away before you start seeing revenue. This goes back to the team really focusing on the wins that we got last year and the customer expansions that we did last year, alongside some international wins as well.

David Martin Roberts: Great. And actually, follow up on that, on the international front, you know, international is not an area for government solutions we've talked a lot about in the past, but perhaps can you provide a bit of context or color about the size of the international market and the opportunities there? You know, is international growing in line with domestic, or how do they kind of compare from a growth trajectory?

Speaker Change: Great and actually following up on that on the international front International as an area of regardless solutions, we've talked about the past, but perhaps can you provide a bit of context or color about the size of the international and the opportunities. There is international growing in line with domestic.

David Martin Roberts: Are they kind of compare from a growth trajectory.

David Martin Roberts: Yeah, I mean, if you look globally, it's a decent-sized market. In many places, it's a hardware-only market, so we've really focused on the areas where there's a service component because that's where our skillset and expertise are, which really lands itself, for the most part, not exclusively, but for the most part, in North America. So Canada, you've got a little bit in Europe, and Australia are the primary places where that exists.

David Martin Roberts: Yes, I mean, if you look globally, it's a decent sized market in many places it's a hardware only markets. So we've really focused in the areas, where there's a service component because that's where kind of our skill set and expertise is.

David Martin Roberts: Which really lends itself for the most part not exclusively but for the most part.

David Martin Roberts: In our.

David Martin Roberts: North America, So Canada, you've got a little bit in Europe, and Australia are the primary places where that exists so.

David Martin Roberts: We feel really good about those markets that we're in, and we'll continue to look for kind of the same approach, which is where we may have red light or speed, and in some countries, we may look to expand that, as well as look for opportunities to expand to a service model versus a hardware-only model. But right now, the North American market is growing so fast, we've got plenty to focus on right here. Great Thank you.

David Martin Roberts: We feel really good about those markets that we're in and we'll continue to look for.

David Martin Roberts: So it's kind of the same approach, which is where we may have red light or speed in some countries. We may look to expand that as well as look for opportunities to expand to a service model versus into hardware only model, but right now the north American market is growing so fast we've got plenty to focus on right here at home.

Keith Michael Housum: Great. Thank you. I appreciate it.

Speaker Change: Great. Thank you appreciate it.

Operator: Your next question is from the line of Louis DiPalma from William Blair. Please go ahead.

Keith Michael Housum: Your next question is from the line of Louie Dipalma from William Blair. Please go ahead.

Michael Louie D DiPalma: David, Craig, Anne, and Mark, good afternoon. Hey, Louie. You announced strong government bookings with the 10 million dollars of ARR incremental awards, and over the past year, it has been well documented that there has been industry momentum for school zone speed cameras across the US, but along these lines, have you also witnessed any change in sentiment for red light cameras, and has the overall demand for red light cameras improved?

Michael Louie D DiPalma: David Craig and Mark good afternoon.

Louie: Hey, Louie.

Michael Louie D DiPalma: You announced strong government bookings with the $10 million of a R. R incremental awards over the past year, it's been well documented that there has been industry momentum for school zone speed cameras across the U S.

Michael Louie D DiPalma: These lines have you also witnessed any change in sentiment for Red light cameras.

Michael Louie D DiPalma: Overall demand for Red light cameras improved.

David Martin Roberts: I would say that the overall demand is mostly unchanged. And what I mean by that is, for the most part, Louis, that the transition to what we call purpose-built enforcement is really the trend, which is, hey, instead of just having something at an intersection, let's go to where the problems are, which are the most important to a community where their precious cargo is, which is around work zones, school zones, and school buses.

Louie: Well I would say that the overall demand is mostly unchanged and what I mean by that is.

David Martin Roberts: For the most part Louie that the transition to what we call purpose built enforcement is really the trend, which is hey, instead of just having something at an intersection let's go to where the problems are which are the most important to a community where they are precious cargo is which is around work Zone School Zone School buses and so what I would say is that.

David Martin Roberts: And so what I would say is that red light demand, we've always thought that would be a flat, flattish type of business long-term. I think it's actually up a little bit, and I would anticipate it to stay there because I think the other ones are, one, more meaningful to the communities and also legislatively a bit more palatable.

David Martin Roberts: The Red light demand, we've always thought that would be.

David Martin Roberts: Flat flattish type of business long term I think it's actually up a little bit.

David Martin Roberts: And I would anticipate it to stay there because I think the other ones are one more meaningful to the communities and also legislatively or bit more palatable.

David Martin Roberts: That makes sense. And yeah, I was just thinking about how there is proposed legislation to dramatically expand the New York City red light program. And I was wondering if that was part of a nationwide trend or not.

Speaker Change: That makes sense and I was just thinking about how there is proposed legislation to dramatically expand the the New York City Red Light program and I was wondering if that.

David Martin Roberts: That was part of a nationwide trend or.

David Martin Roberts: More one off again granted.

David Martin Roberts: Legislation.

David Martin Roberts: Yeah, it's a good point. New York, obviously.

Speaker Change: Yeah. It's a good point New York, obviously has really embraced the benefits of automated enforcement.

David Martin Roberts: They are often a trendsetter for other areas, but that could go quite slowly. So I wouldn't say, that's a harbinger of immediate transition to red light expansion, but it could be something that means something in the future.

Michael Louie D DiPalma: Great. And for Craig, you may have answered this in one of the prior answers, but when are you targeting for the migration to be finished from the legacy platforms onto the new Verra Mobility operating system? Should we expect that expenses will be elevated throughout the rest of the year, or is that something that you expect to finish in the next couple of quarters?

Speaker Change: Great and for Craig He may have.

Michael Louie D DiPalma: And one of the prior.

Michael Louie D DiPalma: Answers, but when are you targeting for the migration to be finished from the legacy platforms onto the new verra mobility operating system should we expect that expenses will be elevated throughout the rest of the areas that's something that.

Michael Louie D DiPalma: Do you expect with finished in the next couple of quarters.

Craig C. Conti: Yeah, the first part of that, Louie, is we expect to have that work complete in 2025. We will see some incremental expenses if you were to look at dollars to dollars year over year. But I still do expect to keep the margins in the GS business at least flat to 25 basis points higher year over year, right? So again, you'll see that increase on a dollar-for-dollar basis. But that increase isn't just the new system spend. David walked through some of them in his prepared remarks.

Craig: The first part of that Louise we expect to have that work completed in 2025.

Craig C. Conti: We will see some incremental expenses. If you were to look dollars to $1 year over year, but I still do expect to keep the margins in the GFS business at least flat to 25 basis points up year over year right. So again, you'll see that increase on a dollar for dollar basis, but that increase is it just.

Craig C. Conti: The new system spent as these new Tam Dave.

Craig C. Conti: David walked through some of them in his prepared remarks as they open right, we need to put salespeople and some of those areas we need to train folks we need to attend conferences, we haven't been to before so there is also some SG&A that just comes along with the market expanding so but I I think if you take that and roll it all together.

Craig C. Conti: As they open, right, we need to put salespeople in some of those areas. We need to train people. We need to attend conferences we haven't been to before. So there's also some SG&A that just comes along with the market expanding. So, but I think if you take that and roll it all together, put it into the total GS business, we still do expect to be able to hold margins and even increase them up to 25 basis points year over year with the spending.

Craig C. Conti: Other and put it into the total GFS business, we still do expect to be able to hold margins and even increase them up to 25 basis points year over year with Hispanic.

Michael Louie D DiPalma: Great. And that makes sense. And you reiterated the $90 million full year CapEx target. I may have missed this, but what was CapEx in the first quarter?

Speaker Change: Great and.

Speaker Change: That makes sense and you reiterated the $90 million full year Capex target I may have missed this.

Michael Louie D DiPalma: What was capex in the first quarter and is there expected to be any seasonality to the capex throughout the year.

Craig C. Conti: It was 15 in the first quarter, Luis, so it is going to ramp up a little bit over time, and that was, we anticipated that. That was not a surprise whatsoever.

Michael Louie D DiPalma: It was <unk> 15 in the first quarter Louie. So it is going to ramp up a little bit over Oh and that we anticipated that that was not a surprise whatsoever.

Craig C. Conti: I still think it'll come in somewhere on the rounds around $90 million for the year and it does ramp up in the back half.

Michael Louie D DiPalma: Excellent. That's it for me. Thanks, everyone.

Speaker Change: Excellent that's it for me thanks, everyone.

Michael Louie D DiPalma: Okay.

Operator: Just a reminder, if you have any questions, please press star, then the number 1 on your telephone keypad. Your next question is from Dave Koning from Baird; please go ahead.

Speaker Change: Just a reminder, if you have any questions. Please press star then the number one on your telephone keypad.

Operator: Our next question is from Dave Koning from Baird. Please go ahead.

David John Koning: Yeah, hey guys. Nice job, and thank you.

David John Koning: Yeah, Hey, guys nice job. Thank you I guess first of all the year over year growth in commercial was about $10 million and I think you said about 6 million travel 3 million F. M C.

Craig C. Conti: I guess, first of all, the year-over-year growth in commercial was about $10 million, and I think you said about $6 million in travel and $3 million FMC. But then, as we go through the year, the FMC growth gets a little smaller. But does travel stay, give or take, around that $6 million then, or maybe even a little better if the TSA demand looks good? I mean, is that kind of how you should think about it?

Craig C. Conti: But then as we go through the year. The F. M C growth gets a little smaller, but this travel stay give or take around that that 6 million that or maybe even a little better if that if the PSA demand looks good I mean does that is that kind of how to think about it.

Craig C. Conti: That is how I think about it. I think you're really close there.

Craig C. Conti: That is how to think about it I think youre really.

Craig C. Conti: So I expect FMC growth year over year. In the second quarter, I expect it again. In the third quarter, I expect it to level out in the fourth quarter. So there is a little bit more to go on FMC. I think the right way to think about TSA is that, essentially, we took what we saw here in the first four months of the year and applied that to the seasonality that we've seen for the last decade over the balance. And I'll save you the math on that.

Craig C. Conti: Most there so I expect FMC growth year over year in the second quarter I expect it again in the third quarter expect that to level out in the fourth quarter. So there is a little bit more to go.

Craig C. Conti: When I say I think the right way to think about PSA is essentially we took what we saw here in the first four months of the year and applied that to the seasonality that we've seen for the last decade over the balance of the year right.

Craig C. Conti: The way that that kind of worked out, when we thought at the beginning of the year, when we talked a few months ago, we said, you know, and before I even say this, let's remember that 2023 isn't a perfect copy either. It did ramp up a little bit through 2023, so as we look at the quarters, it looks a little funky, but for the total year, here's how it s We said originally it'd be somewhere between 101 and 102, right?

Craig C. Conti: And I'll save you the math on that the way that that that kind of worked out when we thought at the beginning of the year when we talked to a few months ago, We said.

Craig C. Conti: I think that if I take what we saw in the first four months of the year, apply that to the back eight months of the year, the total year probably goes up to 103, maybe a little bit north of that. That's with taking what we see today and bringing it forward through the right comps.

Craig C. Conti: Year apply that to the back eight months of the year. The total year, probably goes up to 103, maybe a little bit north of that that's what taking what we see today and bringing it forward through the right cost at the end of the year.

David John Koning: Gotcha. Yep, that makes sense. Thank you.

Speaker Change: Gotcha Yeah.

Speaker Change: That makes sense. Thank you.

Craig C. Conti: And then maybe my follow up, just an interesting thing in the cash flow statement, the bad debt expense was about five million in Q1 and kind of all through last year was kind of one and a half to three million per quarter. And even before that, so it was a little higher. Was there something about the credit cards used by travelers that was a little harder to collect? Or what was it?

Speaker Change: And then maybe my follow up just an interesting thing in the cash flow statement. The bad debt expense was about $5 million in Q1 and kind of all through last year was kind of one and a half to $3 million per quarter and even before that so it was it was a little higher or was there something to the credit card use by travelers that were a little harder to collect or what what was that.

Craig C. Conti: That's a great question and a really good catch. It's not, let me tell you what it's not, and then I'll do my best to tell you what it is, right?

Speaker Change: That's a great question and a really good catch.

Speaker Change: It's not let me tell you what is not and then I'll do my best to tell you what it is right. So what it's not we're not seeing the consumer get weaker alright, because when we saw those come through in the actualized. We had the same question.

Craig C. Conti: So what it's not, we're not seeing the consumer get weaker, all right? Because when we saw those come through, and they materialized, we had the same question. What we're seeing is that, transactionally, there have been some differences, and it's not necessarily about the health of the consumer; it's how we transact it. So I think that has come back in line. So the way I would think about it is that the incremental bad debt expense that we saw in the first quarter is not being seen in the second quarter.

Craig C. Conti: What we're seeing is transaction really theres been differences.

Craig C. Conti: I still need to do some work and find out exactly what that was, but I do know that it was not the health of the consumer. So I think it was a one-time thing that I don't expect to see go forward. Gotcha.

Craig C. Conti: Tumor so I think it was a onetime thing that.

Craig C. Conti: But I don't expect to see go forward.

David John Koning: Gotcha. Thanks. Well, nice job, guys.

Speaker Change: Gotcha, Thanks, well nice job guys.

Craig C. Conti: Thank you. Thank you.

Speaker Change: Thank you. Thank you.

Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker Change: There are no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.

Operator: Okay.

Operator: [music].

Operator: Okay.