Verra Mobility Corporation (NASDAQ:VRRM) Q1 2022 Earnings Conference Call May 9, 2022 5:00 PM ET

Company Participants

David Roberts – Chief Executive Officer
Craig Conti – Chief Financial Officer
Mark Zindler – Vice President, Investor Relations

Conference Call Participants

Daniel Moore – CJS Securities, Inc.
Keith Housum – Northcoast Research

Operator

Please stand by. Good day and welcome to the Verra Mobility Corporation, First Quarter 2022 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Mark Zindler. Please go ahead.

Mark Zindler

Thank you. Good afternoon and welcome to Verra Mobility's first quarter 2022 earnings call. Today we'll be discussing the results announced in our press release issued after the market close. With me on the call are David Roberts, Verra Mobility'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. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our expected future business and financial performance, our plan's to execute on our growth strategy, the benefits of our strategic acquisitions, our ability to maintain existing and acquire new customers, expectations regarding key operational metrics, and other statements regarding our plans and prospects.

Forward-looking statements may often be identified with words such as we expect, we anticipate or upcoming. These statements reflect our view only as of today, May 9, 2022 and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise any forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our annual report on Form 10-K, which are available on the Investor Relations section of our website at ir.verramobility.com, and on the SEC's website at sec.com.

Finally, during today's call, we will refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, which can be found on our website at ir.verramobility.com and on the SEC's website at sec.gov. With that, I'll turn the call over to David.

David Roberts

Thank you, Mark. And thanks for everyone for joining the call today. I'll start with general commentary on the business as a whole, including several exciting announcements and then turn to the trends that are influencing our strong results in each of our business segments. I'm very pleased with a great start to the year, it was driven by strong performance across the company and notably commercial services delivered exceptional results driven by significant increase in travel in the U.S. throughout the first quarter. We experience healthy bookings in both government and parking, both in terms of new contracts and contract renewals.

And we're seeing healthy increases to our business development pipelines in both of these segments. Greg will elaborate further in his remarks about our financial performance, but I'm very pleased with the results to date. Based on our first-quarter performance and our outlook for the remainder of the year, we expect to generate revenue and adjusted EBITDA at the high end of our guidance range. I'm also pleased to report that our Board of Directors has approved a stock repurchase program which authorizes the company to repurchase up to $125 million of its Class A common stock over the next 12 months.

The share repurchase program follows the completion of the share repurchase program announced in August 2021, through which we repurchased approximately $6.8 million shares for $100 million through a privately negotiated transaction, representing about 4% of the outstanding shares. The new stock repurchase program demonstrates the confidence that management and the Board of Directors continue to have at our strong fundamentals and the free cash flow generation of the business and the growth opportunities we see over the long term. Our strong free cash flow generation provides us with the financial flexibility to invest simultaneously across all aspects of our capital deployment plan, including continuous innovation or organic growth, strategic M&A and providing returns to shareholders via share repurchase programs like the one just authorized.

At current valuations, we believe this repurchase of our shares represents an attractive investments opportunity to redeploy excess capital and enhance long-term shareholder value creation. Next, I'll turn back to our first quarter performance in our business segments in more detail. Beginning with commercial services, the team had an incredible quarter taking full advantage of the favorable macro trends shaping the business. Customer adoption and billable days continue to increase, which were the key variables driving our strong performance in that segment.

Revenue of approximately $73 million for the quarter, was -- is 61% increase over last year, and compared to pre -pandemic levels we achieved 17% growth over the first quarter of 2019 absolutely a tremendous accomplishment for our commercial services team. Moreover, I'm very excited to report that we have renewed the Hertz tolls and violations contract for a five-year term on economic terms that are materially consistent with our prior agreement as it relates to anticipated revenue to Verra Mobility.

This was a great accomplishment driven by our exemplary efforts by our team and our partners at Hertz. In addition to the Hertz contract renewal, we also signed a contract with Hertz Spain for a new European tolling pilot following the end of the first quarter. This is the country's first end vehicle toll payment feature for rental cars demonstrating a strong commitment by Hertz to expand toll payment services in Europe with the trusted partner. The joint pilot will provide more insights and proof points as we continue our European expansion efforts with key partners. Moving to our government solutions business, we generated solid volume on bookings both in the U.S. and in our international markets. In general, the market for photo enforcement appears to be increasing at a faster pace, presumably after many municipalities slowed down the procurement activities during COVID.

We're seeing increases to transaction volume, bookings, dollar volume, and sales pipeline development, all very encouraging leading indicators of growth. First, we renewed a major photo enforcement contracts with the top 10 Tier-1 metro customer, valued at approximately $7 million over the 24 month contract renewal term. Additionally, we won new automotive work zone speed enforcement contracts estimated at $7 million of annual revenue for both contracts, we currently do not have permission to disclose further contract details.

However, these are solid wins for our team and demonstrating how Redflex enhance our competitive position through their significant experience and subject matter expertise with operating large statewide mobile speed enforcement programs, including work zone efforts on multi-agency programs, notably with Tender and New South Wales. This experience in subject matter expertise have positioned Verra Mobility well for a wide variety of mobile programs in our pipeline. In addition, we had several important U.S. awards in key markets and in total we're expected to deliver about $4 million of recurring annual revenue.

Furthermore, we booked several international awards which are expected to deliver $4 million of product revenue and roughly $2 million of recurring revenue the latter, which is expected to commence in the second half of 2022. These wins are additive to the previously announced win in the Netherlands,as well as the legislative expansion announced in Washington State, so a great quarter all around for the government solutions team. Next I'll provide commentary on the newly formed Parking Solutions segment, which was made possible by the acquisition of T2 Systems in December 2021. We're excited to add the T2 Systems business to our portfolio for the full quarter results in Q1, for some background, T2 Systems has been in business for more than 27 years and started as a company focused on permit and parking managing solutions for the university market segment.

They have more than 2,100 current customers, a very diversified portfolio business from a customer perspective, with an active user community helping us drive road map innovation. Thanks to the acquisition activity over the last three to five-years, T2 has expanded their solution portfolio to include multi-space station meters, and up safety and enforcement solution targeted to municipal customers. Critical factors for the T2 business are renewal rates in the university of segment portfolio and new logo acquisition in the municipal market segment space. Moving onto the operational financial results, T2 had a strong quarter and is performing at or slightly better than our expectations will be completed the deal, both in terms of financial performance as well as from a business development perspective.

New project bookings were about $9 million, which was an excess of their plan, and they book several large university renewals valued at over $3 million for the quarter. We saw healthy increases to the sales pipeline and closed 16 new Logo customers, 12 of which are in the municipalities space with our permits and enforcement solution, which is a growing market area for in the T2 portfolio. While these 12 new Logo customers will not drive material revenue in the near-term, they will support the long-term vision of cross-selling opportunities with our government solutions business and ultimately serve as a foundation to build the curbside management business area.

Before I conclude, I want to again welcome Craig and John Bolden to the Verra Mobility. These two leaders have immediately stepped into their roles and are making meaningful positive impacts to the business. It's great to have them onboard. Many of you have already met Craig, and John will be presenting at our Investor Day on Tuesday, July 19th, at the NASDAQ Market Site in New York. So it will be a great opportunity to meet John and all the others, members of the executive leadership team. We're really excited about this event. It will be a great opportunity to share our views on the long-term strategy and financial outlook along with our capital allocation strategy. Additional events, details are provided in the Investor Relations section of our website. Now I'll turn it over to Craig to guide us through our financial results.

Craig Conti

Thanks, David. Good afternoon, and thanks to everyone for joining us on the call. I'd like to provide an overview of our first quarter 2022 results, followed by a discussion of 2022 guidance. I'll start on Slide 4, which outlines revenue and adjusted EBITDA performance for the consolidated business. Total revenue increased approximately 90% year-over-year to about $170 million for the quarter driven by strong operating performance across the company in the inclusion of Redflex and T2 Systems in our financial results. Service revenue grew about 80% over the same period last year of which 45% was organic growth. This growth was attributable to several factors.

Commercial Services revenue grew 61% year-over-year, and Government Solutions service revenue increased by 66% over the prior year of which 28% was organic growth. Redflex and T2 Systems contributed $17 million and 14 million of service revenue respectively. Product revenue was $9.2 million for the quarter, of which $6 million was from Redflex and T2 Systems. Adjusted EBITDA of $75 million also increased by approximately 87% over last year for the same reasons as revenue. Moving to commercial services on Slide 5, we delivered revenue of about $73 million, increase in $28 million or 61% year-over-year.

The improvement was driven by increased demand for travel, particularly in the U.S. and the resulting increase in demand for rental cars. As David mentioned, rental car companies experience a significant increase in demand in the first quarter relative to both the fourth quarter of 2021 and the first quarter of last year. While rental car volumes remain below pre -pandemic levels, the percentage of cashless tolls, toll rates, billable days and customer adoption trends are all increasing. Adjusted EBITDA was $47 million for the quarter leading to an overall commercial services margin of 63%. Turning to Slide 6 we'll review the results of Government Solutions Business. Driven primarily by the New York City photo enforcement expansion efforts, revenue increased by $35 million to $79 million for the first quarter.

Service revenue for the first quarter was $73 million, which grew $29 million or 66% year-over-year. Organic service revenue growth, excluding Redflex was approximately $12 million or 28%, which was primarily driven by the expansion of School Zone Speed programs mentioned earlier. In addition, adjusted EBITDA grew 43% year-over-year to approximately $25 million for the quarter. On Slide 7, we've outlined the performance for our newly created Parking Solutions segment. As David mentioned, this represents the acquisition of T2 Systems, which closed in December 2021, revenue of $18 million and adjusted EBITDA of slightly over $3 million was directly aligned with our expectations for the quarter.

While we don't typically provide guidance at the segment level, I mentioned that we expect T2 to drive sequential revenue and adjusted EBITDA growth through the balance of the year and anticipate low double-digit growth for the top-line and bottom-line results for the total year. In addition, we expect T2 to generate margins in the low 20% range. Modestly lower than their pre -acquisition results due to allocation per cost including audit in-stocks fees of D&O Insurance, and other corporate public company costs that the business would not have incurred prior to our acquisition.

The company reported net income of approximately $10 million in the quarter compared to a net loss of $8.9 million for the same period in 2021. Adjusted EPS, which excludes amortization and stock-based compensation, as well as other non-cash and non-recurring items, was $0.20 per share for the current quarter compared to $0.12 per-share in the first quarter of 2021. The tax provision for the quarter was about $7 million, representing an effective tax rate of 40%. As a reminder, our tax rate is impacted by permanent differences related to mark-to-market adjustments for our private placement warrants. Moving forward, I'm confident we'll demonstrate solid earnings power as we continue to drive growth and scale the business.

Moving to cash generation and working capital management, we generated approximately $31 million in cash flow from operating activities for the first quarter. The use of working capital for the quarter, was volume-driven and attributable to the strong growth in commercial services. This growth in commercial services for the quarter was back-end weighted, which resulted in higher accounts receivable balances at quarter-end. We believe this is purely a timing issue and consequently, expect to see sequential increases in cash flow from operations in the second and third quarters, with a slight leveling off in the fourth quarter. Also of importance, the receivables balance for New York City was $50 million at the end of the first quarter.

A $13 million decrease compared to the balance at year-end 2021. Additionally, the balances decreased further to less than $40 million as of the end of April. As you'll low on Slide 8, we ended the first quarter with a $93 million cash balance and a total debt balance of about $1.2 billion. Resulting in net leverage declining to 3.8 times for the quarter. As we previously mentioned, we expect to generate strong free cash flow over the balance of the year as underscored by the $125 million share repurchase program authorized by our Board of Directors as David detailed earlier. Next, I'll move onto our 2022 guidance, which can be found on Slide 9.

During our fourth-quarter earnings call in April 21st, we reiterated guidance as follows. Total revenue in the range of $694 million to $715 million. Product sales in the range of $59 million to $63 million and adjusted EBITDA in the range of $312 million to $322 million. Based on our first-quarter results and our outlook for the remainder of the year, we're now expecting to deliver results at the high end of the range for both revenue and adjusted EBITDA. The macro trends that help drive the out performance in commercial services significantly exceeded our expectations entering the year. If these trends continue in the second quarter, we'll most likely raise our guidance assuming the rest of the business performs consistently with our planning.

Additionally, we continue to anticipate revenue and adjusted EBITDA to increase sequentially in the second and third quarters, followed by a modest reduction in the fourth quarter, all of which is consistent with historical seasonal trends. Finally, based on our assumption that we will achieve the high end of the adjusted EBITDA guidance and expected free cash flow conversion rate of at least 50% of adjusted EBITDA, we expect to reduce net leverage to approximately 3.5 times by year-end 2022. This result includes the stock pur -- the stock repurchase program discussed today. Before we open the call for Q&A, I'd like to take a brief moment to address the material weaknesses discussed in our 10-K.

We take these items very seriously and we're committed to a culture of continuous improvement around such controls. We are taking the necessary steps as an organization and around a viable path to remediate all material weaknesses by year-end, potentially sooner. We will continue to provide updates throughout the year. And with that, thank you for your attention. And I'd like to open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question will come from Daniel Moore with CJS Securities.

Daniel Moore

Thank you. Thank you, David. Thank you, Craig for all the color and taking the questions. Let me start with the guidance. You've just touched on this in your last couple of comments, but Q1 on commercial services, as you mentioned, was up about 17% or so versus Q1, '19. The guidance that even the high end of the range would indicate a significantly lower or a compression in growth for the remainder of the year. I'm just wondering if you're just being conservative for if there's anything that you're seeing that would cause a likely deceleration.

Craig Conti

Thank you for the question. It's a great question and to be completely candid, we're being a little bit conservative here, but let me tell you why. So if we look at the way the market played out in the first quarter, we did see a dip into beginning of the first quarter and a very sharp acceleration in revenue and billable days at the back half of the first quarter and that could make sense when you look at how Omicron rolled through the population here. In order for us to take another look at this and potentially raised guidance forward, we want to see a couple of things.

Number one, we want to see that accelerate velocity we saw in Q1 continue into Q2. We're still going through April data now to see a bet actually stock and I think the second piece is, in the advent of the summer driving season, which is just about the start, we want to see what the impact of those higher fuel costs could be on the summer driving season. So if we continue to see the short answer, if we continue to see the trends that we saw exiting the first quarter in another couple of months here, I do believe we would raise guidance for the balance of the year.

Daniel Moore

Perfect. And then maybe just one more on Parking Solutions, I think you talked when you acquired T2 about getting that business to double-digit growth, at least some the services side. Talk about the cadence you expect over the next year or two and what kind of time frame would you expect to achieve that growth overtime? Thanks.

Craig Conti

I can tell you from a 2022 perspective, we do expect to see double-digit growth versus where we landed in 2021. And the one thing that we put in the script and hopefully we -- that came out in our comments, this business grows sequentially with 1Q being the lowest quarter and the fourth quarter being the largest quarter. So as you see those actuals come through, especially in the second quarter and the third quarter, I think that trend will make a little more sense. And David gave some facts that the pipeline for the business is even stronger than we thought when we bought the business, so I think we're in pretty good shape on T2.

Daniel Moore

Perfect. I'll jump back with any follow-ups. Thanks.

Craig Conti

Thank you.

Operator

Thank you. Our next question will come from Keith Housum with Northcoast Research.

Keith Housum

Good morning, guys -- actually, good afternoon, sorry. Just following up on last question there. In terms of the pipeline and the bookings for T2, could you walk us through in terms of the revenue recognition for those. You expect to turn that in the revenue this year or the carry-on in future years?

Craig Conti

Right. Great question. So when we look at something like bookings, so when we give a bookings number, and I think we said $9 million, if I'm not mistaken in the script today. That's going to turn into booked revenue 75% of that will convert within the next quarter and then to balance by the end of the year. So the way we think about it, that bookings or that pipeline number that goes from the sales pipeline into an actual booking, will convert within about a year, call it three quarters of that number in the next 90 days.

Keith Housum

Great. I appreciate that color. And then in terms of the New York City contract, the additional I think it was 240 is going to be rolled out, I believe in 2022. It looks like we don't have much that was done in the first quarter, can give us a little bit of a cadence of what we should expect the rest of the year on that?

Craig Conti

Yes. Sure. The bad -- the largest part of this will be installed in the third quarter and it will be the 240 will be materially done by the end of the third quarter. I'd say a piece of it here in 2Q, the largest majority in Q3, and then no fixed speed installs, as we see a today in the fourth quarter of this year.

Keith Housum

Great. Thanks, Craig, I will just back in queue.

Craig Conti

Thank you.

Operator

Thank you. As a reminder, if you would like to signal with questions, please [Operator Instructions] on your touchstone telephone. Again, that is [Operator Instructions] if you would like to signal with questions at this time. We -- our next question comes from James Faucette with Morgan Stanley.

Unidentified Analyst

Hi this is Maryland for James. Going back to T2, I think on the opportunity you've mentioned the ability to leverage your existing government relationships to accelerate T2's revenues within cities so I'm curious what's the timeline for that is and the magnitude of got opportunity?

David Roberts

Yeah. Good question. That's certainly part of the thesis is that we have relationships with larger municipalities and T2 has generally played in the smaller market. So that market takes a little bit of time to activate. So what I would suspect is, we're already in the process of cross-selling and what I would call pipeline development. I would anticipate that you would start to see some of those things closing ones of more significant size towards the back half of the year.

Unidentified Analyst

Okay. And then just [Indiscernible] update on how you're thinking about M&A and what kind of deals you guys maybe looking at after some of your recent acquisition? Thank you.

David Roberts

Yeah. I think we're going to -- obviously, we've always been pretty active in the market. We continue to look across the ecosystem of smart mobility. We've -- I think one is anything that we can continue to look at that would bolster our commercial fleet business in terms of -- there's more connected vehicle plays that are relevant to fleets, not only today and in the future. And then continuing to look for the next set of technologies, they're going to help cities drive safety into their community.

So those are two of the broader categories, but pipeline is always active and we will -- and I think we're going to continue to do so. Obviously, the stock repurchase is something that we can do now as a part of our capital. We have a broad-based capital deployment strategy, so we're able to not only do the stock repurchase plan. We still feel confident about the ability to close deals of size this year if the opportunity presents itself.

Unidentified Analyst

Okay. Thank you.

Operator

And our next question will come from Daniel Moore with CJS Securities.

Daniel Moore

Thank you again, as far as Hertz concerned, great to see obviously a five-year agreement provides a lot of a ton of visibility. Just do you expect that to be the norm going forward? Do we go back to longer-term contracts in terms of renewals, I know that's crystal ball? But more importantly, I think you mentioned there was essentially no change from a revenue perspective. Is that over the five-year time frame and what kind of growth or fleet growth or overall market growth does that imply? Just trying to narrow that down a little bit -- nail that down a little bit further. Thanks.

David Roberts

I think as you know, Dan, each of the rental car companies has unique strategies as they look at the types of contracts that they are willing to do. Hertz doing a five-year was just a really great solidification of our relationships, so I don't know that I could use them as any way to speak to any of the other rental car companies. But obviously, our goal is having always been as to maximize the length of contracts to extent if that makes sense for both us on our partner.

And two the comment was that it's materially the same in the the terms of that includes and what I would say is that just for the length of the contracts, but obviously everything comes down to volume and the as you well know, related to how the overall businesses performing. But it does obviously indicated some point that the fleet will get back to a larger fleets and they've already indicated that they are buying vehicles that they can get their fleets up to full to fulfill.

Daniel Moore

Perfect. No, that's helpful. Thanks again.

Operator

And our next question will come from Keith Housum with Northcoast Research.

Keith Housum

Thank you, guys. David, if you can just throw a little color on the take rate. I know you guys have been talked I think the second quarter rail about the take rate at the railcar customers has been higher than what's been in the past. Any color you can provide in terms of approximate numbers or percentages that we can get a grip on the business a bit more?

David Roberts

Yeah. I don't know that we've ever given out the specific take rate by customer or anything like that if so, what I think what we're seeing is a trend. I guess what I can -- let me give you a color on the trend. The trend is that the vehicles are being rented longer than before 2019, and that is colliding with, if you will, it's not a good term for the car rental. Sorry about that, but regardless, it's -- there's still the opportunity for them to rent more tolls as they rent longer and renting in areas that have more tolls. So I think that trend right now seems to be holding strong.

I would certainly anticipate it going through the rest of this year and obviously, as we get into next year, we'll have a better sense of load balancing the demand, but that take rate has been clearly -- and not only that, we've also done a lot of stuff on the court with our customers to increase changing some of the programs, more advertising and training at the calendar. So there's a combination, it's very difficult to pinpoint which one, but clearly, the longer rental duration is one of the major drivers of the uptake.

Keith Housum

Got it. I appreciate it. And then just looking at the guidance for the rest of the year in terms of the impact on our adjusted EBITDA, it appears that the cadence of hiring will increase as the year goes on, as you guys make some of the targeted investments is that a correct assumption?

David Roberts

Yeah, that's correct.

Keith Housum

Okay. Great. Thank you.

David Roberts

Yes. Thank you.

Operator

Thank you. That does conclude the question-and-answer session. I'll now hand the conference back over to you for any additional or closing remarks.

David Roberts

Well, thank you very much. We appreciate your support, and thanks for calling in. And if you have any questions, please reach out to the company, we're happy to help. Thank you.

Operator

Well, thank you. And that does conclude today's conference. We did thank you for your participation. Have an excellent day.