VERRA MOBILITY Corp Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Travel Demand: Year-to-date TSA passenger volumes as of September 30th were 106% of 2023 levels, but travel decelerated in September and October due to hurricanes. However, travel has reaccelerated to guidance levels, and major airlines indicate resilient demand for next year.
• Commercial Services Performance: Delivered outstanding results with third quarter revenues growing 11% y-o-y. RAC tolling and Fleet Management contributed to strong performance, with segment profit margins up 30 basis points.
• Government Solutions Service Revenue: Grew 7% year-over-year, driven by program expansion from existing customers and new cities implementing photo enforcement. Outside of New York City, service revenue grew 12%.
• T2 Systems Updates: Generated $21 million in revenue, slightly below internal expectations. Appointed new leadership to rejuvenate growth, addressing industry transition challenges and working to convert SaaS pipeline to revenue.
• Free Cash Flow: Reported a record $85 million in free cash flow for the third quarter, providing optionality for capital deployment, including M&A and share buybacks.
• Long-Term Outlook: Long-term revenue and adjusted EBITDA targets remain intact, with 2025 revenue expected at the low end of the 6%-8% guide and adjusted EBITDA growth in the low to mid-single digits.

Segment Performance

• Commercial Services: Third quarter revenues were $109 million, growing 11% year-over-year. RAC tolling revenue increased 6% due to strong travel volume and rental growth, while FMC business grew 9% driven by new vehicle enrollments and tolling from existing customers. Segment profit margins were 57%, up about 30 basis points. Revenue contribution from Commercial Services is significant, driving overall growth.
• Government Solutions: Service revenue grew 7% year-over-year, with total revenue up 6% over the prior year quarter. Segment profit was $28 million, with margins at 29%, impacted by increased business development spending and platform investments.
• T2 Systems (Parking Solutions): Generated revenue of $21 million and segment profit of $4 million. SaaS and Service sales were down 4%, and product revenue was down 7% due to industry transition away from hardware and related services towards software and mobile payment solutions.

Guidance

• 2024: Reaffirmed full-year revenue, adjusted EBITDA, and adjusted EPS guidance, with adjusted free cash flow increased to the upper end of the range ($155 million to $165 million). Anticipates net leverage at around 2 times.
• 2025: Expected revenue growth at the low end of the 6%-8% long-term guide, driven by GDP-like travel growth and Government Solutions backlog conversion. Adjusted EBITDA growth in the low to mid-single digits, with financial infrastructure investments and business development costs impacting margins in the first half.

Risks

• Travel Deceleration: Travel decelerated in September and October due to hurricanes, though it has reaccelerated to guidance levels. However, potential future travel disruptions could impact revenue.
• Competitive Procurement: New York City RFP is competitive, with no immediate clarity on outcome, and legislation impacts may delay decisions.
• T2 Systems Challenges: Parking industry transition away from hardware and related services has impacted short-term revenue growth for T2 Systems, requiring efforts to rejuvenate growth.

Question and Answer

Q: Congrats on the strong results, David and Craig. First, I just wanted to touch on the New York City RFP. So, we know that Barra has a strong track record of renewing large customers on the RAC side of the business, but I think it would be helpful just to hear about what you see as there as many competitive advantages relative to competitors going after this RFP including some of the investments you've been making in the platform and how that shapes up to your level of confidence of successfully winning this renewal relative to some of the other large renewals in the past? And also any update on when we could hear back? Thank you.

A: Yes. I mean -- it's David. Thanks for the question. I guess the way that I think about it is, one, we're obviously under an RFP, which really limits our ability to respond to a lot of different types of questions. So, within that, what I would say is New York like our other customers that we've served for quite some time, I think it comes down to a couple of things. One is we feel really good about our technology as we serve customers around the world that we have best-in-class technology. And I think with that, we have also best-in-class support related to those. I think the last part of your question was related to win. The RFP is due next week. I would not expect responses anytime right away. The responses are quite thorough. And I would anticipate that the City will need some time to respond to that. We would not anticipate probably real clarity on that to maybe Q2 of next year, just to give you some perspective.

Q: Got it. Thanks for all the color on that. And then just on the preliminary 2025 outlook, can you just discuss like the cadence of growth throughout the year? Like should we maybe see an acceleration in the back half of 2025 as some of the ARR that you're winning comes online? And also, how should we think about the Government Solutions business ex-New York City for next year? Thanks.

A: Yes. Let me take the -- this is Craig, Nik, thanks for the question. So, let me take the second part first. New York City, we're going to plan to look just like 2024. Everything that we talked about for 2025 has New York City flat year-over-year with as David just said, the RFP is live, and we won't know what the outcome is that of that is until we're well into the year. As I think about the cadence, I want to do a little bit more work on it. The one piece -- if you go back to the three drivers, and I'll talk about profit for a second. I talked about the portfolio mix, the TAM execution, and the financial infrastructure piece of this. The one thing that is clear is the financial infrastructure spend is definitely in the first half. So, I would expect that we'll incur that in the first six months. We won't see that back half. As I think about the pacing of this, I do -- I would expect -- and again, this is in the absence of a completed plan, I would expect to see sequential growth in the Government Solutions business as some of those new TAMs that we've talked about start to take foot over the back half of 2025. But again, we're going to see the larger thrusted increase in revenue in 2026 once those are installed and started.