Verra Mobility Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• New York City Contract: Actively finalizing a 5-year contract with an option for renewal, estimated total value $963 million. Annual service revenue expected to grow from $135 million in 2024 to $165-$185 million by 2027. New York City to purchase equipment adding $20-$30 million in product revenue in 2026-2027.
• Legislation Impact: California passed a work zone speed pilot and reformed red-light camera enforcement, adding $140 million to addressable market, with potential to expand to $500 million.
• Bookings: Government Solutions had $14 million of incremental annual recurring revenue bookings in Q3, trailing 12 months total $51 million. Notable bookings include programs in Seattle, Phoenix, Auburn, and Modesto.
• Capital Allocation: Board authorized a $150 million increase to stock repurchase program, bringing total authorization to $250 million.

Segment Performance

• Commercial Services: Third quarter revenue grew 7% year-over-year. RAC tolling increased 7% due to higher travel volume and tolling activity. Fleet management revenue declined 3% due to customer churn, but European operations contributed $2 million in growth. Segment profit increased 7% with a 67% margin, driven by operating leverage.
• Government Solutions: Total revenue increased 28% year-over-year. Revenue from New York City, the largest customer, grew 46% due to new red-light camera installations. Service revenue outside New York City grew 11%. International product sales increased $4 million. Segment profit was $31 million, down from 29% margin in prior year due to readiness investments for the New York City contract.
• T2 Systems: Total revenue increased about 7% for the quarter. SaaS and services revenue grew 3%, and product revenue increased 30% or $1 million. Recurring SaaS revenue grew low single digits.

Guidance

• 2025: Increased revenue guidance due to New York City red-light expansion, expecting total revenue $955-$965 million. Adjusted EBITDA $410-$420 million, adjusted EPS $1.30-$1.35, free cash flow $175-$185 million.
• 2026: Expected mid-single-digit revenue growth. Government Solutions to grow high single digits, Commercial Services mid-single digits, T2 low to mid-single digits. Adjusted EBITDA margins to decline 250-300 basis points.
• Long-Term: Post-2027, poised for strong growth and margin expansion driven by Government Solutions growth and platform consolidation.

Risks

• Contract Finalization: Uncertainties in finalizing the New York City contract, including administrative processes and potential delays.
• Margin Pressure: Adjusted EBITDA margins expected to decline in 2026 due to portfolio mix and New York City renewal contract, though platform consolidation (MOSAIC) is expected to drive margin expansion post-2027.
• Market and Regulatory: Changes in government regulations or market conditions could impact revenue and margins, especially with varying requirements for minority and women-owned subcontractors.

Question and Answer

• Q: Parse out onetime vs continuing costs for New York City contract impact on margins. A: 2025 onetime readiness costs ~$5-10 million. 2026 margins to decline 250-300 basis points due to portfolio mix, ERP spend, and New York City renewal contract including price normalization and minority/women-owned subcontractor requirements ($20-25 million annual recurring).
• Q: Cadence of camera installations in 2026. A: Relatively smooth throughout the year, but weather and other factors may cause fits and starts. Thrust of installs done by 2027 with some trickling into 2028.
• Q: Benefit of MOSAIC in 2027 and beyond. A: MOSAIC is a cloud-based platform to streamline traffic incident processing, expected to drive margin expansion for Government Solutions, getting margins back to high 20s-30% by 2028.
• Q: Growth in Government Solutions beyond New York City. A: Strong winning in the marketplace, especially in California school bus and speed programs, with backlog turning into revenue in 2027 and beyond.
• Q: Commercial Services growth despite fleet management headwind. A: RAC tolling activity was strong, offsetting some fleet management churn. Tolling activity outside churn was high, but fleet management impact expected in Q4.