Verra Mobility Corporation

Good afternoon ladies and gentlemen and welcome to the VERA mobility second quarter 2023 earnings conference call. At this time all lines are in listen-only mode and following the presentation we will conduct a question and answer session. If at any time during this call you require immediate assistance please press star zero for the operator. This call is being recorded on Wednesday On Thursday, August 9, 2023, I would now like to turn the conference call over to Mr. Mark Zindler, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to VeriMobility's second quarter 2023 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.verimobility.com. With me on the call are David Roberts, VeriMobility's Chief Executive Officer, and Craig Conte, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. During the call, we'll make statements related to our business that may be considered forward-looking, including but not limited to statements concerning our expected future business and financial performance, our plans to execute on our growth strategy, the 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, August 9, 2023, and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise any forward-looking statements. 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 risk and other important factors that could affect our actual results, please refer to those contained in our 2022 Annual Report on Form 10-K and our 2023 quarterly reports on Form 10-Q, which are available on the investor relations section of our website at ir.veramobility.com and on the SEC's website at sec.gov. Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, which can be found on our website at ir.veramobility.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, everyone, for joining us. We delivered an outstanding second quarter, highlighted by 9% year-over-year revenue growth, of which 96% was recurring service revenue. Moreover, we delivered adjusted EBITDA growth of 7% over last year and converted 54% of adjusted EBITDA to free cash flow for the quarter. Starting with commercial services, we delivered 11% revenue growth, driven in large part by an exceptionally strong start to the spring and summer travel season. Additionally, FMC revenue grew 17% over the same period last year, aided by the growth initiatives that we have been executing in the businesses. Underpinning these strong results are several key macro drivers. First, travel demand remains robust. with year-to-date TSA volume at approximately 100% of 2019 and about 115% of 2022 volume. From a qualitative standpoint, the sentiment regarding the strength of travel from the major airlines, hotel chains, and rental car companies remains strong through the remainder of this year, aided by the continued pickup in business travel. We are also seeing continued growth in cashless U.S. toll roads, which is an important secular tailwind for our commercial services business. Through the first half of 2023, four new cashless toll roads or bridges were constructed, including the I-70 Express Lanes in Denver, Colorado. In addition, the Virginia Dulles Toll Road outside of Washington, D.C., converted fully to cashless tolling. As you know, our enterprise agreement is up for renewal and well underway. The contract initially expired at the end of May and we are operating on one month extensions while the parties work on the contract renewal. I anticipate the agreement being completed this month. In addition, as I mentioned earlier, we have further strengthened our FMC and direct fleet business driven by the investments we've made in expanding customer relationships with fleet management companies and the addition of a direct sales function. The team has done an outstanding job of offering a suite of our tolling, title and registration, and violations management solutions to provide a customizable and value-added proposition to our customers. Over the first half of this year, our focus on FMC relationships and the build-out of a direct sales team has resulted in significant growth in combined vehicle solutions we deliver to our customers. Moreover, the FMC and direct fleet business will exit the year on a $60 million run rate, low double-digit growth rate over last year and going forward we would expect the business to deliver growth consistent with the overall commercial services long-term growth rate moving on to government solutions our revenue grew 6% over the same period last year of which 96% was recurring service revenue GS sales growth is benefiting from the prior year completion of the New York City build-out and the city's decision to transition to 24 by 7 monitoring as well as program expansion with existing customers and new camera installations with new customers. Looking at the big picture in government solutions, we are operating amidst the most favorable legislative environment I have experienced in my nine years with Fair Mobility, and states are increasingly turning toward enhanced automated enforcement to increase traffic safety for their citizens. In the second quarter alone, significant positive legislative actions were taken in Florida, Colorado, and Connecticut. Starting with Florida, legislation authorizing automated speed enforcement in school zones and school bus enforcement was signed by the governor. Based on prior experience in other states, it typically takes about six to 12 months before RFPs are issued for bidding. In Colorado, legislation expanding and creating added efficiencies for automated speed enforcement was signed into law. Connecticut also passed legislation authorizing automated speed and red light enforcement. We expect that potential revenue opportunities across the three states will be an approximate 50 to 60 million run rate once fully implemented. It's too early to estimate the specific revenue cadence, but in our experience, these programs typically ramp up across the municipalities to choose to launch enforcement programs over a period of one to three years. In addition, although it is still early in the process, we're seeing continued positive momentum in California and Pennsylvania, and we're excited about helping governments meet their constituents' demands to help keep children, children drivers, pedestrians, cyclists, and workers safer on the road. With respect to contract signings during the second quarter, we renewed a top five air mobility safety enforcement customer contract our customer renewed their base business relationship with us for a two-year contract term with three one-year option periods. In addition to this base business renewal, our customer selected us for additional expansion opportunities among red light, speed, and school bus stop arm enforcement, which has the potential to more than double our existing run rate with the customer. Additionally, we successfully rolled out the Connecticut Work Zone speed program supporting their pilot program. The execution by the implementation team was fantastic, and the program is driving the intended driver behavior changes Connecticut is seeking. We believe that we have hit an inflection point in automated photo enforcement where citizens are demanding safer roads and governments are responding with enhanced automated solutions. Through our technology, we are helping governments quickly and efficiently deliver tangible results for their communities. Plainly speaking, these automated safety programs are highly effective, We and our customers see demonstrated lower speeds, fewer red light running collisions, and a general adherence to road safety and traffic laws. The end result being a measurable and sharp reduction in crash-related fatalities and injuries. Across the board, this is a truly exciting time for our company and for all those who are passionate about public safety. Now let's discuss T2 Systems. We delivered revenue growth of 14% year-over-year, with 76% being recurring subscription and service revenue. Importantly, the continued growth in T2 SaaS and services was a key influencing factor in our decision to acquire this business in the fourth quarter of 2021. And notably, T2 SaaS and service revenue grew 11% over last year, a key performance metric driving future margin expansion in the business. Moreover, we expect to see a higher rate of growth in SaaS and services during the second half of this year. T2 Systems also closed a large new customer in the university space that included our Flex Enterprise software solution, as well as our gated facility solution. On the municipal front, T2 closed 15 new municipal accounts in the Tier 2 and Tier 3 municipality space, and we continue to gain traction adding new logos in that segment. In summary, I'm incredibly pleased with our operating performance and am optimistic about the future industry trends. As I said previously, we have a great business with a bright future. The underlying KPIs driving our commercial services business are strong and durable, and we have an incredibly favorable legislative environment with more and more cities and states gaining conviction around keeping roadways safe, which will drive the future of our government solutions business. And the complexities surrounding university and municipality parking represent prime opportunities for the future growth and profitability of the T2 business. Craig, I'll turn it over to you to guide us through our financial results and current year outlook.