Verra Mobility Corporation

Good afternoon, ladies and gentlemen, and welcome to the Vera Mobility 4th Quarter 2023 Earnings Conference Call. At this time, online is in a listen-only mode. 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 0 for the operator. This call is being recorded on Thursday, February 29, 2024. And I would now like to turn the conference over to Mr. Mark Lindler, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you. Good afternoon and welcome to Vera Mobility's fourth 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.veramobility.com. With me on the call are David Roberts, Vera Mobility'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. 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. 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 VeriMobility's complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. 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 today. For today's call, I'm going to first provide a high-level discussion on our strong fourth quarter results and key drivers. I'll then move on to a discussion of several key trends that are shaping the smart mobility market before closing with our strategic priorities that will influence our 2024 operating plan and build upon the foundation for the long-term outlook that we outlined at our investor day in July of 2022. We delivered fantastic results for the fourth quarter highlighted by robust revenue and adjusted EBITDA. Fourth quarter revenue of $211 million exceeded our expectations and was primarily driven by strong U.S. travel and tolling trends in our commercial services segment. Adjusted EBITDA of $91 million for the fourth quarter was slightly ahead of our forecast despite an approximate $4 million one-time non-cash charge, which Craig will elaborate on in his remarks. Our strong results are aligned with three macro trends across our operating segments. First, we're seeing strong travel demand by both consumers and businesses, particularly in the U.S., Recent commentary from the major airlines and our RAC partners suggests continued strong demand through at least the first half of 2024. The second macro trend is the continued push for safer roads and communities, which drives the need for investments in automated safety enforcement. We experienced a record year in 2023 with the passage of new automated safety enforcement legislation as lawmakers across the globe recognize the efficacy that automated safety solutions have in reducing traffic fatalities. And lastly, the complexity surrounding university and municipality parking create opportunities for customers to use our software-enabled parking management solutions. Now moving on to our business unit operations, 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. Fourth quarter revenue of $95 million grew 16% over the prior year quarter and adjusted EBITDA margins of 66% We're up about 570 basis points over last year due to the strength in rack tolling and prior year FMC growth investments. As we disclosed in an 8K, and you'll see discussed in our earnings release in Form 10K, we entered into a business arrangement with PlusPass, which fully and finally resolved all litigation and disputes between the parties, and pursuant to which we acquired certain assets from PlusPass. We accrued $31.5 million for this matter at December 31st, 2023, and the resulting payment will be made during the first quarter of 2024. Transitioning back to the business fundamentals, full year 2023 TSA volume was about 101% of 2019 volume and about 113% of 2022 volume. RAC tolling revenue increased 23% over the prior year quarter due to increases in adopted rental agreements. the increased adoption of all-inclusive pricing plans, and a durable trend of longer car rentals. Additionally, our FMC business generated 24% growth over the prior year quarter, primarily driven by enrollments of new vehicles and tolling growth from existing customers. The FMC business delivered $63 million of revenue in 2023, representing double-digit year-over-year growth and outstanding accomplishment. I'm incredibly proud of our team's execution efforts. Looking ahead, as I've discussed previously, we expect FMC revenue growth to slow to mid to high single digits, primarily as a result of tougher comps in 2024. I'm also pleased to report the launch of Hertz Italy in the fourth quarter of 2023. We're excited to support our partner in the rollout of their tolling program in Italy in a market with strong and growing cashless tolling trends. Lastly, the secular trends underpinning these business drivers' continued conversion to cashless tolling and new toll roads continue to positively impact our business. Cashless or all electronic toll roads reached approximately 67% penetration this past year, and nine U.S. toll roads were completed in 2023 as well, including in the metropolitan Washington, D.C. area, Denver, Colorado, and Orange County, California. As we look forward, CS is positioned as a high single-digit grower, driven by strong and durable travel trends, continued growth in cashless tolling, and new toll roads. The transition to all-inclusive pricing plans, segment expansion, and a nascent but attractive connected vehicle opportunity. Moving on to government solutions, recurring service revenue, which reflects 97% of total revenue for the quarter, grew 10% 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 strong revenue growth due to our existing customers' demand to expand their programs. From a profitability standpoint, government solutions adjusted even to decline 22% compared to the prior due to a non-cash charge I mentioned earlier and the platform investments that we're making in the business. Looking forward, in addition to the new legislation passed in Florida, Connecticut, Colorado, Washington State, and California, Pennsylvania signed new automated enforcement legislation into law in the fourth quarter. The legislation enables new use cases in select cities, including school zone speed management and school bus stop arm safety. It also extends and expands existing use cases for work zone speed management and highway speed management. The passage of this new legislation results in a significant TAM expansion, which we currently estimated about $50 million and potentially growing to approximately $150 million annually within the next few years, if the legislation allows. Moving forward, we're now focused on the next steps in the procurement process. In Florida, procurement processes are ramping up, and in California, we may see RFPs as early as the second quarter continuing into the second half of the year. In Colorado and Washington State, we have had success expanding existing programs enabled by the new legislation, and we have won several new procurements. Additionally, in the international side of the business, we are experiencing attractive award activity in our expansion efforts in New Zealand, as well as expansion and new business awards across several provinces in Canada. In New York City, we are awaiting the issuance of the RFP for the city's automated enforcement renewal contract. The timing of the RFP is uncertain, but we are working hard to position ourselves for a successful outcome. More to come as this process moves forward. Now, stepping back and looking at the big picture, GS is currently positioned as the mid-single-digit grower on the basis of our existing portfolio and proven net retention rates. We are operating in a very favorable environment as states continue to demonstrate confidence and optimism in enabling various use cases to automate traffic safety and make mobility safer and easier. Moving on to T2 Systems, fourth quarter total revenue increased 13% over the prior year quarter, driven by strength in software services revenue, adjusted EBITDA $5 million was in line with our expectations and reflects year-over-year SaaS and services revenue growth. We expect T2's growth rate to moderate to mid-single digits in 2024, but over the long term, we continue to see T2 growing at a high single digit driven by the strength and focus on SaaS and the introduction of transactional revenue pricing opportunities. Additionally, hardware, particularly pay stations, will likely become a smaller percentage of revenue as the market transitions away from hardware and continues to move towards software and mobile solutions. Turning to the balance sheet and capital allocation over the course of 2023, we fully de-SPACed in our fifth year of being a publicly traded company. I am pleased to report we lowered net leverage nearly a full turn over the course of 2023, ending the year two and a half times adjusted EBITDA. In addition, we purchased $100 million of shares over the course of 2023, and in November, as we previously reported, our board of directors authorized a new share repurchase program for $100 million. Overall, 2023 was a record year in Vermobilie's history, setting new all-time highs in revenue, adjusted EBITDA, and adjusted EPS. We've benefited from the record airline passenger traffic with 2023 TSA volume at 101% of 2019 levels. And in government solutions, we experienced highly favorable legislative environment, resulting in a long-term total addressable market expansion of up to $150 million. Next, I'm pleased to report that we recently published our inaugural corporate responsibility report, which outlines how our core values, purpose, vision, and operating system form the foundation of our corporate responsibility strategy. We believe that our technology helps make the world safer and a better place and are committed to being good corporate citizens and supporting the communities in which we and our customers live and work. Now I will turn to our top strategic priorities in 2024, Over the past two years, we've implemented the Vero Mobility Operating System, or VMOS, a robust standard business system that drives growth, efficiency, and talent development. At the heart of VMOS are three strategic pillars, drive core business outcomes, build the Vero mobility of the future, and create engaging and fulfilling workplace experience. As you'll see on slide five, in 2024, we established key objectives for each of these pillars, focusing on financial execution of the 2024 annual plan, leverage recent investments to capitalize and expand the TAMs and drive operating efficiencies, pursuit of accretive expansion opportunities, accelerating our portfolio model adoption, and making barrier mobility a best place to work. Through execution of our three strategic pillars, we are poised to deliver superior long-term value creation for all stakeholders. Next, I'll drill down a layer and focus on key priorities for each of our business segments as described in more detail on slides six, seven, and eight. In commercial services, where we benefit from strong secular tailwinds, including increased adoption of cashless tolling, new toll roads, and a transition to all-inclusive pricing models, we are focused on growing the core while simultaneously capitalizing on numerous expansion opportunities. Our top priorities include execute the core business while investing in growth, continued segment expansion and fleet management, and European tolling enforcement and violations, and laying the foundation to capitalize on next-generation connected vehicle opportunities. In government solutions where we benefit from an expanding addressable market for automated enforcement, our top priorities are to win our share of new contract awards in Florida, Colorado, Washington, California, Canada, and New Zealand, position ourselves to retain the New York City at contract renewal, and leverage 2023 and 2024 investments in our software platform to enhance our strategic advantages. And finally, in T2 systems where we have significant runway for continued growth and profitability in the university segment, as well as our focused efforts to penetrate the municipality segment, our focus is on the following priorities. Continue to focus on growing our high-margin core permits and enforcement business, successfully launch new products to drive transactional revenue growth and investments in our software platform to further enhance strategic position. These are our top priorities, and as we execute our strategy in 2024. As I've said previously, this is a great business with a bright future, and I look forward to sharing updates on our progress as we execute our plan in 2024. Craig, I'll turn it over to you to guide us through our financial results and 2024 guidance.