Verra Mobility Corporation

Good afternoon, ladies and gentlemen, and welcome to the VariMobility Third Quarter 2024 Earnings Conference Call. At this time, all lines are 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 the star zero for the operator. I would now like to turn the conference over to Mark Zendler, Vice President, Investor Relations. Please go ahead.

Demonstrating what we view as the predictable strength of our portfolio of

businesses. Based on our -to-date financial performance and our outlook for the remainder of the year, we are reaffirming full year 2024 revenue, adjusted EBITDA, and adjusted EPS guidance while increasing the adjusted pre-cash flow guide to the upper end of the range. Craig will elaborate on the details in his remarks. Today we'll highlight four value drivers underpinning our businesses. The current sentiment from the major airlines continues to suggest resilient travel demand, albeit off the first half 2024 highlights. Second, the demand for automated photo enforcement is strong and growing. Third, the company continues to generate robust free cash flow, providing optionality for capital allocation. And fourth, we are putting measures in place to stabilize the T2 parking business and rejuvenate its growth trajectory. Starting with travel demand, the -to-date CSA passenger volumes as of September 30 stood at about 106% of 2023 volume for the same period, driven by strong consumer and business demand. However, travel has decelerated in September and October, particularly in the last week of September and the second week of October due to the hurricanes. We have seen a recent read acceleration of travel back to the levels assumed in our guidance, so we feel comfortable about travel volumes as we close out the year. Additionally, the current sentiment from the major airlines along with the independent surveys we have reviewed indicates resilient demand, suggesting TSA volume growth commiserate with GDP type growth next year. These domestic travel trends had a strong impact on our commercial services business. We delivered outstanding results driven by strong performance in rack tolling and continued solid performance in the fleet management business. Third quarter revenues of 109 million to 11% over the prior year quarter and segment profit margins of 67% were up about 30 basis points over the last year period due primarily to the strength in rack tolling. The third quarter travel demand drove solid growth in adopted rental agreements and tolls incurred, all of which resulted in a 6% increase in rack tolling revenue. Additionally, our FMC business generated revenue of 18 million for the quarter, representing 9% growth over the prior year period, primarily driven by enrollments of new vehicles and increased tolling from FMC customers. Moving on to government solution service revenue, which reflects 95% of total revenue for the quarter and is primarily recurring revenue, grew 7% over the same period last year. The 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 12% service revenue growth due to these factors. Total revenue, including international product sales, were up about 6% over the prior year quarter. Looking at the big picture, the demand for automated enforcement has never been stronger. We generated a strong third quarter in contract awards and saw additional legislative actions supporting automated enforcement. In the third quarter, we won contract awards representing about $22 million of incremental annual recurring revenue at full run rate, bringing the year to date incremental ARR total to $45 million. The largest award came through our partnership with Hayden AI supporting automated bus lane and bus stop enforcement, with our share representing approximately 8 million of the incremental ARR. Our partnership with Hayden AI demonstrates the new and expanding opportunities for automated enforcement beyond speed and red light enforcement. Additionally, we were awarded contracts in Florida representing about $3 million of incremental ARR and in Washington State, which represented about $2 million of incremental ARR. Other notable awards include speed enforcement programs in Australia and Canada, which combined represent about 5 million in total incremental ARR. As we shared in a press release earlier this month, I'm excited to report that the San Francisco Municipal Transportation Agency awarded us the contract to manage its speed safety program. This is California's first automated speed safety program under the state's legislative authorization. Under this contract, we will design, build, operate and maintain a speed safety program with cameras at 33 sites across San Francisco. The goal is to have fully operational program, a fully operational program in early 2025. Additionally, we anticipate competing for the other California city's speed enforcement pilot programs over the next year. These pilot programs are a pivotal step in what we expect will be a broader initiative to expand speed safety across the state as more citizens demand solutions from lawmakers to help make roads safer in California. Moving on to New York City, we look forward to submitting our proposal for the automated traffic enforcement program. New York City is the leader in using automated enforcement technology to make roads safer and more efficient. And they have trusted us to be their technology partner for a highly complex program for many years. While the program is subject to a very competitive procurement process, we remain confident that our scope of services and the support meet the specifications for the program today. And we remain ready to meet the city's evolving needs quickly should we be afforded the ongoing opportunity. We're also excited that New York's red light expansion bill was signed into law earlier last week, allowing for the expansion of cameras at 450 additional intersections in the city of New York. This is an important milestone to goals and objectives of Vision Zero. Next, a brief update on T2 systems. We generated revenue of approximately $21 million for the third quarter, slightly below our internal expectations. Segment profit was $4 million for the quarter with segment profit dollars and margins growing sequentially over the second quarter as we anticipated. In August, we announced that Lynn Bow joined our executive leadership team to lead T2, bringing valuable experience in enhancing operations, driving growth and leading business transformation efforts. As a reminder, our strategic thesis around T2 revolves around the strong and durable recurring revenue of permits and enforcement for cities and universities. We expect this to increase over time with the unique challenges related to urbanization and curb management. To date, we've encountered several challenges since we closed the acquisition in December of 2021. First, the parking industry has experienced a transition away from hardware and related services, which historically represented about 45% of revenue to focus on software and mobile payment solutions. This is expected to benefit our business in the long term but has impacted short-term revenue growth. Additionally, we expect to see a greater conversion of our SaaS pipelines to backlog and revenue generation, and Lynn is earnestly working on retooling the organization to drive execution in this area. The market opportunity for T2 is significant and we're taking the steps needed to drive long-term execution and performance. We also added another talented and experienced executive to our leadership team. We appointed Harshad Karchi as the Senior Vice President of Business Transformation. In this role, Harshad will ensure the continued adoption of the Bearer Mobility's business operating system and help enhance our culture of continuous improvement company-wide. Next, we reported a record quarter of free cashflow, generating $85 million for the third quarter. This provides significant optionality for capital deployment. We have been actively evaluating M&A opportunities in current and adjacent technology sectors, and we also have approximately $50 million remaining under our existing share buyback authorization. Next, our long-term outlook remains intact relative to the revenue and adjusted EBITDA targets we provided at our July 2022 Investor Day. As we've indicated, there will be years where we exceed the growth rates and other years where we're at or modestly below our growth targets. Based on our current views of travel demand next year and the cadence of converting, government solutions backlog to revenue, we anticipate -over-year revenue growth at the low end of our 68% long-term guide in 2025. In addition, we expect growth in 2025 adjusted EBITDA dollars to be the low to mid-single digits compared to 2024 as we continue to invest in business development and complete the customer installs in front of expected strong revenue generation as we exit 2025 and into 2026. Greg will elaborate on the key drivers in his remarks. In summary, the first nine months of the year have been great and we are very excited about our long-term outlook. We've done exactly what we said we would do in terms of financial performance. Additionally, travel demand appears to remain solid, albeit off the 2024 highs, and the bid pipeline for automated enforcement is strong and growing. This is a great business with a bright future and I look forward to sharing additional updates as we continue to execute against our growth strategy. Before I conclude, I'd like to share a road safety reminder that tonight's Halloween festivities can be potentially dangerous as kids are -or-treating at dusk. The risk of pedestrian fatalities is 43% higher on Halloween compared to any other night, according to research published by the Journal and American Medical Association, so please drive safely and responsibly. Greg, I'll turn it over to you to guide us through our financial results, current year guidance, and a high-level preview of the 2025 financial estimates.

Thank you, David, and hello, everyone. Appreciate you joining us on the call today. Let's turn to slide four, which outlines the key financial measures for the consolidated business for the third quarter. Our Q3 performance was right on plan, which included 8% services revenue growth and 7% total revenue. The service revenue growth, which was primarily recurring revenue, was driven by strong third quarter travel demand in the commercial services business, and service revenue growth outside of New York City and the government solutions business. At the segment level, commercial services grew 11% year over year, government solution service revenue increased by 7% over the prior year, while T2 system SaaS and services revenue declined 4% over the third quarter of last year. Product revenue was 8 million for the quarter, GS contributed 5 million, and T2 delivered about 3 million in product sales overall for the quarter. Our consolidated adjusted EBITDA for the quarter was 105 million, an increase of approximately 8% versus last year with margins flagged. We reported net income of $35 million for the quarter, including a tax provision of about 14 million, representing an effective tax rate of 28%. This rate includes certain discrete items which favorably impacted the tax rate for the quarter for the full year, we're anticipating an approximate 30% effective tax rate. GAP EPS was 21 cents per share for the third quarter of 2024, as compared to 18 cents per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation, and other non-recurring items, was 32 cents per share for the third quarter of this year, compared to 29 cents per share in the third quarter of 2023, representing 10% year over year. Cash flows provided by operating activities totaled 109 million, and we delivered 85 million of free cash flow for the quarter, which was above our quarterly run rate due to a catch up on cash collections and other non-recurring working capital items. Turning this by five, we've generated 391 million of adjusted EBITDA on approximately 869 million of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin. Additionally, over the trailing 12 months, we generated 172 million of adjusted free cash flow for a 44% conversion of adjusted EBITDA on a weighted average base of approximately 168 million. Next, I'll walk through the third quarter performance of each of our three business segments, beginning with commercial services on slide six. CS year over year revenue growth was 11% in the third quarter. RAC tolling revenue increased 6%, or about five million over the same period last year, driven by strong travel volume and increased rental volume. Our FMC business grew 9%, or about $1 billion year over year, driven by the enrollment of new vehicles and tolling growth from existing and newly enrolled FMC customers. Additionally, the combination of title and registration, violations management in Europe contributed approximately 4 million of revenue growth in the quarter. Commercial services' second profit margin expanded about 30 basis points, 67%, driven by volume leverage from the summer driving season. Turning to slide seven, government solutions had strong service revenue growth in the quarter, driven by 12% growth outside of New York City. Total revenue grew 6% over the prior year quarter. Segment profit was 28 million per quarter, representing margins of 29%. The reduction in margins versus the prior year is primarily due to increased spending in business development efforts, the non-capitalized portion of our platform investment, and a favorable non-recurring bad debt adjustment in the prior year period. Let's turn to slide eight for a view of the results of T2 systems, which is our parking solutions business. We generated 21 million and set, we generated revenue of 21 million in segment profit of approximately 4 million for the quarter. SaaS and service sales were down 4% or $700,000 from the prior year quarter, while product revenue was down 7% or $300,000 compared to last year. Breaking the SaaS and services revenue down a bit further, pure SaaS revenue grew low single digits over the prior year quarter. However, offsetting this increase was a decline in installation in other professional services due to the reduction in product sales over the past

three quarters.

Okay, let's turn to slide nine and discuss the balance sheet and take a closer look at leverage. As you can see, we ended the quarter with a net debt balance of 844 million, down significantly on a sequential basis due to our strong free cashflow generation this quarter. We ended the quarter with net leverage of 2.2 times and we've maintained significant liquidity with our undrawn credit revolving. Our gross debt balance at year end stands at about $1.1 billion, of which approximately $700 million is floating rate debt. Based on the SOFR forward yield curve, we opted to utilize our early termination option and cancel the entirety of our float per fixed rate spot. Consequently, the term loan is now fully floating. In addition, subsequent to the end of the third quarter, we completed a successful repricing of our $700 million term loan fee. The repricing was materially oversubscribed and we achieved a 50 basis point reduction in coupon rate, lowering it to SOFR plus 2.25%. The transaction yields about $10 million in cash savings, net of fees over the remaining life of the debt. On our total debt stack, this lowers our weighted average cost of debt to about .5% at current SOFR levels. This was our second successful debt repricing this year, the cumulative effect being a reduction in our spread of a full 100 basis points this year. Let's turn to slide 10 and have a look at full year 2024 guidance. Revenue, adjusted EBITDA and adjusted EPS remain unchanged. However, we are increasing adjusted free cash flow to the upper end of the range. For purposes of review, I'll give you a quick run through of our total year guidance by Matricat. We expect total revenue growth of approximately 8% and adjusted EBITDA dollars growth of approximately 9% compared to 2023. Adjusted EPS is expected at the upper end of the $1.15 to $1.20 per share range. Adjusted free cash flow is now anticipated to be at the upper end of the range of 155 to 165 million driven by lower capex spending. We expect to spend about $75 million in 2024 capex. The lower capex spends partially offset by an increased use of working capital. And finally, we expect net leverage will land at approximately two times, assuming no additional capital allocation investments beyond the investments we've made through the third quarter. Our revenue guidance incorporates a modest reduction in rack tolling driven by historical fourth quarter travel trends, as well as certain temporary Florida toll road suspensions stemming from hurricane. Government solution service revenue is expected to be up slightly in the fourth quarter due to customer installs generating incremental ARR. Finally, parking solutions revenue is expected to be about sequentially flat in fourth quarter. Additionally, at the total company level, we expect sequential margin expansion in the fourth quarter in line with our existing guidance. Other key assumptions supporting our adjusted EPS and adjusted free cash flow outlook can be found on SlideAway. Now let's move to a brief preview of how we expect 2025 will play out. I'll remind you that our annual operating plan is not yet complete, so these estimates may change. As David mentioned, we currently anticipate revenue growth at the low end of our 6 to 8% long-term guide

next

year. This is largely driven by three facts. First, we're anticipating that TSA passenger volume growth will decelerate and will be in line with GDP type growth next year, which impacts overall commercial services revenue. Second, we expect flat revenue from our largest customer, New York City, while we await the outcome of the competitive procurement. And lastly, while we've had a terrific year generating new ARR bookings in our government solutions business, it may take up to 18 months to convert this backlog into full run. From a project perspective, we expect adjusted EBITDA dollars to grow low to mid single digits in 2025, driven primarily by portfolio mix, TAM execution costs, and financial infrastructure investment. Let me give you a little bit of detail on each of these drivers. The TAM execution cost item is largely driven by our government business as we incur incremental business development costs and project goal life costs in advance of converting our growing backlog spread. The financial infrastructure item relates to our previously discussed in-twice replacement of our aging ERP. We expect to incur about $5 million non-capitalized costs in the first half of the year to complete this project. These project costs are one time in nature and will not continue past 2025. The portfolio mix is primarily in our commercial business where we expect travel growth year over year. However, that growth will be moderated relative to other growth drivers in the business limiting margin expansion. From a cash perspective at the total company level, we anticipate our 2025 pre-cash flow to adjusted EBITDA conversion to be about 40 to 45%. Finally, as Dave indicated, we have approximately $50 million left on our open share buyback authorization. Consistent with our past practice, we will evaluate the optimal returns to capital deployment and execute accordingly. In summary, the core fundamentals of the business are solid. We think travel demand is resilient and our bookings and GS are healthy, leading to strong recurring revenue growth in the future. Additionally, we have identified past recovery and growth in the parking business. On the basis of these trends, we anticipate that our long-term outlook remains intact relative to the revenue and adjusted EBITDA targets we provided at our July 2022 investor day. This concludes our prepared remarks. Thank you for your time and attention today. At this time, I'd like to invite Ludi to open the line for any questions. Ludi, I'm gonna send it over to you.

Thank you, and ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you're using a speakerphone, please lift the handset apart, pressing any keys. One moment please for your first question. And your first question comes from the line of Nick Cremow with UBS, please go ahead.

Hey, congrats on the strong results, David and Craig. First, I just wanted to touch on the New York City RFP. So we know that Barrow has a strong track record of renewing large customers on the rack side of the business, but I think it would be helpful just to hear about what you see as Barrow's main competitive advantages relative to competitors going after this RFP, including some of the investments you've been making in the platform and how that shakes out to your level of competence 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.

Yeah, I mean, thanks 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 when, 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. So maybe Q2

of next year, just to give you some perspective.

Yeah, thanks for all the color on that. And then just on the preliminary 2025 outlook, can you just discuss the cadence of growth throughout the year? 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 at New York City for next year? Thanks.

Yeah, let me say to you, this is Craig, Nick. Thanks for the question. So let me take the second part first. New York City, we're gonna plan to look just like 2024. That everything that we've talked about for 2025 as New York City flat year over year, as David just said, the RFP is live. And we won't know what the outcome is of that is until we're well into the year. As I think about the cadence, I wanna do a little bit more work on it. The one piece, if you go back to the three drivers, but 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 and spend is definitely in the first half. So I would expect that we'll incur that the first six months and won't see that back half. As I think about the pacing of this, 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 talked about start to take foot over the back half of 2025. But again, we're going to see the larger thrust and increase in revenue in 2026

once those are installed and started. Got it, thanks for all the cover Craig.

Your next question comes from the line of Vanyar Moore with CJS securities, please go ahead.

Yeah, thanks again for taking questions. Probably self-evident, but given the outlook for fiscal 2025, fair to assume if just in terms of rank ordering the growth, are we thinking about commercial services maybe kind of mid single digit, low to mid single digit with government solutions a little bit higher than that, and what are your underlying assumptions for T2?

Yeah, I would say that, let's go business by business at a very high level. I totally understand why you're asking the question. I think CJS, the way to think about it, it would be on the lower end of the long term guide that we put out for investigate. I don't think it's anywhere near, I don't see low single digits today whatsoever. So let's just say the low end of the long term guide and the assumption that underlies that is travel growing at GDP like growth year over year. On the GS business, I think that's going to be on the high side of our long term guide. We've talked about the strength, I think that you pick up some of that revenue in the back half of the year. And I think we'll see growth rates similar to 2024 and 2025 for GS is my best view today. T2 is going to be a little bit more episodic. They're pressured on equipment sales as we've seen this year. I do think we'll see growth, but frankly speaking, if we grow at mid single digit or low single digit, I don't think it's really going to change the calculus at the consolidated level. So that's how I rack and stack it, but I can see today.

Makes sense. And then the, you know, obviously can't talk too much about the RFP, but you know, some interesting legislation. You know, the New York governor just, as you alluded to, signed legislation to increase red light camera program, you know, by 450 and by 2027. Curious if you expect New York to purchase cameras that they have in the past and how you think about scale and magnitude of the opportunities that, you know, both in New York city, but also as enabling legislation opens up across the rest of the state. Thank you.

Yeah, I mean, the legislation just passed this week. So I don't think we've had any direct conversations, but I would anticipate up until the RFP is finalized that New York will probably sit on the sidelines related to that. And they'll make that determination at that time. I wouldn't have a read into the cities.

If you remember, we did talk about in the past, and I know this was public from some of the Q&A is that New York is actually looking at the RFP booklets, whether they would buy or whether they would ask for the build on operate model that we have in the rest of the country. So again, that's how we'll quote it. And New York state will make their choice as they will. With respect to the other part of your question is, I don't see a direct camera purchase being any more prevalent in the United States in the future than it has been in the past. So I know this is a simple answer to the first part of your

question. All right, maybe just last one will jump out, but would leverage now approaching two times by year end. Just talk about priorities for reinvesting cashflow and that barring a meaningful M&A would you continue to pay down debt or maybe accelerate investments into our return cash to shareholders rather than push leverage further or below the kind of long-term target range? Thank you again.

Yeah, I mean, ultimately, I don't think there, anything has changed in terms of our prioritization. The first thing is growth and we wanna continue to look for ways to continue to perform at the business level. So we'll be looking both at opportunities to invest in the business as well as opportunities to invest via M&A. I think we've been very, very active on that. And I think our cash balance just gives us a really great position as we think about different types of transactions. Based upon the timing or what we calculate is the returns related to those, we're always open to looking at both share repurchases. We have a 50 million authorization outstanding as we sit today. And as Craig mentioned earlier, we've done debt twice, we've refinanced the debt twice this year. So I think we're pretty open to whatever makes sense. And we have a, because of the cashflow generation company, we're able to make those decisions kind of in a quarterly view. So right now we're really comfortable with our cash position and we remain active on the M&A front.

I would add to that is that we still have a target of three times that leverage, right? So if we land at two and we don't do any incremental capital deployment from where we were at the end of the third quarter as the Senate prepared remarks, that's gonna be a result on a target. So the thought on targeting that leverage

for the company hasn't changed. Understood, thank you.

Your

next question comes from the line of Fiza Alvi with Deutsche Bank, please go ahead.

Yes, hi, thank you. So Craig, I was hoping you could give us a little bit more color on the incremental costs that you talked about for 2025. And I think you mentioned portfolio mix and some costs. So just if you can help frame some of those things for us, that would be helpful.

Yeah, sure. So I'll take them one by one, Fiza. So, and thanks for the question. So on portfolio mix, this is really the CS business with GDP-like growth and travel. There are other parts of the business that are at a different, I can't go too specific on margin percentages for competitive reasons as I know we've crossed in this call before. So there will be parts of the business that grow a little faster than travel, the travel-facing parts of the business next year, which will put a little bit of pressure on the margins, not extremely material, but we won't see the kind of margin accretion that we saw in 2024, 2023 because of the travel cover. That's the mix. The second part is TAM executions in the GS business. So a couple things going on here. We've talked about previously going up through, I think the third quarter of 2024, about lobby legislation and sales costs. Those continue. We continue to open new TAMs. So that's a piece that's gonna be there, but I also think that's in the run rate. Probably the bigger pieces, if you think about the ARR land announcements that we've talked about, they really ramped in the back half of the year. And so the revenue is gonna follow that, right? So if you go 12 to 18 months beyond that, we're talking about lately, 2025 revenue, really 2026. The other piece of that is as we go to install these, there's R&D costs that goes as part of every install that we're gonna incur. Let me tell you about what some of those things are. So things like signage at the roadside, multiple camera angles that needs to be customized. Certain municipalities want different camera angles and custom evidence packages. These are new costs. We incur these all the time for every implementation that we do. But since we have this really favorable outweigh, if you will, of installs that's building towards the back of this year into next year, those costs are going to precede revenue a little bit. So when I myopically snap the truck in 2025, going to see incremental costs in advance of revenue. And then the final piece is on the financial infrastructure side. So we've talked about this for about a year, but this is the final thrust of implementing a new ERP for the company, about $5 million of non-capitalized costs that will incur in and around the first six months of 2025.

So that's all very helpful. I just have two quick follow-ups. One is on the, are you expecting a higher level of capex spending also than in 2025?

Yeah, marginally. And I would bracket it by saying, I'm still working that out, Faisal, but here's how I would bracket it. I think that free cash flow conversion as a percentage of adjusted EBITDA is going to be in the 40 to 45, 45% range next year. We're going to be at the high end of that range this year. So by widening that range a little bit, that would tell you, I probably am going to have a little bit more capex, but those installs as we get to the back half of last year could push like they did this year in terms of timing. So I think the capex will be roughly similar, but higher year over

year. Okay. Okay. And then just last one, this might be difficult to answer, but I'm curious as you're winning these new contracts and the new ARR, you mentioned the installation costs, but how should we think about like this margin mix with these new contracts? I know there is quite a bit of competition in some cases. Are you finding, like as we look ahead over a longer period of time, do you think these are margin dilutive to the government business, or are you getting them at a similar margin profile than where you are currently, or at least where last year?

Yeah, I would say it's going to depend on the size of the program. I mean, some of the programs that are much larger, like New York have higher levels of costs, and certainly some that are smaller, it's going to depend. So what I would say is that generally speaking, we are winning the deals at prices that have been relatively similar to the way they have in the last several years, as we would continue to hope to win and maintain margin outside of the investments that Craig mentioned earlier.

Yeah, and I think it's right on David, right? As I look at it, as I was the margin percent of the business in the low 30s today, we may have, we have a heavy install year that could go to the very tippy top of the high 20s, right? But that's because you have to incur the cost ahead of the revenue coming in. I don't think about this business being sub 30% though, as we go out a couple of years, Faisal. So it's very variable, not only by municipality, but also by the mode that we're selling. I mean, we don't sell one product, we sell multiple. But as I look at it in general, in total, in consolidation, I think about this as a low 30s business, as we continue to scale that on volume go forward.

Great, thank you so much.

Your next question comes from the line of Dave Koning with Bayard Peace Go Heads.

Yeah, hey guys. No, thanks for doing this and taking my call. So first of all, just on parking, the service part of parking had been flat up, for I think almost all the quarters since you bought it. But this quarter, I believe it was down about 4% year over year, just on the service side too. Maybe refresh on what that was or why that is and does that kind of get back to growth mode pretty soon?

Sure, that service contains two things. There are installation services and warranty services, which tend to follow the equipment side of the business. Also within there is the pure SaaS component. So in the prepared remarks, we tried to bifurcate those. If I look at just the pure SaaS component, which is roughly 50% of the business, that grew year over year. Even as we're in this pressure environment, that grew a couple percent year over year. The service component, true service of what we call services and consolidation, was down what, Mark, 4 or 5%, something like that, mid single digits. Was down mid single digits because those are the services that are following the equipment side of the business, which is, as you know, been pressured and back half a year.

Gotcha, okay. And then

I guess my follow-up question, it's like, yeah, super nerdy, but in the filing, the last couple quarters, a little over half of the commercial growth was tolling and then a third or so was fleet and then just a little bit was kind of other stuff. This quarter, about half was tolling, only a million was fleet and then about half of growth was actually, it looked like title registration violations, all that other stuff. So this quarter was really big on that stuff compared to the last many quarters. Am I reading that right and maybe why were some of those things strong this quarter?

I think we had a one-timer last year that was in that, that I think could be messing up the comps on that. There's not really a story there, to be honest with you. We've seen relatively, let's talk about the TSA throughput, that's probably the best way to say it, right? For the first three quarters of the year, we've been 106, 106, 104 and a half. So the tolling side of the business tends to follow that and the violation side tends to follow that. The one thing on TNR that I think is probably a little bit to call out is we have seen less registrations thus far this year. The racks will be reporting tomorrow, so you can hear all about that from them. But if I bring it back to the total CS level, I don't think that there's a story there to tease out.

Yeah, gotcha, and tolling overall is good

it looks like. So, no, I appreciate that all, thank you. Sure.

Your next

question comes from the line of Keith Husum with North Coast Research Fees, go ahead.

Good afternoon, guys. Just first off a little bit of housekeeping in terms of fourth quarter. In terms of this disruption, in terms of the Florida tolling, as a result of the hurricanes, can you quantify what kind of headwinds is presenting for you guys in the quarter?

Yeah, our best guess on that is one to $2 million, probably towards the upper end of that range, Keith, if I were a betting man here. I haven't seen it all come through, that's why I can't give you a precise answer, even though the storm hit 23 days ago. But it'll be around one to $2 million.

Great, appreciate it. And then just in terms of the international business, I know, I think, David, you might have called out Australia and Canada as having some nice AR winds, but perhaps you could go through each of your segments and talk about the importance of international, both in terms of what it is today and perhaps how it's growing compared to the rest of the business.

I mean, I think ultimately, I mean, we continue to have a lot of really strong, like in the government solutions business, principally, we're talking about Australia. We have one of our largest customers in the entire globe, in New South Wales, it continues to, we continue to work with them and grow. So I would say that's really, really important to the government solutions business over the horizon. We use that as a sort of launching pad to win some work in New Zealand. I think we talked about that last quarter of our problem, but we still, so those are important there. Obviously, Europe is principally for commercial services, which remains a good business. We're still continuing to work some pilots across multiple racks, as well as multiple countries. Some of those are actually coming up for extension, so we're excited about that. We have some things going on in Italy, which is one of the real big areas of tolling. So as we've mentioned in previous quarters, we're starting to see that thaw. So again, I would still say that that's very important to the long-term growth of the company.

Gotcha, I appreciate it. And that's a question for you. Do you understand that New York City also has a pilot out there for your crossing guard product that I think you might be doing with one of your competitors? Can you perhaps clarify if that's part of a larger New York City proposal that we've been talking about here earlier, or is that a separate proposal that you're working on?

I'm not familiar with the combined school. Yeah, I mean, there's a separate procurement for a school bus stop on.

You said pilot. Yeah, there's not a pilot program. Okay, and that's separate from the New York City RFP that we've been talking about in terms of red, it's to be like cameras and so on, correct? Yeah, it would be a second submittal.

Okay.

All right, that's all I got, I appreciate it.

And your next question comes from the line of James Fossett with Morgan Stanley. Please go ahead.

Hi, this is Shefali Tamaskar asking a question on behalf of James. Thanks for taking my question. So great to see so much strong free cashflow this quarter. So want to touch upon capital return. You provided a little bit in your prepared remarks about looking into adjacent technology sectors and just want to get a sense of in the pipeline what types of assets you might be looking for and how valuation in this space is looking generally. Any new ways you've been thinking about it?

Yeah, I think generally the framework by which we look at is still the same, which is we start with our core and are we able to use capital to strengthen our position in the core in both the products as well as the geographies that we serve. So that's kind of number one. I think that's probably number one on most people's list. On number two is adjacency. So we talked about last quarter that we've really started to look at slightly broader aperture because we recognize things like government software and public safety are kind of different markets that we're not necessarily in today, but there's a lot of overlap with customers and both customers as well as technology. So those would be some of the areas that we're looking at today inside of what we call urban mobility. And then in connected fleet, we continue to look for vehicle payments and things like fleet management, fleet software, and telematics

are areas that we continue to look at. Great, thank you.

Your next question comes from

the line at Noah Levych with William Blair, please go ahead.

David, Craig and Mark, good afternoon. This is Noah on for Louis De Palma. To start off, I wanted to first of all, congratulate you on winning San Francisco. That's awesome news. What's the timing on the rest of the California pilot cities being awarded and can more cities or towns outside of the six that's been announced get awards before now and that pilot has ended?

Yeah, so I mean, I think

you'll start to see more. San Francisco really was a thought leader in getting the legislation passed. That's why they jumped on it quite early. What you would potentially anticipate is other cities that are included in the pilot language would use the RFP that San Francisco submitted as sort of a template as it were for as they think about it. And so I think we're gonna start to see some acceleration there probably shortly. Outside of that, Sons new legislation as it stands today, those are the cities that are named in the legislation are the ones that can do it. But we certainly think that there's already a strong demand that may open up that state for late, sooner than later for all cities that would wanna participate in

that they could. Got it and then staying in government solutions, can you talk a little bit about how the state of Florida is looking in terms of business development activity?

Yeah, continue. We had some wins we talked, I think it was last quarter if I remember correctly. It's a state that we're continuing to see some wins in as well as still a lot of competitors there, more competitors there than we've seen in other places. But yeah, overall, you feel very good about our position there, especially some of the larger procurements.

Got it, that's great. And then just one final question. You mentioned in your prepared remarks about an $8 million ARR contract with Hayden AI. Can you talk a little bit more about that and what it involves? Thanks.

Yeah, so Hayden is a partner. They have an outstanding capability related to the cameras that they use. And so they're able to do a mobile bus lane enforcement. And so that we are effectively serving in their backend processing capability for their front end with their

outstanding technology.

Great, thank you very much.

Thank

you and there are no further questions at this time. This now concludes today's conference call. Thank you all for participating. You may now disconnect.