Verra Mobility Corporation

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 risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for VeriMobility's complete forward-looking statement disclosure. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and 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 for the most directly comparable GAAP measure is included in our earnings release, quarterly earnings presentation, and investor presentation, all of which can be found on our website at .verimobility.com. With that, I'll turn the call over to David.

Thank you, Mark, and thanks everyone for joining us. We delivered a strong first quarter with all key financial measures ahead of our internal expectations. Total revenue for the quarter increased 6% over the same period last year to $223 million, driven by outperformance in all three business segments relative to our internal plan. Adjusted EPS increased 11% over the prior year period given our operating performance, recent share repurchases, and the reduction in our interest rate on our term loan debt. Before I elaborate further on our financial performance, I am pleased to report that the New York City Department of Transportation identified verimobility as the vendor to manage New York City's automated enforcement safety programs for what is expected to be a five-year period after the company's current contract expires in December 2025. We are honored by the opportunity to continue serving as New York City's trusted technology provider on a world-class transportation safety program. This remains an act of procurement as we are currently engaged in contract negotiations with the New York City Department of Transportation. As such, we do not intend to make any additional disclosures about the program until the contract is finalized. Moving on to the segment level financials, commercial services, first quarter revenue, and segment profit increased about 6% and 4% respectively over the prior year period. Rack tolling increased 6% over the prior year period driven by a modest 1% increase in TSA travel volume, increased product adoption, and higher tolling activity compared to the first quarter of last year. Additionally, FMC revenue grew 12% compared to the first quarter of 2024, primarily due to the increased vehicle enrollment as well as higher tolling activity. Looking ahead, we anticipate that FMC growth rates will moderate due to tougher comps over the balance 2025. Government solution service revenue increased 4% over the first quarter of 2024. Revenue from New York City, our largest government solutions customer was essentially flat year over year as we await the finalization of the aforementioned contracts. Service revenue increased 7% outside of New York City driven by expansion from existing customers in New City's implementing photo enforcement programs. Total revenue including international product sales was up about 8% over the prior year quarter fueled by a $4 million increase to product sales compared to the first quarter 2024. Moving on to T2, our parking solutions business, total revenues increased about 2% for the quarter driven by increased revenue from SAS product offerings and a modest increase in product sales was partially offset by lower professional services revenue. Next, I will move on to the macro environment and the implications to our business. We monitor domestic travel demand as it directly influences our commercial services business. We are experiencing a broader pullback in consumer confidence levels and the impact on travel demand as evidenced by the US air carriers cutting their forecast. As I mentioned, first quarter TSA volume increased about 1% over the first quarter of last year and second quarter today is about 100% of the same period last year. In this uncertain economic environment, we anticipate that discretionary spending may be impacted and travel demand may soften as a result. Consequently, we have incorporated a modest deceleration of travel volumes in the second half of 2025 in our current assumptions. This is subject to further change and we are closely monitoring the airline industry which is often a good indicator of trends that impact the commercial services business. Next, I'll discuss the demand for automated photo enforcement, the key driver for our government solutions business. We continue to see positive support of photo enforcement programs across the United States. In total, the enabling legislation passed over the prior two and a half years across the United States adds approximately $185 million of TAM with the potential to expand over 300 million as further legislation allows in California. Our execution against the TAM has been strong. In the first quarter, we booked about $6 million of incremental annual recurring revenue at full run rate bringing the trailing 12 months total to 52 million. Notable first quarter bookings include Windsor, Colorado, Red Light, excuse me, Windsor, Colorado, Red Light and Ontario Canada Speed expansion programs along with Carroll County, Georgia School Bus Stop Arm expansion. Moreover, our pipeline for Q2 is attractive as we have a number of wards awaiting contract execution. Our government solutions annual recurring revenue bookings typically materialize into revenue over a 12 to 18 month period. In conjunction with an approximate 97% increase in contract, approximately 97% contract renewal rate, we believe this demonstrates a strong and predictable recurring revenue stream. Moving on to our full year outlook, we are maintaining our full year 2025 financial guidance. However, recognizing that there's a risk with uncertain travel demand, we may trend towards the lower end of the ranges previously provided. Our guidance ranges factor in a level of travel demand variability and we will continue to reevaluate as the summer travel season kicks off in earnest. Additionally, note that our growth and margin expectations for government solutions and T2 remain unchanged as the market for photo enforcement is strong and our parking business turnaround is showing some early signs of success. We believe these businesses are areas are largely unaffected by economic sensitivity. Craig, I'll turn it over to you to guide us through our financial results and additional details on our 2025 financial capital. 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 first quarter. Our Q1 performance exceeded internal expectations, which included 5% service revenue growth and 6% total revenue growth year over year. The service revenue growth, which consists primarily of recurring revenue was driven by a modest increase in travel value, increased product adoption and higher tolling activity in the commercial services business, as well as service revenue growth outside of New York City in the government solutions business. At the segment level, commercial services grew 6% year over year, government solution service revenue increased by 4% over the prior year and P2 system staff and services revenue was essentially flat compared to the first quarter of 2024. Total product revenue was 11 million for the quarter, government solutions contributed roughly 8 million and P2 delivered about 3 million in product sales overall for the quarter. Additionally, our consolidated adjusted EBITDA for the quarter was $95 million, an increase of approximately 3% versus last year. We reported net income of $32 million for the quarter, including a tax provision of about 12 million, representing an effective tax rate of 28%. Gap diluted EPS was 20 cents per share for the first quarter of 2025, compared to 17 cents per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other non-recurring items was 30 cents per share for the first quarter of this year, compared to 27 cents per share in the first quarter of 2024, representing 11% year over year growth. The adjusted EPS growth was driven by an increase in adjusted EBITDA, a sustained reduction in interest expense driven by our prior year debt repricing efforts and our share repurchases in 2024. Cash flows provided by operating activities totaled 63 million and we delivered 42 million of free cash flow for the quarter ahead of our internal expectations. Turning to slide five, we generated 404 million of adjusted EBITDA on approximately 893 million of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin. Additionally, we generated 174 million of free cash flow or 43% conversion of adjusted EBITDA over the trailing 12 months. Next, I'll walk through the first quarter performance in each of our three business segments, beginning with commercial services on slide six. CS year over year revenue growth was 6% in the first quarter. RAC tolling revenue increased 6% or about 4 million over the same period last year, driven by modest travel demand growth and increased product adoption and tolling activity. Our FMC business grew 12% or about 2 million year over year, driven by the enrollment of new vehicles and tolling growth from existing and newly enrolled FMC customers. As David mentioned, we anticipate that FMC growth rates will moderate over the balance of 2025 due to tougher comps. Commercial services segment profit increased 4% over the prior year. Revenue growth was partially offset by ERP implementation costs, as well as higher bad debt expense driven by a non-recurring write down of age receivables. Turning to slide seven, government solutions had solid service revenue growth in the quarter, driven by 7% growth outside of New York City. Total revenue grew 8% over the prior year quarter, benefiting from about 8 million in product sales, which was a $4 million increase over the same period last year. Government solutions segment profit was 29 million for the quarter, representing margins of approximately 29%. The reduction in margins versus the prior year is primarily due to increased marketing and business development costs. Project inflammation costs for newly awarded programs and ERP implementation costs. Let's turn to slide eight for a review of the results of T2 systems. We generated revenue of 20 million and segment profit of approximately 3 million for the quarter. Fast and services sales were essentially flat compared to the prior year, while product revenue was up 13% or $400,000 compared to 2024. Breaking the T2 SaaS and services revenue down a bit further, recurring SaaS revenue grew about 5% over the prior year quarter. However, offsetting this increase was a decline in installation and other professional services due to the reduction in product sales over the prior quarters. Okay, let's turn to slide nine and discuss the balance sheet and take a closer look at leverage. We ended the quarter with net-net balance of 935 million, which reflects the strong free cashflow we generated in the first quarter. Net leverage landed at 2.3 times and we've maintained significant liquidity with our undrawn credit revolver. Our gross debt balance at year end stands at about $1 billion, of which approximately 690 million is floating break debt. Okay, now let's turn to slide 10 and have a look at full year 2025 guidance. Based on our first quarter results and our outlook for the remainder of the year, we are reaffirming all guidance measures. As David discussed, our primary consideration is the uncertain economic environment and potential impact to travel. Ultimately, based on our strong first quarter performance and our ability to withstand some level of travel volume variability, we are reaffirming guidance. Recognizing that there's a risk of moving to the lower end of guidance, of the guidance ranges of travel demand continues to worsen in current levels. In the event that the US economy enters a recession and we see a material move downward in TSA volume, we will reassess and update the market accordingly. Additionally, we have evaluated potential tariff exposure and we expect the direct impact to be immaterial to our business in the near term. However, as we've discussed, the indirect impact to consumer and business spending may impact travel demand in our commercial services business. As a reminder, the full year 2025 guidance ranges provided on our fourth quarter 2024 earnings call were as follows. We expect total revenue in the range of 925 to 935 million representing approximately 6% growth at the midpoint over 2024. We expected -eve-a in the range 410 to 420 million representing approximately 3% growth at the midpoint. We anticipate adjusted EPS in the range of $1.30 to $1.35 per share. And free cash flow is expected to be in the range of 175 to 185 million representing a conversion rate in the low to mid 40th percentile of adjusted EBDEL. Moving on to the second level, we are reaffirming that government solutions is expected to generate the high end of mid single digit total revenue growth driven by the expansion of camera installations with existing customers and new customers awarded in fiscal year 2024. Recall that this growth includes an expectation of flat service revenue from New York City in 2025 under the legacy contract while we work through the contract negotiations. Additionally, we expect product revenue to be largely flat 2024 levels. Taken together, both New York City service and global product sales comprise nearly 40% of total government solutions revenue. The remaining 60% of government solutions revenue is expected to grow low double digits in 2025. We continue to anticipate that parking solutions revenue will be about flat 2024 levels. We expect SAS revenue to grow low to mid single digits offset by a decline in installation and professional service revenue on roughly flat product sales. Any variability is expected to come from commercial services and specifically rack tolling contingent on TSA volume. Historically, in the combined CS business, the first quarter is forecast to be our lowest revenue generating quarter followed by sequential revenue increases in the second and third quarter followed then by a revenue decline in the fourth quarter as the summer driving season comes to a close. However, given the current economic uncertainty, these trends may play out differently in 2025. Other key assumptions supporting our adjusted EPS and precast full outlook can be found at slide 11. Before we close out, I'd like to give you an update on our ongoing ERP implementation. I am pleased to report that the project is going well and the vast majority of processes are now live in the new platform and the implementation is on schedule and on budget. In closing, we're very pleased with our first quarter performance. We exhibited solid execution across the board and we're delivering strong precast low in earnings. As we head into the back half of 2025, we remain cautiously optimistic about our outlook and we'll be monitoring the economic environment and travel demand very close. This concludes our prepared remarks. Thank you for your time and attention today. At this time, I'd like to invite Michelle to start the Q&A session. Michelle, over to you.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from Nick Cremo with UBS. Your line is open.

Thanks for the great update and all the incremental color here. First, just a quick one on the New York City contract. I realize you guys can't share any real details, but what is the expectation as to when this contract will be finalized and when we'll have greater clarity on the impact on your business?

Yeah, good question, Nick and David. I would say probably in the next 60 to 90 days is probably a reasonable bet. Got

it. Thanks for that. And then I was hoping just to get a little incremental color on the attractive pipeline that you referenced in the prepared remarks you have coming in Q2, and then also just any updates on the city-level RFPs going on in California, if there was any updates there. Thank you.

Yeah, I think what we've seen is the activation of the TAM that we've worked really hard to do has translated to pipeline. I think we are well ahead of where we hope to be from a pipeline, and now it's really just the translation of that pipeline to revenue. So our bookings are running ahead of our internal plan. California is going very well. We're waiting right now for some final updates from a couple of RFPs that we've submitted for San Jose and for Oakland. But overall, we feel very good about our position there.

Thanks very much.

Thank you. Our next question comes from Daniel Moore with CJS Securities. Your line is open.

Thank you, David and Craig. Good afternoon. Thanks for taking questions. Maybe, I think you've probably covered this, but just parsing the updated commentary around guidance. Are you seeing travel and commercial services revenue slow in real time, and that's causing you to lose your job? Is it more to point to the low end, or is it more just the anticipation of softer volumes, perhaps, in the back half of the year, given some of the revised outlooks from the airlines?

Yeah, thanks for the question. This is Craig. I see exactly where you're coming from. And I think it's more the latter than the former. Let me contextualize it this way. As we exited, well, let me tell you how we planned. We expected the year when we talked last time to be somewhere in the 102 percent. It's a 2 percent growth versus last year, if we look and level that over the year. As I look out today, we ended the quarter Q1 at about 101 percent. April was right around that level. May is trending a bit lower. So, the short answer, I would say, is we're starting to see a very small decline, but not big enough, anything that I would call material. So, as I think about the back half of the year, though, we look at some of our peers and some of the other market participants that David mentioned in his prepared remarks. We don't exactly know what we don't know. So, the way that we've thought about the guide is, we're okay at, call it, flattish-type demand from this point forward to the balance of the year, and maybe even a point or two worse than that. But if it goes further than that, we'll have to come back to you. I think that's really in line with what we've seen year to date and what we've heard from other market

participants. Now, that helps, certainly. And then, your rack tolling revenue, specifically, continues to comfortably outpace TSA volume growth. And I recognize that travel volumes might be a little lower, but is that a trend you expect to continue for the balance of the year, that sort of outperformance versus the market?

That's always a tough one. And I fully appreciate the question. I understand what you're getting at there. And here's the reason, is there could be a disconnect between how our business performs versus how the TSA performs for the simple reason that TSA covers the entire country, and the entire country doesn't have toll roads, right? So, I think, as I said before, five states make up two-thirds on some quarters as high as 80% on other quarters of our revenue. So, it's all about if that travel is going to be down or up in the areas where variability does the most business. So, I have to take that kind of as it comes. I can't look forward and anticipate that at this time.

Understood. One more, and I'll jump back into you. Government solutions. Obviously, nice to see continued growth in RFPs and pipeline. This has been a little bit of an investment or setup year in that business. How should we kind of think about the opportunity for margin expansion? Maybe not specifically 26. I know you don't want to get into that. But beyond over the next, I'll call it one, two, three years. Thanks again for the call. Yeah,

I mean, I think what you see is with all the TAN that we mentioned, and that's with just the pilot in California, it was $185 million, I think, just the last couple of years going up to $300. So, you would say that relative to a tailwind, that that is about as good of a tailwind as you can have inside of that business, which is we have a market leadership position and an expanding market with new opportunities as well as expanding use cases. So, I would say that the next couple of years, based on both the pipeline as well as the work we've done to sort of lay the groundwork from a legislative perspective, sets us up really, really well in that business.

Thank you. Our next question comes from Louie DePalma with William Blair. Your line is open.

Okay. David, Craig, and Mark, good afternoon, and congrats on the preliminary New York City renewal. Thanks, Louie. For David, as you are well aware, one of the major autonomous vehicle fleet operators has a major facility in your neighborhood of Mesa. It seems autonomous vehicles have been making significant strides recently on different earnings calls and rollouts in different cities. For the long term, what are your thoughts on driverless fleet operators being like potential towing partners of yours?

Yeah, so if you drive around the city of Phoenix, you'll definitely see some unique camera-laden cars that are no driver and people in the back. I think one is while there is certainly some, I think autonomy has actually made some nice traction the last couple of years after being really silent or not growing to what people had thought. You still have over 200 million vehicles in the United States that are being driven today that do not have any autonomy. I still think that's a longer way out relative to significant impact. In the short term, relative to partnerships, we're really focused on developing partnerships with the car manufacturers so that we can embed our technology with them. I would say that as we think about the longer term future, it's probably in partnership with the manufacturers.

That makes sense. Secondly, you have disclosed the camera photo enforcement bookings for the past five quarters. I was wondering how should we think of how your camera backlog has built in terms of cameras that are under contract that are awaiting installation? Related to this, how should we think of any potential churn, whether temporary or permanent, that may have taken place such as trying to connect the dots between all the ARR that you've added and your future revenue?

Yeah, Louis. This is Craig. I'll take a crack at that one. I would think of that camera backlog a lot like we talk about the ARR backlog. The one thing I would remember on that one is it takes 12 to 18 months for that to translate into revenue. But if you take even the longer end of short term or the shorter end of medium term view, that's a great way to think about it. I think the number that we kicked out with paired remarks was $52 million of ARR growth over the TTM period. If you compare that to the overall consolidated revenue of government solutions, you get an idea of what that revenue looks like. If anything, we've continued to see that accelerate.

Okay. Is one able to just add that $52 million of ARR to your current ARR to get your future ARR?

Short answer is yes. The slightly longer answer is you can't do it for the next 90 days or for the next 12 months specifically, but over the next 12 to 18 months, that's what that reported number means. That is over the last 12 months, we've signed up new customers that will generate $52 million of annual recurring revenue. I think on your second question, I want to make sure I come back to answer exactly what you asked. On the second question, in terms of churn, this is a 97, 98% renewal business. It's been that way for quite some years and it's stayed that way today. Our stick rate on these cameras is very, very high.

Great. A third potential question, if I may, you mentioned how there could be a recession. A lot of analysts also think that. How does that influence your thinking on your long-term leverage target, Craig?

Yeah, I'd say the best indication of that is let's look at what happened in the past. When we went out for investor day, and wow, this was 2022, that's incredible. Four years ago, you're telling me, Louie, is we were three and a half times that leverage was the target leverage for the company. As we looked at, interest rates ran from that point. Credit markets froze up a little bit. We brought that down to three times net leverage. I still think three times net leverage for a company that generates low to mid 40% conversion of free cash flow to adjust even still makes sense. We will absolutely resnap that chalk line in response to whatever the macro environment at the given time. We've done in the past and we would do it again. We're not in that space today, Louie, but certainly it's something that we'll keep an eye on.

Great. Thanks for all the questions. Thanks, everyone. Thanks, Louie.

Thank you. Our next question comes from David Koning with Baird. Your line is open.

Yeah. Hey, guys. Great job. I guess, first of all, commercial services, the presentation shows guidance to a high single digit growth. I'm wondering if that does weaken towards the low end of total guidance, do you still mean for that to be the lower end of high single digits or if it weakens, would it be a little less than high single digits?

I think it'd be a little less than high single digits, Dave, is my guess today. Right where we sit today, we're on the cusp. If travel were to slow and it were to slow in the states that are most material to their mobility, then that would likely drag that growth rate down with it.

Yeah. Okay. Secondly, it seems like super high quality earnings this quarter. You look through the press release, you didn't add hardly anything back anymore in terms of transition costs and it looks like you called out on the call something that shows up in the cash flow statement about 8 million of bad debt expense. I think that you included in your numbers, I believe, and just maybe talk through that and maybe what that was and then it seems like next year's setting up well because you won't have the ERP, you won't have this most likely, et cetera.

Yeah. The one that we called out, thank you for that observation. The one that we called out in our script was simply some age-bad debt at commercial services. This was more an accounting reconciliation thing than anything else. I wouldn't equate it to current operations in any way, shape, or form and it was relatively small. One thing we've really tried to do is we're really sparse on what we spike out here, right? We have a lot of internal processes to make sure what ends up on our adjusted list is something that is commonly adjusted for other places in the market. I appreciate you calling out that it's clean. Remind me, I'm sorry, Dave, what was the second part of your question?

Yeah, just next year it seems like some things like the ERP conversion, maybe some of this bad debt expense, et cetera, falls off and sets up for nice expansion.

You know, it should. It should. It all depends. We've got a contract negotiation ongoing, as David mentioned in his prepared remarks. We'll see what travel does here in the back half. Still looks like it's okay right now, but for sure we've got a handful of millions of dollars that we spent on the ERP this year, which again is going very well, that will not be there next year, right? So all else being considered constant, I would say you're right. Yeah,

great. Thanks, guys. Good job.

Thank

you.

Thank you. As a reminder, to ask a question, please press star 11. Our next question comes from Keith Hewesam with North Coast Research. Your line is open.

Hey, thanks, guys, for taking my questions. This is Rodney McFaul on for Keith Howson today. So I'm just curious what initial steps you guys are taking in T2 to improve that business since the management change, and did that contribute to growth at all in the quarter? Thanks.

Yeah, it did. I mean, it was a small growth, but it was definitely in the right direction. I think what the management team has done has really gotten their arms around the business and the customers. We have reinvigorated our commercial leadership as well as our execution there. I think by using the Variability Operating System to help to deploy some really good metrics and KPIs and kind of a cadence of discipline behind it, it's really turned into a good story, one that we're really excited about for the future.

Got it. Got it. And then just a quick follow-up. Looking at the potential for lower travel demand, is there any color around how exposed you are to international travel versus domestic travel? I mean, I'm assuming that most of the benefits that you guys get from travel is domestic, but just curious if you guys had any color on international travel as well? Thanks.

Yeah, it's really, we probably look at just sort of gross TSA numbers as our real barometer. I mean, certainly it coming down will have some impact, but we sort of look more domestically because principally there's about five states where all the tolling activity is, and we really are looking at travel inside those states, not necessarily people coming from out of the country to someplace else.

That's right. Rodney, I just had one thing that when you're in the market listening to other markets, just spends a lot of time, especially airlines, I say airlines, is when they talk about international travel, a lot of times that commentary is on the outbound international travel. For very mobility, it would be more on the inbound international travel. Right? So, but at the end of the day, as we think about travelers, we're agnostic to where that traveler actually came from is just our folks at the airport because that translates to folks at the car rental

company. Got it. Understood. Thank you. That's all the questions I have.

Thank you. I'm showing no further questions at this time. This does conclude the question and answer session. Thank you for your participation. You may now disconnect. Everyone.