Good afternoon, ladies and gentlemen, and welcome to the Verra Mobility First Quarter 2024 Earnings Call. This call is being recorded on Thursday, 2nd of May 2024.

Thank you. Good afternoon, and welcome to Verra Mobility's First Quarter 2024 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.verramobility.com. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, 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 Verra Mobility'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.verramobility.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 had a strong start to the year, with revenue, adjusted EBITDA, and earnings exceeding our internal expectations for the first quarter. Moreover, all three business units met or exceeded our internal expectations for adjusted EBITDA for the quarter. Through our customer-oriented solutions and execution strength guided by the Verra Mobility Operating System, or VMOS, we are consistently delivering strong financial performance. Consolidated revenue growth was 9%, adjusted EBITDA increased 6%, and adjusted free cash flow increased 57% over the prior year period, demonstrating the predictable strength of our portfolio of businesses. Based on the first quarter financial performance and our outlook for the remainder of the year, we are increasing our full year 2024 guidance, which Craig will elaborate on in his remarks. 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. First quarter revenue of $96 million grew 12% over the prior year quarter, and adjusted EBITDA margins of 63% were up about 90 basis points over last year due primarily to the strength of RAC tolling. First quarter TSA throughput volume was about 106% of 2023, driving strong growth in adopted rental agreements and tolls incurred, all of which resulted in a 10% increase in RAC tolling revenue. Additionally, our FMC business generated revenue of $17 million for the quarter, representing 25% growth over the prior year period, primarily driven by enrollment of new vehicles and increased tolling from FMC customers. Looking ahead, over the course of 2024, we expect continued strength in RAC tolling revenue due to strong travel bookings based on commentary from the major airlines and hotel chains. In our FMC business, we are anticipating a modest pullback in relative growth rates over the balance of the year due primarily to tougher comps this year. The underlying strength of commercial services and particularly the strong travel outlook were the key factors influencing the decision to raise full year guidance. Moving on to Government Solutions. Recurring service revenue, which reflects 96% of total revenue for the quarter, grew 8% over the same period last year. The recurring service revenue growth was driven by program expansion from existing customers and new cities implementing further enforcement efforts to improve road safety. To this point, outside of New York City, we drove 15% revenue growth due to our existing customers' efforts to expand their safety programs. Total revenue, including international product sales, was up about 10% over the prior year quarter. As we discussed in our last earnings call, we are seeing RFPs and award activity continue to ramp up in Florida. I am pleased to report that year-to-date, we have executed contracts for school zone speed, school bus stop-arm, and red light programs that, in the aggregate, represent potential recurring revenue of up to $7 million per year. Additionally, on the international side of the GS business, we were awarded an extension of our national highways maintenance contract in the United Kingdom for our variable speed and lane closure systems. This contract award will drive an approximately $2 million of ARR increase in the current revenue run rate. We're also very pleased to report that in the state of Washington, legislation was passed for the expansion of speed programs, bus lane automated enforcement, and other beneficial reforms. Overall, we had a strong first quarter from an awards perspective. We're highly competitive in the market and winning our fair share of deals, which, for the quarter, represented up to $10 million of incremental full run rate ARR potential. Moving on to the New York City automated enforcement renewal contract. The city recently published a notification indicating its intention to release the RFP in fiscal year 2024, potentially late in the second quarter of this year. We expect this to be a competitive procurement and believe we have a strong combination of best-in-class technical solutions and market experience to compete effectively for this program. Next, a brief update on T2 Systems. We generated total revenue of approximately $20 million for the first quarter as we anticipated onetime product revenue decline by about $1 million compared to the prior year quarter due to a structural transition away from hardware and towards software and mobile solutions. As product revenue decelerates, we also experienced a decline in onetime ancillary installation and maintenance services revenue. Recurring SaaS revenue was up 5% over the prior year quarter. Adjusted EBITDA of $3 million for the quarter was primarily driven by the year-over-year SaaS revenue growth. For the full year, we continue to expect T2 System to deliver mid-single-digit revenue growth and return to high single-digit revenue growth over the long term, driven by the strength and focus on SaaS and the introduction of transactional revenue pricing opportunities. Turning to capital allocation. We further reduced net leverage to 2.4x, providing optionality for future capital deployment. With respect to M&A, the pipeline is growing. We've been disciplined around valuation but remain active in our evaluation of opportunities. Additionally, we have an open authorization for a $100 million stock buyback. Through the first quarter, we have sought to increase cash on the balance sheet, but the open buyback continues to be a viable option for capital deployment. Lastly, I'll provide a brief update on the company-wide implementation of a Verra Mobility Operating System, or VMOS. Two years ago, we set out to build the future of Verra Mobility. We knew that to deliver unparalleled value to our customers and power our employees and maximize returns for shareholders, we needed a unified and standardized approach to continuously improve the critical areas of our business. We established the Verra Mobility Operating System, a dynamic set of mechanisms and tools designed to drive operational excellence and spark continuous improvement across all parts of Verra Mobility. Since then, we have deployed VMOS mechanisms in core focus areas, including operating reviews, strategic planning and deployment, problem solving, and sales funnel management. As an organization, we are building the muscle memory around leveraging VMOS to drive operational excellence across these areas. Finally, as we announced in our press release last month, I'd like to formally welcome and congratulate Cate Prescott on her appointment as Executive Vice President and Chief People Officer. Cate's HR experience and leadership expertise will be instrumental in shaping our organization and HR strategy. Welcome to the team, Cate. Craig, I'll turn it over to you to guide us through our financial results and the 2024 guidance update.

Thank you, David. Good afternoon, and thanks to everyone for joining us on the call. I'll start out today by providing an overview of our first quarter results, followed by an updated overview of how we're thinking about full year 2024. Let's turn to Slide 4, which outlines the key financial measures for the consolidated business for the first quarter. Total revenue increased approximately 9% year-over-year to $210 million for the quarter, driven by strong recurring service revenue growth across the company. Recurring service revenue grew 10% over the prior year quarter, driven by strong travel demand in the CS business and recurring service revenue growth outside of New York City in GS business. At the segment level, Commercial Services grew 12% year-over-year. Government Solutions service revenue increased by 8% over the prior year. And T2 Systems' SaaS and services revenue grew 5% over the first quarter of 2023. Product revenue was $7 million for the quarter. About $3 million of this total was from T2 Systems, while $4 million was from Government Solutions, the majority of which were international products. From a total profit standpoint, consolidated adjusted EBITDA of $93 million increased by approximately 6% over last year. We reported net income of $29 million for the quarter, including a tax provision of about $10 million, representing an effective tax rate of 25%. The tax rate includes certain discrete items, which favorably impacted the rate for the quarter. For the full year, we are anticipating an approximate 30% effective tax rate. Adjusted EPS, which excludes amortization, stock-based compensation, and other nonrecurring items, was $0.27 per share for the current quarter compared to $0.26 per share in the first quarter of 2023. Adjusted EPS grew 4% over the prior year quarter despite nearly 16 million additional shares in the share count due to the completion of our de-SPAC process over the second and third quarters of 2023. We delivered $42 million of adjusted free cash flow for the quarter, which includes a $22 million adjustment for the resolution of the PlusPass matter on an after-tax cost basis. The 45% conversion of adjusted EBITDA was driven by strong operating performance and over $10 million of collections that were received in early January in lieu of December of last year. Turning to Slide 5. We generated $376 million of adjusted EBITDA on approximately $835 million of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin. Additionally, we generated $164 million of adjusted free cash flow or a 44% conversion of adjusted EBITDA, representing $1 of adjusted free cash flow per share on a trailing 12-month basis. Moving to Commercial Services on Slide 6. We delivered revenue of about $96 million in the first quarter, increasing $10 million or 12% year-over-year. RAC tolling revenue increased 10% or about $6 million over the same period last year, driven by robust travel volume and increased rental volume. Additionally, our FMC business grew 25% or about $3 million year-over-year, driven by the enrollment of new vehicles and tolling growth from existing FMC customers. First quarter adjusted EBITDA in Commercial Services was $61 million, representing 14% year-over-year growth. Adjusted EBITDA margins of about 63%, a 90 basis point increase over the first quarter of last year, were largely driven by the continued strength in RAC tolling and execution of our growth initiatives. Let's turn to Slide 7, and we'll take a look at the results of the Government Solutions business. Driven primarily by growth outside of our largest customer, New York City, service revenue increased by $7 million or 8% over the same period last year to $90 million for the quarter. Product revenue was about $4 million for the quarter and was driven primarily by international programs. Adjusted EBITDA was $29 million for the quarter, representing margins of 31%. The reduction in margins versus the prior year is primarily due to slightly increased spending on business development efforts as well as a $2 million onetime benefit for a contract amendment in the first quarter of 2023. Let's turn to Slide 8 for the results of T2 Systems, which is our Parking Solutions business segment. We generated revenue of $20 million and adjusted EBITDA of approximately $3 million for the quarter. Software and services sales increased 5% over the prior year quarter, slightly offset by a $1 million year-over-year reduction in product revenue for the quarter. This decrease was expected based on the transition we're seeing from hardware to software in mobile solutions. Before I close out the financial review of the quarter, I'd like to give you an update on where we stand on the material weakness we described in our 2023 10-K. In our 10-K, we described several deficiencies regarding IT general control gaps, which aggregated to a material weakness last year. While our remediation work is materially complete, the new controls are required to operate for a sufficient length of time and will undergo additional testing to ensure that they are operating as intended. We will continue to keep you updated on our progress, and we remain confident in our corrective measures. Okay. Let's turn to Slide 9 and discuss the balance sheet and take a little bit closer look at the leverage. As you can see, we ended the quarter with a net debt balance of $903 million, resulting in net leverage of 2.4x at quarter end. We have maintained significant liquidity with our undrawn credit revolvers. Our gross debt balance at year-end stands at about $1.1 billion, of which approximately $700 million is floating rate debt. As we've discussed in the past, our notional hedge of approximately $675 million covers about 95% of our current floating debt total, with a float for fixed rate swap that's cancelable at our option. Before I move on to 2024 guidance, I wanted to provide a brief update on our thinking around long-term leverage targets. We have revised our long-term net leverage target from the prior 3.5x to an updated target of 3x net leverage, recognizing that in periods of M&A activity, we may temporarily and modestly exceed that level. This updated view is consistent with our commitment to deliver value to our shareholders through a disciplined and flexible capital allocation strategy, and we believe this new lower leverage target level is more contemporary with current market trends. Okay. Let's turn to Slide 10 and have a look at full year 2024 guidance. Based on our first quarter results and our outlook for the remainder of the year, we are increasing our revenue guidance from the prior range of $865 million to $880 million to the upper end of that range. We're increasing our adjusted EBITDA guidance from the prior range of $395 million to $405 million to the upper end of that range. We are increasing our adjusted EPS guidance from the prior range of $1.15 to $1.20 per share to the upper end of that range. And lastly, there is no change to our prior adjusted free cash flow guidance of $155 million to $165 million or our expected net leverage at year-end of 2x. The primary influencing factor to raise guidance after the first quarter was a strong travel outlook from the major airlines. Year-to-date TSA volume has been about 106% of 2023, and we are anticipating a strong spring and summer travel season. In terms of cadence for the rest of the year, we continue to anticipate revenue and adjusted EBITDA to increase sequentially in the second and third quarters. However, as we experienced in both 2022 and 2023, we expect a strong sequential growth in the second quarter, with slower sequential growth in the third quarter due to travel demand shifting forward in the year. Consistent with historical trends, we would then expect a modest reduction to revenue and adjusted EBITDA in the fourth quarter. Adjusted EBITDA margins are expected to follow sequential revenue trends. Commercial Services, having the largest influence on the sequential growth rates, will follow the same trends as the consolidated company. And Government Solutions, we expect modest sequential revenue growth over the balance of the year. Lastly, Parking Solutions revenue is expected to deliver mid-single-digit total revenue growth, as we discussed on our fourth quarter earnings call. The temporary reduction in revenue growth is driven by strong demand in SaaS and services, offset by a reduction in onetime product sales as the industry transitions to a focus on software and mobile solutions. We expect comparable adjusted EBITDA margins in the second quarter as compared to first quarter performance, followed by an increase in second half margin performance. Over the long term, we expect Parking Solutions to return to high single-digit growth as we execute our SaaS and transactional revenue growth strategies. Other key assumptions supporting our adjusted EPS and adjusted free cash flow outlook can be found on Slide 11. In summary, we had a strong start to the year, and I'm confident in our ability to deliver on our increased 2024 outlook. We have strong operating momentum in the business, enabled by secular growth drivers and favorable business trends. We're focused on execution and operational excellence to deliver continued solid performance. This concludes our prepared remarks. Thank you for your time and attention.

Your first question comes from Faiza Alwy from Deutsche Bank.

I wanted to discuss the raised guidance. Craig, you mentioned the travel outlook as a factor for this increase, along with the possibility of additional contracts in the government sector. Could you provide more details on how we should interpret the raised guidance and if we should anticipate any additional recurring revenue from the Government Services side?

Thank you, Faiza. I will provide more details on our thought process. Taking revenue as an example, if we consider the midpoint of our previous guidance moving towards the high end, it represents an increase of $5 million to $10 million. The majority of this increase in guidance comes from Commercial Services due to rising travel demand. We noticed a stronger performance from the TSA than we had expected in the first quarter. Looking ahead for the rest of the year, we anticipate that our full-year outlook on TSA throughput could improve by about 1.5 to 2 points. For Government Services, we are maintaining our previous expectations, and we expect to see low high single-digit growth this year. Regarding ARR, we continue to observe strong progress in Florida and beyond, but the timing of that revenue realization is uncertain. We expect that revenue might flow into the business very late this year or potentially in 2025. Therefore, this isn’t a factor in raising the revenue guidance for 2024, but it certainly indicates the potential the business has moving forward.

That's very helpful. I have a question about capital allocation. You lowered your leverage target and mentioned the opportunity to possibly buy back stock. I want to understand if you plan to reach that target before buying back stock, or if we should expect you to start buying back stock now while aiming to meet that leverage target by the end of the year. Please share your thoughts on capital allocation.

Thank you for the question, Faiza. We plan to maintain balance as we have in the past, and our open authorization is in place for a reason. Regarding M&A, there are currently more opportunities and assets available than before, making it difficult to predict which will come first. If I had to guess, I'd have a 50% chance of being incorrect, so I won't make a prediction. Overall, our view on the 3.5x net leverage was relevant for the company two years ago. Today, considering current rates and M&A activity, we believe that 3x is the appropriate leverage target. Keep in mind that this is a long-term goal. As mentioned in our prepared remarks, we may temporarily exceed this target. However, with the company's cash generation, we have the capability to reduce leverage over several quarters and return to that 3x level, instead of the 3.5x target we discussed 2 to 2.5 years ago.

Your next question is from the line of Daniel Moore from CJS Securities.

To provide more details about Commercial Services, we've seen sustained double-digit growth over several quarters, despite facing tough comparisons. We've moved beyond the pandemic-related recovery phase, with TSA volumes contributing significantly. In terms of performance, we're seeing strong attachment rates, increased uptake of our services, more rental contracts, expanded toll road usage, and a shift towards cashless transactions. These factors are trending better than what our single-digit algorithms would suggest.

Right. So Dan, I completely understand what you're asking. Let me start by stating that high single-digit growth remains our target, even with the raised guidance for Commercial Services. This framework looks similar to what we discussed last quarter. About half of the expected high single-digit growth is driven by secular tailwinds. This includes the transition to cashless toll roads, primarily in the United States, as well as the ongoing implementation of the all-inclusive pricing model. The other half of that growth is evenly divided between growth initiatives and TSA growth. We've mentioned the strength in the FMC business, which is largely from increased fleet utilization and some growth in Europe. The remaining portion of that growth comes from TSA. While we said three months ago that it was split evenly, it seems today it leans a bit more towards TSA due to its performance in the first quarter, but the overall structure remains consistent with our previous discussions.

That makes sense. On the Government Solutions side, I would like to dive deeper into the specifics of the investments you're making to enhance customer-facing platforms. More generally, what are your goals with these investments, and how long do you expect the additional expenses to continue? Is it a one-time cost?

Yes. Dan, it's David. So I mean, basically, we're really excited for the Government Solutions business. There's a lot of really great things going on that have been buoyed by an ongoing sort of legislative opening across the country. And to the investments, which is our platform, over the history of the company, we've done lots of acquisitions. And when you do that, you end up with multiple platforms. And so this is an opportunity to, one, consolidate from several platforms to one or two; and two, to modernize that and reduce our ongoing cost of ownership of the platform so we can be really much more scalable in the future. And that's going to be ongoing. We would anticipate that's going to be pretty much the bulk of this year, as it has been, and probably go into maybe the first part of next year as well.

Your next question comes from the line of Keith Housum from Northcoast Research.

Congratulations, guys, on a good quarter. In terms of the Government Solutions segment, perhaps talk a little bit about the outperformance in the quarter. I'm assuming these are unrelated to the positive legislation developments that we have last year. But are these a mix of smaller engagements? Or was that weighted down by just a few different agencies?

I think what you're saying, Keith, is that it’s not primarily from the new total addressable market we just opened. We are beginning to achieve some successes in that area, which is very exciting, particularly in Florida. However, it will take a couple of quarters before we start seeing the revenue from this. This ties back to our focus on the successes we had last year and the customer expansions we accomplished last year, as well as some international successes.

Your next question is from the line of Louie DiPalma from William Blair.

You announced strong government bookings with the $10 million of ARR incremental awards. And over the past year, it has been well documented that there has been industry momentum for school zone speed cameras across the U.S. But along these lines, have you also witnessed any change in sentiment for red light cameras? And has the overall demand for red light cameras improved?

I would say that the overall demand is mostly unchanged. And what I mean by that is for the most part, Louie, the transition to what we call purpose-built enforcement is really the trend, which is, hey, instead of just having something at an intersection, let's go to where the problems are, which are the most important to a community where their precious cargo is, which is around work zones, school zones, school buses. And so what I would say is that the red light demand, we've always thought that would be a flat, flattish type of business long term. I think it's actually up a little bit. And I would anticipate it to stay there because I think the other ones are, one, more meaningful to the communities and also legislatively a bit more palatable.

That makes sense. And yes, I was just thinking about how there is proposed legislation to dramatically expand the New York City red light program, and I was wondering if that was part of a nationwide trend or if it's more one-off and granted legislation.

Yes, it's a good point. New York obviously has really embraced the benefits of automated enforcement, and they are often a trendsetter for other areas, but that could go quite slowly. So I wouldn't say that's a harbinger of immediate transition to red light expansion, but it could be something that means something in the future.

Great. And for Craig, you may have answered this in one of the prior answers, but when are you targeting for the migration to be finished from the legacy platforms onto the new Verra Mobility Operating System? Should we expect that expenses will be elevated throughout the rest of the year? Or is that something that you expect to finish in the next couple of quarters?

Yes, Louie, we anticipate completing that work in 2025. You may notice some additional expenses when comparing year-over-year numbers. However, I still expect to maintain the GS business margins at least flat or with a 25 basis points increase year-over-year. So, while the dollar amount will rise, this increase is not solely due to the new system expenses. As we expand into the new target addressable markets, which David mentioned in his remarks, we'll need to hire salespeople in those regions, provide training, and participate in previously unattended conferences. There will also be additional selling, general, and administrative expenses that come with market expansion. Overall, when considering everything for the total GS business, we expect to sustain and potentially increase margins up to 25 basis points year-over-year despite the spending.

Great. And that makes sense. And you reiterated the $90 million full year CapEx target. I may have missed this, but what was CapEx in the first quarter? And is there expected to be any seasonality to the CapEx throughout the year?

It was $15 million in the first quarter, Louie, so it will increase a bit over time as we expected. That was not a surprise at all. I still believe it will total around $90 million for the year, and it does increase in the second half.

Your next question is from Dave Koning from Baird.

Nice job. I guess, first of all, the year-over-year growth in commercial was about $10 million. And I think you said about $6 million travel, $3 million FMC. But then as we go through the year, the FMC growth gets a little smaller. But does travel stay, give or take, around that $6 million that or maybe even a little better if the TSA demand looks good? I mean is that kind of how to think about it?

That is how to think about it. I believe you're very close. I expect FMC growth year-over-year in the second quarter, again in the third quarter, and then to level off in the fourth quarter. There is still some potential for FMC. When considering TSA, we took what we observed in the first four months of the year and applied it to the seasonal trends we've seen over the last decade for the remainder of the year. I'll spare you the detailed calculations on that. Initially, when we discussed this at the beginning of the year and a few months ago, we mentioned that it would fall between $101 to $102. Given what we've seen in the first four months, if I apply that to the remaining eight months of the year, the total for the year is likely to increase to around $103 or possibly a bit higher. This reflects our current observations and aligns them with the appropriate comparisons for the year-end. There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.