Good day and thank you for standing by. Welcome to Verra Mobility's First Quarter 2025 Earnings Conference Call. My name is Michelle, and I will be your conference operator today. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mark Zindler, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Verra Mobility's First Quarter 2025 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market close, 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 risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for Verra Mobility'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 will 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, quarterly earnings presentation and investor presentation, all of which can be found on our website at ir.verramobility.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 Verra Mobility as the vendor to manage New York City's automated enforcement safety programs for what is expected to be a 5-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 active 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. RAC 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 Solutions 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 and new cities 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 of 2024. Moving on to T2, our Parking Solutions business. Total revenue increased about 2% for the quarter driven by increased revenue from SaaS product offerings and a modest increase in product sales, 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 U.S. 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 to date 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 for photo enforcement programs across the United States. In total, the enabling legislation passed over the prior 2.5 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, and Ontario Canada speed expansion programs along with Carol County, Georgia school bus stop farm expansion. Moreover, our pipeline for Q2 is attractive as we have a number of awards awaiting contract execution. Our Government Solutions annual recurring revenue bookings typically materialize into revenue over a 12 month to 18 month period. In conjunction with an approximate 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 is a risk with uncertain travel demand, we may trend towards the lower end of the range as 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 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 outlook.

Thank you, David, and hello, everyone. I appreciate you joining us on the call today. Let's turn to Slide 4, 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 volumes, increased product adoption and higher tolling activity in the commercial services business as well as service revenue growth outside of New York City, within the Government Solutions business. At the segment level, Commercial Services grew 6% year-over-year. Government Solutions service revenue increased by 4% over the prior year, and T2 Systems SaaS 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 T2 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%. GAAP diluted EPS was $0.20 per share for the first quarter of 2025 compared to $0.17 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items was $0.30 per share for the first quarter of this year compared to $0.27 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 5. 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 a 43% conversion of adjusted EBITDA over the trailing 12 months. Next, I'll walk through the first quarter performance in each of our 3 business segments, beginning with Commercial Services on Slide 6. 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 comparisons. 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 nonrecurring write-down of aged receivables. Turning to Slide 7. 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 implementation costs for newly awarded programs and ERP implementation costs. Let's turn to Slide 8 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. SaaS and services sales were essentially flat compared to the prior year, while product revenue was up 13% or $400,000 compared to 2024. Breaking down the T2 SaaS and services revenue 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. Now, let's turn to Slide 9 to discuss the balance sheet and take a closer look at leverage. We ended the quarter with a net debt balance of $935 million, which reflects the strong free cash flow 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 rate debt. Okay. Now, let's turn to Slide 10 and have a look at the 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 demand. 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 is a risk of moving to the lower end of the guidance ranges if travel demand continues to worsen from current levels. In the event that the U.S. economy enters a recession, and we see a material drop 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 affect 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 million to $935 million, representing approximately 6% growth at the midpoint over 2024. We expect adjusted EBITDA in the range of $410 million 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 million to $185 million, representing a conversion rate in the low to mid-40 percentile of adjusted EBITDA. Moving on to the segment 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 worked through the contract negotiations. Additionally, we expect product revenue to be largely flat with 2024 levels. Taken together, both New York City service and global product sales comprised 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 with 2024 levels. We expect SaaS 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 RAC 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 free cash flow outlook can be found on 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 on the new platform. The implementation is on schedule and on budget. In closing, we are very pleased with our first quarter performance. We exhibited solid execution across the board, and we are delivering strong free cash flow and earnings. As we head into the back half of 2025, we remain cautiously optimistic about our outlook, and we will be monitoring the economic environment and travel demand very closely. 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.

And our first question comes from Nik 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's the expectation as to when this contract will be finalized and when we'll have greater clarity on the impact on your business?

Yes, Nik, it's David. I would say that a timeframe of approximately 60 to 90 days seems reasonable.

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 that you have coming in Q2? And then also just any updates on the city-level RFPs going on in California, if there were any updates there? Thank you.

Yes. What we've observed is that the activation of the total addressable market we have diligently focused on has resulted in a strong pipeline. We are ahead of our initial expectations in terms of pipeline, and now the key task is converting that pipeline into revenue. Our bookings are exceeding our internal projections. California is performing very well. We are currently awaiting final updates on several RFPs we have submitted for San Jose and Oakland. Overall, we feel very optimistic about our position in the state.

Got it. Thanks very much.

Thank you, Dav and Craig. Good afternoon, and I appreciate you taking the questions. I think you might have already addressed this, but I'd like to clarify the updated comments regarding guidance. Are you observing a real-time slowdown in Travel and Commercial Services revenue which has led you to highlight the low end of your expectations? Or is it primarily due to the anticipation of softer volumes in the latter half of the year based on some revised outlooks from the airlines?

Hey Dan, thanks for the question. This is Craig. I understand your perspective. I believe it leans more towards the latter. Let me put it this way. When we wrapped up the last conversation, we anticipated a growth of around 2% for the year, totaling around 102%. As of now, we've completed Q1 at approximately 101%, and April was around that same level. However, May is showing a slight decrease. So, in short, we are noticing a small decline, but it's not significant enough to be classified as material. Looking ahead to the second half of the year, we observe some of our peers and other market players, as David mentioned, and there are uncertainties involved. Our guiding thought is that we can manage a flat demand moving forward for the rest of the year, or possibly a percentage or two lower. If it worsens beyond that, we'll need to revisit this with you. This perspective aligns with what we've experienced year-to-date and the insights shared by other market participants.

No, that helps. Certainly. And then your RAC tolling revenue specifically, growth 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. And here is the reason, 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. So I think, as I've said before, 5 states make up 2/3 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 Verra Mobility 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 in the queue. Government Solutions, obviously, nice to see the continued growth in RFPs in the 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 2026? I know you don't want to get into that, but beyond over the next, call it, 1, 2, 3 years? And thanks again for the color.

Yes. I mean, I think what you see is with all of the TAM that we mentioned, and that's with just the pilot in California was $185 million, I think, just in the last couple of years going up to $300 million. So you would say that relative to a tailwind, but that is about as good of a tailwind 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 upon 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.

David, Craig and Mark, 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 potential tolling partners of yours?

Yes, if you drive around Phoenix, you'll certainly see some unique driverless cars with passengers inside. While autonomy has gained some traction in recent years after a period of stagnation, there are still over 200 million vehicles on U.S. roads today that lack any autonomy. This suggests that we are still a considerable distance away from achieving significant impact. In the short term, we are concentrating on building partnerships with car manufacturers to integrate our technology with theirs. Looking to the long-term future, collaboration with manufacturers is likely the best path forward.

That makes sense. And secondly, you have disclosed the camera photo enforcement bookings for the past five quarters. And 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? And 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?

Yes, Louie, 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. And the one thing I would remember on that one is it takes 12 months 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. So I think the number that we kicked out in the prepared remarks was $52 million of ARR growth over the TTM period. And then if you kind of compare that to the overall consolidated revenue of Government Solutions, you get an idea of what that revenue looks like. And if anything, we continue to see that accelerate.

Okay. So can you add the $52 million of ARR to your current ARR to project your future ARR?

The short answer is yes. However, you won't be able to do this for the next 90 days or the next 12 months specifically. Over the course of the next 12 to 18 months, the reported number signifies that in the last 12 months, we have acquired new customers expected to generate $52 million in annual recurring revenue. As for your second question about churn, our renewal business maintains a rate of 97% to 98%. This trend has persisted for several years and remains consistent today, indicating that our stick rate for these cameras is extremely 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?

Yes. I'd say the best indication of that is let's look at what happened in the past, right? So when we went out for Investor Day and wow, I guess it was 2022, that's incredible. Four years ago, is we were 3.5 times net levered was the target leverage for the company. And as we looked at interest rates run from that point, credit markets froze up a little bit, we brought that down to 3 times net leverage. I still think 3 times net leverage for a company that generates low to mid-40% conversion of free cash flow to adjusted EBITDA still makes sense. But we will absolutely resnap that chalk line in response to wherever the macro environment is at the given time. We've done it 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.

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, good day.