Earnings Call Transcript - VRRM Q3 2025

Operator, Operator

Good afternoon, everyone, and welcome to Verra Mobility's Third Quarter 2025 Earnings Conference Call. I am Towanda, your conference operator for today. This call is being recorded. I will now hand it over to Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please proceed, Mr. Zindler.

Mark Zindler, Vice President of Investor Relations

Thank you. Good afternoon, and welcome to Verra Mobility's Third Quarter 2025 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 and expectations, 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 our cautionary note on forward-looking statements. 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 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.

David Roberts, CEO

Thank you, Mark, and thanks, everyone, for joining us. Before I get into our consolidated financial results, I want to provide an update on our automated photo enforcement contract with the New York City Department of Transportation to give context to our third quarter financial performance and our updated guidance for the year. We are actively working with the New York City Department of Transportation to finalize the new automated enforcement contract, which was announced at the end of March 2025. While we work on finalizing this contract, we can now share some key financial expectations. We anticipate the new contract will have a 5-year term with an option for a 5-year renewal and an estimated total contract value of $963 million. We expect annual service revenue to grow from approximately $135 million in 2024 to between $165 million and $185 million by 2027. Additionally, the New York City Department of Transportation has decided to purchase its own equipment, which is projected to add $20 million to $30 million in product revenue in both 2026 and 2027. Craig will go over more financial details during his remarks. While we are finalizing the new contract, the New York City Department of Transportation has instructed Verra Mobility through a change order process to install up to 250 red-light cameras by the end of 2025 as part of the legislatively authorized expansion. These new cameras are expected to generate about $30 million in revenue in 2025, with approximately $10 million coming from product revenue and $20 million from installation services revenue. The red-light camera expansion program started in the third quarter, leading to $17 million in revenue related to these installations in the third quarter, with about $6 million in product revenue and around $11 million in installation services revenue. We look forward to continuing to serve the New York City Department of Transportation and to support the citizen safety priorities of Vision Zero. This program has shown to improve safety on New York City's roads, as evidenced by data indicating a reduction in crashes and fatalities. According to 2024 reports from the New York City Department of Transportation, daily violations at speed camera locations have decreased by 94% since the program started in 2014. Moreover, the average daily number of red-light running violations at camera locations has declined by 73% since the start of the program in 1994. We look forward to further supporting New York City's safety mission. The contract is strategically important and will provide long-term value creation for Verra Mobility. Now, turning to our third quarter consolidated financials, we had a solid quarter with all key financial measures exceeding our internal expectations. Total revenue for the quarter rose 16% compared to the same period last year to $262 million, with all three business segments meeting or surpassing their respective internal plans. The New York City red-light expansion change order was a significant contributor, adding $17 million of revenue for the quarter. Additionally, adjusted EPS increased 16% year-over-year, driven by our operational performance, prior share repurchases, and a reduction in our interest rate on term loan debt. Regarding segment-level financials, Commercial Services saw third quarter revenue and segment profit each increase by about 7% compared to the previous year. Rental Car tolling rose by 7% year-over-year, fueled by increased travel volume, product adoption, and higher tolling activity compared to last year's third quarter. However, this growth in rental car tolling was partially offset by a 3% decline in fleet management revenue relative to last year due to customer churn we discussed during our second-quarter earnings call. Shifting to the macro environment and its impact on our Commercial Services business, we noted that travel demand stabilized and grew modestly in Q3 compared to the prior year. TSA volume increased by about 1% over last year, and year-to-date TSA volume is similar to 2024. Major airlines have expressed optimism for strong fourth-quarter travel demand, which is expected to slightly exceed our earlier guidance. In Government Solutions, total revenue increased by 28% compared to Q3 of 2024. Revenue from New York City, our largest government solutions customer, rose by 46% driven by the new red-light camera installations. Service revenue outside New York City grew by 11%, supported by expansions with existing customers and new cities launching photo enforcement programs. International product sales were up by $4 million versus Q3 of 2024, contributing to overall revenue growth. I also want to highlight two significant pieces of legislation passed this quarter. California enacted a work zone speed pilot expected to deploy up to 35 camera-based systems in highway work zones. Additionally, California reformed its red-light camera enforcement program by changing violations from criminal to civil, reducing fine amounts and modifying some program operating requirements. These reforms align California's program more closely with other state safety programs and are expected to generate positive momentum for automated enforcement. We estimate these legislative authorizations could add about $140 million to the total addressable market, primarily driven by red-light camera reforms, increasing our incremental total addressable market to roughly $365 million, with potential expansion to $500 million if additional legislation is passed. Contracted bookings in Government Solutions remained strong in the third quarter, totaling approximately $14 million in incremental annual recurring revenue based on full run rates, bringing the trailing 12-month total to about $51 million. Notable third quarter bookings include a school bus stop-arm program in Seattle, a speed program in Phoenix, an expansion of the school zone speed program in Auburn, and a new red-light safety program in Modesto, California. After the quarter ended, we received notification from San Jose, California, about the intent to award the City's Speed Safety Program to Verra Mobility. We are honored to partner with San Jose to provide this critical safety technology. This marks our third California Speed Enforcement Award, following awards in San Francisco and Oakland. We expect the remaining pilot cities, Los Angeles, Glendale, and Long Beach, to launch their respective procurements over the next few quarters. We’re pleased to share that the San Francisco speed pilot program is producing positive results. A San Francisco Municipal Transportation Agency study showed an average 72% reduction in speeding across 15 corridors where cameras have been installed during the first four months of operations when comparing data before and after camera deployment. In our Parking Solutions business, T2 Systems, total revenue grew about 7% this quarter, driven by a 3% increase in SaaS and services revenue and a $1 million or 30% increase in product revenue, all aligning with our internal expectations. For our full-year outlook, we are raising our 2025 revenue guidance due to the New York City red-light camera expansion, which we expect will generate an additional $30 million in total revenue this year. Our expectations for the rest of our business remain unchanged as we believe that the automated enforcement market is robust, our Parking business turnaround is ahead of plan, and we expect stable travel demand. We're also providing a preliminary outlook for 2026. Previously, our 2025 guidance assumed that New York City revenue would remain flat compared to 2024. Our updated outlook anticipates that our new contract with New York City will start in January 2026. Due to the change order to our existing contract and the timing shift of red-light camera installations from 2026 to 2025, we expect total consolidated revenue growth to moderate to mid-single digits in 2026. By segment, we expect Government Solutions to grow at high single digits driven by strong service revenue. Commercial Services is expected to grow in the mid-single digits due to modest TSA volume growth combined with the impact of customer churn impacting FMC revenue in the first half of 2026. Lastly, T2 is anticipated to grow low to mid-single digits next year, driven by moderate SaaS and equipment sales growth. We expect adjusted EBITDA margins to decline by 250 to 300 basis points due to portfolio mix and impacts from the New York City renewal contract. Craig will walk through these details and the path to margin expansion as we leverage growth opportunities and ongoing cost reduction initiatives. I believe that 2026 will serve as a transition year between the investments made over the past two years and the expected benefits. Over several years, beginning in 2027, we are set to achieve strong growth and margin expansion, primarily driven by the growth in Government Solutions and our capacity to execute at scale, along with continued growth within commercial services and T2. In terms of capital allocation, our Board of Directors has authorized a $150 million increase to our existing stock repurchase program, now totaling $250 million available through November 2026. We plan to initiate the buyback soon, depending on market conditions and other factors. Craig, I will now turn it over to you to guide us through our financial results, the New York City contract update, our revised financial outlook for 2025, and our preliminary perspectives for 2026.

Craig Conti, CFO

Thank you, David, and hello, everyone. We appreciate you joining us on the call today. We'll turn to Slide 4, which outlines the key financial measures from the consolidated business for the third quarter. Our Q3 performance, including 12% service revenue growth and 16% total revenue growth year-over-year, exceeded our internal expectations. Service revenue growth, primarily consisting of recurring revenue, was driven by the change order for the New York City red-light expansion program and service revenue growth outside of New York City in the Government Solutions business, as well as increased revenue from RAC tolling and European operations in the Commercial Services business. At the segment level, Government Solutions service revenue grew 19% year-over-year, and Commercial Services revenue increased by 7% over the prior year. In T2 Systems, SaaS and services revenue increased by 3% compared to the third quarter of 2024. Total product revenue was about $19 million for the quarter, with Government Solutions contributing roughly $14 million—$6 million from the New York City red-light expansion and $8 million from international product sales. T2 delivered about $4 million in product sales overall for the quarter. Regarding profitability, our consolidated adjusted EBITDA for the quarter was $113 million, an increase of about 8% compared to the same period last year. We reported net income of $47 million for the quarter, including a tax provision of around $18 million, representing an effective tax rate of approximately 28%. GAAP diluted EPS was $0.29 per share for the third quarter of 2025, compared to $0.21 per share in the prior year period. Adjusted EPS, excluding amortization, stock-based compensation, and other nonrecurring items, was $0.37 per share for this quarter compared to $0.32 per share in the third quarter of 2024, representing a 16% year-over-year growth. The adjusted EPS growth was driven by increased adjusted EBITDA, a sustained reduction in interest expense due to our debt repricing efforts from the prior year, and our share repurchases in 2024. Cash flows from operating activity totaled $78 million, and we delivered $49 million of free cash flow for the quarter, aligning with our internal expectations. Moving to Slide 5, we generated $416 million of adjusted EBITDA on around $943 million of revenue for the trailing 12 months, representing a 44% adjusted EBITDA margin. Additionally, we generated $153 million of free cash flow, equating to a 37% conversion of adjusted EBITDA over the trailing 12 months. Now, I'll walk through our third quarter performance in each of our three business segments, starting with Commercial Services on Slide 6. CS year-over-year revenue growth was 7% in Q3. RAC tolling revenue increased 7% or about $5 million compared to the same period last year, driven by increased product adoption and tolling activity, benefiting from a 1% rise in U.S. travel volume over the prior year quarter. Our FMC business declined by 3% or about $500,000 year-over-year due to customer churn from previous periods. Additionally, our European operations contributed $2 million of growth compared to the third quarter of 2024. The Commercial Services segment profit increased by 7% over the prior year, representing a 67% segment profit margin. The margin improvement was primarily driven by operating leverage created by higher travel volume and increased product adoption. Turning to Slide 7, Government Solutions experienced robust service revenue growth this quarter, driven by $11 million of installation service for the new red-light camera expansion in New York City and 11% service growth outside of New York City. The growth was broad-based across all customer use cases, particularly in speed, bus lane, and school bus stop-arm enforcement programs. Total revenue grew by 28% over the prior year quarter, benefiting from about $14 million in product sales—$6 million from New York City red-light camera sales and $8 million from international product sales. Overall, product sales increased by $9 million compared to the same period last year. Government Solutions segment profit was $31 million for the quarter, representing margins of roughly 26%, down from 29% in the prior year period. The decrease in margins compared to last year was mainly due to readiness investments made to prepare the company for execution on the upcoming New York City contract. Moving to Slide 8 for T2 Systems results, we generated $22 million in revenue and approximately $4 million in segment profit for the quarter. SaaS and services sales increased by 3% year-over-year, while product revenue rose by 30% or $1 million compared to the third quarter of 2024. Within SaaS and services, recurring SaaS revenue saw low single-digit growth compared to the third quarter of 2024. Turning to Slide 9, we look at our balance sheet and net leverage. We ended the quarter with a net debt balance of $843 million, reflecting the strong free cash flow generated in the first nine months of the year. Net leverage was at 2x, and we've maintained significant liquidity with our newly expanded $150 million undrawn credit revolver. Our gross debt balance at year-end is approximately $1 billion, with around $690 million being floating rate debt. After the end of the quarter, we successfully refinanced both our ABL revolver and term loan due to the strong market for institutional debt relative to historical levels. We proactively increased the revolver limit from $125 million to $150 million and added an accordion feature for an additional $75 million of liquidity if needed in the future, bringing potential limits to $225 million. The maturity of the revolver was extended by five years to October 2030. In light of favorable institutional debt market conditions, we also refinanced our term loan, extending its maturity by seven years to October 2032, and reduced the interest spread by 25 basis points to 2% flat. Now, let's turn to Slide 10 to discuss our full-year 2025 guidance. Based on our year-to-date results and outlook for the fourth quarter, we are raising our full-year 2025 revenue guidance while affirming all other metrics. New York City has authorized the installation of up to 250 additional red-light cameras in 2025 under our existing contract, expected to deliver about $30 million in revenue, with around $10 million anticipated to come from product revenue and $20 million from installation services. The adjusted EBITDA from these camera sales is expected to be offset by one-time readiness investments necessary for the new contract requirements in New York City. These investments include developing a state-of-the-art real-time camera health dashboard, cloud migration activities for certain legacy data, and minority- and women-owned business enterprise subcontractor ramp-up costs. Consequently, we are not increasing adjusted EPS or free cash flow guidance for the remainder of 2025. Apart from the New York City camera installations, our perspective on guidance remains unchanged. The updated full-year 2025 guidance now expects total revenue in the range of $955 million to $965 million, reflecting roughly 9% growth at the midpoint compared to 2024. The rest of the financial guidance remains consistent: we expect adjusted EBITDA between $410 million and $420 million, indicating around 3% growth at the midpoint over 2024, along with an adjusted EPS range of $1.30 to $1.35 per share. Free cash flow is projected to fall between $175 million and $185 million, corresponding to a conversion rate in the low to mid-40% of adjusted EBITDA. Moving on to segment performance, Government Solutions is anticipated to generate low to mid-teens total revenue growth for 2025, fueled by new camera installations for New York City and expansions in existing and new customers won in previous quarters. We expect Parking Solutions revenue to remain roughly flat compared to 2024 levels. SaaS revenue is expected to grow in low single digits, balanced against a decline in installation professional service revenue with approximately flat product sales. Assuming travel volume increases only slightly in 2025 compared to 2024, we forecast Commercial Services growing at the high end of mid-single digits. We expect CS revenue, adjusted EBITDA, and margins to decline sequentially in the fourth quarter, in line with historical trends based on travel. Our key assumptions supporting our adjusted EPS and free cash flow outlook will be outlined on Slide 11. Turning to Slide 12, I want to present the key financial assumptions regarding the New York City contract we are finalizing, alongside an updated view of the Government Solutions business. On March 31 of this year, New York City announced that we were chosen as the vendor for their automated enforcement program, which has an initial five-year term with a five-year extension option. The estimated total contract value for the first five years is $963 million, and we are currently in the final stages of contract negotiations. We expect New York City to purchase its own equipment, with all installation and relocation services included in service revenue, adding to the scope of the existing contract. We anticipate selling and installing about 1,000 additional new red-light and fixed bus lane cameras over the next two-plus years. New York City service revenue is expected to grow in the high single to low double-digit range through 2027, then plateau in 2028 and beyond. Product sales in New York City post-2027 are expected to be under $5 million annually. Total Government Solutions service revenue is projected to grow in the high single to low double-digit range over the next several years, leveling off at the lower end of high single digits after the New York City installations are complete. Margins for the Government Solutions segment are expected to decline in 2026, reaching the low to mid-20% range due to repricing and the requirement that at least 30% of the total contract value be invested in minority and women-owned subcontractors. Beginning in 2027, we expect productivity improvements and platform consolidation to spur margin expansion, aiming for around 30% by 2028 and beyond. Now, let’s review our expectations for 2026 on Slide 13, which includes preliminary estimates for commercial services and T2. Please note that our annual operating plan is not finalized, so these estimates may change. At the consolidated level, with the delay in New York City red-light camera installations until 2025, we are expecting overall mid-single-digit revenue growth in 2026. Moreover, we anticipate a reduction of 250 to 300 basis points in adjusted EBITDA margins due to portfolio mix shifts in the New York City renewal contract, which will be partially balanced by a reduction in year-over-year ERP implementation costs. To elaborate on these items, the portfolio mix reflects Government Solutions growing faster than Commercial Services, which impacts consolidated adjusted EBITDA margins by approximately 25 basis points. More significantly, the New York City renewal contract is predicted to lead to a decline in margins of around 250 to 300 basis points, driven by pricing adjustments resulting from the competitive procurement process and the requirements for minority- and women-owned subcontractors. Despite the ramp-up costs in Government Solutions, adjusted EPS is expected to rise in the low to mid-single digits year-over-year, largely owing to the expanded stock repurchase plan announced today. In terms of the segments, we expect Commercial Services to grow in the mid-single digits as we anticipate TSA volume to rise by approximately 1% to 2% over 2025, consistent with year-to-date growth. Additionally, fleet business growth is expected to taper to low single digits due to previous churn in our FMC business, which will anniversary in the second quarter of 2026. Segment profit margins for Commercial Services are projected to increase by about 25 to 50 basis points due to volume leverage and decreased ERP spending in 2026. Ultimately, we expect T2 Systems to grow in the low to mid-single digits, with segment profit margins improving by 50 to 100 basis points over 2025. Looking beyond 2026, we believe that the Government Solutions platform consolidation discussed in prior quarters will act as a catalyst for margin expansion and overall productivity improvements in 2027 and later. This platform, highlighted on Slide 14, represents an IT initiative to deploy our latest smart mobility platform, MOSAIC, internally. MOSAIC is a cloud-based, fully secure application designed to streamline the processing of traffic incident events. The platform is expected to yield numerous advantages, such as a flexible architecture that enhances project deployment pipelines, improved automation processing, and increased productivity efficiencies, becoming a key driver of Government Solutions margin growth in 2027 and beyond. As David noted, our Board has authorized an extension of our stock buyback plan by an additional $150 million, raising the total authorization to $250 million. We anticipate commencing the stock buybacks soon, subject to market conditions and other factors. We are genuinely excited about our business's future trajectory. Finalizing the updated New York City contract will enhance financial predictability and create value. Furthermore, we are positioned for growth and profitability across our businesses as we harness the benefits of investing in our platforms, achieving the desired scale and margin improvements. This concludes our prepared remarks. Thank you for your time and attention. I would now like to invite Towanda to open the line for questions.

Operator, Operator

Our first question comes from Faiza Alwy with Deutsche Bank.

Faiza Alwy, Analyst

Thank you so much for giving us all that detail around the New York City contract, really helpful, and just giving us a longer-term view there. I guess I wanted to double-click on the margins, as you can imagine. So Craig, you pointed to a few different things. It sounded like there were some start-up costs that you're incurring this year. And then it sounds like there are some continuing costs next year and beyond and you mentioned the subcontracting with the minority and women-owned businesses. So I guess, just parse that out to the extent you can further quantify how much of this might be one-time versus continuing. That would be really helpful.

Craig Conti, CFO

Yes, you bet. So let me start first with 2025. So when we talk about those one-time readiness costs, that truly is one time. And the scope of that is approximately $5 million to $10 million depending on where it shakes out. And that's all baked into the guidance. But I think the crux of your question is let's move into 2026. So at the total Verra Mobility level, I expect margins to come down about 250 to 300 basis points, okay? And there's three buckets I want you to think about there. The first bucket is the portfolio mix, which simply means that the GS business, which is a lower-margin business than CS, as you well know, is growing faster than CS in 2026 as compared to '25. That's about 25 basis points at the consolidated level. That's negative. Then we pick up about 25 to 50 basis points on the positive between two things. Number one is our CS business. We'll still have volume leverage and accrete margins as we've talked about. I don't see any change there. And also, the ERP spending, as we've discussed in the past, the thrust of that spend will be behind us. So we'll get some benefit there. So I get 25 to 50 basis points back. And then the New York City renewal in totality, I expect to be a 250 to 300 basis point reduction in 2026, and that's really two pieces. The first is the price normalization. This was a competitive contract, as everyone well knows. And then the second piece is the cut in of the minority and women-owned business requirements. Now those minority and women-owned business requirements is a recurring cost and that will be to the tune of $20 million to $25 million per year that we did not have previously as we look out for the life of contract.

Faiza Alwy, Analyst

Understood. Just to clarify, will there be additional capital expenditure related to the purchase of these cameras, or will it be reflected in the income statement?

Craig Conti, CFO

Let me be really clear on this one, Faiza, it's a great question. Absolutely not. Absolutely not. So the expectation here is that New York is once again going to purchase their own capital as they have in the past.

Faiza Alwy, Analyst

Okay. Got it. And then just a follow-up on this point right around the competitive process and the margin dilution that you're seeing from this contract. I know you have previously talked about, as the TAM has increased, you've made some investments in the business. Like are you seeing a similar outcome with some of these other contracts that you're signing with other municipalities or jurisdictions? And like how should we think about margins overall beyond just the New York City impact in the Government Solutions business?

David Roberts, CEO

Yes, this is David. I would say that New York City, given its size and scale, has a significantly higher impact. In general, we are competing at very similar levels to what we have seen in the past. Outside of New York, only a few other major metropolitan areas currently have the same requirements regarding the use of minority and women-owned businesses. Therefore, we are not seeing this trend emerge across the country. I would consider New York City to be somewhat unique in this respect.

Craig Conti, CFO

And I would add on to the end of that, as you asked about go-forward margins, I think we said on this call a couple of times that the GS business is a high 20s, 30% margin business. Clearly, it's not going to be that in 2026, and we know that. But that has not changed. That has not changed. So the investments that we've made in previous years and a little bit this year to consolidate our platform and I wanted to give some updated perspective on what that is today called MOSAIC will get us back to that level of profitability. So we feel very good about that.

Keith Housum, Analyst

Thank you for the insights on New York City. Can you provide any information regarding the timeline for the cameras in 2026? Will their installation be consistent throughout the quarter and the year, or will it require ramping up over time?

David Roberts, CEO

We don't know yet. We'll plan for the end of the year, but it will probably be relatively smooth throughout the year. However, there are always variations depending on the weather and other factors within the city.

Craig Conti, CFO

I think the only thing I would mention is that if we look at all the years, the bulk of the installations will be completed by 2027, with a few extending into 2028. However, as David mentioned, we don't have enough detail to provide a quarterly outlook.

Keith Housum, Analyst

Got you. And then Craig, you might have just mentioned it, what do you anticipate the benefit being from MOSAIC in 2027 and beyond?

Craig Conti, CFO

I think that we will for the...

David Roberts, CEO

Say, 2025, not 2026.

Keith Housum, Analyst

Yes.

Craig Conti, CFO

Yes. Here's how I think about that is, I'm actually going to back it up to 2026. I think this is about 1.5 points to 2 points of margin in the GS business alone until we get to, I'll call it, the level altitude here, which is probably out in the end of 2028. So when you look at the New York City slide that I put and you kind of look in the upper right, the major driver of bringing the GS margins from the low to mid-20s back up to those high 20s, approaching 30% by 2028 is MOSAIC. So I would level load it across that time period.

Keith Housum, Analyst

Okay. That's helpful. Appreciate it. In terms of the share repurchases, you guys have had a share repurchase outstanding $100 million out there previously for a while. But it sounds like you guys are ready to act on the combined 250 years shortly, correct? As opposed to previously you guys were more opportunistic and you hold for dry powder.

Craig Conti, CFO

The short answer is yes. The slightly longer answer is we always have to say, obviously, subject to market conditions. But we feel pretty good about taking an active role on that, Keith.

Louie DiPalma, Analyst

Congrats on inching closer to the finalization of the contract. I was wondering what remains in terms of establishing the definitive contract? And do you have a sense of the timing?

David Roberts, CEO

At this point, what I would call it is primarily administrative working inside of the process that the city has laid out for contract approval. There's not really any significant terms and conditions that we're working through at this point. I would expect it relatively short order.

Louie DiPalma, Analyst

And for Craig, you provided great detail on the 3-year Government Systems revenue and EBITDA outlook. I think, it implies a 3-year government systems EBITDA growth CAGR of approximately 7%. I was wondering what does the 3-year outlook assume for CapEx? I don't think you provided any CapEx assumptions, but anything regarding CapEx or the total company free cash flow conversion in 2028 would be helpful.

Craig Conti, CFO

I won't discuss the 2028 free cash flow conversion right now. We're still considering a potential date for an Investor Day, which would be an excellent opportunity for that discussion. Regarding 2026, I anticipate that the CapEx spending will resemble that of 2025, and I take pride in that as we expect another year of high single-digit growth outside of New York City. The CapEx total should look similar to what we presented to investors this year. Directionally, I expect our CapEx as a percentage of service revenue, both for the company and for Government Solutions, to have peaked in 2025 based on what I see today. I can provide more details as I learn more.

Louie DiPalma, Analyst

Great. And another New York City related question for David or Craig, you both discussed installing 1,000 incremental cameras over the next 2 years. Does that total include all of the upgrades for the existing cameras? And do you still plan on upgrading the entire fleet of existing cameras? Or does that 1,000 include everything?

Craig Conti, CFO

Well, Louie, I can give you most of that. It does not include the upgrades. That 1,000 does not include the upgrades. However, when I went into the financial, we kind of did the CAGR discussion just a minute ago, that does include the upgrade. So those upgrades will be more. In terms of a number, I really want to see a final contract from New York because that's really at the customer's option. But the 1,000 does not include upgrades. It also doesn't include relocations of cameras from one spot to another.

Louie DiPalma, Analyst

Okay. And one final one. From a high level, how does the functionality of the new cameras compare to the cameras that you've been installing 5 years ago? Are there like many new features with the cameras? And is there the potential to add on like new revenue lines? And I'm not talking specifically about the New York market, but even for other markets, like what's the additional functionality with the latest generation of cameras?

David Roberts, CEO

I would say primarily two things. One is obviously the resolution and the quality of the image detection gets much higher. So think of your iPhone 17 versus the iPhone 12 or whatever, just the quality of the images and video is significantly better. That's number one. The ability to shoot across other lanes. I would say a lot of the investment we made is into the platform that Craig had mentioned MOSAIC, which is functionality that will deliver a much more seamless, much more efficient capability for our customers, look at data, data dashboards, making decisions. But the third point is, yes, in the world of cameras, that is the direction, which is a single camera that can do 5, 6 or 7 things, not just one thing. And that's what we would anticipate moving with that type of technology going forward.

Chao Zhang, Analyst

I wanted to focus on California for a moment and thank you for the legislative update and the news from various cities, especially the San Jose Award. From the perspective of guidance for 2026, can we assume that the awards you’ve received, including San Jose, are included in that guidance? Conversely, will the upcoming pilots in cities like Los Angeles, Glendale, and Long Beach be excluded from the guidance? Could you also share your overall scale in California and the potential opportunities you see in those particular cities?

Craig Conti, CFO

Yes, Chris, first of all, welcome. Second, this is Craig. I'll provide the financial details, and then David can discuss the commercial activities we've observed in California. The pilots you mentioned represent about $10 million in annual recurring revenue for the state of California, but roughly half have only recently gone out for request for proposals. If we were to secure 100% of those pilots, as David mentioned, it's included in our projections, but it does not represent a significant sum. Additionally, when introducing a new modality in a state where we already have a customer, the timeline from contract award to revenue generation is typically 12 to 18 months. Even if the figures were higher, it would still mean it’s factored into our projections, but it wouldn't be substantial. Now, regarding the red-light aspect, Dave, would you like to elaborate on that?

David Roberts, CEO

Yes, as I mentioned earlier, we still have a couple of pending projects from the school zone speed program, which we expect to roll out in the first part of next year. The red-light camera program is significant, and we are currently the largest provider of red-light services in California. However, there have historically been some unique administrative challenges that we have faced, which I previously mentioned and won’t repeat. We see this as an opportunity to reshape how we serve our customers. With the removal of some of those administrative barriers, we anticipate that these programs will expand. We have put a tremendous amount of effort into California as an organization, focusing on collaboration with our government relations and local teams to achieve what we believe will be a great outcome for many years to come.

Operator, Operator

Thank you. Ladies and gentlemen, that brings our Q&A session to the end. And that concludes today's conference call. Thank you for your participation. You may now disconnect.