Verra Mobility Corp (VRRM) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the Verra Mobility announces third-quarter 2018 financial results conference call.

Today's call is being recorded.

Now I would like to turn the conference over to Marc Griffin.

Please go ahead, Marc.

Thank you.

Good afternoon and welcome to Verra Mobility's third-quarter 2018 earnings call.

Today we will be discussing the results announced in our press release issued after the market close.

With me on the call this afternoon is David Roberts, Verra Mobility's Chief Executive Officer, and Tricia Chiodo, Chief Financial Officer of Verra Mobility.

They will begin with prepared remarks and then we will open the call for Q&A.

During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the fourth fiscal quarter of 2018 and the full year of 2018, our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers, and other statements regarding our plans and prospects.

Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming.

These statements reflect our views only as of today and should not be considered our reviews at any subsequent date.

We undertake no obligation to update or revise these forward-looking statements.

Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that will cause the actual results to differ materially from expectations.

For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our definitive proxy statement on Schedule 14A filed with the SEC on October 2, 2018, as updated by other SEC filings, all of which are available on the investor relations section of our website at ir.verramobility.com and on the SEC's website at SEC.com (sic, sec.gov).

Finally, during the course of today's call, we will refer to certain non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the market close today, which is located on our website, iR.verramobility.com, and on the SEC's website at SEC.gov.

With that, let me turn the call over to David.

Thank you, Marc, and thank you to everyone joining us today on our first call as a public company.

We very much appreciate your interest, so thank you for your participation.

As most of you know, Verra Mobility recently closed the SPAC transaction with Gores Holdings II and are a newly listed public company on NASDAQ.

Becoming a public company was an exciting milestone and Tricia and I would like to start by thanking our customers and our employees who have made this success possible.

We are excited about how this new ownership structure will support the ongoing growth and success for Verra Mobility customer, employees, and shareholders.

Given that this is our first earnings call, we thought it would be helpful to provide a brief overview of Verra Mobility.

I will then summarize the operating results for the third quarter and discuss our strategic growth initiatives before turning it over to Tricia, our CFO.

Verra Mobility is a leading provider of tech-enabled smart mobility solutions for commercial fleets, state and local governments, and consumers.

Through a broad portfolio of products and services, we address the needs of these customers in areas like tolling, violations, road safety, and title and registration.

Our commercial fleet business unit comprises approximately 65% of the Company.

In the commercial segment, we focus on products that make tolling, violation processing, and title and registration smarter and easier for our customers.

We are the largest provider of toll management to rental car companies and fleet management companies in North America and serve great customers like Avis, Enterprise, and Hertz in the rental car market and Element, ARI, and LeasePlan in the fleet management market.

During the quarter, we signed a three-year extension with Fox Rent-A-Car.

This multiyear commitment underscores the strength of our platform and the long-term nature of our relationships.

We are very excited about the opportunities for our commercial segment.

The transition to cashless tolling and the increase in the number of express tollings will continue to drive our commercial business.

The remaining approximate 35% of our business comes from our government solutions.

In this segment, we are a leader in photo enforcement in North America, including red lights, speed, and school bus cameras.

We have become the go-to vendor for local municipalities and school districts, including New York, Chicago, Dallas, and Seattle, as we support them in their pursuit of increasing driver and schoolchildren safety in their cities.

Across the country, traffic safety continues to be a major driver, as vehicles are traveling more miles, along with more instances of distracted driving and speeding.

Furthermore, most US cities are adopting the Vision Zero approach to safety and making the necessary capital investments to make meaningful strides in traffic safety.

Vision Zero is a road safety project that aims to achieve a highway system with no fatalities or serious injuries involving road traffic.

We are working with a large number of municipalities and school districts on their RFPs for traffic safety and look forward to implementing more systems in the coming years.

During the quarter, we won several new safety programs with municipalities, including Bellevue, Washington, for crossing guard; Edgewood, Washington, for speed; and Norfolk, Virginia, for red light camera.

Additionally, we extended our contract with Austin, Texas, Independent School District for its crossing guard.

Looking forward, our future could not be brighter as we look to accelerate growth with a geographical expansion and new products.

We recently expanded into Europe with the acquisition of EPC and are very excited by the opportunity that acquisition brings in terms of a geographical footprint.

Our tolling and fleet customers in the US have been asking for a platform that has the capabilities we have in the US for Europe.

We now will be able to provide that capability in Europe and are looking forward to working with our customers and toll authorities in bringing that to fruition.

We also just launched our consumer tolling application called Peasy.

Peasy is a nationwide pay-as-you-go tolling service that aims to make toll management and payments effortless and headache-free with a single account.

The service and mobile app are complementary to existing transponders and will enable drivers to travel on 95% of cashless toll roads and bridges across the US without additional hardware, transponders, or multiple tolling accounts.

As both Europe and Peasy are in the initial phases, we do not have much detail on those during this period, but look forward to updating you on their progress in 2019.

As Tricia will discuss in detail in a moment, we are very pleased with our third-quarter results.

On a pro forma adjusted basis, our third-quarter revenue grew 23% year over year to $107.6 million and our pro forma adjusted EBITDA grew 34% to $61.9 million or 57.6% of revenue.

Additionally, we generated $46.1 million in cash flow from operating activities.

Driven by our out-performance in the quarter, we are raising our full 2018 outlook.

For the full year 2018, we are expecting revenues in the range of $385 million to $390 million, up from $373 million, and expect pro forma adjusted EBITDA to be $220 million to $225 million, up from $218.5 million.

So in summary, we are very pleased with our third-quarter execution and remain excited about our position in the market and our ability to leverage our platforms.

With that, let me hand it over to Tricia to walk through the financials in more detail.

Thank you, David.

Before I get into the results of the quarter, I'd like to take a minute to discuss our public filings with the SEC and information contained in our earnings release and investor deck.

As David mentioned, we closed on a reverse merger with Gores Holdings II on October 17 of this year.

Prior to the merger, Gores was a special-purpose acquisition company trading under the ticker GSHT.

Because the transaction took place in October, after the quarter end, the financial statements filed with the SEC on Form 10-Q reflect the results of Gores Holdings II and not those of Verra Mobility.

Understanding that the operating results of Verra Mobility are important to your investment decision, the schedules accompanying our earnings release reflect our financial results in accordance with generally accepted accounting principles in a format that is similar to that that would be required in an SEC filing.

Verra Mobility completed two acquisitions earlier this year.

We acquired Highway Toll Administration in March 2018, making us the undisputed leader in tolling administration for RACs and fleet management companies.

We acquired Euro Parking Collections in April of 2018, establishing a platform in Europe from which we can expand our existing products and services.

Most of the commentary today will reflect the Company's results on a pro forma adjusted basis, meaning that we have adjusted the financial results in the prior periods to include the impact of two acquisitions and carved out transactions and other one-time costs from the operating results.

Let me give you an example of why this is important.

If we were only to report on the GAAP results that's reflected in our earnings release, we would communicate that total revenues of $107.6 million for the quarter ended September 30, 2018, increased by $51.5 million or 92% over the same period in 2017.

If, however, we discussed the pro forma adjusted results, we'd communicate the same revenue -- $107.6 million -- grew $20 million or 23% over the same period in the prior year.

Still an outstanding result, but much more valuable to the investor.

We have provided a short investor deck on our website that has a reconciliation from GAAP results to pro forma adjusted information that we will be discussing today.

If you are following along on the investor deck, we are on slide 2. In addition to our strong revenue growth, our pro forma adjusted EBITDA grew $15.7 million or 34%, increasing from $46.2 million in the third quarter of 2017 to $61.9 million in the third quarter of 2018.

EBITDA expansion is the result of improved revenue and the realization of expected synergies as we integrate acquisitions.

EBITDA margin reached 57.6% for the quarter.

With growing revenue and expanding EBITDA margins, the Company generated $46.1 million in cash flow from operating activities during the third quarter and held $52 million of cash on the balance sheet at the end of September.

As of September 30, we had $1.036 billion of debt, which is 4.6 times trailing 12-months adjusted pro forma EBITDA.

The transaction we just completed with Gores in October reduced that debt by $130 million.

It expanded our first lien from $836 million to $906 million -- that is a $70 million increase -- and paid off the $200 million second lien.

This reduced total debt, lowering interest expense going forward.

Transaction leverage of 3.8 times assumes post-transaction debt levels for the -- and full-year 2018 pro forma adjusted EBITDA at the midpoint of our outlook range.

As David mentioned, we have increased our outlook for the full year of 2018.

We are increasing expected revenues to the range of $385 million to $390 million and we expect pro forma adjusted EBITDA in the range of $220 million to $225 million.

I want to remind everyone that the full-year EBITDA numbers assume $10 million of run rate synergies.

These are cost savings or revenue initiatives that were executed on in 2018, but won't be reflected in our financial results in 2019.

This is a great outcome for the Company.

We are an execution-focused company and it shows in our financial results.

I want to quickly touch base on the segment performance.

On the next slide, we have pro forma adjusted revenue and pro forma adjusted EBITDA by segment.

Our commercial services business delivers tolling, violation processing, title and registration services to rental car companies and fleet management companies in the US and collects on violations in Europe.

From 2015 to 2017, our tolling services grew at a compounded annual growth rate of 18% and we are continuing to grow into 2018.

Third-quarter service revenue grew 32% over the prior year, from $54.7 million in Q3 2017 to $72 million in the current quarter.

David mentioned some of the tailwinds in the tolling industry: the increase in cashless toll roads and the increase in express tolling.

These result in increased usage of our tolling products.

We continue to see adoption rates grow.

One of our large RAC's adoption grew from 16.5% in Q3 of 2017 to 22.5% in the current quarter.

Adoption is the measure of the total number of rental agreements with tolling products divided by the total number of rental agreements in aggregate.

There is seasonality in tolling revenue, with Q3 being the highest-volume quarter.

Rental companies experience increased demand during the summer and we benefit from the increased number of rental agreements.

Pro forma adjusted EBITDA grew from $33.4 million in Q3 2017 to $49.4 million in the current quarter.

This 48% year-over-year growth is directly aligned with the increased revenue and the impacted integration synergies.

We previously reported that we would achieve $8 million in in-year synergies -- that is in 2018 -- through a combination of revenue and cost initiatives and that run rate synergies would be $10 million rolling into 2019.

We are well on our way to achieving our synergy targets.

Our government solutions segment operates red light, speed, school bus stop arms, bus lane photo enforcement programs for municipalities and school districts, offering end-to-end solutions, providing and installing equipment to printing and mailing citations.

Total revenue grew 8%, from $32.9 million in the third quarter of 2017 to $35.6 million in the current quarter.

Government solutions has both service revenue and products revenue.

Service revenue of $33.2 million in the current quarter grew slightly from $32.4 million in the third quarter.

Service revenue has some seasonality associated with school zone speed and school bus stop arm programs that don't operate at full capacity in the summer.

Third quarter will generally be the seasonal low point of the revenue cycle.

Product revenue grew from $400,000 in the third quarter of 2017 to $2.4 million in the current quarter.

For the majority of our customers, we provide the equipment to operate their programs.

However, there are a few customers who purchase their equipment.

But with a limited number of customers and purchasing patterns dependent upon municipality budgets, product revenue is very inconsistent from quarter to quarter.

Q3 2018 EBITDA of $12.5 million grew 8% compared to the same quarter in the prior year.

EBITDA margins dropped to 35.5% compared to 38.9% in the second quarter.

This is largely attributable to the lower service revenue during the summer months.

We are very pleased with the operating results of both of our reporting segments and we really look forward to finishing this year strong.

And with that, I will turn the call back over to the operator for questions.

(Operator Instructions) Ashish Sabadra, Deutsche Bank.

Congratulations on the solid results.

These results were truly spectacular, particularly on the commercial side, where we saw a significant improvement in the growth profile to 32%.

And you highlighted, Tricia, you highlighted the increased penetration at a RAC and also some secular drivers in that business.

I was just wondering if you could give some more clarity around where you think the penetration can go over the longer term.

How does the trajectory look like for penetration at this particular RAC, but more importantly across all the other customer profile -- other RACs that you have?

What is the revenue opportunity?

Is there a way to think about it?

Yes, so if you look at just what we did with that one particular RAC, we moved it from 16.5% to 22.5% over the course of a year.

We do have other rental car organizations that have higher adoption rates than that.

So if you think that some of our other ones are roughly at that 24% mark, there is still a step-function where we can continue to increase.

I think what we are seeing is the acceleration of our adoption rates really associated with this trend in cashless tolling.

I am not really sure how to predict where the top end of that adoption rate can be.

But I do think that we will continue to step-function up adoption over the course of the next future years.

That's helpful.

And maybe just a broader question about the growth profile over the midterm, particularly the European expansion as well as the consumer products.

Can you talk about what -- any kind of tractions that you've seen on the consumer front?

You've recently launched the product.

Wondering if you could share any kind of statistics or any kind of information on the consumer products and how you think about those products progressing.

Yes, it is David.

So as I said earlier, those are both so new, they are sort of more -- we launched the product really past its [minimum vial] only a few weeks ago.

We are seeing the initial adoption continue to increase slowly.

We have not yet really announced any of our partners that are in the works that we will be talking about over the course of the next year that will really push the sort of captive audience, if you will, that Peasy will be associated with.

The good news: people are using it, it works, and the feedback that we have gotten is that it works very well.

As for Europe, in terms of where we are is our goal is to be launching a pilot in I will just call it Southern Europe sometime towards the first part of next year because we want to be ahead of the summer travel season.

We have already been meeting with toll authorities.

We are hiring employees on the ground and we are also working with several customers to shape that pilot.

So I think what I would say relative to that is that we are on track relative to what we're reporting on.

Back to Peasy just quickly, recognizing that that is a consumer app, it looks sort of wholly different than what we sort of typically do from a revenue perspective.

We will be providing next year as it gets to critical mass more unit metrics so that you can track the growth of that a little more clearly.

At this point, those numbers -- they wouldn't be helpful to you.

And I think you should think about the growth rate as a ramp, not a step function for those two product lines.

So we are ramping up into brand-new areas, so think about them as growing over time to those results rather than step-functioning up.

No, that's helpful.

And maybe a question on the margin.

So we saw some pretty good margin expansion in the quarter.

Can you just highlight what are the drivers for margins, where you are seeing operating leverage, and how should we think about margins going forward?

Yes.

I think especially in the commercial business -- and revenue always helps.

So the revenue growth is very important to creating that margin expansion.

What we have been able to show is that the commercial business does have tremendous operating leverage.

That the next new dollar in the door really does flow through to the bottom line.

The other things that were helpful: after the acquisition of HTA, we did reorganize the company, creating an operating model from an organizational structure that was truly integrated.

So we are not running as separate companies; we are running as an integrated system across a singular management team led by David.

That was very helpful in us step-functioning to our overall synergy target.

And over time, I think what you will see is as we continue to consolidate back-office platforms and move through these step-functions, we will be able to realize another $10 million in synergies in 2019 to create a really nice run rate.

That's great.

And maybe one final question on government solution and then I will get back in the queue.

But on the government solution side, can you help us understand the progress that has been made on the school safety?

You have a lot of good products on that front.

How is the sales effort there on that front?

Yes, I think it's going very well.

We have really started to land the plane in a couple of different key markets, where, for instance, Georgia is a key market for us.

And so there is two assets to think about that, Ashish.

One is we did open up via legislation earlier in the year that there is now the availability for school zone speed in the state of Georgia, which is huge for that because that is a TAM of approximately $50 million.

We continue to win in the market against competitors on the school bus side.

And that is where we, as an example, we renewed Austin; I think -- I believe it was for a five-year contract, which was outstanding.

That was one of the larger school districts that we have cameras in the country.

And so we would anticipate that to continue to be a growing segment.

It is also an area that is getting to some extent unfortunate attention due to recent accidents.

And thus, we are getting a higher level of inquiry related to potential technology.

Thanks, David.

Congrats once again.

Thanks.

Appreciate it.

(Operator Instructions) Louis DiPalma, William Blair.

Good afternoon, David and Tricia.

Congrats to you, Gores, and Platinum Equity on closing the transaction.

Thank you.

Thank you, Louis.

Appreciate that.

David, you mentioned the European EPC acquisition.

It seems that EPC can provide you with a beachhead into Europe.

And currently in the US, you generate about $175 million in annual tolling services revenue with a 60% EBITDA margin.

How big do you think the potential tolling market can be in Europe?

Yes, it's a great question.

So we did some analysis on that, Louis.

And what we came back with was the total opportunity in Europe for tolling and violations, so that also includes violation processing, was around $450 million.

I will say that you would not anticipate the same level of margin profile in Europe because the cost structure and the dynamics with toll authorities is a little bit unique.

Clearly, it will still be an outstanding revenue and profit generator, but it will not mirror exactly the dynamics that we have here in the US.

Okay.

And in terms of the RACs or the rental car companies, do they have the same type of presence in Europe or a similar presence that they have in the US?

And can you leverage the existing relationship?

Yes, of course.

And that is why we are there.

It was at the behest of customers, even -- and I have been here four years.

And I think in the first six months, there was a request about doing violations in Europe for one of our customers.

So they are -- what I would say is many of the same problems that exist here exist there.

The customers there very aware of it.

As you would imagine, they operate somewhat independently from the US market sometimes.

But we have had meetings with all of them and all have expressed interest in the opportunity.

And even some companies that we have not worked with in the past that are only operating in Europe.

So that is a real leverage point for us.

And we try to go to the places where our customers ask us to go.

If you look at our history of acquisitions, they have been very much synonymous with customers asking us to do something for them.

And we do it and we turn that into profitability for the business.

The title and registration business is a great example of that.

We bought Sunshine and the EPC acquisition was purely in line with that as well.

Okay.

And according to our industry checks, we think that Hertz recently increased the price that they charge renters for your tolling service by about 20%.

Does that positively impact your revenue as part of your revenue share economic agreement?

It does impact us.

They did raise the price.

It is also important that the price model was different as well.

The previous pricing that you saw was related to a traditional rental day agreement, meaning you were charged the fee for every day that you have the vehicle.

Versus now Hertz has gone to usage day, meaning that you only pay the fee related to the toll program on the days that you run a toll.

But they did indeed raise the price and we do indeed benefit from that.

Okay.

Great.

And last question: industry-wide, there seems to be around 8,000 enforcement cameras deployed in North America compared to over 300,000 total traffic lights.

And with Miami being an exception, have you observed whether sentiment in general has been improving?

Or, I mean, getting better for photo enforcement solutions, particularly as you bring them to school bus and school zones for safety purposes?

Yes.

I mean, I think you can even see just in the growth in the business over the last quarter that we are starting to see an increase.

What I would anticipate -- so the answer is absolutely.

What we are seeing, though, Louis, is really what you would call purpose-built photo enforcement.

Meaning, you are using photo enforcement to solve very specific problems and those problems are the problems that people can genuinely agree on.

Meaning, it's very difficult to argue that a child should not be able to walk in a school zone without a person speeding through and causing an accident.

It's very difficult to argue that they shouldn't be able to walk across the street and not fear getting hit by someone blowing by a school bus.

It's very hard to argue.

Pennsylvania just passed legislation for work zone speeding, meaning that they can do speed enforcement in work zones to protect workers.

So I think what you're going to see is probably a shift in the sentiment related to photo enforcement because of these very specific uses and obviously, the proof of the value in terms of saving lives that they have.

So I think when you look at the legislative bodies endorsing photo enforcement in Pennsylvania and Georgia, those obviously bode well for our business.

Okay.

And regarding Miami, for the media coverage of the removal of the Miami cameras, it discussed how detectives in the Miami region protested the removal because I think they use for those camera also had ATS Live on them that had like surveillance capabilities for those detectives.

Can you discuss how you are adding like more services or more sensors onto these cameras and how that might increase stickiness in the future?

That's a great, really good question.

So we get calls all across the country on a regular basis for images from our cameras because the cameras are on all the time.

And so they are constantly recording, and they use that image in other crime detection scenarios, whether that be local enforcement or federal enforcement.

ATS Live was an example of one that you referenced in Miami and many, many other clients in the state of Florida have that same application.

So one of the things that we are looking into right now is to add the capability around ALPR.

ALPR is automated license plate recognition that local police can use for things like AMBER alerts as an example.

And also looking for expanded technology at the intersection, meaning there is a lot of data and information that flows through intersections because of the detection capability that is out there today.

And that information can be used for traffic management, for violation detection, and it can also be used, as we think about the future, as we relate to autonomy and connected vehicles.

So I think what you will see from us over the course of the next several years are relatively aggressive moves so that we can be a major player.

Because we do have cities that are asking us for more -- because of our trusted relationship with large cities, they are asking us to do more for them.

And that is probably an area that you will hear from us as well.

Thanks, David and Tricia.

That's it for me.

Appreciate it.

Thanks for calling in.

And with no additional questions at this time, that does conclude today's conference.

Once again, I'd like to thank everyone for joining us today.