Verra Mobility Corp (VRRM) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Verra Mobility Corporation First Quarter 2021 Earnings Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Sajid Daudi, Vice President, Investor Relations.

Thank you, Sajid, you may begin.

Thank you, and good afternoon, and welcome to Verra Mobility's First Quarter 2021 Earnings Call.

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

With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Tricia Chiodo, our Chief Financial Officer.

David will begin with prepared remarks, followed by Tricia and then we'll open up the call for Q&A.

During the call, we'll make statements related to our business that may be considered forward-looking, including statements concerning 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 view only as of today, May 17, 2021, and should not be considered our views as of any subsequent date.

We undertake no obligation to update or revise any 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 could cause the actual results to differ materially from our expectations.

For a discussion of material risks and other important factors that could affect our annual -- actual results, please refer to those contained in our annual report on Form 10-K/A and quarterly report, Form 10-Q, which are available on the Investor Relations section of our website at ir@verramobility.com (sic) [ir.verramobility.com] and on the SEC's website at sec.gov.

Finally, during today's call, we'll refer to certain non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the close today, located again on our website at ir@verramobility.com (sic) ir.verramobility.com and on the SEC's website at sec.gov.

And with that, let me turn the call over to David.

Thanks, Sajid, and thank you to everyone for joining us on the call today.

We delivered solid first quarter results that exceeded our expectations as we continue to navigate through a challenging economic environment.

However, with more than 1 in 4 Americans vaccinated and improving March and April TSA traveler throughput data, the trends are promising.

As the U.S. economy reopens, we see improving metrics across both our business segments.

Our Government Solutions business saw a solid service revenue contribution driven by the expansion of the New York City school zone speed program in 2020, and our Commercial Services segment showed improved demand at the big 3 rental car companies.

Adjusted EBITDA came in at approximately $40 million or 45% of revenue, exceeding our internal expectations.

During the quarter, we optimized our debt capital structure to address our short-term capital needs and strengthen our balance sheet to invest for future growth, including funding the purchase of Redflex Holdings, which now -- which has now received shareholder and court approval.

We ended the quarter with approximately $250 million in cash and have additional liquidity through our revolver, which remains undrawn.

With clarity on our outstanding New York City receivable, which I will detail shortly, we expect to maintain a healthy cash balance throughout the calendar year.

Now I will move into our Q1 results by segment.

Our Government Solutions segment delivered revenue of approximately $44 million and generated approximately $18 million in adjusted EBITDA, with a healthy margin of roughly 40%.

Service revenue grew approximately 15% during the first quarter, driven by solid contribution from our fixed speed portfolio, partially offset by our variable programs, which remain impacted by the pandemic.

Our speed portfolio is now our largest product line, representing approximately 49% of Government Solutions service revenue.

The most significant contributor to our speed portfolio is the ongoing expansion of the New York City school zone speed program.

This program is one of the largest programs globally, and the city has become nationally and internationally recognized as a leading innovator in street safety initiatives.

As a reminder, we have 2 current contracts with the City of New York Department of Transportation, a 2014 legacy contract for red light, bus lane, mobile speed and fixed speed photo enforcement cameras, and a 2020 emergency contract for the purchase, installation, maintenance and operation of an expanded school zone speed program that began in 2020.

In our last earnings call, we addressed that we were in the process of remediating certain installation deficiencies that we had discovered, which had occurred under our 2014 legacy contract and also that we were cooperating with an investigation by the City of New York for matters related to those installations.

I am pleased to report that all addressable sites that we have access to have been fully remediated.

Approximately 15 sites are remaining due to conditions that exist at those locations that are preventing remediation.

Additionally, the City of New York concluded its investigation into the related matters reported in our 10-K/A, and as Tricia will address, we have agreed with the city on the settlement to resolve those matters.

I'm very proud of our team's efforts in managing these issues and believe we have emerged as a stronger partner for our long standing customer, the New York City Department of Transportation.

We've also made progress on the outstanding receivables related to our New York City contracts, which combined amounts to approximately $121 million through the end of March.

With respect to the 2020 emergency contract, which represents approximately 66% of that receivable, I'm happy to report that it has now been submitted to the city Comptroller's office for registration.

Once registered, we expect to begin receiving payments on those invoices.

We are also making progress on clearing administrative hurdles for the unpaid invoices on the 2014 contract and hope to see payments begin this quarter.

We are proud to continue to play a meaningful role in bringing New York City's Vision Zero initiative to fruition.

We recently announced that we received authorization under the emergency contract to order and install 720 additional school zone speed cameras throughout the city.

We began installation in April.

And through last Friday, we have installed approximately 63 of those cameras, and the remainder is expected to be completed in the current calendar year.

Tricia will provide additional color on the impact of our accounts receivable status and the new camera order on our balance sheet and cash flows.

Overall, we see further momentum for our Government Solutions business as states reopen and COVID restrictions subside.

We are making good progress in Virginia and Georgia states with newer speed enforcement legislation.

We recently initiated a pilot for a speed program in Bedford County in Virginia.

And in Georgia, we have received notice to proceed with the installation of 51 speed cameras in Spalding County and are awaiting regulatory approval for potentially another 24 cameras.

In addition, our healthy pipeline of opportunities include new awards and contracts for approximately 50 speed and red light cameras year-to-date.

We expect those opportunities to translate into revenue during the second half of this year or early '22.

We also maintained consistently high renewal rates during the first quarter, including key customer contracts in Washington, Florida, Maryland, North Carolina and Georgia.

With schools expected to be entirely open for in-person learning this fall, we expect to see recent awards for our CrossingGuard programs to translate into deployments for the coming school year.

In fact, we have already begun work on our recently announced CrossingGuard contract for approximately 200 buses for Broome County, New York, with more expected over the near term.

As a reminder, we have received awards from 6 counties in New York state for our CrossingGuard program, and we expect new wins with the potential to cover approximately 6,500 school buses.

Lastly, I would like to address the status of our acquisition of Redflex Holdings.

As we announced in late April, we agreed to increase the purchase price from AUD 0.92 per share to AUD 0.96 per share.

I am pleased to report that just last week, Redflex shareholders approved the transaction, which we hope will close in this quarter but may slip into Q3.

The delay in closing is related to receiving regulatory approval from Saudi Arabia, for which we don't anticipate problems, but which is taking longer than anticipated due to their regulatory regime and the associated time line.

On May 13, the Australian court overseeing the scheme issued orders approving the transaction based on the shareholder vote, which makes the Saudi regulatory approval the final contractual condition for the scheme to take effect.

We are incredibly excited about the opportunities this transaction will have for our customers and our business.

We believe the combination will expand our global presence and growth in the smart mobility and safety enforcement market, increase our resources and scale and enhance our technology capabilities.

Our teams are already engaged in identifying cost and revenue synergies to create a worldwide leader in safety enforcement.

Moving on to our Commercial Services segment.

We delivered revenue of approximately $46 million and adjusted EBITDA came in at approximately $23 million or 49% of revenue.

And as a reminder, the largest proportion of the revenue in Commercial Services is highly correlated to rental car volume.

At the big 3 RACs, we saw volume pick up by 33% in March, which is the highest month-over-month volume improvement they have experienced since June of 2020.

We are seeing solid in-demand in the current quarter, which correlates with the pent-up demand for car rentals as recently reported by various trade publications.

Our internal dashboards and the KPIs we follow also support continuous improvement in the underlying markets.

Recent reports from Hertz and Avis point to higher utilization rates indicating efficient fleet management and a healthy demand environment at the customer level.

In addition, the consistent sequential improvements we see in billable days reaffirm solid business trends.

While we are optimistic and the trend line remains favorable, RAC still need to overcome some challenges as rental volumes remain well below pre-pandemic levels, our outlook remains cautious on the industry, especially given the supply constraints at the OEM level, which potentially could limit volume growth.

We are happy to report that we have made great strides with enterprise and have an agreement in principle to renew our contract for tolling services in the U.S. through May of 2023 on terms that are materially similar to our current contracts, although we are still finalizing those terms.

Our international expansion for RAC tolling continues to make progress, although the impacts of COVID-19 on the European RAC market are limiting the progress of those discussions.

That said, we are continuing active dialogues with many large rental car companies throughout Europe.

We are close to finalizing terms with 1 large global RAC in Ireland and in January of this year, we also converted the pilot with rent-a-car in France to an 18-month country-wide contract.

Additionally, we recently announced that we won a new contract for transport for London to enforce its direct vision standard scheme that went into effect on March 1, 2021.

This public safety initiative requires heavy goods vehicles to obtain a safety permit before entering and operating in most of the Greater London.

This initiative is part of the Mayor of London's Vision Zero plan to eliminate all death and serious injuries from London Streets by 2041.

On the title and registration side, which continued to do well, we renewed our contract with Element, a global leader in the fleet management industry.

In summary, the foundation for a thoughtfully constructed and accurate forecast is still challenging, and therefore, we will refrain from offering guidance in the near term, but we can provide some qualitative thoughts on our business going forward.

Though we see lots of signs of optimism, we continue to anticipate the slow recovery in our Commercial Services segment, given the ongoing challenges faced by the car rental industry.

We expect to return to 2019 service revenue levels by late '21 or possibly early 2022.

As we have commented in the past, we anticipate leisure travel to return earlier than business travel.

Additionally, the new substantial order from the New York City school zone speed program will help drive product revenue for our Government Solutions business during the current year.

Citation volumes are still well below pre-pandemic levels and we expect positive contributions from our fixed portfolio to offset our variable cameras entering a seasonally slow period through the fall.

Additionally, we see a potential of secular changes in traffic enforcement in the coming years, which could serve as a catalyst for our government solutions offerings.

Overall, we are happy with the progress that we are making toward our strategic imperatives and remain focused on executing against our plan to create shareholder value.

We continue to believe that a balanced product portfolio provides stability in these uncertain times and growth for the future.

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

Thank you, David, and good afternoon, everyone.

I'll provide a more detailed overview of our first quarter financial performance, and then we'll open up the call for questions.

We've provided a short earnings deck on our website that provides some insight into the quarter and some reconciliations from our GAAP to any non-GAAP results.

Before I get into the quarterly results, I wanted to provide a quick update on the status of the restatement that we announced on May 7 and filed with the SEC after market on Friday.

On April 12, the SEC issued a statement regarding the accounting treatment of warrants, highlighting the potential accounting implications of certain features of the warrants commonly issued in transactions involving SPAC.

As a result of the SEC statement, we reevaluated our accounting treatment of our warrants and concluded that our 13.3 million public warrants were properly classified as a component of equity.

However, our 6.67 million private placement warrants should be and should have been previously classified as a liability, measured at fair market value with the noncash fair value adjustments recorded in earnings at each reporting period.

We filed a restatement on Form 10 K/A, reflecting the private placement warrants as a liability from the inception of our business combination in 2018, and reported the market-to-market adjustments to the fair market value of that liability as a gain or loss on the P&L for all subsequent reporting periods.

In general, as the stock price increases, the fair value of the warrant liability in the company -- so as the stock price increases, so does the fair value of the warrant liability and the company recognizes additional noncash loss in the statement of operations, with the opposite of effect happening when the stock price declines, this can create a lot of volatility in our net income but has no impact on revenue, adjusted EBITDA or total cash flows.

Now let's turn to the quarterly results.

If you're following along on the earnings deck, I'm on Slide 2, which outlines revenue and adjusted EBITDA performance for the Commercial Services segment.

Our Commercial Services segment delivered revenue of $45.7 million, declining $15.6 million or 25% year-over-year.

This business, this segment delivers the majority of its revenue -- derives majority of its revenue from tolling services provided to rental car companies that continue to feel the effects of reduced travel due to COVID-19.

As David mentioned, the big 3 RAC saw a significant pickup in demand during March, which resulted in the largest month-over-month increase that we've seen in the last 9 months.

This momentum carried over into April, which gives us reason for optimism.

However, rental car volumes are still approximately 40% below pre-pandemic levels.

Adjusted EBITDA for the quarter of $22.6 million, declined 33.3% year-over-year with adjusted EBITDA margins at 49%.

If you recall, we stated on our last call that margins would be pressured in Q1 as we reinstated bonuses for 2021 and ramped up to meet demand.

Turning to the next slide, you can see the results of the Government Solutions business.

This segment operates photo enforcement programs for municipalities, school districts, offering an end-to-end solution.

Our Government Solutions business delivered revenue of $44.2 million in the first quarter, declining $11.3 million or approximately 20% year-over-year.

As a reminder, the revenue for this segment is comprised of service revenue, that's the monthly fees we generate from the operation of photo enforcement programs and product revenue from selling and installing camera systems.

I think it's important that we talk about these 2 sources of revenue separately.

The service revenue for the first quarter was $44 million, which grew $5.8 million or 15.2% year-over-year.

The service revenue growth is driven by our expansion of the school zone speed program, which increased by 43.2% over the same quarter in the prior year.

The growth in our speed portfolio is primarily related to the New York City school zone speed program, where we installed 720 cameras throughout 2020 for which we are now booking service revenue.

This growth was offset by a decline in the school bus stop arm cameras that were impacted by school closures related to COVID-19.

As schools return to in-person learning, revenue should return to these programs late in 2021.

Product revenue was almost negligible for the quarter as we didn't install any cameras.

As David mentioned, we received a new authorization for installation, service and maintenance for New York City Department of Transportation for an additional 720 school zone speed cameras, which we began installing in April.

As such, we expect our product revenue to be $50 million to $55 million for the current year compared to the previous expectation of $3 million to $5 million.

We'd anticipate installing all cameras by the end of the year.

Adjusted EBITDA of $17.8 million decreased $3.5 million from the prior year quarter.

Adjusted EBITDA margins for this business were strong at 40%.

David referenced, we reached an agreement in principle with the City of New York to resolve matters related to previously disclosed installation issues.

And while the nonfinancial terms of the settlement are still being finalized, we accrued $1.3 million for the settlement amount.

Separately, with the higher product revenue expected from the balance of this year, we anticipate our margins to remain strong for the remainder of the year.

Turning to the next slide.

We show our consolidated results for the quarter.

The combined results of the businesses that we just discussed generated total revenue of $89.9 million for the quarter, a decline of $26.9 million or 23% from the same period in the prior year.

Adjusted EBITDA of $40.3 million decreased by $14.5 million or 26% from the prior year quarter.

First quarter adjusted EBITDA margins were 45%.

The company reported a net loss of $8.9 million in the quarter compared to net income of $22.1 million as restated for the impact of the warrant accounting in the same period in the prior year.

Adjusted EPS, which excludes amortization, stock-based compensation and other noncash items, was $0.12 per share for the current quarter compared to $0.19 per share for the same quarter of 2020.

The tax benefit for the quarter was $2.9 million, representing an effective tax rate of 24.5%.

In the quarter, we optimized our capital structure, amending and extending our existing term loan with a new $650 million first lien term loan maturing in 2028, which includes an accordion feature providing an additional $250 million of borrowing capacity.

We also issued $350 million of new senior unsecured notes at a fixed rate of 5.5% maturing in 2029.

This strengthens our balance sheet and provides us with ample liquidity to execute on our strategic priorities for the current calendar year and beyond while providing liquidity for the pending Redflex acquisition.

The company generated $9 million in cash flow from operating activities during the quarter compared to $14.8 million in the same period of the prior year.

The change resulted in the reduction of -- change resulted from the reduction of net income and was further impacted by increased AR.

As of March 31, our City of New York Department of Transportation contracts represented approximately 63% of our net accounts receivable.

As of the end of the quarter, they owed us $120.7 million under the legacy and emergency contracts combined.

Under the emergency contract, we are owed $52.6 million in product revenue and $26.8 million in service revenue.

The emergency contract has been submitted for registration to the New York City comptroller, and we'd expect to receive our first payment during the quarter.

We also believe that we will begin receiving payments towards the $41.3 million balance under the 2014 legacy contract.

Provided these payments begin as anticipated, we should significantly enhance our cash flow performance for the balance of the year.

Free cash flow, defined as cash flow provided by operating activities less CapEx, was $5.3 million in the quarter.

And as of March 31, we had debt of $1 billion.

Net of $250 million of cash on hand, our net debt was $750 million, which was 5 -- sorry, 4.5x trailing 12 months adjusted EBITDA of $167.3 million.

We anticipate this to be the trough of our trailing 12 months adjusted EBITDA, and therefore, the peak of our leverage.

We'd expect to delever quickly for the remainder of the year.

As we turn to the future, uncertainty surrounding the recovery cycle following the COVID-19 virus makes it difficult to provide guidance.

Our ability to predict travel and rental car demand are limited.

We're seeing strong sequential growth in March and April and would expect greater service revenue in Q2 and the back half of the year.

We anticipate product revenue in the range of $50 million to $55 million.

We're pleased with our profitability during these difficult times and believe that we're well positioned to capture revenue as the cycle returns.

And with that, I'll open up the line for questions.

(Operator Instructions) Your first question comes from Justin Forsythe from Crédit Suisse.

Well, I wanted to dig into the NYC opportunity a little bit.

And congratulations on that win.

So I know we had talked previously about a ceiling of roughly 1,500 cameras in NYC, meaning coverage of 2 cameras per school zone.

And just wanted to dig into that.

By my math, it seems like you've actually exceeded that number.

So is there more coverage per school zone?

And is there incremental upside numbers in that perhaps an expansion of the contract even further?

The second half of that, this is the length of what the legislation allows for.

So there won't be more cameras past the new 720, but the number is higher than what we thought.

Yes.

Their actually -- I think their actually can be -- originally, what they had said was they were going to expand it to a certain number of school zones that, that number was 750, of which, we were already in 150.

So then you'd say 600 school zones times 2 cameras should get us to about 1,200.

That being said, sometimes the school zones can expand around a corner or something like that.

So we installed 300 cameras under the legacy contract in 2019.

The emergency order that we're currently operating under now actually has 1,687 cameras available for installation on it, of which, this order gives us the second.

So we're at 1,440.

So there's a little bit more room.

I see, I see.

Got it.

So -- but you'll be -- like you said, you'll be bumping up against the high end of that.

So there is not to be expected any incremental additions on top of this?

Yes.

And I think we'll keep that exactly like we've always done it.

And when we get the order to proceed, we'll let you guys know.

Sure, sure.

And regarding the economics there, is there anything different on the service revenue side?

It sounded like from your guide for product revenue, you're about in line with perhaps that last order was on the product revenue side.

But is there anything different on the service revenue side?

Not at all.

So it would be about the same as we've been talking about for the total monthly fee, which I think we've said that the portfolio in general, average is about $3,800.

Got it.

Got it.

Super helpful.

I guess one brief follow-up.

I wanted to dig into the London opportunity a little bit.

And you mentioned this recent win there, where you're providing the overweight shipping program there?

And I think you had some operations there in contracts with EPC historically.

Just curious if you could provide some color around how that will benefit you perhaps selling other solutions into London, which seems to be one of the kind of leading photo enforcement type of cities probably after New York?

Yes.

So this is less around photo enforcement, although, they do have that in the U.K. This is more around sort of like road user charging and some of those types of events.

So to me, it's a great adjacency.

We worked with TfL for some time on other initiatives.

This was an opportunity to expand a platform that they'd already been using into another area.

So it's not a huge opportunity, but it is something that just shows kind of the efficacy of both the platform and the relationship that we have with TfL.

Your next question comes from Daniel Moore from CJS Securities.

Maybe just talk a little bit about if travel, and therefore, rental demand continue to recover, and based on bookings, certainly, things are looking up as we look into the summer and fall.

What's your visibility or confidence that the RACs will have sufficient fleet sizes to get back to '19 levels by maybe early '22, as you described in terms of your outlook?

Yes.

So the best -- I think they've been actually quite public about the fact that they've had some concerns related to new vehicles.

And so certainly, the ones that we know about publicly are entering into the sort of, what you might call the newly used car market to try to round out their fleets.

But I think they have been relatively clear about that there would be an expectation that the demand will outstrip supply, at least for some period of time as we head into the back part of the year until the OEMs and the chip -- that really is the chip manufacturing can get back into a place where they can fill up that demand.

Hard to guess like what the lagging effect of that is, but it's certainly -- they are certainly anticipating some slowness on that aspect.

Got it.

But we're talking likely months or quarters as opposed to materially longer than that.

Understood.

And then just in terms of the -- you mentioned the contract in Ireland.

As far as your discussions with RACs, are they kind of ready to start talking again about expansion services into Europe as they get their own ducks in a road here, maybe any update in terms of timing of the opportunity around there would be great?

Yes, I think it's going to be -- well, not a tale of 2 cities, but a tale of 2 countries, which is the sort of significant increase in travel-related opportunities here in the U.S. is outpacing Europe.

It continues to grow a bit wider because there's still some restrictions inside of Europe.

So I think what the rental car companies would say is that they are hopeful that by the end of the year that the vaccination efforts inside of Europe are pacing then with the U.S., and that would allow them to sort of see that travel demand pick up.

I know certain countries are definitely trying to target the ability to have more travel come summer.

So I suspect it will be -- it will still be reasonably delayed until the vaccination progress makes it more headway inside of Europe.

Very helpful.

Last one and then I'll leave it.

But in, I believe you said Georgia, additional 50 cameras or so.

Any product revenue associated with that?

Or is it more typical lease agreements?

Yes, think of a standard operating procedures, the usual kind of lease agreement, to your point.

Your next question comes from James Faucette from Morgan Stanley.

And thanks for the color on at least some of the puts and takes as you think about the rest of this year and where you can get back to some of the key metrics or at least compared to 2019.

I'm wondering if you can help us bracket though where -- kind of what bottom versus top end would be and -- or what would be the drivers in variance going forward?

It seems like -- I think kind of as you suggested, we should be seeing pretty consistent sequential improvement as long as the world continues to reopen, et cetera.

So just looking for a little incremental clarification there.

So I may not fully understand the question.

So if you think about what are the -- maybe the -- when you say puts and takes, James, you're telling like, what are the things that sort of influenced to go up and then the influencers to go down?

Like what are the things about it?

Exactly.

Yes, exactly.

Yes.

So I think in general, you've got a commitment from New York City, which gives us a really strong sort of right down the middle of the road, going to be very, very consistent with previous practice in terms of the way we think about growth.

But we still have variable programs, and in particular, ones that are in school zones or in particular, school zone or CrossingGuard, which is our school bus program.

The -- right now, we would think that those would be "turned back on come fall" and kids are back in school, but there still could be a -- to use your word, take on that, meaning it could get delayed, they could be less.

It could maybe hybrid learning situations that could potentially impact.

And so up and until we're back to full sort of recovery, any variable program, I think, will have some level of pressure on it.

And so we're hoping that by the -- going into next year that we're back to a normalized run rate.

And to be the same, obviously, the big driver in Commercial Services is on the tolling side, which, as we talked about, is hoping to get back to that 2019 level as we leave this year.

But the variability of things like the cars available as well as any sort of potential setback in the concept of opening or reclosings or vaccination or anything like that could potentially be a take on that.

And then Europe is one that we're still -- it's unclear as to when that's going to sort of hit its critical mass because of the current stance of the countries there is certainly more conservative here in the U.S. and until that gets clarified, I don't think we'll have quite the same level of ability to predict what we think is going to be.

Got it.

Got it.

And then just back on the cash flow and the receivables from New York, et cetera, good to hear that there's progress being made on that.

Can you any way you can help us anticipate what you think the time frame is before they get fully up-to-date on that?

I can appreciate that there are some different issues at play there.

But just trying to get a general sense as to when you get caught up or when they get caught up there?

Yes.

And I really have no way of predicting what the city is going to do.

What I can tell you is what we've modeled internally.

So internally, we have modelings that they will continue to add to their receivable on the service revenue side by about $7.3 million a month.

And then we have them starting to pay.

So whatever is current, plus about $10 million in backlog starting in, call it, like July.

So that we would catch up $60 million from the old receivable and remain current, like that from what they were going on, that would still mean at the end of the year, they'd still owe us close to $60 million, if that were the way that, that money flowed.

But once again, I -- that is just what we're modeling, which is probably trying to be conservative, but we would hope that especially on the installation of product that they would be able to catch up quickly.

Because I believe that those monies are set aside for those infrastructure products.

Your next question comes from David Koning from Baird.

Yes.

I guess, first of all, I was just kind of going through the 10-Q.

And when we look at the top 3 RACs, they all got nicely better in terms of growth in Q1 obviously than Q4, but the other revenue, if we take total segment revenue less top 3, that declined, I think by more than any quarter of last year, it was down like 34% year-over-year.

So just wondering what happened to the fleet part or other parts of that commercial business?

Yes.

I always know you're going to be the one reading through the 10-Q.

Yes.

So as I look through there, it is that we're still getting really strong revenue from the RAC tolling side.

Let me pull up the other ones, and I can tell you where we are from their viewpoint.

And you're looking at quarter-over-quarter, is that right?

Or are you looking sequential?

I'm looking -- yes, compared to the first quarter of last year, year-over-year.

And I know enterprise is really good, right?

I mean, it actually grew by Q1.

I mean, that's pretty impressive.

But yes, there is -- the non-top 3 was the part that declined by most?

Yes.

Yes.

And we're seeing bigger declines, like a 20% decline on a quarter-over-quarter basis from the FMCs.

Our violations business, so in the U.S. declined by -- well, this is actually U.S. and Europe declined by about 28%.

And so we are seeing declines in those.

And then we had a fairly big drop off also 43% in our title and registration business from those comparative timeframes.

So -- and that's really volume-driven of what's moving through those.

So -- but we are seeing sort of that rebound from the RAC.

And I think what happened in those other businesses is they've got lagging revenue.

So even though we started to see that down in Q -- in March of last year, it really didn't impact those businesses, the FMCs and titles and registration until later.

So we'll see -- we should see growth in all of these products as we go through into the next quarter.

Got you.

Okay.

So the good news there, if that's just lagging, it just means that we're going to get, yes, nice recovery, just maybe a quarter or 2 later than some of the RACs?

Yes.

Yes, okay.

That's exactly right.

And then the only other one, just in government, obviously, New York is going to progress.

Both lines will be good, nice sequential growth, I would imagine, both cameras and service revenue.

But then the rest of the business, the non-New York part the last few quarters has been nicely stable or even growing.

I think this quarter maybe was down slightly sequentially, but basically, it's been pretty stable.

Is that going to start to grow to with -- I know you talked about Georgia and other things, but you just expect sequential progression?

Yes.

You will anticipate it.

One of the major things that are, David, that drive that is just government decision-making.

And obviously, during the pandemic, there weren't a lot of new awards that were given and not a lot of decisioning around those types of things as local governments were highly focused on, obviously, the pandemic.

So now that you can start to see these counties and cities are starting to kind of pull themselves out, you saw some decisions in Georgia, you would hope to start to see some of those other decisions getting made here.

The summer may slow it down a little bit as it would normally would relative to suiting, but then you would start to see a pick up in the back part of the year.

Yes.

Our next question comes from Louie DiPalma from William Blair.

What are your high-level thoughts on the proposed infrastructure bill and how that could benefit Verra Mobility as a transportation infrastructure provider?

Do you think that as a result of this bill, there will be more tolling infrastructure, road user charging systems and in general speed cameras that could lead to more demand for your systems?

Well, certainly -- so I think any investment in infrastructure is good for our business, clearly, that as they look to modernize and upgrade that's going to be -- overall, that halo effect should be good.

I think in addition, there's also been more conversation.

We certainly did a press release a couple of weeks ago around sort of a broader view of photo enforcements and having that as a standard play in transportation across the country versus today, where it is a state-by-state decision, thinking perhaps there might be an opportunity for more of a federal playbook, if you will.

And again, that's not pending.

That's just conversation at this point.

So all that -- but tolling is a proven way to both increase the efficacy of travel time as well as to raise revenue.

And so the -- you would anticipate that over time, there should be more toll roads.

And so with the infrastructure bill, again, I'm not betting on when that's going to get complete because I suspect it's going to be quite some time, but that, that would still be positive for our business as a whole.

Great.

And regarding the pilot that you mentioned in Ireland, is that with a new RAC partner?

It would be with a current customer that has operations in Ireland.

So would it be with your current European partner or one of your current North American partner?

It would be with the customer that's not already in Europe.

Your next question comes from Keith Housum from Northcoast Research.

Congratulations on New York City.

In terms of the remediation efforts that you guys have put in over the past however long it's been.

Can you provide a little bit of context in terms of the impact they had on profitability for how long you're required to do so?

Yes.

We had estimated the expenses in relation to remediation to be about $3 million, the majority of which have been accrued for by the end of the year.

And then obviously, the settlement of $1.3 million, which was in the current quarter.

So if you think about this as $4.3 million, $4.5 million, that's right around what it cost us.

Got you.

And was that -- you said you already accrued about $3 million.

So you accrued for that last year?

Or was that this quarter?

Yes.

No, the majority of it was accrued for last year and -- but we expended the cash this quarter, but we did a lot of the work this quarter, but it was accrued for at the end of the year.

Got it.

Appreciate it.

In terms of -- and then the color about the school bus camera is opportunity for 6,500 school bus cameras.

I'm sorry, I didn't catch all the details there.

Do you perhaps review some of the context there for us?

For the 6,500, so that is multiple cameras.

So New York state has enabling legislation for school bus cameras.

The 6,500 is a collection of multiple counties that have sort of signed on for the ability to go and deploy those cameras.

It doesn't mean that they will deploy all 6,500, but they certainly have the -- over time, they will start to pilot and deploy those over the course of the next several months and probably over the next year or so.

The -- we mentioned that in the statement that we're starting to install for Broome County with 200 cameras, and we would hope to anticipate more installs here over the summer as schools start to realign on getting that kit back in buses and back-to-school in the fall.

Got it.

Appreciate it.

So it's really a license to hunt for you guys to go out and get new counties in.

Exactly.

Yes, well said.

Got you.

Okay.

And then if I can squeeze one more in here.

In terms of the commercial business, you guys noticed the increased penetration rate or adoption rate of your total transponders with the movement toward cashless collections?

No.

What we're seeing is more -- we're seeing more billable days per rental agreement.

So you could say that, that could be in relation to sort of the take rate of the product or it could be that those rental agreements are lasting longer.

So they're hitting more tolls along those sides.

But if you think about the RACs being down 40% year-over-year on their volume, we're not down by that much.

So we're sort of buoyed up by the fact that we're seeing more billable days per contract, for which we have our product in it.

We're seeing more toll usage per contract, all of which is helpful for us.

Our next question is a follow-up question from Justin Forsythe from Crédit Suisse.

I apologize.

I was on mute.

Sorry.

I wanted to jump back in queue.

I just had a quick follow-up regarding something you hinted at, but maybe wanted to dive in a little more.

And it's regarding capacity constraints at -- potentially at the big 3 RACs.

And it seems like obviously, there's a lot of pent-up demand in certain RACs, you could even see potentially positive growth.

But how do you see that playing out?

And do you think they are prepared to go into this travel season with sufficient capacity?

Or do you think that could potentially kind of limit upside going forward this year and then perhaps kind of catching up in 2022?

Well, certainly, the statements and plenty of articles on major news publications regarding the issue and pictures of people standing in empty lots at airports waiting for a car to get return so they can get in because there are no vehicles.

It's certainly not an issue related to the rental car companies because they are very quick and consistent orders from OEMs, it's the OEMs and the inability to get their appropriate chips that run the vehicles that they would like to purchase.

So it's a global supply chain issue that is having this downstream effect.

My understanding, again, from publicly-related conversations with people that work for the RAC is that they're looking at going into the used car market, that which they were just in selling, they are now going back to buy.

Their buyers in the used car market are probably the more newly used.

So knowing them and given the year that they had before, I suspect they're going to be pretty scrappy and finding a way to make sure that they can fill out that demand, which obviously ends up being a good thing for our business as well.

Got it.

Right.

And I think you mentioned this, but it sounded like demand and you saw it.

And I think they commented on their calls as well that demand had been pretty robust through April.

And so that kind of would be expected to expand into the summer months.

Yes, there is -- I think it's coming back ahead of what many of us would have thought, depending on where we were in vaccinations, but I think the openings and the new guidances from CDC and things like that are all boding well for a lot of people ready to get out of their house.

Got it.

Got it.

And just a minor housekeeping one here.

The $50 million to $55 million in product revenue I assume that does not include any potential addition from Redflex?

No, no, that's just us.

Your next question comes from Sameer Kalucha from Deutsche Bank.

What I was wondering is with the remediation measures you put in or you went through for the NY or NYC contract, I'm wondering if that impacts any economics going forward, that's one?

And number two, what kind of mitigation strategies you're putting in to make sure that you don't run into those issues going forward?

Yes, there haven't -- so we don't -- there are some operating procedures that we're going to take on going forward.

But most of those, we discovered this issue in the end of 2019.

So most of those we already had in play for all of 2020.

So really, what it is, is that it's a method by which we install and how we take pictures of the contracts, and there are certain sort of procedures that we and the city have agreed to, that will go -- that we'll use on a go-forward basis.

But many of those had been in play at the installation site for 2020 or at least we had step function towards them.

So I don't think it's going to be a big lift from that perspective.

Great.

It seems like things are progressing well on other fronts.

So congrats.

Thank you.

There are no further questions at this time.

That does conclude our conference.

You may disconnect at any time.

Thank you for participating.