Okay, great. Let's get started. Welcome, everyone, to day 1 of the UBS Global Technology Conference. My name is Nik Cremo, and I help cover the payments and fintech sector here at UBS.
We're excited to have the Verra Mobility team here with us today. We have David Roberts, CEO; and Craig Conti, CFO. So thanks for making it out, guys. I know it was a long trip for you. For us, it's about 10 minutes from our office, so pretty easy for us.
Yes, yes.
Great. So I think it would be good if we could just start on the expanding TAM in the Government Solutions business. David, I know that you mentioned a number of new legislation that was passed over the last 6 months. I believe you sized the total opportunity for California at $100 million, and there are three other states you sized around $40 million to $60 million. So I think it would be good to hear your perspective on just what we're seeing from a legislative perspective.
Yes. So for the -- I'm going to do 30 seconds for those of you that don't know us. First of all, this will be your best meeting all day, so welcome. Number two is I'm going to give you very quickly what we do for a living, just so they can -- and then I'll land on that question for Government Solutions.
So Verra Mobility is a leader in smart mobility. We operate today in 3 segments. Those segments include Government Solutions, where we're the #1 provider of automated enforcement solutions that it includes red-light cameras, speed cameras, school bus stop-arm cameras. We operate mostly in the United States, but we also operate via acquisition in New Zealand, in Australia and Canada.
Number two is our Commercial Services business, where we work with commercial fleets on connected vehicle solutions, including tolling, violations and registration. And for those of you that I suspect, and you may even have rented a car here, if you've ever rented a car from Hertz or Avis or Enterprise and you see that little box in the wind shield, that's us. Everything related to that product being there and how you access toll roads goes through Verra Mobility.
And finally, we have a Parking Solutions business, where we're the #1 provider of parking solutions software to universities in North America. That was an acquisition we did a couple of years ago.
Now back to your question, in Government Solutions, the way that it works is through legislation. So we partner with legislative bodies across the different states to enable legislation to allow us to -- our products to exist.
And recently, we've had more, what I would just call, overall traction in legislation than we have. I've been with the company 9 years. This year was, by far, the biggest year of new legislation opening, and that included Florida as well as California and Connecticut and Colorado.
So right now, I think what's happening is there's a really broad-based understanding that the technology that we provide is one that really, really works. It not only changes driver behavior related to the use case, but it also gets police -- it's a force multiplier for police. So they don't have to be out doing traffic ticket, they can do things that are more important. So right now, there's a real tailwind behind that business.
Great. And so one of the questions that we often get related to all this new legislation is how investors should think about this from just a whole like timing perspective from the RFP, the implementation and then the test period and the full rollout.
Yes. So typically, when I -- think of a legislation, the governor signed the bill. More than likely, the first camera will be in the ground in 9 to 12 months. The reason being is that once that bill gets passed, then there's some sort of working with local municipalities on what the adoption and sort of how do we manage this? How does it work? All -- almost all contracts are done through that RFP process.
So they're going to create an RFP. They'll go through that process. They'll select a vendor, and then they'll go put the cameras where -- and depending on which kind they're using. So I would say, probably, as we've opened up legislation right around now, you would anticipate -- in the second half of next year, we would anticipate to start to see some cameras in the ground and generating revenue from that.
Got it. And then just taking another step back, I mean, where are we in terms of adoption of automated enforcement across the 50 states?
Yes. So right now, we operate in 22 states, and each state is different. So some -- not all states -- and in those states, you would imagine, if you're looking at a map, they would sort of go around the corners of the -- where the population is on sort of the -- from California all the way down across into Florida, and then up the East Coast and then a little bit in the Illinois sort of the Central Heartland area. Each state has different laws.
So up until -- so as an example, there had been a red-light camera enforcement in Florida for about 8 years. And just this year, we were able to pass an additional speed -- school zone speed and school bus. And so now you would say they have three types of enforcement in the state. So we can get what I call a share of wallet legislatively. And so not each of those 22 states have every type of enforcement. But over time, we would anticipate that they would.
Got it. So while in the Government Solutions business -- I mean, I know the long-term growth algo is mid-single digits. So maybe if you could just kind of walk through the building blocks of that. And with all this legislation being passed, like is there a potential to maybe raise that target here over the next year or 2?
Nik, I think -- thanks for the question, and I think there is, right? As I look forward to 2024, I still think we're in that mid-single-digit growth rate that we talked about at Investor Day. And the growth algorithm there is, if you think about this business, this renews with existing customers at about 98%, but penetration with existing customers is over 100%. So that's how you get to that growth, plus the expanding TAMs.
As I look back 18 months ago, when we were doing Investor Day, we talked about mid-single-digit growth, and there was the potential for this TAM that we've talked about that's actually actualized in '23 to come. So if I think about the potential for this to be a high single-digit growth business, I'm much more confident today than we were 18 months ago. I just think it's going to take a while for that TAM to actualize.
Got it. No, that makes sense. And just while on the Government Solutions business, I know your largest customer in New York City. I think that contract is coming up for renewal. So can we just kind of walk through what that whole process looks like going up for RFP and what your competitive strengths are going into it?
Sure. Like any other major program, they are almost always required to do an RFP around every 3 to 5 years. It's just a -- it's a common government practice. We -- and we have -- just to give some context, we have been the sole provider for New York through acquisition for the past 15 years. So we were really the only provider that has provided a fully outsourced solution for them in this particular topic.
We would anticipate -- originally, the RFP was going to be some time this quarter. Given that we passed the Thanksgiving holiday, I would probably bet that the RFP would come out sometime in the mid part of the first quarter. We'll have an opportunity to respond. And then I would anticipate decisions being made and things like that towards the end of the year.
It will take some time, for sure. It's just -- it's a big program. There certainly will be competitors. Why do we feel good? One is the knowledge that we've been operating there. We've installed -- every single camera in New York has been installed by a Verra Mobility employee or through acquisition.
Number two is we feel very good about our technology. We've recently added some new technology to our capabilities, both software as well as on the hardware side, so that we feel very good about that. And I think, just overall, are not -- we have people that are on the ground in New York that have been working in and among and fixing and working with local police in DOT and MTA for so many years that we feel like that's a great advantage for us.
And there's no other comparative program, meaning the New York City program is so much bigger than every other program, it would be challenging, certainly, for a competitor to come in and say, "Oh, I've run a program this size and scale because it's the only one."
Okay. And would there be any switching costs if another competitor did come in as well that you have to deal with?
For sure. Absolutely. It's a very complex program, and there would be high switching costs as well.
Got it. And then last on this topic, is there any potential for the contract to maybe expand in scope or maybe add some new areas? Or...
Yes. They -- New York is very, very -- I would just say they're very on the leading edge of what is called Vision Zero, which is sort of a commitment from municipalities to have 0 deaths related to traffic fatalities within that city. And they look at enforcement as one of the planks to support that mandate.
And they've done things like bus lane. They're probably looking at other areas of expansion. The RFP is not out, so we can't say for sure what it will or won't have. But certainly, those are areas that have had high levels of interest for potential expansion with the city.
Got it. And Craig, maybe one for you. Just wanted to revisit some of the investments that you made in the business in 2023 and some that are earmarked for 2024. Maybe just walk us through why these investments were necessary and how recurring they may or may not be.
Sure. In the back half of 2023, we made a relatively significant investment in Commercial Services business. This is in the fleet management sector of the business, which is, on the round, it's about a $60 million business, what we'll close the year with. We invested in platform modernization and essentially the ability to bring this complex solution to smaller fleets. So we've made that investment, and we expect to see the growth from that investment next year.
On the Government Solutions side of the house, we made some minor investments in the platform here in the back half of the year, which are behind us from an operating expense standpoint. But as we look out to 2024, if you had a chance to listen into our earnings call, we talked about what our capital expense may look like in 2024. So I expect to close the year this year with somewhere in the range of $55 million to $60 million of total capital. And I expect that number to go at a $90 million of new capital next year.
Now the reason why I'm being this specific about it because I think it's really important. That $30 million increase year-over-year, roughly half of that $30 million increase is for additional platform modernization in Government Solutions, which will enable us to bring a multitude of legacy platforms to a much lower number of new platforms, which will allow us to capitalize on this TAM and reduce our install time.
The remaining $15 million of that $30 million increase is actually an increase in the number of cameras, right? So if you go back to what David was saying about Florida, California, right, we're going to start installing those cameras in the back half of the year, and we'll have expense to do -- we'll have capital expenditure to do that.
But remember, especially for folks who aren't as familiar with Verra Mobility, the way that capital works, it's not like capital unlike other companies. This is revenue-generating capital. So as we go out and pursue a new customer, we are actually leading with our balance sheet, and it's paid back over the term -- over the life of the contract.
Got it. And thanks for all that color, Craig. So I think it would be good if we could touch on the Commercial Services business. Maybe, just to start, like what are the trends that you're seeing in travel for the first 2 months of Q4? I'm not sure if you have any read into the holiday travel from last weekend. But how is that tracking relative to your expectations?
Sure. Well, it's -- we just had an article today that was published this past Thanksgiving on Sunday, it was the highest TSA through -- people going through TSA ever recorded. So it's been a nice -- the travel seems to be in full stead for this quarter. I think it's important to note that just because Thanksgiving was really good, that doesn't -- we don't make money the next day. There's a delay in terms of how the tolling works and things like that.
But I think it goes to what we've noticed, and I think other airlines and our rental car partners have all been observant that there seems to be a pretty durable trend of travel here that, that has become a de facto way in which not only businesses are beginning to increase their spend there or maintain it at a minimum, but people are using travel with their sort of excess cash capacity. So I think, right now, we still feel very good about what travel will do next year and kind of keeping it with our expectations for the growth of the business.
Got it. And on the Commercial Services business, I know it's like a high single-digit long-term growth algo. And now that we're in excess of 2019 levels, how should we be thinking about that business growth for the next year?
Yes. I think this remains a high single-digit organic grower, right? And maybe what will help contextualize that a little bit, let's break down that high single-digit organic growth. What does that mean? Roughly half of that is going to be GDP growth in the markets that we serve. The other half is going to be split between the secular tailwinds that, if you've heard us talk before, these are things we talk about quite a bit. So roads going from free roads today to toll roads, right?
As more toll roads come into existence, we added 8 in the United States, I believe, last year, the adoption of a product goes up. That's more opportunity to capture toll on a rental car. And then, of course, going from roads that are barrier based to free flowing. So now when you don't have the ability to stop and pay with your credit card anymore, again, that increases the adoption of our product because we have a cash flow solution.
So that's another piece of the growth. And then I think the final piece of the growth are the organic investments that we're talking about. So putting money into the fleet management business to grow that organically. When you add those 3 things together, you get to a sustainable high single-digit organic growth number.
Got it. And just while on this topic, I mean, I know that there's the secular growth of toll roads going to free flow. Where are we in terms of that? I know it's been increasing over the last few years, and kind of how much is there to go?
Sure. We're in the high 60s percent here in the United States, so there's still quite some room to go there.
Got it. So you guys provided a preliminary 2024 outlook, right, at your guys' long-term range of 6% to 8% next year. So what's your thinking behind that? What are the assumptions?
Yes. I probably need another couple of weeks with the plan to be able to go kind of business by business. But I do think, at the top of the waves, we'll be somewhere between that 6% and 8% growth organically as we expected to be at Investor Day. From a margin standpoint, we will be accretive year-over-year. We've always talked about 50 to 75 basis points per year in the business, and that's the rubric we led out from 2022 to 2026.
I still believe, over term, we'll get there. Next year, I think we'll be on the lower side of that, probably even below the 50 basis points. And the reason is this is investment in the platform as we continue to attack these new TAMs in Government Solutions. So I feel pretty good about where we're headed next year.
Got it. And do you see a path to returning to the 50 to 75?
I do. And I think a lot can happen, Nik, as you well know. But if we look at -- if we're sitting here in 2026 looking back to 2022, if you average it out, I still think we'll be at the rate that we talked about at Investor Day.
That's great. Okay. So we haven't spent any time on T2 yet. I know it's been about a year or 2 since you guys closed that acquisition. I know part of the thesis there was being able to cross-sell that solution to some of your municipality relationships you have on the Government Solutions side. So maybe it would be good just to get an update on how that initiative is going.
Yes. I mean, I think, on the first part, the vast majority of the revenue that comes out of the Parking Solutions business is in university. So that was -- thesis number one is we want to expand into an adjacent segment that would allow us this highly recurring, software-driven SaaS revenue in a market position that they had over 50% market share. So that was like thesis #1.
Thesis #2 was, hey, would we be able to expand our relationships around parking in some of our larger cities? What we found is, while it's been helpful in what I would call not a cross-sell, but like a cross-reference, the decision-makers in the larger cities, in particular, which is where we do most of our work, are pretty bifurcated. I mean the one that does parking has anything to do with automated enforcement and vice versa.
And so that hasn't panned out. But it's been a very good source of leads at the smaller side, where we're, hey, we may not be able to do automated enforcement, have you been able to talk to our permits and enforcement business, which is what we offer in the municipal segment. So from that standpoint, I think it's been working well.
Got it. So next, I mean, a lot of investors are anticipating that the U.S. could go into a recession at some point in 2024. So I think it would be good just to recap the recession-resistant nature of Verra Mobility. You guys have the Government Solutions business, which is dependent on legislation, which seems to be a little idiosyncratic. Maybe just walk through the recurring nature of the business and how you would expect it to perform in a recession.
Sure. So we'll go business by business. I don't think it's any secret, where we're probably most exposed is in the Commercial Services business, and that has to do with travel trends, right? So -- and I want to point that out because I think it's really important to the degree that you go into a recession, travel has to follow, right? We've seen a slowdown, travel hasn't followed. That's just where we are today.
But in the future, we will be exposed to the travel trends. If travel goes down by 20%, the business will go down by 20%, right? But then if I look at the other businesses, our Government Solutions business, this is 98%, 99% of recurring revenue, right, so not a lot of impact to the Government Solutions business from a recessionary impact. So I would say very little impact.
And one thing David likes to point out is we've owned this business through recessions in the past, and people don't drive less or more carefully during a recession either. So we don't expect the inputs to how we make money to be any different.
And then if you go into the T2 business, roughly 2/3 to 3 quarters, depending on the year of this business' recurring SaaS revenue, right? So you'd only be exposed here for a smaller portion of the equipment side. So are we completely insulated from the recession? Absolutely not. I think you'd see it come through in travel for CS. We are relatively insulated in GS and T2, though, due to the recurring nature of the business.
Got it. Another one for you, Craig, I mean, what levers do you have to pull on the expense side to maintain or help on the margin front in case of a slowdown on the volume side for travel?
Yes. Sure. We run pretty lean, right? So there are -- I'd like to say, if we had a 5%, maybe 10% reduction in travel, we could probably hold our margins. But besides that, the company would be exposed because we don't -- we run relatively lean. But there's all the standard playbook that anyone sitting up here who does my job would tell you about, right, it would be the higher is you'd go in and make sure your workforce was rightsized, you would not spend on travel.
So we have that standard playbook that we're always looking to run. And we have a pretty good lean playbook that we keep ongoing throughout the business. So we would be relatively insulated for a small move, but if travel were to pull back significantly, you would see the impact in the company.
Got it. Next, I just wanted to discuss capital allocation. You guys are running about a turn below your 3.5x leverage target. You guys have some CapEx earmarked for next year, but you still have a lot of free cash flow to deploy aside from that. So how are you prioritizing buybacks versus additional M&A? It's been a while since you guys have done a deal. And maybe how is the M&A pipeline looking as well?
One of the great things about our business is that we get a look over the horizon on how to use our cash almost on a quarterly basis because we generate so much of it. So we have the opportunity, on a regular basis, to sit down and say, "What is our M&A pipeline? How are we thinking about interest rates? Where do our shares trading at related to the intrinsic value?" And we get to make those decisions.
If you look at the history of the business, we've done all 3, sometimes within the same quarter, sometimes within 6 months. We bought back plenty of shares. We paid down debt. We've done all the things that a smart capital allocator should do and should -- what you would expect us to do.
M&A, we've been -- we are a DCF buyer. So we don't buy pre-money sort of hopeful companies that are going to make money at some point. We're buying discounted cash flows. And because of that, we're -- we have to be very, very patient because a lot of the tech in our space is a little more startuppy. And so we have to be really thoughtful about how we're thinking about that.
I think also, prior to the interest rates going up the way they did, that valuations from M&A were still kind of in a pre-COVID kind of a world in terms of what sellers were expecting, and we're not going to overpay either. So we have a very patient, thoughtful -- but what we did when we were doing deals as we bought back a couple of hundred million dollars worth of shares, we paid down our debt, we've fixed our debt through hedging instruments. We did a lot of other smart things with that capital.
And just from an M&A perspective, I mean, which parts of the business do you think it would make most sense to get some inorganic help from?
Well, I think all of them, to some extent. I think where you would say is, the way we think about it is, what are the areas that we can solidify a position in a market that we already compete? So we bought a company a couple of years ago called Redflex. They were a direct competitor in our automated enforcement business. That gave us not only some market share within the United States, but also a foothold overseas. So that would be like really near to home.
And then we would look at areas that give us an opportunity to expand in other geographies. So we bought companies several years ago that gave us our foothold into Europe so we could add our Commercial Services there. So that was more of an adjacent geography expansion. And then we're also looking at other platforms. And we operate in 2 large segments, one called urban mobility, the other one called connected fleet. And those are multi, multi, multibillion dollar TAMs.
And so we're looking for what are the other use cases or businesses that we want to own that have highly recurring revenue, great market positions and great leadership teams that would be a really good fit within our portfolio. And so it's not necessarily which segment because there's also like this really simple view of affordability and availability of deals. So just -- it really kind of depends on where we can foster the most opportunity.
Got it. And are you guys seeing valuations loosen up at all on the private side? Or it's still a little fuzzy?
I think we're starting to see a more reasonable expectation. Obviously, there's a lot of deals that are held by private equity that may have just pulled because they didn't see the valuations that they want, but they also have to transact at some point. So we're hoping that this year, we'll start to see a higher -- we would anticipate a higher cadence from us on the buy side.
Got it. So I wanted to touch on the European rental car business opportunity. We used to get a lot of questions on this a few years ago. And we know that it's like the circumstances there are a little different in terms of adoption of cashless tolling in the various countries. But we also note that you guys are focused on it, have a number of pilots across the continent. So maybe if you guys could just give us an update on that, what the timing looks like?
Yes. So the idea behind European tolling is it's kind of the perfect adjacency, which is same product, same customer, new geography, leverage the assets that we have. We did buy a couple of assets there to kind of give us a foothold in terms of being in Europe and having people on the ground there.
And a couple of things happened. One, COVID hit, and COVID impacted the rental car market in Europe significantly more than it did here in the U.S. in terms of the de-fleeting and sort of the recovery of how those, by country, what kind of came back to sort of normal business size. And then two is the conversion that you mentioned from cash to cashless.
So in major areas of Europe, like Italy and France, they still have barrier-based tolling. So the arm still stops down. Our solution works best in a cashless environment when there's no option to pull over and pay and have the arm go down. And so that has been much slower than we had originally anticipated.
That being said, in areas that do have cashless tolling, like Spain and like Ireland, we are running pilots for some of our customers today. Those are beginning to expand, and we would anticipate adding more pilots. And places like France are slowly but surely starting to go cashless. And so we would anticipate that, that would bring us some growth there in the next couple of years.
So it has not gone at the speed that we would have liked or would have anticipated, but we still believe it's a great future for the company. So we can be patient because we have other businesses in Europe that are supporting it from a cash flow perspective.
Got it. So maybe in the next like 3 or 4 years or so?
Two to 3 years, that's right.
Two to 3 years?
Yes.
Okay. Got it. I just want to make sure that we take time to address any questions from the audience. Now we've got plenty more to run through. Don't be shy. Okay. All right. So first, I think it would just be good just to recap the market share that you have in both of your core businesses, in the Commercial and Government Solutions side, and kind of -- and also just who your main competitors are in each of those businesses, maybe starting on the government side?
Sure. In the government business in North America, we have about a 70% market share. So the ones that we compete with on larger cities, we compete with a company called Conduent that has a division that has transportation that includes both parking as well as automated enforcement. So that's kind of the government business.
And then in smaller areas, we work, there's a company called RedSpeed, there's a manufacturer out of Europe called Jenoptik, Sensys Gatso. Those are some of the names that we kind of run in, depending on what part of the country you're competing on the mandate for. So that would be Government Solutions.
Got it. And then on the...
Commercial side?
Yes.
In Commercial Services, in tolling for commercial fleet, we probably have 95% market share. We are privileged to work with all 3 of the major rental car companies. We also work with large FMCs, and we attach our programs to the vehicles that they sell to other customers. So -- in the rental car side, we're in the 90%, 95% in the FMC space, we're still not close to being full potential. So that's one of the areas that we've keep for growth as we start to look down market at smaller fleets.
And on the FMC side, you guys have had a lot of success there this year. I think you guys put up 20% growth in that business last quarter, maybe a slightly smaller base. How big could that business be in the next 3, 4 years?
Yes. I think you would take that $60 million and grow it at that mid- to high single-digit organic growth. So -- and I'll try to do that math on stage on top of my head, but 70, 80...
Make them do the math...
Yes. No one gets get the wrong answer. But look, that 20% growth, you're right, Nik. And if you look at the -- that was the third quarter, and I think if you look at the first and second quarter year-over-year growth, within the high teens as well for both of those quarters. And that -- those comps are going to get a little tougher, right? But that -- getting that to a mid- to high single-digit organic growth is going to be quite a feat.
Got it. All right. Well, it looks like we are almost out of time here. So any last words to leave the audience with? Or...
Yes. I mean one of the key themes we referenced at our Investor Day, what, about 1.5 years ago now, this is a great business with a bright future. When you look at our business and you look at the market positions that we have, the sort of macro environment underneath those businesses, our market share and our growth and our ability to generate cash flow and I think a reputation of really good stewardship related to that, we think it's just a great business that has nothing but a really bright future ahead. So we're really excited about what the future holds, and '24 is going to be a great year for us.
And I agree. And I think as you go out and look at the history and where we're headed, as of the third quarter, in case you missed it, we are 100% fully lease-backed. So this is all that overhang that's been on the company since we've been a public company for 5 years now is now gone. It's a lot easier to see.
Indeed.
Right. Well, thanks so much for joining us, guys. We appreciate it. Thank you all.
Yes. Thanks, Nik.
Thank you, Nik. Thank you.
