Verra Mobility Corporation Class A Aktie

Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's First Quarter 2026 Earnings Conference Call. My name is Liz, and I will be your conference operator today. This call is being recorded. I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please go ahead, Mr. Zindler.

Thank you. Good afternoon, and welcome to Verra Mobility's First Quarter 2026 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. Management may make forward-looking statements during the call regarding future events and expectations, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for our cautionary note on forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we do not undertake any obligation to update forward-looking statements. Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, quarterly earnings presentation and investor presentation, all of which can be found on our website at ir.verramobility.com. With that, I'll turn the call over to David.

Good afternoon, everyone, and thank you for joining us today. I'll begin with a brief overview of our performance for the first quarter, followed by a commentary on our business segments, operational progress and outlook for the remainder of the year. Overall, we are pleased with our performance in the first quarter, which represents a solid start to 2026. We delivered top line results in line with our internal expectations with upside and profitability while building on our momentum in several of our key growth areas. At Verra Mobility, we remain steadfast in our mission, delivering technology solutions to make transportation safer, smarter and more connected. This mission guides our strategy and execution across the organization. Before I share the details of those results, let me take a moment to reiterate our strategy, which is centered on the theme of safe, smart and connected. This is actually the framework outlining our competitive advantage and where we see growth opportunities for the company. Safe should be obvious that it's been the cornerstone since our -- it's been the cornerstone since our company was founded.

Last year, we saw a positive momentum, but there's still a long way to go to dramatically decreasing traffic fatalities and crashes. Smart is all about bringing operational intelligence to transportation systems to make them more efficient and reliable for our customers and connected, which I'll expand on later when discussing commercial services is about unifying fragmented transportation systems and disconnected networks. We are confident that we are well positioned to help customers solve safe, smart, connected challenges and improve the overall mobility experience for everyone.

Turning to our financial results. Total revenue of $224 million for the quarter was aligned with our internal expectations, reflecting steady demand across our core business segments. Adjusted EBITDA and margins came in ahead of our internal expectations, driven primarily by better-than-expected New York City camera installations despite weather delays in January and February, as well as reduced bad debt expense for the quarter. This performance underscores our continued focus on disciplined execution and operational efficiency.

Let me now turn to our segment performance, starting with Government Solutions, which was the standout contributor in the quarter. We saw strong momentum in bookings with up to $13 million in new awards during Q1. Key wins came in across the portfolio, including enforcement programs at Redline, speed, work some, mobile and school bus product offerings. Over the trailing 12 months, new bookings totaled approximately $71 million, reflecting sustained demand and strong conversion across our pipeline. We continue to see healthy activity levels driven by increasing adoption of automated traffic enforcement solutions by municipalities. These programs are attractive due to their ability to change driver behavior and improve road safety. Moreover, these programs are long-term recurring contracts that provide strong visibility into future revenue streams and support durable growth over time.

In fact, we were by the latest reporting for the National Highway Safety Administration, which indicates that traffic fatalities decreased significantly in 2025 by more than 6%. This is a great indication that safety measures are working. And in the vein of safe, smart and connected, we believe continued deployment of automated enforcement will make significant impact on safety and ultimately saving lives.

From an operational standpoint, we continue to make progress against our key strategic priorities. We are expanding our customer base within the government sector while maintaining a strong focus on execution and delivery. At the same time, we are investing in technology and innovation to enhance our platform capabilities. This includes the implementation of Mosaic, our secure cloud-based back-end automated enforcement platform solution and government solutions. We have successfully migrated several customers onto the platform and are actively working to complete other migrations. We continue to expect that the MosaiQ platform will deliver productivity improvements and enable long-term margin expansion by streamlining the end-to-end process of traffic incident events.

Moving on to Commercial Services revenue declined 4% compared to the first quarter of 2025 due primarily to prior period churn in our fleet management business. Looking at the remainder of the year, while the price of fuel and events in the Middle East weigh on travel, household budgets and consumer assessment, we are cautiously optimistic about travel trends. Consumers of business traveler demand for domestic travel continues to be resilient so far, and we remain hopeful that airfare pricing remains affordable and travel volumes remain consistent with the performance year-to-date. As a reminder, significant customer relationship which represents over 10% of our revenue is currently operating under a short-term contract extension -- this contract extension enables us to continue to serve the customer without interruption while we continue to negotiate a long-term renewal. These discussions are ongoing and constructive.

As I mentioned earlier, we continue to believe the future of transportation will be defined by solutions that are safe, smart and connected. I've already touched on the safe dimension through government solutions. So let me expand on what we mean by connected. Today, mobility in the U.S. remains highly fragmented with many systems operating in isolation. We see a meaningful opportunity to help bridge those gaps by connecting platforms, processes and payment methods. We believe we are well positioned to support our customers and partners, including cities and fleets, tolling authorities and delivering more seamless integrated experiences for the people-based search. One example of delivering a more connected and seamless mobility experience is the Auto Connect virtual agent, a solution we announced in April. It is a digital solution for rental car companies to allow drivers to finish the checkout process and activate add-on services like tolling and fueling directly from the vehicle, streamline the experience for renters. This technology can help our rental car customers notify drivers of available services as counter bypass becomes more popular and improves the customer experience and enables new revenue streams through the service selection. This is just 1 example where we believe we can deliver on connected solutions.

Lastly, top line revenue for Parking Solutions was in line with our internal expectations and with a slight beat on segment profit margins on revenue mix and operating activities. Looking at the broader market environment, we continue to see favorable tailwinds supporting our business. There's an increasing global focus on road safety alongside growing demand from government customers and automated enforcement solutions. At the same time, domestic travel demand remains resilient, supporting continued growth in our Commercial Services segment. But even against this backdrop of tailwinds, we operate with a pervasive continuous improvement mindset and we launched a company-wide transformation initiative to better position the business for long-term growth. This effort is focused on controlling what we can control, optimizing our cost structure, improving operational efficiency and aligning resources to unlock new growth opportunities while creating capacity to invest in the future.

As a part of this transformation, we made the difficult decision to reduce our workforce by approximately 5% in the first quarter, which we expect will generate approximately $10 million in annualized cost savings. Importantly, these things are being actively redeployed into the business to drive top line growth and reinforce our technology leadership. We are investing in strategic areas where we have clear competitive advantages, including large-scale fleet management and deep interoperability with cities, courts and law enforcement. Our priority investments include areas include AI-driven capabilities across both hardware and software, autonomous vehicle ecosystems, rideshare solutions and emerging technologies such as drone applications.

A key pillar of this reinvestment is the expanded use of AI across our business directly supporting our smart mobility strategy. In the near term, we are focused on using AI to improve internal workflows and automate processes to drive efficiency and scalability. In parallel, we are embedding AI capability into our products through targeted R&D investments to enhance customer value and differentiate our offerings.

While these initiatives are still in the early stages, initial pilot programs have delivered encouraging results. Over time, we expect this disciplined reallocation of resources to enhance our growth profile and improve operating leverage, and we will continue to provide updates as we make progress.

Turning to our outlook. We are entering the remainder of 2026 with solid momentum and confidence in our strategy. We believe our strong bookings performance provides a solid foundation for future revenue growth in Government Solutions and our pipeline remains robust. As we look ahead, our priorities for the year remain clear, converting Government Solutions bookings into revenue executing against our Mosaic platform implementation plan, which we expect to lead to margin expansion in 2027 and beyond and maintaining discipline around capital allocation.

In closing, we delivered a solid first quarter, with revenue in line with expectations and upside in profitability. We saw strong booking momentum in Government Solutions, reinforcing the long-term value of that segment. and we are well positioned for continued growth as we move through 2026.

Craig, I'll turn it over to you to guidance to our financial results and our outlook for the remainder of the year.

Thank you, David, and hello, everyone. I appreciate you joining us on the call today. SP1 Let's turn to Slide 4, which outlines the key financial measures for the consolidated business for the first quarter -- our Q1 performance was generally in line to slightly ahead of internal expectations with total revenue directly in line with internal expectations and adjusted unit dollars and margins slightly ahead due to revenue mix and timing considerations.

Starting with service revenue. Government Solutions increased 4% in the quarter, driven by 12% growth outside of New York City. -- within New York City, incremental new camera installation growth was more than offset by the updated contract pricing change. Commercial services revenue declined about 4% year-over-year due to the impact of prior period churn and a small nonrecurring accounting true up. Parking Solutions service revenue increased 6% on SaaS and subscription revenue for flows.

Total product revenue was $10 million for the quarter, Government Solutions contributed roughly $7 million and T2 delivered about $3 million in product sales overall for the quarter. Consolidated adjusted EBITDA for the quarter was $86 million, modestly stronger than our internal expectations as New York City camera installations were better than expected once the weather improved in March. We reported net income of $27 million for the quarter, including a tax provision of about $14 million, representing an effective tax rate of 34%. The effective tax rate is temporarily higher this quarter due to the year-over-year impact of stock-based compensation and reserve timing. We expect the full year effective tax rate to be 28% to 29% based on the second half 2026 activities, which is unchanged from our guidance.

The EPS was $0.17 per share for the first quarter of 2026 compared to $0.20 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items was $0.25 per share for the first quarter this year compared to $0.30 per share in the first quarter of 2025. The adjusted EPS decline was driven by the reduction in adjusted EBITDA, along with increased depreciation expense, partially offset by the effect of our share repurchases in the fourth quarter of 2025 and the first quarter of 2026.

Moving on to cash flows. Cash flows provided by operating activities totaled $41 million, and we delivered about $10 million of free cash flow for the quarter, which was below our internal expectations of about $20 million. The $10 million shortfall is comprised of $7 million of temporarily increased inventory balances in GS due to the weather delays in New York City. Additionally, CS unbilled receivables increased about $5 million, driven by nonrecurring timing items related to the settlement of incurred and associated invoicing to end users. Lastly, and partially offsetting these amounts, we benefited from about $2 million of bad debt improvement to year-over-year. These New York City and commercial service items are solely timing related and thus, we are reaffirming our free cash flow outlook for the full year, which I'll cover in a bit more detail in a few minutes.

Next, I'll walk through the first quarter performance in each of our 3 business segments, beginning with Commercial Services on Slide 5. CS year-over-year revenue declined 4% in the first quarter. RAC tolling revenue increased 1% over the same period last year, driven by increased product adoption and tolling activity, which benefited from a 1.5% increase in U.S. volume over the prior year quarter. The core rent tolling growth was offset by about $2 million related to the nonrecurring true-up that I discussed earlier. Our FMC business declined 19% or about $3.6 million year-over-year, primarily driven by the prior period customer churn we have discussed historically. Adjusting for both the prior period and the nonrecurring throne, revenue growth would have been mid-single digits for the quarter.

Commercial Services segment profit margin increased 100 basis points over the prior year. The revenue decline was more than offset by volume leverage and lower bad debt expense on improved cash collections.

Turning to Slide 6. Government Solutions service revenue increased 4% in the quarter, driven by a 12% growth outside of New York City. Within New York City, incremental new camera installation growth was more than offset by the updated contract pricing change, which went into effect on January 1 of this year. Total revenue grew 3% over the prior year quarter as product revenue was down about $1 million year-over-year due primarily to a reduction in product revenue in our international business.

Government Solutions segment profit was $21 million for the quarter, representing margins of approximately 20%. The decline in segment profit dollars and margins is primarily attributable to the New York City pricing change. While this represents a reduction in segment profit dollars and margins over the prior year, this performance was better than expected due to both the revenue growth outside of New York and New York City camera installations expanded faster than we contemplated as we establish the pacing on our full year 2026 centers.

Let's turn to Slide 7 for a review of the results of Parking Solutions. We generated revenue of $20 million and segment profit of approximately $3 million for the quarter. SaaS and services sales increased about 6% compared to the prior year, while product revenue declined about $600,000 compared to 2015. Parking Solutions segment profit margins expanded 210 basis points driven by revenue mix and other onetime items.

Okay. I'll turn to Slide 8 and discuss the balance sheet and take a closer look at leverage. We ended the quarter with a net debt balance of approximately $1 million, which was elevated sequentially due primarily to first quarter share repurchases. Net leverage landed at 2.5x, which also reflects partial usage of our credit revolver to help fund the share repurchases.

Let me give you some detail on our share repurchase activity. In the first quarter, we purchased approximately 2.2 million shares for about $50 million through open market transactions. This brings the cumulative share repurchases up to $184 million under the $250 million authorization, which is the largest program in the company's history. We slowed our share repurchases in the first quarter out to conservatism. Q1 is routinely our lowest cash generation quarter due to the seasonality of our core business. This was compounded by one-off transitory items such as the weather-related increase in New York City. Share buybacks remain an important element of our capital allocation strategy, and we are pleased to have significant additional capacity of $66 million under our current authorization to repurchase shares through the remainder of the year.

Looking ahead, based on our view that free cash flow will grow over the remainder of the year and in line with our guidance levels, we'll continue to actively consider opportunities to repurchase shares and otherwise allocate capital to drive shareholder returns.

Okay. Let's now turn to Slide 9 and I have a look at full year 2026 guidance. Based on our first quarter results and our outlook for the remainder of the year, we are reaffirming all guidance measures. As a reminder, the full year 2026 guidance ranges provided our fourth quarter 2021 earnings call were as follows: we expect total revenue in the range of $1.02 billion to $1.03 billion, representing approximately 5% growth at the midpoint of guidance over 2025. We expect adjusted EBITDA in the range of $405 million to $415 million or adjusted EBITDA margin of about 40%, representing a 250 basis point decline compared to 2025. As we previously discussed, the combination of portfolio mix in the New York City renewal contract, partially offset by a year-over-year reduction in ERP implementation costs are expected to drive the temporary reduction in margins. We expect 2026 non-GAAP adjusted EPS to be in the range of $1.32 to $1.38 per share, representing low single-digit growth over 2025. And lastly, free cash flow is expected to be in the range of $150 million to $160 million for 2026, representing a conversion rate in the high 30th percentile adjusted. We expect to spend approximately $125 million of CapEx in 2026, roughly flat with 2025. The vast majority will be spent Government Solutions to implement newly awarded photo enforcement programs.

Moving on to the segment level. Government Solutions is expected to generate the high end of mid-single-digit total revenue growth which reflects the blended growth rates across the segment, including low double-digit revenue growth outside of New York City. This also comes from flat product revenue compared to the prior year as New York City product sales will be offset by a decline in international product revenue. The outlook for GS margins is unchanged. We expect segment profit margins to contract by approximately 450 to 500 basis points compared to 2025, primarily due to the New York City renewal contract including service pricing adjustments from the competitive procurement process and the inclusion of minority and women-owned subcontract requirements by the city of New York. Weather in New York City to January and February delayed our camera installation timelines and informed our Q1 guidance but a quicker-than-expected recovery in March enabled us to accelerate installations and ultimately overdrive Q1 margins, which led to the outperformance in the first quarter.

We expect second and third quarter margins to be around the same levels as Q1 and and then a ramp up to the mid-20s by Q4 2026, fueled by volume leverage, Mosaic cost savings and school bus stop arm seasonality. We still expect GS margins to land in the low 20s overall for total year 2026 and consistent with what we shared on our last call.

Commercial services revenue growth is expected to accelerate as the spring/summer travel season ramps up and we sunset the FMC churn after the second quarter of this year to get to mid-single-digit revenue growth overall for the full year. CS segment profit margins are expected to expand over the prior year, driven by volume leverage, prior year ERP spending and improved bad debt expense. These expectations are also predicated on a successful outcome of our ongoing negotiations with a significant customer for a pending contract renal, as David discussed earlier. We continue to anticipate that Parking Solutions revenue will be up mid-single digits versus 2025 levels driven by growth in SaaS and subscription and professional services.

Lastly, we expect Parking Solutions margins to be slightly accretive to 2025. Other key assumptions supporting our adjusted EPS and free cash flow can be found on Slide 10.

This concludes our prepared remarks. Thank you for your time and attention today. At this time, I'd like to invite Liz to open the line for any questions. Over to you, Liz.

[Operator Instructions] Our first question comes from Daniel Moore with CJS Securities.

David and Craig I'll start with Government Solutions. I think you said $13 million new bookings in Q1, but I hear that right outside of New York City. And -- just how would you describe the overall level of RFQs and opportunity in the pipeline today versus a year ago?

I would say it's very -- I mean, probably right on par with it, Dan, is we've seen a lot of great activity, continued expansion and opportunities in places like California that we talked about a long time ago. School bus continues to have a lot of RFPs coming out. So we would say that the activity and the go forward of that business looks really good and it looks from fantastic right now.

Very helpful. And then shifting gears. You mentioned, obviously, no change to the full year outlook for Commercial Services. You did say that it was based on a successful outcome of the renegotiation -- is there sort of a timing that you have in mind as it relates to kind of low and high end of the guidance range there.

I would say, obviously, we're very careful when we talk about those things. We're continuing to work under contract. So we wouldn't put a place of timing on that right now, Dan.

Understood. Maybe 1 more and I'll jump back in queue. Just the integration of Mosaic, -- how is that progressing relative to expectations? And is $10 million to $15 million cost savings in 27 still a good target?

Yes, it is. It's going well. It's a big project that we've been doing for quite some time, and we've got some customers stood up on the program -- or excuse me, on the platform and we've got a line of others that are waiting to get on. So we're excited about the potential of the product.

Yes. And I'll just come a bit on that. That number that we've talked about is something that we talk about here a lot. So there's a lot of visibility to it. So yes, -- the short answer is, we look at the look at the pacing of Mosaic, we expect it to be breakeven this year from an investment, this is at the EBIT line and so on from an investment savings standpoint, we do expect in that 10 to 15-ish range, $15 million way upper end of that. But 10 to 15 in 2027, an additional 10% compounded out beyond that. So looking -- we do have customers live on the platform as we speak today.

Our next question comes from Tomo Sano with JPMorgan. SP1 Okay. .

Could you talk about the CS business revenue impact from FMC customer churn has bottomed in Q1? And if you could talk about the main drivers for the revenue recovery and the key factors behind the margin improvement and then sustainabilities into -- throughout the year, please?

Yes. Okay. So let me -- this is Craig. I'll take a shot at that. So if we think about the CS business, it's down 3.5%. That's the actual quarter year-over-year in the first quarter. And there's 4 pieces to that bridge. The first piece is the FMC churn, which we've been talking about for a year now. This is the last -- it will impact us in the second quarter as well, but this is the most material impact that will have. That was just under $5 million. If I forget about the churn, look at the FMC business that actually grew right? So we grew over $1 million outside of the churn in the quarter. Travel was somewhere between $1.5 million to $2 million positive. And then we had the accounting true-up. And let me explain just quickly what this was.

The tolling -- 1 of the largest tolling authorities in the country changed their back office in the back quarter of 2025. And as we went and reconciled that all the activity from the fourth quarter we did find something that we needed to change. So that was about $2 million. So if you look at that in terms of fee dollars that I just gave you, that would get you down 3.5% year-over-year. Let me get to the second part, though, is how we're comfortable or how do you think about mid-single-digit growth for the rest of the year. Well, if I take out that FMC churn, which I said will not be as impactful in the second quarter and then anniversaries after the second quarter, it's not even in the back half of the year, and I take out that onetime true-up that relates back to the fourth quarter. I already had mid-single-digit growth within the quarter.

So that's how I think about how that looks for the rest of the year total. And that was lay on top of that where travel is maybe more than you wanted, but I'll just give you the full answer. So it's we closed the quarter with 101% or 1.5% growth travel year-over-year. As we sit here as of last night, I think we're about at 101%, which is exactly what we told you we modeled for the rest of the year. if I listen to the airlines, they sound cautiously optimistic, I think, is how I would characterize it. In terms of domestic demand. So you kind of mix all that up and say, if I take the onetimer the first quarter, I are already seeing that mid-single-digit growth -- if I go forward, it feels like travel is hanging in there. So I feel comfortable with the mid-single-digit growth as we look out to the balance of the year.

That's very helpful. And one more on the GS business, could you provide an upgrade on the regulatory developments and new project opportunities in California and how you see the growth potential in that state going forward, please?

Yes. So far, we continue to do very well in California. All of the legislation has been that we help support as has been a tailwind to us as we've -- I want to say around the table. We've won more than our fair share relative to what's been happening in California, and we feel like there's going to be even more opportunities for expansion as we look for other use cases to be applied later. So in all regards, I think California is exactly what we hoped it to be when we started talking about the legislation 3.5 years ago. So we're really excited about California.

Our next question comes from Faiza Alwy with Deutsche Bank.

I wanted to follow up on the Government Solutions business. It sounds like you had some timing benefits on the product sales side, so I'm just curious if you could kind of level out with us on how we should think about revenue realization, both product and service revenue within Government Solutions as we go through the rest of the year?

Yes, Faiza no problem. So as I think about GS, we talked about this with New York and without the York, let's forget that for a second, let's talk about just total GS -- like I said in the prepared remarks, I expect this to be the high end or mid-single-digit growth overall for total GS, okay? Now if we want to split that into just not going to do the New York City split, I'll do that in a minute. So just between product and service. I expect GS overall service to be a high single-digit grower for the year. And I expect GS product to be roughly flat, maybe down a couple of million dollars. And the reason on the down a couple of million dollars on GS is really the project runoff that we had in international. So meaning that we have a large order last year that's not referring this year. It's not the business. That's how we think about overall GS.

If I bring that to New York City, okay, I think that New York City for the full year in total is going to grow high single digits, low double digits. That depends on exactly when we get these installs done. Again, we went a little faster in March than we thought. It looks pretty good in April. But then overall, not New York City, so just to kind of round it out, I expect non-New York City to be a low double-digit grower service-wise for the total year 2026. So those are the kind of 6 points of truth on GS, was that helpful?

Yes, very helpful. And then I wanted to ask about the incremental cost savings that you mentioned. I think you said $10 million annualized savings -- when do we start to see that? Is that going to help in 2026? And if so, considering that you didn't raise the EBITDA guide, like are there offsets? Are you incrementally reinvesting somewhere -- just additional color around that would be helpful.

Yes, sure. So the easy short answer is already at okay? The additional detail on that is why is it already in the guide what we're talking about now is because literally, we announced the actions that generated that -- those savings in March of our earnings calls at the end of February. So obviously, we had announced we could talk about that. That's the financial side. And as to where that will show up, it will may show up in R&D. There are R&D type of activities that may show up in R&D and may show up in SG&A and OpEx outside of R&D. But as David said, -- the whole reason that we're doing this, we're controlling what we can control to invest in the future of the company.

Our next question comes from David Koning with Baird.

I guess, first of all, in the commercial business, just so we think correctly sequentially, it seems like the only 2 things really to think about sequentially, one, you typically grow 8% to 10% sequentially, just seasonality. And then two, the true-up of $2 million you get that back, right? So those would be your 2 main things to think about sequentially.

Yes, that's right. I think -- I'll just give you the number, Dave, for everybody. I think that, that sequential growth from Q1 to Q2 is to be a little stronger. One, I don't expect the FMC churn number to quite be as big, but I don't know if that was the origin not. So I expect that number to be in the low to mid-double digits sequentially for CS.

Yes. Yes. That makes sense. Okay. And then government EBITDA -- when we think about, I guess, transitioning from this year to next, once next year, we get to kind of more and everything. Should it be bigger than 2025? And really where I'm going with this is you have the 2 components, you have New York. I guess with all the extra revenue, does that EBITDA, is that going to be better EBITDA than it was before you got the extra revenue. And then is the EBITDA from the non-New York business, just given other growth there going to also be bigger in just making sure the expenses aren't overweighing the revenue? Just to understand that better.

Yes. I don't want to split that between New York and non-New York, but I will tell you overall, Dave, is that I think you're talking about 27% to 26%, right, not '26 to '25?

Well, kind of -- but I'm kind of just making sure that by 27, when everything is clean, that will at least be bigger than kind of the pre-growth in both parts of the business.

I'm sorry. Okay. I got your question. So in other I want to make sure I'm answering the question you're asking. So it's 27% bigger than 25%. Right. Yes. Yes. The answer to your question yes, Yes. And I think -- let me give a couple of detailed points on how you can triangulate that. So let's talk about margins of the GES business. We did the -- in the prepared remarks, I did the pacing, which is a little bit updated from our last call, but how we get to pacing for 2026 by quarter. That overall gives us to the low 20s. I expect to be in an EBITDA percentage. I expect to be in the mid-20s by the time we get to 2027.

If we think about what we talked about previously and what that growth looks like, the non-New York City growth that we talked about in the third quarter was double digits. -- double-digit growth. New York City growth, I still expect that to grow on the service side. Obviously, I'm not going to be growing on the product side the majority of the installations will be behind us. But I don't expect that revenue to step back. So you've got good growth on the non-New York City side, you've got flattish growth in the New York City side, maybe a little bit positive, and you've got a couple of basis points of margin expansion mostly from the cutters savings.

[Operator Instructions] Our next question comes from Louie DiPalma with William Blair.

Following up on the last question, has there been any change for the 2 EBITDA outlook for the GS business. I think on the third quarter earnings call, you said that EBITDA should be in the range of $135 million to $145 million. So -- has that been not changed?

No change, Louis.

Great. And my other question, has there been any developments in terms of the trials and commercialization of the European rental car tolling products? I know that there's been -- I think there was the agreement in Italy last year. Any color there would be great.

Yes. We continue to operate in many of the same countries, although the fleets are getting slightly larger, there was some growth there on a relative basis small but it is continuing to grow. Yes, we are operating in and around the city of Milan in Italy as well as we continue to offer in Ireland a little bit in France and Spain.

That concludes today's question-and-answer session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

All right. Hi, everyone. Thank you very much. And this is Tomo Sano from JPMorgan covering SMID Cap Industrials. This is Verra Mobility Corporation's sessions. And then with me, we have Craig Conti, Chief Financial Officer. Thank you very much, Craig, for joining us.

So let me start by sharing why Verra Mobility is such a standout in this year's conference lineup as the market leader in U.S. tolling, automated enforcement and smart mobility solutions. Verra boosted over 90% recurring revenue and a strong track record of technology-driven growth with the major contract wins in New York City and Hawaii, fueling the next phase of expansions.

So with that, I'd like to hand it over to Craig to go through who the company is and what you do and your stories for those who may not be familiar with it. Thank you, Craig.

Yes. Thanks a lot, Tomo. First of all, thanks for the invite. Really nice conference so far. I'm looking forward to the rest of the day. So let me tell you a little bit about the company. I've only got a few slides for those who might not be familiar with it. And I'll start at the top of the wave, it's the financial profile. I'll go through our businesses quickly, and I'll tell you a little bit how I think about allocating capital.

So Verra Mobility, if we look at 2025, just south of $1 billion, 94% service revenue, which is basically all recurring revenue. We'll talk about that as we get a little deeper today. Adjusted EBITDA, north of $400 million, 42% margins across the enterprise and free cash flow generation of about $137 million for the trailing 12 months ending 2025.

We have about just shy of 2,000 employees, 1,900 we've got on the slide, 2,300 customers. Interestingly with this, about 2,000 of those customers are in our smallest business, which is Parking Solutions. The balance, about 300 or so customers between Commercial and Government, I'll talk about those businesses in a second.

And if you think about the geography, so the geography behind that, just roughly under $1 billion of revenue, about 90% of that is in North America, 7% of it is in APAC, heavily concentrated in Australia and New Zealand and 3% spread across the continent in Europe. So that's the top of the waves financially for the company.

Let me tell you what we do. I think Tomo gave a pretty nice intro already. The Commercial Services business, which is about 45% of our consolidated revenue in this business, we're the market leader in toll and violation management for commercial fleets. The way that typically shows up is rental cars, although we also do large and medium corporate fleets.

We do toll services, violation processing and title and registration on behalf of our customers. This is a mid-single-digit organic grower over the next couple of years, if you heard that we talked about that in our earnings call. And this is a business that operates in the mid-60s in terms of the EBITDA margin.

Our Government Solutions business, just south of half of the company, we're the industry leader in automated traffic enforcement for cities and school districts. This is a high single-digit grower, about high 20s margins that's going to step back a little bit in '26, get back up to those levels in '27 and then expanding from there in '28.

And if you think about how we go to market here, these are speed safety cameras, traffic or bus lane enforcement cameras, school bus stop arm cameras and red light cameras.

And then finally, Parking Solutions. And in Parking Solutions, we're the leading technology provider of end-to-end parking management solutions in North America. What I like to say about this business isn't what it is, it's what it isn't, okay? We do not own parking lots. We don't own any real estate. We do -- the easiest way to think about it is the hardware and the software, the ERP of parking for universities and cities. And our solution is across SaaS services and hardware.

So that's a little bit about Verra Mobility, each of our businesses. And then, I want to -- this is my last slide, I want to talk a little bit about our capital allocation. I think with any company, the question that you may ask is how do you allocate capital? And for Verra Mobility, I'd like to say a good indicator of how we're going to allocate capital in the future is how we've done in the past.

This capital allocation, what I call the wheel, covers our capital allocation since we went public in 2018. The first -- it's about $2.5 billion of capital deployed, and let me walk you through how we've done that. The first dollars out the door for Verra Mobility are always organic investment. The organic investment is our CapEx. So the overwhelming majority of our CapEx is in our Government Solutions business, where we actually keep the photo enforcement equipment on our books. We provide that to our customers, pseudo-free of charge is probably the way -- the best way to think about it for most of our customers, first dollars out the door.

Secondly is strategic M&A. We spent about $1.2 billion on that since we went public. We haven't done a deal since the end of 2021. I don't have it on the page, but debt repayment. We've paid down a couple of hundred million dollars of debt, primarily over the last couple of years. And then finally, share buybacks. We've done $650 million of share buybacks since we went public. So that's a little bit about the company, our profile, what we do and how we allocate capital.

And I think with that, I'll turn it over to Tomo, and let's have a conversation.

Yes. Great. Thank you, Craig. I wanted to -- yes, please.

All right. Shall we talk about the company transformation, culture and leadership perspectives, and you have evolved into a market-leading safety and smart mobility platform with a strong culture of operational discipline, innovation and customer focus. So what have you -- been the most important cultural or organizational changes driving this transformation, Craig?

Yes. How does this work? Can you hear me okay? Okay. Great. Yes. Look, Tomo, the way I think about that is, first, you start with the purpose of the company, right? The purpose of the company is to make transportation safer, smarter and more efficient and more connected, okay? And then I think a piece that's been really successful culturally is we run the company on 4 pillars, and these have been really consistent. And they're not just words on a wall. This is actually how we evaluate ourselves and how we talk about ourselves, right?

And those 4 pillars, they're going to sound familiar. You might have heard them at other companies. But as we go a little deeper, I'll tell you how we actually run the company on these. So pillar 1 is do what's right, okay? The second pillar is courage over comfort. So that's always how we communicate with each other, courage over comfort. Win together, I'll leave it there. I'll leave it there for now.

So it is the way that we think about those. This is the way that we communicate with each other. This is how we evaluate each other. And when we're in meetings, this is how we make sure that what needs to be said actually is said, and it's been a cultural bedrock of the company for a long time.

And if you could give an example from Craig, your perspective, like to embody, like the -- one of those pillars.

Yes, sure. I think the big thing is courage over comfort. I want to talk about that one. I grew up in GE and the Jack Welch era, and we used to call something similar to this edge. This is not a new concept. And I think what happens is we'll talk culturally about the company. We have an internal promoter score. It's a Glint survey. It's an engagement score, which is really, really high. And I'm very proud of that.

But I think that one thing is when you have a high engagement among your employees and you like working together, sometimes it becomes hard to have that tough conversation. So this is actually a recent change to our values when we talk about courage over comfort. So when you're in a meeting, and there's a tough question to be asked, you have the license in the company to do that, and it's not perceived as being rude. That's really, really important. I use it financially all the time. Like I actually say in meetings courage over comfort for a second here, how do you think about X, Y and Z? And that's been really successful. But I think successful cultures sometimes need to give themselves the license to have those discussions. That's how we've done it at Verra.

Yes. Thank you for sharing. And then if you could talk about the -- how do you ensure the operational discipline, customer centricity and a people-first culture remain embedded across your global footprint?

Yes. The big thing to me is the Verra Mobility operating system. So the Verra Mobility operating system is roughly leveraged from Danaher, the Danaher Business System. But essentially, what that is, is a set of standard metrics or mechanisms that we use across the company. So if you think about Verra, and a question I get a lot, Tomo, is what do you -- why is the Government and the Commercial business together, right? Like why are they under the same umbrella? And the not really satisfying answer is the same founder invented both products. They could easily not be under the same umbrella.

So how do you get commonality between those 2 things? You have a common operating system. And I think what that common operating system allows the business to do is I have the same way that I look at in terms of problem solving, daily management, Kaizen focus. On 2 very different businesses that allows the business to know what kind of questions the senior leaders are going to ask, right? And it also allows the senior leaders to effectively lead across very diverse end markets. So the Verra Mobility Operating System has done a lot for us in terms of culture and clarity and accountability within the company. It's been really well received.

And then if you could talk about what other key elements of your talent strategies? And how do you maintain consistency and accountability across your business segments? So it's more about the talent structure.

Yes, that's a great question. Human resources is centralized. We do -- we have a very formal twice-a-year evaluations. We have goal setting, and that goal setting is permeated throughout the company. And I also -- I mentioned our engagement score that we track. We do this on a biannual basis. That means twice a year, right, not every 2 years, so just make sure I get that. I'm a finance guy, not an English guy, right? So -- okay, so twice a year, we do that.

And what's really important about that is we've used the same vendor and the same survey. We changed the questions, but the same format for 3 or 4 years now. So we can start to track our progress. And the way that, that works is once those are done, it's not like the executive leadership of the company gets in a room and says, okay, that's interesting, now on to next. No, no, no, what we do is we say we roll it up for each of the leaders in the company. Each of the leaders are accountable to go back to their team saying, here's what I heard, here's what we're going to do. That's really, really important. And that over term gains buy-in.

The other piece, and I want to go back to the Verra Mobility operating system, when you have a common operating system across the company, it provides clarity. It provides clarity as to what folks are accountable for and how those problems get solved. And I think that does 2 things. Number one, it clarifies expectations for the team, but it allows for feedback, right? You can easily take someone who's struggling and put them somewhere else in the company and say, look, learn from this. And we found that to be -- we found that to really help us in identifying top talent in the company and promoting that top talent.

Very helpful. So talking about growth strategies. So Verra's strategy leverage, its leading positions as you talk about Commercial Service, Government Solutions and Parking Solutions. And then, what are the major drivers to drive sustaining the revenue and margin expansions for each segment? So let's start it from Commercial Solutions.

Yes. All right. So first of all, across all 3 of our businesses, volume leverage is a big thing. And here's why I say that, our businesses scale very, very well, right, especially. I think that's probably historically most evident on the commercial side of the house, but you're starting to see that as well as we continue to ramp up on the government side of the house.

I think on the government side of the house, the other thing that's going to continue to be a tailwind for the company is the expanding end markets, right? And I see that same thing in Parking Solutions. I really like our competitive position in universities and in small and medium cities because there's white space in both of those.

So, as I think about what is going to be that kind of next thing, I think volume leverage is always going to be a tailwind for the company in terms of profitability I think as long as the businesses are growing, obviously, right? And I also think that the expanding market that we're seeing in Government Solutions and in Parking Solutions is going to be a tailwind for some time.

And then I think the final piece is innovation and opening new markets, right? We've talked about that on the commercial side of the house with our connected vehicle strategy. I think we'll probably talk about that a little bit later. But it's those 3 pillars.

And if you could talk about the scales, volume leverage? Like could you talk about the new contracts, like New York City and Hawaii? How it's actually impacting your business for the medium and long term?

Yes, sure. I'll start with New York City. So New York City is a bit of a different animal. So our CEO says there's only one New York, right? And when you think about that, it's on average, I mean, 10x or larger than our second largest contract. It's the biggest customer in the company by far. So let me talk about what's going on there. So New York City has been the largest deployment of photo enforcement technology as far as I know in the history of planet, and it's been sole sourced through Verra Mobility since inception, and they started their journey a long time ago.

So where we look at ourselves in this journey today is New York City has renewed their contract, $1 billion contract, $998 million to be exact, for the next 5 years with -- then there's an option to renew from 5 years from there. So when you think about that $1 billion contract, obviously, a very huge deal, extremely excited at Verra Mobility for this.

I'm going to talk -- 2 things I want to make sure are clear about this. Number one is we think about the margin percent of the new New York City contract. It is still materially accretive to the rest of the Government Solutions business. I want to start with that, right? So this is an excellent contract for us. But when we compare this to the other -- the older contract, it has taken a bit of a step back. Let me talk about why that is. And I'm going to do that at the EBITDA dollars level, Tomo, right, so we're all clear on that.

If I think about the new contract versus the old contract, we've added a lot of scope. We have the expansion of about 1,000 cameras in New York, which is an enormous expansion. That's margin dollars into the contract with the new installs. We've added some new use cases we didn't do before. That's margin dollars into the contract. And then, we have some stuff that we used to do, call it, at breakeven that now we do at margin. So that would be more margin dollars into the contract.

Then, we had a price -- what I'll call, price realization, right? And the way that we thought about this is the contract is now out in the market. We had an out-of-market price before because it was an older contract. Now, it's a newer contract. So there's been some price realization from the old to the -- price rationalization from the old to the new contract. So if I take the EBITDA dollars I've covered so far, we'd be slightly EBITDA dollar accretive, okay?

Now, we have the minority and women-owned businesses, which we've talked about at length, which brings it to EBITDA dollars down versus the old contract. And essentially, the way that is, New York has been very consistent on this, over 30% of the dollars that New York pays on this contract need to be spent within the 5 boroughs of minority and women-owned businesses.

Now, the way you think about that for Verra Mobility are things that we used to do with our own employees, we're now paying a third-party margin to do. That causes the investment.

So if you think about the new contract versus the old contract, there's an EBITDA dollar step back. If you think about it in terms of growth for the company and optionality for the company, again, EBITDA percent accretive to the rest of the GS business, materially EBITDA percent accretive and the largest example case on the planet. Great contract for Verra to have. That's how I think about it.

Yes. So -- and then if you could talk about the -- how you see the balance evolving between core, tolling, enforcement and parking solutions? What are the most important growth opportunities in the next 3 to 5 years?

Yes, sure. I mean, so if I think about the commercial business or the tolling business, the way that this business grows is 1/3, 1/3, 1/3. So I get this question a lot. Let me tell you the shape of the question, Tomo, is whether we look historically, and we've had years where travel is strong, and this has been a high single-digit grower, if I think about it today, it probably feels more like a mid-single-digit grower for the next couple of years.

Well, if you already have the majority of the rental car customers in the United States, how do you grow? What are you growing, right? And here's the way to think about it. 1/3 of it comes from travel growth. I expect travel growth to be 1%-ish or so this year. It had been a little higher in previous years. The second 1/3 is what we call secular tailwinds. We still do not have 100% cashless roads in the United States. They're probably only around 70%. As that goes more cashless, the uptake on our product goes up. That's one.

The second thing is we add toll roads in the United States every year. So the addition of toll roads and the continued penetration of cashless is the secular tailwinds, which is the second of my 1/3, 1/3, 1/3. And my final 1/3 are what our traditional growth initiatives. So this is the growth of our fleet business. This is the growth in Europe.

So when you think about Commercial Services, I think it's 1/3, 1/3, 1/3. The back 1/3 of that are how do we continue to expand our footprint in Europe and how do we continue to expand with fleets here in the United States, particularly. That's Commercial.

For Government Solutions, we continue to see a -- I don't want to use an inflammatory word, but an expansion of a really strong expansion in the adoption of photo enforcement technology. The way I would think about this, we closed the year with $63 million or $64 million, Mark? $64 million of trailing 12-month ARR that we added. Now, this is a business that's less than $0.5 billion. So if you look at adding that much ARR, which will generalize into revenue in 12 to 18 months, you start to get a sense of why we're so excited about the growth.

And if you think about the near-term TAM that we've expanded in the company over the last 18 to 24 months, it's been about $350 million, right? So as I think about the adoption of photo enforcement technology, and I want to be clear on this, particularly what we call purpose-built photo enforcement technology. What I mean by that, Tomo, is if you looked at photo enforcement technology 15 years ago, it was a red light industry.

Red light is still an expanding part of the business, very important. We love that product. We love what it does for our customers. But if you look at the other piece that's grown even faster than red light, it's been stuff that protects precious cargo. So that's stuff in bus lanes, that school bus stop arm, that school zone speed, right? So you've seen some growth there.

So if -- to get back to your question, where do I see the growth in Government Solutions as I see it across on all fronts and expanding in the technology. And one other fact on that, when we did our Investor Day back in '22, in the summer of '22, there were about 20 states that had one form -- at least one form of photo enforcement. That number now is more like 40. So a question I get on that is, okay, so is the growth done if it's up to 40? Absolutely not. That's only one form. So then, if you look at those 40 states, how do you incent the states or help the states adopt more forms, then how do you expand those programs, that's how the business has grown traditionally.

And then finally, on Parking Solutions, where I get excited, I just -- I like our position, right? We're the leader with universities. A lot of the competition here is about going to a university that doesn't have a solution today and saying that showing the efficacy of our solutions. So there's a competitive aspect, too, a lot of white space. Same thing with the medium-sized municipalities for that business. So that's how I think about it, probably more than you wanted, but...

That's great. And if you could talk about the -- how -- like do you plan to further unlock the value from your technology platforms such as MOSAIC and SaaS transition, please?

Sure. Yes, perfect. So let's talk about MOSAIC specifically. So if we think about MOSAIC, by the way, what is it and where does it point to? So this is in our Government Solutions business. And what this is, is this takes our historic operating footprint where we had 3 or more legacy systems and consolidates them to a much smaller number of systems. And what that system does, think about it kind of like the ERP for photo enforcement, right? So this will be the system that you bring to the customers that helps all the cameras talk to the city and helps it issue citations, sometimes print and mail if that needs to be done. It's basically the inner workings of a photo enforcement system.

And as I think about that, let's think about it in terms of the margin percent of the Government Solutions business because I think that gets to your question of how does it impact that. We closed last year. GS' margins were in the mid-20s, I think 26%, don't quote me on that, but it should be pretty close. We're going to step back here in 2026 to the low 20s. Big reason for that is we're ramping up with New York City, and now, we have the new New York City contract. We expect the GS business to grow to get to the mid- to high 20s, again, by the time we get to 2028. And the main path between those 2 things is the MOSAIC project.

And what the MOSAIC project is going to allow us to do, again, to consolidate those systems, which we're going to be able to have less folks working on those systems. We're going to move some stuff that's on-prem today to the cloud to be much more efficient with like you can imagine the amount of data that we have in video. And the one thing that I'm really excited about is if you look at how quick our Government Solutions business has grown, we're using a lot of resources that are engineering resources to work on installations because we're growing so quickly.

A more common architecture will allow us to re-purpose that highly skilled engineering talent to thinking about the problem of the future, not just installing the deal that we just won. I'm really excited about what kind of value that can unlock for the company. So that's what I think MOSAIC is probably the largest one.

Really quickly on T2, our evolution in SaaS, if you think about the T2 market or you think about the parking market, for a long time, a university or a hospital, it was a swing arm that you go in, you put in money or a ticket and the swing arm goes up, and then, it comes back down or you go in and you pay at a parking meter. That is rapidly moving towards an equipment-free or an asset-light deployment.

I think when you look in the university space, you also tack on the fact that you have young folks that are early adopters of that technology. That trend is a great trend for Verra Mobility. That allows us to move from a historically SaaS -- equipment-enabled SaaS business to a true SaaS business. That progression is going to take time, but we have the products, and we know how to sell and design those products in the company. So we're excited about that transition.

Great. And then, if you talk about the Government Solutions, how do you see the regulatory landscape evolving? This is something topical, the themes. And what are the most important opportunities and risks?

Yes. Well, I think the one fact that I gave you about 20 states to 40 states, the expansion that we've seen in the adoption of this technology across state lines, across the political lines in the last 3 years has been larger growth than we've seen in the preceding 10. So I'm very, very bullish on that.

What was the other part of the question, Tomo? Sorry.

Yes. So the -- like the most opportunity is in real.

Yes. Okay. Okay. So let me stay on the opportunity side. I think California is probably the biggest opportunity today. A couple of things going on there. The first is about 1.5 years ago or so, maybe within 6 months or 1.5 years ago, California launched a speed pilot, right? And they did that with 6 cities. So far, they've awarded 5 of those cities, and Verra Mobility is one of 5. To the degree that, that then goes statewide, that would be $150-or-so million opportunity. And we feel like we're in a very good position to capitalize on some of that.

I think the other part in California, if you happen to catch this in our Q3 earnings call, we talked about a regulatory change in red light camera. California historically -- we are -- we provide red light camera service to a lot of cities in California today. Historically, this had been what was called driver liability. So what that means is you need 2 cameras. You would have a camera take a picture of the car, and it'll take a picture of the driver. And then that would go to the court system, and the court system would adjudicate that historically as a criminal offense with fines north of $1,000.

Because of that, it was very difficult for the cities of California to kind of get behind that legislation, and it really wasn't enforced as much. They changed that in the third quarter of last year to be owner liability, which is like it is a lot of other places in the country, where it's simply a photograph of the license plate. And now, the violation is a civil matter. It doesn't go to the criminal court. It's a lower fine.

Because of that, we expect a reinvigoration of red light camera enforcement in California, and that is going to be somewhere between $100 million and $140 million of opportunity to the company. So those 2 things that we just talked about are not generating incremental revenue just yet, but came to be in the last year or 2 at the most. That's how I get -- I'm really, really excited about the trend of this technology, the adoption of this technology and our position in the market to be able to capitalize on it.

And then, Craig, if you could talk about the rental car, one of your biggest, like 4 big companies, when they think about the digitalizing their older platform, and then, how you actually ensure your operating -- your Verra operating business model like to help them versus be replaced by their like in-house capabilities?

Yes. This is -- we've worked with each of the rental car companies for 10-plus years. We're very closely integrated with the teams. You can imagine, we're actually integrated with their operating systems because the problem that Verra Mobility solves is when the owner and the driver of the car are different. So think about that in a tolling transaction, right? So if you're in a rental car and you go underneath a cashless toll gantry, how is -- how does that tolling authority know that the person driving the car is not the rental car company? They don't, right? So that's where we come in.

And I think because of the fact that we need to be so real-time, we're always with the customer, and we have very deep relationships to make sure that we -- I go back to the whole reason we exist. We make transportation smarter, safer and more connected, and we serve our customers at their highest point of need. Serving the customer at the highest point of need make sure I'm creating value for that customer every day.

So capital allocations, and I would open up for questions. Capital allocations, thank you for highlighting at the beginning, with leverage declining, strong free cash flow, again, like how do you prioritize organic investment, bolt-on M&A, share repurchase, like going forward?

Yes. One thing I would like to say is I can't tell you what I'm going to do in the next 60 days, but I'm going to tell you exactly how I'm going to think about it. It's exactly how we think about it. We common size cash flows at the company, okay? There are 4 things we can do with our cash, maybe 5 arguably. One of them is a dividend. We're not going to pay dividend. So if you're looking for a dividend, you're in the wrong room, right? So then, you go into buying back shares, doing M&A or paying down your debt.

So let me explain real simply how we evaluate that. So I have a Term Loan B, covenant-lite. I can pay it at my option. I know what my interest rate is, and I know what my tax rate is, so the tax affect my interest rate, that's return #1 to a stakeholder in the company. Return #2, I keep a very live view of the intrinsic value of the company versus the screen, right? And then, we're a cash-generative company. So I have the ability to buy back shares. I have a supportive Board on that as well. So I look at the return of the intrinsic value of the company versus what we're seeing on the screen. That's number two.

And then, the third thing is on M&A, and this is where you could have -- it's not pure math, there's some strategy that comes into here. But how we buy companies? Typically, we are a DCF buyer, right? I don't have the scale to do pre-revenue, pre-money usually. And I discount net of any synergies or dis-synergies, whatever the case may be, is I discount the cash flows of that acquisition by either my WACC or the match-funded deal cost, whichever one is higher.

And then, I compare those 3 things. And I pick the one that has the highest number, right? And I think if you look back over the wheel that we covered upfront, you can see that, that changes. Given the strong free cash flow generation of the company, David, the CEO, and I make this decision every 60 to 90 days. We don't typically run with a lot of cash on the balance sheet. That's how we think about it. It's the same answer I would have given you a year ago. It's the same answer I'll give you a year from today.

Yes. So I'll open up for questions if anyone can ask questions. Good. Okay. Moving forward, the underappreciation, it's been a challenging year-to-date, Craig, I have to say. But like are there aspects from like your perspective such as recurring revenue model, technology platform, strong cash flow, global reach that you believe are underappreciated by investors?

And I think that was a great list, Tomo. Maybe I have a few to add. I wouldn't take anything off. No. But look, in all honesty, I do think it's a great list. But here's how I think about that. We do prioritize recurring revenue at the company. And we talked about 94% of our revenue in service revenue. The overwhelming majority of that is recurring revenue. I love the -- I love our position in the markets. I love the end markets that we operate in. I'll continually point to the Government Solutions business.

Photo enforcement is a market we've been in since the last -- since the late 1980s. One thing I like -- I think I said it to you, one thing I like to tell people when they come to our office, which is in Mesa, Arizona, is the founder of our company installed the first red light camera in North America, about a mile from where our headquarters is today in 1987, and that location is still active, right? So we've seen the evolution of this industry, and we've got some folks in the business that have been there.

Our CEO is a great example. He's been with the company over 12 years, right? And he actually, in one iteration, ran that business early before he was the CEO. So his market perspective on this is I have never -- I've seen more growth in the adoption of this technology in the last several years than I have in the preceding 10. And I want to go back to why that is, Tomo. So when I really get excited about this business, I want to talk about why that is. And it's a big reason why I joined Verra Mobility.

So one thing you may not know, my father was a police officer. He was chief police in our hometown. I remember photo enforcement in the '90s, when it was a thing that, oh, oh, that's going to take jobs away from cops, very different. It's a very different environment. When you look at where we are today in terms of policing in the United States, I think a lot of police departments view this as a force multiplier, not as a -- and that's why it's gained so much. That's one of the reasons why it's gained such a nice groundswell.

And the way I think about that, these are my words, not the police agencies' words, but would you rather have a police officer standing with a radar gun or have them out doing a felony follow-up? This allows the force multiplier aspect of it. And I think the second thing is, and this is really intentional on the part of the company. So we have 70% of the market in the United States. We're very proud of that. There's been a large focus on purpose-built technology, over and above what was historically just photo enforcement you may think of as a red light camera. Again, that's still a very important piece of the company.

But when you talk about protecting precious cargo, we see a lot of growth in school zones. We see a lot of growth on school bus stop arms. I believe it's still on our website. If you go and look at some of the worst offenders, just as an adult in the United States, it will turn your stomach when you see kids in a -- walking off a school bus and somebody going around school bus 70 miles an hour. So those kind of things, I think, are really important. Those trends are things that we've either participated in helping to build or certainly have glommed on to that I think give us a nice sustainable growth go forward.

In the Commercial Business, we've been in this business for a very, very long time. We love our position. We have a very close connection with our customers. And I think back to culturally, too, on this business for a second, we have to think about what's next. So let's think about what's next for a second. Tolling in the United States has been a piece of plastic on the windshield or a video toll through a license plate for a long time.

What will that tolling transaction look like in 10 to 15 years? More likely than not, it will go through the head unit of a vehicle. So when you think about that, Verra Mobility has a business stood up, and we've had it for quite some time, thinking about what that next iteration is, how we can help and how we can play. That helps our employees stay engaged, and it helps our customers make sure that we know we're investing on their behalf.

I'm going to wrap it up. Thank you very much, Craig, and thank you for everyone to join. Thank you.

Appreciate it. Thank you.

Thank you, everybody, for joining us this afternoon here at the Morgan Stanley TMT Conference. Very excited to have Verra Mobility. David Roberts, President and CEO; and Craig Conti, CFO, are joining me here on stage. Before I get started with David and Craig, I do have to read the disclosure. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to us here at Morgan Stanley.

So maybe we'll start with a little bit of a preamble, and I'll open it up to both of you, David and Craig. Great -- first of all, let me say, great to have you here at our TMT conference again. But maybe can you give us and those that may be listening in, et cetera, an overview of the business segments of Verra and in particular, what that mix and growth drivers look like and maybe how that mix is evolving in 2026?

Yes, happy to do so, and thank you for having us again. So Verra Mobility is a leader in smart transportation, and we effectively compete in 2 specific markets, one which we call urban mobility, which is working with cities around the globe to manage transportation, safety and congestion. And then we also work with commercial fleets, providing access to -- giving them fleet management plus access to tolls, handling violations and titles and registrations. And we also work with universities where we're helping them around their parking challenges. So that makes up the sort of the width of the business.

So if you were to look right now at our business, you would say that our Government Solutions business is where we are the #1 provider of automated enforcement in North America is having a real renaissance. If you look -- that business operates through the opening of legislation in specific states and in those states, then cities have the option to choose to use an enforcement product or not. And there's been a real sea change in that sentiment, especially around what we call purpose-built enforcement, which are things like school zone speed, work zone speed, school bus stop on. And so we've seen a real tailwind, and that has shown up as how we're talking about the business. And then if we look at the backlog of ARR revenue from last year, it was $63...

$64 million.

$64 million from last year -- excuse me. So that's -- when you talk about growth, I think the recognition that there's a lot of fatalities related to driving, and this is a tool that is in the city's arsenal that they can use to help save lives. So we're super excited about that. But others -- our commercial services is where we're the #1 provider of toll management solutions for rental car companies as well alongside fleet management companies. The real drivers there really are connected to travel. So the more travel, the more people are renting cars, the more the tolling happens to occur.

There's also a couple of other, what we call secular tailwinds, but one of which is the conversion to cashless lanes, which is where there used to be -- people may remember, we used to be able to throw a quarter in a basket and the arm comes down, that doesn't really happen anymore. When those lanes are cashless, that's a benefit to both our customers as well as to us. So -- right now, we have a slightly more conservative view on travel. TSA numbers are going to be moderate this year, we think just with all the -- a lot going on in the world, obviously, and we think that's going to be slightly more moderate. We have talked more about a mid-single-digit growth for that business. So businesses are in great place. We're really excited for what we're doing this year and feel like we're going to exit the year really strong, accelerating into '27.

So let's delve in a little bit to the commercial segment that you just touched on. So when you think about the key drivers of growth there, you mentioned increased shift to cashless tolls, new toll roads, international expansion, growth in travel generally. How should we generally rank order each of those or any other factors as growth drivers for the commercial segment?

Yes, James. Let's go through the growth rubric. So we've talked about -- Commercial Services being a mid-single-digit grower over the next couple of years. And the way I like to decouple that growth and talk about the pieces are 1/3, 1/3, 1/3. So the first 1/3 is travel demand, right? So Verra Mobility is a net taker of that. People come to the airport, go through TSA and they rent a car. The second 1/3 of that or what we call the secular tailwinds, which David just touched on a little bit, this is the increasing penetration of cashless rows in the United States. So to give you kind of an idea of that, just less than 3/4 of the roads in the United States that are toll roads are fully cashless.

The minute that road goes from a cash pay option to a cashless option, the uptake on our product goes up. So that's a tailwind to us. Also, every year, we add new toll roads in the United States, right? So that's the second 1/3 of 1/3, 1/3, 1/3. And then the final piece are what I say are standard growth initiatives. This is continuing to penetrate the fleet market, continuing with new commercial offerings with our RAC customers and growth in title and registration violations in Europe. So again, really high level, that mid-single-digit growth that we've talked about, 1/3, 1/3, 1/3; 1/3 of it in travel, 1/3 of it secular tailwinds and 1/3 of it in growth initiatives.

So let's talk a couple -- about a couple of things there. First, fleets. My impression is you guys already have very good representation among the car rental companies as it is. Just kind of where do you have footprint there? And then what kind of incremental fleets should we be thinking about, if any, beyond car rental?

Yes. So we work with all the 3 major providers here in the U.S. plus a few of the others. When you think about additional fleets, think of what we call the FMC business. FMC business is large corporations that have many vehicles under their purview and they use a third party to both procure and manage many of the services associated with that.

So we redistribute our products, which includes toll management, includes violation management. So when the owner of the vehicle and the driver of the vehicle are not the same, that creates some friction that we solve through our technology. And so for FMCs, we sell tolling, we sell violations. We also do title and registration. So -- just think of license plate stickers and the registration of the glove box. When those cars are moving around, that actually becomes a relatively complicated thing, and we provide solutions for our customers there.

Got it. Got it. And then international, can we give an update on Europe? What has to happen from your perspective for cashless tolling to scale meaningfully across the continent or additional countries there? And how do you think about the time horizon for that opportunity?

Well, to be really clear, our initial estimate and time horizon when we bought the business over there, we were off. We thought it was going to happen a little sooner than it did, to be very clear and to be transparent. Look, it really comes down to 2 countries that provide the vast majority of tolling, which would be Italy as well as France. Both of them are predominantly barrier based. And what that really means to us is that as a driver of a vehicle, in particular, rental car vehicle, you can still pull over and put your credit card in and pay or your debit card and the barrier is going to go up. It's not as efficient, it's not as quick.

But as they convert to cashless tolls where there is no more option, then you would automatically opt into the program. We have started to see both in Italy in and around Milan and then in and around Paris, more conversion to cashless. So it's not one -- the question is not will they go cashless? Of course, they will because it's significantly more cost effective for them. It's a better experience for the people on the toll roads. It's just at what pace. It's very difficult to say. We have continued to expand in other countries. Our rental car partners are really happy that we're helping them in the countries that we are. So we still really like the business, but we would say that there should be an acceleration here probably in the next 2 to 4 years.

Got it. And then Yes. And I mean to that point is like I've started to see some of the cashless tolling mechanisms we put in place like near the Paris Airport, et cetera. So how are you positioned because with the rental car fleet in Europe because that's the other part of it. It tends -- my impression is a bit more fragmented in that market versus here, so...

They are more independent -- so there's not like a -- for most of the fleets there, it's not like a central office in London says everybody do this. Really, it's the country manager. I'm not even sure that's the appropriate title, but that's how we think about it -- is they're making a decision based upon what's happening. So we've had to go and call on them and reference our relationships here in the United States. But -- so we've got pilots going with all of the major brands just in different countries -- not all in the same country. But they all have shown an interest, and we're still solving a meaningful problem for them, and they realize the problem only gets bigger.

So back on the U.S. and commercial services, one of the key questions we often get from investors is customer concentration risk within the segment. How should investors think about the cadence of RAC renewals and competitive dynamics for those programs?

Yes. I mean, look, I think historically, our business has been the #1 provider of solutions to rental car companies around tolling really since the inception of the industry. And so we've got long-dated relationships with these customers. They -- relative to the cadence, they do -- we're in a discussion now with Avis Budget Group, and we have both Hertz and Enterprise would renew next year. And that's very common. There tend to be 3 to 5 years, just depending on the moment of time that we renew the contract.

And we've got, I think, what you would say is a pretty impeccable track record of continuing to serve these customers, and we would imagine doing that. As it relates to customer concentration, we recognize that, that's a thing. When you look at the 3 rental car companies plus New York City, we have customer concentration. We have -- the best way to solve that is through really thoughtful M&A, but we haven't found one that have met our price threshold over the last several years. So we're just going to continue to grow outside. We continue to diversify with other customer types, and we'll settle that over time.

And then back on some of these renewals, -- how do you think about like the risk of in-sourcing from those customers and managing that? Or what are the things that you typically need to do either from a product or capability or even pricing standpoint to make sure you keep that business?

Yes. I don't think of in-sourcing as much of an issue as I would -- and we have competitors. We have competitors in the fleet management companies that we go up against. So I would say that's probably a more likely to manage against from our standpoint because it's a very -- what we do is very complex. It sounds quite easy on the face of it, but tolling is highly -- there's 54 different toll authorities that all have different types of standards and they're not one place to plug in. You have to set up accounts with all them.

So there's a lot of complexity there. So we rely on our commitment to our customers and the ability to do what we do. But we also need to -- I think your last point is continue to invest in the platform, how do we make it faster and easier? How do we make this a more seamless experience for the renter, how do we optimize the experience for both our customer and their customer.

Got it. So let's turn to government. This is where -- there have certainly been a bunch of headlines in terms of creating incremental opportunity as well as business that Verra has won over the last 1 to 2 years. To that point, you recently finalized a new 5-year contract with New York City's Department of Transportation, and that began on January 1, 2026. And as part of that contract, you're going to be managing and expanding the city's automated enforcement camera programs. Can you talk about that rollout time line, the phasing of revenue, in particular, equipment versus services? And what success should look like over the first 12 to 18 months?

Yes. So great question. I mean the way I think about this is the majority of the expansion will be installed in 2026 with the remainder in 2027. So as we start talking about that and we're on the quarterly cadence with investors, we're going to let you know how we're going on that. So if you look back to our last earnings call, going a little slower at the beginning of the year because of weather in New York, we can't say concrete. But we expect to be on size with our 2026 expectation. We know how to do this. We've done this for a long time. A little bit on the New York City contract, I want to make sure that we talk about here. The first thing is how does the new contract stack up against the old contract.

And I think that's really important. There's a couple of things I want to make sure are clear. When we think about this from a margin dollars or an EBITDA dollars perspective, a couple of things I want to think about moving between the 2. The first is we add EBITDA dollars into the contract because, obviously, we're expanding, right? There's 1,000-plus cameras that we're putting in. That's number one. So that's EBITDA dollars in versus the old contract.

The second thing is there's some scope in the contract that we used to do at cost and now we do at margin. So that's more dollars into the contract. And then the third thing is there's new use cases such as speed on green that we're going to do in the new contract that we hadn't done in the old contract, more margin dollars into the contract. And then the next piece is the price rationalization. So that's EBITDA dollars out of the contract. Now I've got one more item to cover on this bridge. But if I snap the bridge right there, old contract versus the new contract, roughly flat to slightly accretive.

The next piece that comes in that takes the EBITDA margin dollars down is the investment in the minority and women-owned businesses. That's about $22 million to $24 million a year, right? So that's how to think about the old contract versus the new contract. The other piece of this that I want to make sure is really clear though, if you think about this from a margin percentage standpoint, the new contract is still materially accretive to the rest of the GS business. So as we get a lot of questions on these, sometimes they come from different angles. I want to make sure to lay that all out upfront.

So let's talk about that part of that initiative around minority and women-owned businesses. And just -- you made it clear just now, Craig, that, that brings down EBITDA dollars a bit, et cetera. A little background on those programs, what does that entail? And maybe most importantly for most investors, how long or how recurring is that investment?

Yes. So the way to think about it is this was actually one of the #1 scoring criteria for the RFP for the contract was the use of -- as a percent of the total contract value, the use of minority women-owned businesses. The city looks at this as an opportunity to create local jobs because it's a big and important program. And so it was -- it's a -- think of it, it's a -- you do this or you don't even get a bid or you're definitely not going to -- and so what we look at is, hey, this is a part of doing business in a city like New York. It's the largest automated enforcement program in the world.

It won't go down. It will probably just be at the same percentage for the rest of it. So as we think about performance for the rest of the business, we can look for other areas of continuous improvement. We are required to use kind of a -- think of it as almost a fixed percentage of the total contract against minority women-owned businesses.

Got it. Got it. Got it. So that's New York. And I mean, maybe, Craig, I'd go back as -- and David, if you have something to add here, it would be great. But I think for a lot of people, they took notice of this program and the RFP and then the contract, et cetera, but maybe got a little bit offside on the profitability of it. Is that just because like this component wasn't taken into account? Or are there some other things around just the accounting and the way that the program will operate that you've heard from other investors may have been confusing.

Yes. I think the one thing that I heard was the bifurcation between -- is it an accretive margin percent contract versus what does that mean for margin dollars contract. That was the piece that I think may have gotten lost in the mix a little bit. So -- we clarified that on the earnings call, and I think we're clear now. The other thing I would add about New York to what David said, and he's 100% right, obviously, but is the minority and women-owned business isn't 100% of the cost of the contract, right? But when we think about -- and we've talked about this at length, how we take our Government Solutions margin from the low 20s where we expected this year up to the mid- to high 20s by 2028 with potential to grow from there. How do we do that? The majority of that is the MOSAIC project, which I think we'll probably talk about here today. Maybe David can tell you a little bit about it. But it's -- when we think about that and you think about that increase in margin over time for Government Solutions, that's the primary driver.

So let's take advantage of this moment to talk about MOSAIC. Like why does that matter? And how does that -- how should we expect that to drive profitability and margins?

Yes. So Mosaic is really our investment in an updated architecture and platform. The current platform that we've used is one that's been around in the business before I joined and I've been at the company 12 years. So -- it's an older technology architecture, a technology stack. So the cost of ownership of that is significantly higher than modern technology.

Our MOSAIC, which is not a brand name, that's just our project name for the product is effectively cloud-based service-oriented architecture that's much more modular and flexible. So we would imagine 3 things effectively happening. One is the software licensing cost of supporting the older program will go down because we won't need it anymore. Two, the number of people required to support the new platform and/or onboard new customers goes down because it's much easier and more standard. And then three, just the total cost of ownership of OpEx to host and support that is significantly lower. So those are the 3 things that will -- as we deploy that over the next 6 to 8 months, that's where the majority of the cost savings will come over time.

Got it. So -- you've also consistently highlighted significant TAM expansion potential from legislation. And so just recap for us, which states or programs do you expect are most likely to convert to meaningful revenue in the next 12 to 24 months? And how are you expecting that those economics will compare to your legacy programs?

Well, I would say the one that we're most excited is here in California. So California, while it had had legislation for red light cameras for years, it was actually a pretty poor legislation, was not effective at deterring anything. We've recently been able to support movements to rectify that legislation for red light, but also open up pilot programs for school zone speed. And there were 6 cities identified, 5 have been RFP, and we won all 5. And so when you look at the opportunity here in California, it's just -- it's the biggest one by far, just given that the state is pretty nascent in its adoption of speed enforcement and that would -- and if that goes statewide, that increases the TAM by another $100 million, $150 million. So we've got a great track record here. We're excited to win. I would say that the economics of that would be very, very similar to other programs in aggregate across the rest of the country.

So -- and what's the composition and timing for these programs? You mentioned maybe expanding the TAM by up to $150 million here in Canada.

That would -- there's some things that have to happen there. So TAM for us is an output of legislation. So that means you've got to get legislators on board to -- and I know you people would be surprised that not only -- you can't always get legislators to agree on things. I know that's shocking to people. But it's a combination of getting them to agree on the problem and the opportunity. It's given that these pilots only started this year -- or in the last year rather, I would say it's another 2 or 3 years. But the fact that we won all 5 that the programs are going to be launched successfully, we feel really, really good about California and spent a lot of time here, a lot of time here.

Got it. So what about Florida? Florida seemed to be moving pretty quickly, especially on school zone. I know there are pilots there. Where are we at from a legislation perspective in that?

Yes. Outside of New York, Florida is the largest red light customer for us, and they have launched school zone speed. They have been sort of a little bit of one foot on the gas and one on the brake. They've opened up some, they pulled some back. That is an area where we've had significantly higher levels of competition. Our competitors are not generally nationwide. They tend to exist in pockets of the country. So we all have a competitor in the Southeast that doesn't compete in the Northeast, and we sort of don't really have much competition out here in the West.

So we won a few. they've won a few. So that one has been a little bit slower. But I think one of the nice things is as we rolled out school zone speed in Florida a couple of years ago, we probably made some missteps along the way, just like anybody would, and we really learned from that. And we turned that into continuous improvement. And so far in California, where we're doing the exact same thing we did in Florida, we're 5 for 5. So I feel like we really have put ourselves in a real pole position to be winning here going forward.

And those issues in Florida, were those product or offering related? Or was the engagement with decision-making bodies related?

I would say probably not recognizing that smaller -- that ultimately, this comes down to some level of influence with your customers or the sort of constituents around the customers. And our competitors were very fast and they probably offer things at prices that we weren't quite used to at that time. And so we had to sort of pivot and adjust accordingly.

And then what about other states that should be on the radar even if we don't quite have at least pilot programs funded, et cetera?

I mean we've got work zone that's rolling out in New York. I think that's an area to watch. We've got other work zone programs. School bus is one of our fastest-growing products. That's continued to open up. A couple of years ago, it was only 5 states. It's now in 13. I would say that's another one that we're really excited about as well.

Got it. Got it. Got it. So you mentioned competition. And obviously, we tend to think about you as the leading provider in the markets where you compete. But maybe give an update on the competitive environment. Any changes in your business line that we should be aware of, whether it's new entrants or some of these regional incumbents trying to expand footprint or making incremental investment to improve product, et cetera?

Yes. Where I would say is leadership -- when you're in the leadership position, you attract competitors because people want to be where you are, right? In the automated enforcement side, what I would just say is, again, we compete with smaller local companies that have some resources deployed in a certain area of country. They tend to focus in and around that area. I would not say that they have launched products that were materially different or a new offering per se, although some of them have had some really good products.

I don't want to -- I don't want to be dismissive. But it's probably just more -- hey, they put -- they said we're going to focus right here. We're rolling out the largest program in the world in New York City. We're opening up TAM. So we may have been less focused on certain pockets. But as we have pivoted, we've really redeployed our resources into these regions to stay kind of just, hey, you're going to own that area of the country and compete against XYZ. And we started to see our win rate continue to go up. Our win rate last year was like 70% on that -- so I think we've really pivoted the business against some of the competitive responses that we've seen in the market over the last couple of years.

Got it. And then let's talk about -- I can't believe we've made it whatever, almost 25 minutes without speaking directly about AI. But how are you thinking about that key risks and opportunities in AI-enabled government tech and urban mobility, especially given you have a partnership with Hayden AI. What are you seeing in terms of adoption? How is that changing the competitive environment? Where is the market headed?

Yes. I would say so on the -- I'll call it on the outside the company. And so on our products, we use AI today in the cameras, the camera use machine learning technology. We use that to process out false positives so that we're not running all that video across the network. It's very expensive to run that video across the network. We're able to eliminate that at the roadside. So the camera does that on its own and gets...

And false positive would be something that normally would have triggered the camera...

The violation wasn't...

Right. Exactly.

Exactly. So we're trying to limit those as much as we can. Otherwise, the person that gets more expensive, you're pulling video. So we've been doing that for a couple of years now. Look, I think the -- what's happening is the cameras are getting significantly smarter at the road side, but the back-end system, i.e., Mosaic is really going to be using AI to be predictive. And then how do you allow for our cities to make better decisions around safety based upon the data that you're gathering, not just from an enforcement camera, but from other data points that are sitting in and around the intersections that they operate.

Inside the company, we've had some successful, what I would call sort of small pilots. We ran 30 pilots of AI in the company. So this is anything from how do we do RFP responses to how we think about HR services, like everything. We were just trying to find some grit under the tire of the promise of AI. And obviously, I think AI clearly has a fair amount of press right now. In practicality, in reality, we're just trying to find use cases that actually result in dollars to the business versus technology. So -- we've got several that we've deployed. This year, we've got a couple more.

I would say that over time that you would -- in a more -- I don't -- obviously, there was a story of a company laying off, I think, half of its workforce at one time related to AI. That's not going to be happening at Verra Mobility. But what I think we can do is how do we thoughtfully and considerately deploy AI in the pockets that are -- that it has the high side so we can redeploy resources to growth is something that we're very keen on doing, and we've got a lot of resources tied up against that right now.

Got it. So let's shift to parking, small nascent part of the business for Verra, but one where there's probably a lot of opportunity. Talk about -- and you mentioned universities as one of the areas.

Yes.

What are the complexities of university and maybe municipal parking generally that the T2 part of the business addresses? And how would you describe demand versus the biggest opportunities?

Yes. So the thing about a university is it's -- you don't think about when we bought the business, you're like, how hard can it be? Well, I have 2 kids at school right now. And every semester, they got to get a new permit for a new lot. The rules are different. Those lots don't ever stay the same. You can park there on Tuesday, but you can't park there on Wednesday, then you get a ticket for it. Then you've got visitors coming in for football games and then you've got faculty and advisers and all these things. So there's a fair amount of real-time complexity generally in constrained spaces that universities have to deal with.

One of the large universities that we deal with is the Texas A&M University. And you would be shocked at the number of challenges that they have. They have like a 20-person parking department just in the university. And what our software does is, it acts as a partner to them in an ERP to help them manage that. We now are able to deploy most of the sort of parker-facing technology via mobile and very quick payment apps. We're helping them make decisions on where to place access controls for security purposes as well as for revenue generation. So that's the -- that business has, I think, those are going to be real -- those are very real and durable challenges that will be there for many years to come.

So how should we think about growth of the Parking segment and how big can it be?

Look, I think right now, we've had a year or 2 where churn was a real problem in the business. We lost some customers, and I think the company has done a really nice job to settle that. So the growth rate is going to be more muted. So it's going to be low mid-single digits for this year and probably next. What I think is important in that business is the continued move to transaction-based revenue versus just the hardware that we sell, either the Pay station or the access controls and/or just the software, but moving more to that recurring revenue is the real goal because that's going to lift the margins up as well. And they're doing a really good job, I think, of both updating the product and also updating their sort of go-to-market commercial motion to do that as well.

Got it. Last few minutes, I want to chat capital allocation and some of the financials. What are your capital allocation priorities today? And you guys have always done a lot around organic investment, but also M&A and even buybacks. So talk us through where the priority is and what we should expect the balance sheet to look like in the next 1 to 2 years, et cetera.

I'll do the first, and you can talk about the balance sheet. I think the -- I mean, our philosophy on this has not changed since going public, which is the first thing we want to do is invest in our businesses. This year, we talked recently in earnings where we're going to be increasing our R&D and spend around autonomous vehicles as we think of what are the solutions that we want to be providing in and around that area as we look to cities and fleets and some of the challenges they're facing. So we're upping the ante there a bit. Part 2 is growth. As you mentioned earlier, we do have customer concentration. We'd like to diversify our revenue sources thoughtfully and considerately over time.

And you can do that through M&A. We haven't done a deal in a while because we also have a lot of financial discipline. We -- as I've said, we've chased a lot of deals, but we've said no on price and candidly, so did everybody else. So perhaps this new market will reset the expectations of what price would be. And then third, since going public, we bought $650 million worth of shares. We did $130 million in the quarter -- sorry, excuse me, in Q4. So because of the cash flow generation of our company, we're able to sort of recalibrate against those top 3 sort of regularly. It's not something we set and then revisit 2 years later. We can do that almost every 6 months. You can you talk about where we'll be on the balance sheet?

Yes, real quick. I mean, so look, at the end of last year, we did another debt refi, brought down our borrowing cost. The consolidated interest rate for the company is now under 6%, which if I were to think that, that would be the case 2 years ago, would have thought it was crazy, right? So I think it's wonderful. But that also will tell you that maybe it's not as much to -- it's a higher bar to lean into paying down our debt at this point. We ended the quarter at around 2.3x net levered. If you run out my guide to the end of the year, it will get you to 2x -- we've said consistently for quite some time now that we think the level of flight path for leverage for the company is 3x. But we are more than happy to run it lower than that.

We will not artificially get to that 3x to see that 3x. But I think that's a good gating item to say would -- for the right acquisition or the right combination of capital allocation, could we pop above that, come back to that and kind of stay at that level, that should be what you're thinking of as that long-term level loaded ceiling. But again, if you run my guide out to the end of the year, you're going to get to a 2x net levered business.

Got it. So let's finish up there on the guide and potential swing factors. Look, we've got the 2026 guidance. We've got renewed NYC programs. So with that in mind, what are the key swing factors, whether it be NYC rollout pace, some costs associated with minority and women-owned businesses, commercial volumes, new program awards. Where should we be anticipating the biggest potential variance in both upside or downside risks?

Yes. I think for Verra Mobility for time and memorial, it does travel -- it does follow travel demand, right? So to the degree -- and we have modeled in to be clear what we have and why, we have 1% growth in for this year, and here's exactly why. That's where we exited the fourth quarter. As of this morning, we're at about 1.5 points. So it's kind of at least for the first...

Slightly better.

Slightly better, but we're well within the rounds of saying 1%. So to the degree that it's higher or lower than that, that's always one piece to look at. And I think on the Government Solutions side, one may be short term, one may be slightly more medium or long term. The short term one are the installs in New York City, like we're confident we can do that in 2026. I don't love having to go out at the end of the fourth quarter and saying, well, I can't put in cameras if it's not above 32%, but that is...

Going or whatever...

I don't love having to go through that complexity. So we'll watch that. And then I think the second thing is we've talked about getting the margins in our GS business. We've not just talked, we've committed to getting those margins back up to a significantly higher level than they are today. And the largest path to do that is continue to execute on MOSAIC, which we're doing in the background, and that's going to start showing up in the prints in '27.

Got it. Got it. Last thing for you, David, priority. Priorities this year as you kind of work through and look beyond just this year from a horizon perspective?

Yes. Look, this is all about resetting the base of the business, but also it comes down to growth. What are our new growth vectors. We're investing in innovation. We're investing in product management. We're investing in autonomous. So really, we want to -- the priority is to leave the year with a clear idea of where we're going to play in those markets and go put some capital behind them.

Love it. David, Craig, thank you very much for joining us today.

Thank for having us.

Appreciate it.

Good to see you. Thank you.

Great. Thank you.

Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's Fourth Quarter and Year-End 2025 Earnings Conference Call. My name is Michelle, and I will be your conference operator today. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please go ahead, Mr. Zindler.

Thank you. Good afternoon, and welcome to Verra Mobility's Fourth Quarter and Full Year 2025 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com.

With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A.

Management may make forward-looking statements during the call regarding future events and expectations, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for our cautionary note on forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we do not undertake any obligation to update forward-looking statements.

Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, quarterly earnings presentation and investor presentation, all of which can be found on our website at ir.verramobility.com.

With that, I'll turn the call over to David.

Thank you, Mark, and thanks, everyone, for joining us. We closed 2025 with strong execution and momentum across our 3 business segments. Total revenue for the fourth quarter increased 16% from the fourth quarter of 2024, exceeding our internal expectations, while adjusted EBITDA and adjusted EPS were generally in line with our internal expectations. Looking ahead to 2026 and beyond, we are executing against a focused value creation strategy designed to strengthen our core, enhance profitability and position Verra Mobility for durable long-term growth.

In the near term, we are driving operational discipline, sharpening our portfolio focus and anticipate expanding margins in 2027 and beyond. We are allocating capital and prioritizing resources against the highest return opportunities. Our priorities are clear, deliver predictable, profitable growth while strengthening margin performance over the long term. At the same time, we are investing with intent to extend our leadership and unlock long-term value. We are modernizing our technology platforms, including advancing MOSAIC, our secure cloud-based end-to-end automated enforcement solution and Government Solutions and accelerating development of our connected vehicle platform and Commercial Services.

The future of mobility is safe, smart and connected. Cities and fleets are moving in that direction, and we are building the capabilities to lead that transition. These investments are disciplined, aligned with customer demand and designed to drive durable competitive advantage and sustained shareholder value. Before I transition to our operating results, I'll start with an update on our automated photo enforcement contract with the city -- with New York City Department of Transportation. I'm pleased to report that we signed and registered our contract at the end of 2025 -- at the end of December 2025. The total contract value now stands at $998 million over a 5-year period and includes an option for a 5-year renewal. Under our then existing contract with New York City Department of Transportation, we generated $22 million of revenue attributable to the Red-Light camera installations in the fourth quarter of 2025, of which approximately $14 million was installation services revenue and about $8 million was product revenue.

Next, I'll move on to a macro view of each of our segments, starting with Government Solutions, which we consider our primary value creation engine due to the expanding addressable market and our competitive positioning. We are continuing to deliver strong growth and high win rates. Moreover, we are poised for margin expansion in 2027 and beyond via the deployment of the MOSAIC platform to support the event processing requirements of our global enforcement programs.

Starting with growth and high win rates in the fourth quarter of 2025, Government Solutions total revenue increased 25% over the fourth quarter of 2024, driven primarily by the New York City Red-Light expansion. Additionally, we entered into bookings of about $23 million of incremental annual recurring revenue based on a full run rate, bringing the full year 2025 total to about $64 million in bookings. Notable fourth quarter bookings included school zone speed program in Orlando, Florida, our Red-Light enforcement program in Pittsburgh, Pennsylvania and a speed enforcement program across the state of Hawaii. These recent wins reinforce our structural advantage serving cities and public sector partners. Moreover, our addressable market in the U.S. has expanded by approximately $365 million due to new enabling legislation over the past 3 years with the potential to expand to about $500 million if California passes additional enabling legislation for the statewide deployment of speed enforcement.

That said, we recognize there continues to be legislative activity and ongoing public debate about automated enforcement programs, including new state and local laws enabling speed and stop-arm camera programs and ongoing discussion over the role of automated tools and traffic safety. But we remain confident in our business given the wide body of evidence showing these systems successfully change driver behavior and improve safety. Speed cameras contribute to significant declines in violations as well as a 14% reduction in crashes in major cities. National safety authorities, including the United States Department of Transportation's Federal Highway Administration and the National Highway Traffic Safety Administration recognize that automated speed enforcement is a proven safety countermeasure that can reduce fatalities and serious injuries by meaningful margins.

Moreover, the vast majority of automated enforcement programs are cost neutral to our customers as we incur the cost of the cameras and installation costs in most deployments and remaining cash outlays are paid for via self-funding mechanisms.

We also prioritize data privacy, compliance and transparency in every implementation, and we will continue partnering with local authorities to create safer streets and better outcomes for the communities with which we serve. Our school bus stop and safety program is a standout example, clear safety outcomes, coupled with strong customer adoption and durable long-term demand as well as public acceptance. In fact, we recently shared the results of a consumer survey we conducted late last year, which showed 82% of respondents supported safety cameras to monitor and penalize drivers who illegally pass stop school buses and 70% of respondents favor automated enforcement in school zones. Automated enforcement remains a core catalyst for driver safety, which continues to be a top public priority.

Next, I will turn to our Parking Solutions business or T2 Systems. In summary, T2 is stable, improving and being invested in thoughtfully. Fourth quarter total revenue increased 5% over the year -- prior year quarter, in line with our internal expectations. In 2025, T2 performed in line with its internal plan along with an improving outlook. We are seeing an early signs of momentum, primarily in the context of decreasing customer churn, while growth is primarily driven by SaaS bookings and investments in the transaction-based business area. Our operational focus is twofold, improving utilization and monetization of our SaaS and transaction-based revenue model, coupled with disciplined self-funded growth.

Moving on to Commercial Services. Fourth quarter revenue and segment profit increased about 10% and 7%, respectively, over the prior year period. Rental car or RAC tolling increased 16% over the prior year period, driven by increased travel volume and product adoption as well as higher tolling activity compared to the fourth quarter of last year. The growth in RAC tolling was partially offset by a decline in fleet management revenue of about 8% compared to the fourth quarter of 2024 due to the prior period customer churn we had discussed in our second quarter earnings call. Strategically, Commercial Services remains a durable cash-generative business with clear competitive advantage, while the operating environment is more normalized relative to recent years, we believe that the fundamentals of the business remain solid.

For 2026, we expect mid-single-digit revenue growth. We expect TSA volumes to grow modestly compared to 2025 levels and FMC revenue is expected to grow mid-single digits, reflecting the impact of prior year period churn in the first half of 2025. Importantly, the segment continues to generate significant free cash flow to support reinvestment and capital returns. While long-term growth expectations are more moderate than prior outlooks, we see a clear and achievable path to sustained mid-single-digit growth. The drivers remain balanced and resilient, roughly 1/3 from travel volume growth, 1/3 from structural secular tailwinds and 1/3 from focused growth initiatives that expand our value proposition.

We're particularly excited about the future of Connected Payments through our partnership with Stellantis, which we believe will improve the driving experience and simplify in-vehicle payment processes. In the near term, especially over the next 2 years, we are taking a more cautious view due to softer anticipated travel volumes, reduced European travel to the United States and expected fleet reductions among our rental car customers. Should macro conditions improve and fleet levels recover faster than expected, there remains potential to perform above this baseline. In Commercial Services, we are sharpening our execution, serving customers at their highest point of need and reinforcing cost discipline and prioritizing profitability and cash generation. We're positioning the business to deliver consistent high-quality earnings over time.

Moving on to capital deployment and portfolio focus. Our approach to capital deployment remains disciplined and clearly prioritized. First, we continue to allocate capital toward areas of the business where we see the strongest growth and returns, including programs like school bus stop-arm enforcement, where demand, safety outcomes and long-term economics are compelling. Second, we are actively evaluating M&A opportunities that can accelerate growth or advance our capabilities in key areas along with safe, smart and connected themes with a strong focus on strategic fit and return on invested capital. Third, share repurchases remain an available tool within our capital allocation framework, and we have returned over $650 million to shareholders through buybacks over the past 5 years. Across all capital deployment decisions, we are sharpening our portfolio to maximize performance in businesses that are already growing and to improve returns on invested capital, allocating capital with greater focus and selectivity. We believe this discipline supports both near-term margin performance and long-term strategic flexibility.

As we look ahead, particularly around AI and autonomous vehicles and the evolving fleet landscape, we're focused less on defining specific products today and more about the problem spaces where we believe we are structurally advantaged. As mobility becomes more autonomous, connected and data-driven, cities and fleets alike will face fundamental changes in how safety, compliance, enforcement, governance and transactions are managing. And those are areas we're already operating at scale with trusted relationships. We're taking an intentional but very disciplined approach, building capabilities, working closely with cities and fleet operators and investing in learning before committing significant capital. As mobility transitions from individually driven vehicles to software-directed vehicles, value accrues to the systems that enable safe, efficient and compliant access to the road. These are exactly the environments in which Verra Mobility operates today, which we believe creates a long-term structural tailwind as autonomy continues to advance.

In conjunction with these trends, we're expecting to increase R&D spending in these areas and the financial guidance that Craig will discuss incorporates the spending. Craig, I'll turn it over to you to guide us through our financial results, capital deployment and 2026 guidance.

Thank you, David, and hello, everyone. We appreciate you joining us on the call today. Let's turn to Slide 4, which outlines the key financial measures for the consolidated business for the fourth quarter. Our Q4 revenue performance, which included 14% service revenue growth and 16% total revenue growth year-over-year exceeded our internal expectations. Service revenue growth, which consists primarily of recurring revenue, was driven by the change order for the New York City Red-Light expansion program and service revenue growth outside of New York City in the Government Solutions business as well as increased revenue from RAC tolling and European operations in the Commercial Services business.

At the segment level, Government Solutions service revenue grew 21% year-over-year. Commercial Services revenue increased by 10% over the prior year and Parking Solutions SaaS and services revenue increased 2% compared to the fourth quarter of 2024. Total product revenue was about $18 million for the quarter. Government Solutions contributed roughly $14 million with $8 million coming from New York City Red-Light expansion and $6 million from international product sales. T2 delivered about $4 million in product sales overall for the quarter.

On the profitability side, our consolidated adjusted EBITDA for the quarter was $102 million, roughly flat compared to the same period last year, largely due to the investments made in New York City. We reported net income of $19 million for the quarter, and GAAP diluted EPS was $0.12 per share for the fourth quarter of 2025 compared to a loss of $0.41 per share for the prior year period. GAAP results included approximately $16 million of nonrecurring expenses, about $6 million related to our fourth quarter debt refinancing and $10 million related to fixed asset write-down expenses due to our exit from Ontario, Canada.

Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items, was $0.30 per share for the fourth quarter of this year compared to $0.33 per share in the fourth quarter of 2024. The adjusted EPS decline was primarily driven by New York City readiness costs. For the full year, we reported net income of $137 million, including a tax provision of $58 million, representing a full year effective tax rate of about 30%. GAAP diluted EPS was $0.85 per share in 2025 compared to $0.19 in 2024. Full year 2025 adjusted EPS was $1.32 per share compared to $1.23 per share in 2024. Cash flows provided by operating activities totaled $40 million, and we delivered $6 million of free cash flow for the quarter. Free cash flow was negatively impacted by the timing of cash collections. As of today's call, we have collected approximately $22 million that we originally anticipated collecting in the fourth quarter of 2025.

Turning to Slide 5. We generated $416 million of adjusted EBITDA on approximately $979 million of revenue for the trailing 12 months, representing a 42% adjusted EBITDA margin. Additionally, we generated $137 million of free cash flow or 33% conversion of adjusted EBITDA over the trailing 12 months. Adjusting for the cash -- adjusting for the cash in the first quarter of 2026 that we anticipated collecting in the fourth quarter of 2025, free cash flow conversion would have been greater than 38% in 2025.

Next, I'll walk through the fourth quarter performance in each of our 3 business segments, beginning with Commercial Services on Slide 6. CS year-over-year revenue growth was 10% in the fourth quarter. RAC tolling revenue increased 16% or about $10 million over the same period last year, driven by increased product adoption and tolling activity, which benefited from a 1% increase in U.S. travel volume over the prior year quarter. Our FMC business declined 8% or about $1.6 million year-over-year, primarily driven by prior period customer churn. Additionally, our European operations contributed just shy of $1 billion of growth compared to the fourth quarter of 2024.

Commercial Services segment profit increased 7% over the prior year, representing a 64% segment profit margin. The margin decline compared to the prior year quarter was largely driven by a modest increase in credit loss expense and one-time selling, general and administrative costs. For the full year, Commercial Services generated $436 million of revenue or 7% growth over last year. Segment Profit of $283 million resulted in margins of about 65%, an 85 basis point decline over the prior year, driven by ERP implementation costs and modestly increased credit loss expense.

Turning to Slide 7. Government Solutions saw strong revenue growth in the quarter, driven by $14 million of installation service for the new Red-Light camera expansion in New York City as well as 11% service growth outside of New York City. The growth was broad-based across all customer use cases with particular strength in speed, bus lane and school bus stop-arm enforcement programs. Total revenue grew 25% over the prior year quarter, benefiting from about $14 million in product sales, of which $8 million were generated from New York City Red-Light camera sales and $6 million from international product sales. In total, product sales increased by $6 million over the same period last year.

Government Solutions segment profit was $31 million for the quarter, representing margins of approximately 24% compared to 34% in the prior year period. The reduction in margins versus prior year was primarily due to readiness investments made to prepare the company for execution of the New York City contract as well as lower credit loss expense in the prior year quarter. For the full year, Government Solutions generated $461 million of total revenue, an 18% increase over 2024, driven primarily by New York City installation services revenue as well as 10% service revenue growth outside of New York City. Segment Profit was $122 million, which was roughly flat with prior year.

Let's turn to Slide 8 for a review of the results of Parking Solutions. We generated revenue of $21 million and segment profit of approximately $2 million for the quarter. SaaS and services sales increased 2% compared to the prior year, while product revenue increased 17% or about $1 million compared to the fourth quarter of 2024. For the full year, Parking Solutions delivered revenue of $83 million, an increase of approximately 2% versus last year and segment profit of $11 million. SaaS revenue grew 2% over 2024.

Okay. Let's turn to Slide 9 for a review of the balance sheet and take a look at net leverage. Our gross debt balance at year-end was about $1 billion, of which approximately $690 million was floating rate debt. We ended the quarter with a net debt balance of $972 million, which was elevated sequentially due to fourth quarter share repurchases. Net leverage landed at 2.3x, and we maintained significant liquidity with our recently expanded $150 million undrawn credit revolver. Let me give you some detail on our share repurchase plan. Our Board had previously authorized the expansion of our existing buyback plan by an incremental $150 million, bringing the total authorization up to $250 million. In the fourth quarter, we purchased approximately 6 million shares for about $133 million through open market transactions.

Now let's switch gears and talk about the future. Let's turn to Slide 10 for a discussion on how we think 2026 is going to shape up. We expect total revenue in the range of $1.02 billion to $1.03 billion, representing approximately 5% growth at the midpoint of guidance over 2025, consistent with the preliminary outlook we provided on our third quarter earnings call. We expect adjusted EBITDA in the range of $405 million to $415 million or an adjusted EBITDA margin percent of about 40%, representing a 250 basis point decline compared to 2025, again, consistent with the preliminary outlook provided on our Q3 call.

As we previously discussed, the combination of portfolio mix in the New York City renewal contract, partially offset by a year-over-year reduction in ERP implementation costs are expected to drive the temporary reduction in margins. We expect 2026 non-GAAP adjusted EPS to be in the range of $1.32 to $1.38 per share, representing low single-digit growth over 2025, consistent with the outlook we provided on our Q3 earnings call.

And lastly, free cash flow is expected to be in the range of $150 million to $160 million for 2026, representing a conversion rate in the high 30th percentile of adjusted EBITDA. We expect to spend approximately $125 million of CapEx in 2026, roughly flat with 2025. The vast majority will be spent in Government Solutions to implement newly awarded photo enforcement programs.

Turning back to the adjusted EBITDA margin. Let me provide a quick refresher on each of those key drivers. The portfolio mix is simply Government Solutions growing faster than commercial services. This represents about 25 basis points of year-over-year decline at the total company level. Secondly, in Government Solutions, margins will be negatively impacted by service pricing changes established through the competitive procurement process for New York City and incremental operating costs associated with minority and women-owned subcontractor requirements under the renewal contract. These factors combined to represent about 250 to 300 basis points of margin decline at the total company level. Third, and partially offsetting the first 2 drivers, we expect Commercial Services segment profit margins to expand 25 to 50 basis points due to volume leverage and the absence of 2025 ERP spending.

Moving on to the segment level. In Commercial Services, we expect mid-single-digit revenue growth. We are modeling TSA volume growing about 100 basis points for the full year. In addition, we're expecting FMC revenue to grow mid-single digits over the prior year, down high single digits in the first half of the year due to the prior period churn and growing low double digits in the back half of the year due to the easier comps. For the combined CS business, we expect the first quarter to be our lowest revenue-generating quarter, likely flat compared to the first quarter of 2025, followed by sequential revenue increases in the second and third quarters and then a modest sequential revenue decline in the fourth. Adjusted EBITDA margins are expected to follow the same cadence as sequential revenue.

Government Solutions is expected to generate the high end of mid-single-digit total revenue growth in 2026. There are a few components influencing this growth. The expansion under the updated New York City contract is expected to drive $11 million of service revenue growth and non-New York City revenue is expected to grow 8% or roughly $20 million. In total, we expect GS service revenue to grow high single digits. Additionally, product revenue will be basically flat year-over-year as New York City product sales will be offset by a decline in international product revenue. We expect GS margins to be down about 450 to 500 basis points compared to 2025, consistent with the outlook we provided on our Q3 earnings call.

This is driven by the New York City renewal contract, specifically service pricing changes established through the competitive procurement process and the minority and women-owned subcontractor requirements. Margins are expected to ramp up over the course of the year from mid- to high teens in Q1 2026 as we incur the impact of the New York City service pricing change, up to the mid-20s by Q4 2026, fueled by volume, MOSAIC cost savings and school bus stop-arm seasonality.

Before I move on to Parking Solutions, I'll provide a brief synopsis on Government Solutions' historical and anticipated future cost drivers. For the full year 2025, we absorbed approximately $15 million of nonrecurring operating expenses to support a combination of New York City readiness and MOSAIC development costs. In 2026, we anticipate that the investment in MOSAIC will be cost neutral as remaining investment operating expenses will be offset by second half 2026 operating expense savings. Thereafter, starting in 2027 and driven primarily from the MOSAIC implementation along with volume leverage, we expect to be in a position of operating expense savings of $10 million to $20 million per year relative to the 2026 run rate. Lastly and separate from the MOSAIC implementation, we expect to incur approximately $22 million to $24 million of costs annually beginning in 2026 that we expect to be split amongst cost of service revenue and operating expense to support the New York City minority and women-owned business subcontractor requirement as we discussed on our third quarter earnings call.

For Parking Solutions, we expect to deliver mid-single-digit revenue growth over 2025 levels. We expect SaaS revenue to grow low single digits and subscription and professional services along with product revenue to grow high single digits. We expect Parking Solutions margins to be slightly accretive in 2025. Before we close out today, I'd like to provide some perspective on how we expect 2026 revenue and earnings to pace out quarterly. For the company as a whole, we expect first quarter 2026 total revenue to be about flat compared to the first quarter of 2025, followed by high single-digit year-over-year growth in the second quarter, followed by mid-single-digit growth in the third and fourth quarters of 2026. We expect adjusted EBITDA margins to land in the mid-30% range in Q1 due to the factors I've discussed and then trend up to the high 30s to the low 40s for the balance of the year, resulting in an expected 40% margin for the full year 2026. Other key assumptions supporting our adjusted EPS and free cash flow outlook can be found on Slide 11.

This concludes our prepared remarks. Thank you for your time and attention today. At this time, I'd like to invite Michelle to open the line for any questions. Over to you, Michelle.

[Operator Instructions] And our first question comes from Faiza Alwy with Deutsche Bank.

I guess, first, just a follow-up for Craig on the quarterly cadence that you mentioned. I think you said first quarter, you're expecting flat revenue and then it kind of builds up from there. So it would be really helpful just to address kind of what's driving that and what's going to drive the improving revenue through the course of the year.

Yes. Great. Well, thanks for the question, Faiza. So let me just recap at the beginning what the kind of the guide was. So if we talk about it from a revenue perspective, to your question, we expect it to be flat, then we expect on a year-over-year basis to be up high single digits in Q2 stand-alone and then mid-single digits in Q3 and Q4 stand-alone. That gets you to mid-single digits for the year. And then on the margin side, we expect to be, again, for the total company in the first quarter in the mid-30s, getting up around 40% in the second quarter and a little north of 40% in the third and fourth quarter to get you to the 40% for the year.

So here's the why, I think myopically on the first quarter. Some of it's the weather, some of it's -- some other things that are going on, but I'll break it down by business. So on the commercial side, we expect commercial to be relatively flat. A big piece of that is the FMC churn. So this is what we talked about in the second quarter of last year. It's particularly acute in the first quarter because we had a strong first quarter in 2024. So that churn is a big piece of it.

The other piece in Commercial Services is the pacing of travel and some of the inclement weather that we've seen. I know you live in New York, Faiza, so you probably know this outside your window that we've seen kind of for the last 7 weeks. If we think about today, the quarter-to-date TSA throughput went down about 80 basis points last night, just based on the Northeast kind of being snowed. So if I combine those 2 things, the pacing of the increase in travel year-over-year, which I expect to be back-end weighted anyway, I think being a little bit slower here starting off the first quarter in the FMC churn, it's been roughly flattish on the commercial side of the house.

Now let me go to the government side. Also flattish there. The first piece of this is the price normalization. We talked about this in the competitive -- the competitive procurement that we did for the contract, that hits us starting on 1/1 of 2026. Now we had expected that to be offset by some volume. But again, going back to inclement weather, we can't set concrete unless it's been above freezing for 24 hours. In New York City, we've had a lot more days underneath freezing than we anticipated at this point. So I still think that all of that install volume is safely within 2026. It's just going to be a little bit more bunched up in the back 3 quarters. So if I look at FMC, the pricing and then the weather, those 3 things kind of come together to give us a flattish Q1. That's my best view as of today, Faiza.

Understood. Makes sense. And then I just wanted to ask about the political environment around automated photo traffic enforcement. I think, David, you touched on this just a little bit in your prepared commentary. I know there's been some noise coming out of D.C. and the Trump administration and -- just curious like what you're seeing on the ground in terms of new RFPs coming out? Just would love to hear more -- your perspective around that.

Yes. Great question. I think one point to start is, as I say, there's nothing new under the sun, and that includes any sort of comments in the press related to automated enforcement that's been going on for 18 years. So that's something very normal. It has moments where it's a little higher volume like it is right now. But then I would just point to the state legislatures that have opened up the $350 million of TAM that we talked about in the last 3 years. So I think that's where the market stands. And so I think we continue to be in a really good place. I think because the industry has done a really good job of pivoting to very specific, what we call purpose-built use cases, in places like school zones and work zones and school buses. Those are what I would just consider "more popular and I think draw less sort of feedback." so overall, I feel like we're in a good place. This is nothing that is new to Verra Mobility or to the industry, and it's something that we just handle as it comes.

And our next question will come from Tomo Sano with JPMorgan.

Could you talk about the -- with the new New York City contract finalized, would you be able to quantify the impact of price normalization and MWBE requirements on margins? And if you could discuss your expectations for the pace of margin normalization from 2027 onward, please?

Yes. The best way, Tomo, I could think to answer that. I got to be careful from a competitive standpoint, of course. But if you compare the new contract with the old contract, right? So as you know, Tomo, we've had this contract in some form or fashion for quite some time, this is the latest iteration of that significantly expanded. I'd like to talk about it in terms of margin dollars. So there's a couple of things going on in this contract. The first thing is there's several thousand camera expansion, okay, depending on use cases. That's margin dollars into the contract.

There's also new scope in the contract that we're doing things we didn't do before for the city, that's margin dollars into the contract. And then there are things that we used to do kind of, call it, at breakeven that now we do at a slight margin, so that's margin dollars into the contract. And then you've got the price, which is the modernization, I would say, of the revenue per approach. As you combine all of those things over the life of this deal, which is a 10-year deal, 5-year within a renewal, so let's say, a 5-year deal, you get to roughly even margin dollars. That's the way to think about it. The investment that Verra is making into the project or what's causing that and the $22 million to $24 million I mentioned in my script, that is us using the minority and women-owned subcontractors in the state of New York. So the way to think about that, that's work that we used to do in-house that now we're subcontracting out to those folks that are based in the five boroughs. That's the investment in the contract. Does that make sense from a margin standpoint?

Yes, it's clear. And just wanted to get a follow-up on the AI questions. From a long-term perspective, how do you [indiscernible] and opportunities that advances in AI present for your business model, including the potential for rental car companies to develop their own AI-driven solutions and your own efforts to differentiate and create the value through AI, please?

Yes. I mean I think -- I don't think there's a public company CEO that wouldn't say, yes, AI is going to have some impact on their business at some point. What I would say is we're going to be on offense on this, not on defense, which is we have already deployed AI into some of the technology we've deployed today. We're using it regular in our software development. And as I mentioned in the closing part of my remarks, we really feel that AI and autonomous vehicles create a really great lane of potential future growth for us. Specifically -- but as you go back to your specific question is the AI also -- we still continue to work with tolling authorities and some technology that's probably a little less AI-oriented.

So we continue to find new ways to integrate with them as well as we're always pushing on with our customers, how can we add more value? What are new products and services that we can deploy? And you see that in our connected vehicle platform, which I think is sort of where the next generation of tolling will occur, which is inside of a connected vehicle. It's still a ways away. I don't think it's anytime soon, but we've already made inroads with folks like Stellantis to help create that platform. So I think we feel pretty good about where we sit today.

And the next question is going to come from Daniel Moore with CJS Securities.

Just wanted to ask on the cash flow. Just I think your CapEx expectation is $125 million. The guidance includes $22 million of collections that kind of spilled over. So just wondering kind of what the working capital embedded in the guidance and when we might get back to a more normalized level of conversions when you sort of factor that good guy that's helping the guidance in '26.

Yes, yes. No, you bet. Great question. So I would say that this is close to normal. So working capital, let me answer your question directly, is $20 million investment year-over-year that I think that's on Slide 11. So that will be there to look at for your model later. And that is what I always call a right just use of working capital. The vast majority of that is as we grow our commercial services business, which is we expect mid-single-digit growth this year, that's more funds on deposit that we put with the 54-plus toll authorities in the United States. So as that business grows, working capital should always be a little bit more of a use. I think as you pace that out and you picked out exactly the right pieces, the reason why that $22 million that I got in '26 that I expected in '25 didn't push that number north is because CapEx is a little higher than I thought.

So if we go back a couple of quarters, I don't know if it was you that asked it and someone said, what is -- what do you think about for 2026 CapEx? And the number I had was not as high as the $125 million that we've got in the box and in the guide today. So had that number been the lower number I thought a few months ago, we would have had higher conversion. Now that's kind of the bad news on conversion. The good news is the reason why it's higher is because we continue to win on the Government Solutions side of the house. I'm sure you saw the Hawaii announcement that went out not too long ago, and we've got a few more in the late funnel that I can't quite talk about yet that we expect to go here in the year. So when I think about our Government Solutions business on a non-New York City basis, service revenue growing high single digits approaching double digits, free cash flow conversion getting around 40% is probably the right level for that.

All right. That's helpful, Craig. And then you actually just touched on it, the Hawaii contract. Just talk a little bit about kind of the cadence of revenue, how we should think about the ramp in that $160 million over the next few years?

Yes. This one -- this is a big deployment in a small area. So you think it go fast, but actually, it's kind of the opposite. I expect to see this over the next several years, right? So this is typically, I'd say, 12 to 18 months. I think this one is probably more 36 months, maybe a little bit north of that. And we've got a pretty big geographical area to cover here even though there's not a lot of land mass. So very exciting win for us, great partnership with the state. We're super pleased about it. It's going to be a little slower on the rollout, but good news all around.

[Operator Instructions] The next question comes from David Koning with Baird.

Nice job. I guess my question is around the government business, ARR growth, the backlog, really good again. And I guess my question, is that better than you expected? And do you still feel like the '27, '28, '29 expectations you gave for government revenue hold the ones you gave last quarter, do those still hold? Or are those even a little better now with some of the new signings?

I would say -- thanks for the question, David. I would say hold. Those are -- they still hold to what we talked about last time. And the one that we talked about last time specifically was does 2027 feel like double digits. And I still see a path to that today. So maybe just one more level of detail on that. When we talked last quarter and we gave that view out to 2028, I believe that we had non-New York City growing in the high single digits, which is from an organic perspective, which is exactly what we've got in the guide today. So I don't -- I'm a little closer to it, and [ I still am ] as confident as what I said it last quarter that '27 looks especially good.

Okay. And then as a follow-up, it sounds like you're going to exit this year in the mid-20s margin within the government segment. Is that a fair kind of starting point as we think in the out years that we know you can get back to at least the mid-20s and hopefully get back to 30% over time?

Yes. I think we're going to exit. I'm going to [indiscernible] consult my notes here, give me one second to make sure. Yes, we're going to exit with GS, I think, a little lower than the mid-20s this year. We should be on the lower end of the 20s, which is, again, consistent with last quarter. But does that path still exist to get up to the mid- to high 20s by 2028 going into 2029? And the answer is yes. And the path to that is volume leverage and first of all, and second of all is MOSAIC.

And our next question will come from James Faucette with Morgan Stanley.

This is Shefali Tamaskar on for James. So you gave some really helpful commentary around AI, specifically around increasing R&D and how you view AI as a lane for potential future growth. So I wanted to better understand how you think about the trade-offs between building out technology related to AI internally versus partnering or potentially acquiring targets with AI capabilities.

Yes. Great question. I think the way I would describe my answer is it's both and not either/or, meaning we probably see that relative to AI impacting transportation, it's going to be showing up in autonomous vehicles, and there's going to be a slightly slower bend toward that over the next decade or 2 as more autonomous fleets get proliferated, the legislation gets set. There's a lot to be worked out. And so there's both arms and legs component of that, and then there's also an AI and software development side.

So I would say that we're open to partnering and have already started conversations. And actually, the Stellantis conversation is a really good one where we're partnering with them. That's not explicitly AI, but it is software delivered in a connected vehicle case, which is good. So I would say we will be more than open to partnering with -- but first and foremost, we want to find the use cases and the problems that are most impacting the current customers we have and really go hard at the hoop to solve those. And we'll do that with our own capital, our own innovation. We can do it through potentially capabilities through acquisition and/or partnership.

And I am showing no further questions in the queue. This concludes today's conference call, and thank you for participating, and you may now disconnect.

Okay. Great. Good afternoon, everyone. I'm Pat Ennis. I'm on the Payments Processors and Fintech team. Happy to have Verra Mobility joining at the UBS Tech and AI Conference today.

On stage with me, we have David Roberts, President and CEO; and Craig Conti, CFO. So thanks for being here, guys.

Thank you.

So to start, for those who may not be familiar with the Verra Mobility story, I think it would be helpful for David to provide or give an overview of the different segments of the business, the high-level secular trends in the verticals the company operates in and the competitive landscape.

Sure. Great to be here. Craig and I both live about 15 minutes from here. So it's nice to have a drive to work or morning's conference to have travel. So Verra Mobility is a global leader in smart transportation, and that effectively shows up in 3 different customer segments.

The first one is Government Solutions, where we are the #1 provider of automated enforcement technology in North America. That includes things like red light cameras, speed cameras, school bus stop-arm cameras, bus lane cameras and even a couple of more use cases other than that. Principally, that business operates here in the United States, where we have an approximately 70% market share. And then we also operate in Australia, New Zealand and in Europe.

Our primary customer is local cities and municipalities who want to change the trajectory of safety on their roads, and they use automated technology as one of the tools in their toolkit to do so. And that represents, call it, roughly 45-ish percent of our total business. We also -- our next business is commercial services, where we're the #1 provider of toll management solutions for commercial fleets in the United States.

That mostly shows up as rental cars. So if you are ever on a business trip and you rent a car from Hertz or Avis our Enterprise and you see that box up on the screen -- on the wind screen, that's us. So everything related to that program is effectively outsourced to Verra Mobility, where we are connected to all of the toll authorities. We pay on their behalf. We collect payment on behalf of the rental car payment. So everything effectively for that, the call center, everything is outsourced to us.

We also work with fleet management companies, who offer those services to their corporate clients. That business is mostly North American, but we also operate a little bit in Europe. We can talk about that in terms of growth a bit later.

And then our third segment is our Parking segment, which is an asset we bought about 5 years ago now called T2, where they work with universities and municipalities on their parking. So that shows up as permits and enforcements sort of an ERP software platform as well as hardware, meaning pay stations as well as what we call par parks, which is parking access. So those are the gates and the payments that move gates up on parking lots. So that's kind of the shape of the business.

Okay. Great. I appreciate all that detail. And so I think next, maybe we'll jump into the Government Solutions segment. So at Q3 results, you provided a multiyear Government Solutions total revenue outlook calling for a 10% to 12% CAGR over '24 to '27, and then high single-digit percent service revenue growth in 2028 and beyond.

You've also provided your projection for NYC revenue from this outlook. Can you talk about what assumptions underpin your revenue outlook for NYC and the rest of the Government Solutions business portfolio?

Yes, sure. I mean we're really excited about the progression that we have here. So we did announce New York City, their intention to renew. We're still going through the final contract here. This $963 million. That's a 5-year deal with a 5-year option to renew. We've had that -- we've had New York City as a customer for a long time. We're very proud to have that.

And when you think about the shape of that contract, there's a 1,000 camera expansion in there, and there's also some things that we're doing that we didn't do before. So some nice revenue growth in the contract. When you look at the Government Solutions business outside of -- and I don't want to hit on any of your other questions.

I'm sure you've got a few more. But outside of New York City, continuing to see really strong growth there. We're going to have a year this year where we'll have high single-digit growth in service. I expect that for the next 2 or 3 years, high single-digit, low double-digit growth as we've continued to expand the TAM, and we've continued to penetrate existing states with new modalities. We're very excited about our growth. And I think that growth trend is durable for the medium term.

Definitely. And so I mean, I guess taking a step back then and looking at the opportunity set, and you touched on this a little bit, but can you give us an update of where you are versus the 21 original states that had automated enforcement at the time you went public?

Yes. So if you go back to when I joined the company over 11 years ago, it was -- I think it was a little less than 21, but automated enforcement was still sort of catching on from a state legislature support perspective. We now have authorized legislation in 36 states. So that includes not only just red light camera, but speed, school bus and some of the others as well.

Okay. Great. Perfect. And so I guess, segueing to the Commercial Services segment. Similarly, your preliminary outlook is expecting the commercial services revenue growth to be roughly mid-single digits versus the high end of mid-single digits in 2025. Can you recap the assumptions for that growth outlook and what cadence we should think about next year, especially exiting '26?

Yes. So I think probably a good place to start with that is how does the commercial service business grow, right? So David kind of walked through what our major customers are and a lot of that market that we participate in. And the way I like to think of it simply is 1/3, 1/3, 1/3. That's the growth algorithm. So 1/3 is, call it, GDP-ish travel growth, especially in the United States. Another 1/3 are what I would call classic growth initiatives. So those are things that we can allocate capital to and grow, things like our fleet business, our footprint in Europe.

That's the second 1/3, if you will. And then the remaining 1/3 are the secular tailwinds, which is the addition of toll roads in the United States of America, so 20 new toll roads over the last year have been added in the United States of America. That's about the run rate per year. So added toll roads is a tailwind to the company. And then the continued transition to cashless toll roads in the United States. We're about 70% to 75% penetrated with obviously, the balance to go.

And as roads go from barrier-based to cashless toll roads, the adoption of our product goes up as a convenience to the customer. So if you take those and you take any growth rate we talk about for commercial services, it's coming from those 3 components, okay? So now let me -- that's the backdrop. Let me answer your question specifically.

I expect mid-single-digit growth next year because I think travel is probably going to be a little lower than what would be, call it, the normal run rate of GDP in the U.S. So if the normal GDP growth is 2%, I expect travel to be about 1%. And here's how I got that number. That's pretty much where we are year-to-date in 2025. So there's been a lot of talk in the industry.

And I always say, especially at these conferences is if you're looking for a leading indicator for the commercial services business, you'd always look to travel and the folks who have the best view of that are certainly the airlines. So a lot of what I'm going to tell you is what I hear from the airlines, they have forward booking data that's pretty good.

But as I look at where we were in the last 3 months with the government shutdown and how that was going to impact the airlines, it's kind of worked itself out at this point, and we're about 0.5% to 1% growth overall year-to-date, almost all the way through 2025. I simply took that growth rate, put it in 2026 and then built from there, that's how we get to mid-single-digit growth.

Okay. I appreciate it. Those building blocks are great. I mean where do you see the kind of long-term growth of this business today? I mean I know you just walked through kind of those 1/3, 1/3, 1/3, but does that growth algorithm by component outside of maybe GDP or the secular tailwinds that -- do you see that changing materially at all? Or mid-single digits is kind of the way to look at it?

I think it's between mid and high. I really think it's between mid and high. So if -- and the swing factor there would probably be to the degree that travel increases faster in the United States, particularly in the United States, you would see our growth rate go higher. But everything I know now tells me it feels more like mid.

Okay. Perfect. And then I know we just touched on this briefly, but maybe you could offer a little bit more specifics on just like how the government shutdown and the FAA impacts -- impacted your business, specifically within the Commercial Services segment?

Yes. It wasn't a lot. So what I'm going to say since it didn't happen for a very long time is a little more qualitative. But what we saw was the rental volume stayed pretty constant. And I think that the assumption is when you have a short-term disruption in airline travel, folks will still take the trip and maybe they'll drive, right now, I don't think that would be the same thing if the government shutdown went on for 6 months. But in the little nanosecond that we had, we did not see a super material pullback on the rental car side of the house in terms of volume.

Okay. Great. And then last year at the conference, you had mentioned the Avis Budget contract renewal comes up in Q4 '25. Can you share any updates on that renewal? Are there important RFPs or renewals coming up over the next year or so as well?

We're -- we don't talk much about it, but we're in active discussions with Avis Budget currently. The next one to come up is enterprise, which is toward the end of next year.

Okay. Perfect. And then moving on, kind of we've talked about the segment level preliminary outlook. But for 2026, putting it all together, you've provided kind of the outlook for mid-single-digit revenue growth with -- in Commercial Services, high single digits in Government Solutions and low single digits to mid-single digits in the Parking segment. What are some of the biggest variables in this outlook?

I feel pretty good about that outlook. I think we have a good view of Government Solutions, a little bit longer cycle of the business, where just for anybody who may be newer to the story, when we win a new deal and we put that forth as this is now in our backlog as annual recurring revenue, between the time that we make that determination, we get what's called a notice to proceed on the deal versus when it actually shows up in revenue is anywhere from 12 to 18 months, right?

So that gives us a little bit more surety at least on the top line. When I look at the Parking Solutions business or T2, I feel pretty good about that. The business has grown this year. They've hit their plan. I think they're executing really well. There's always variability on the commercial side of the house. I mean, and that has a lot to do with -- we are a net taker of some of that revenue. People need to come through TSA and come up to the rental counter for our business to begin. So to the degree that you see ebbs and flows there in the American consumer, that will impact our business. But today, how we said it on the third quarter call is kind of how we see it.

Okay. Perfect. And then the adjusted EBITDA margin, that's expected to decline by roughly 250 to 300 basis points next year. Can you recap the drivers for us and help us understand kind of what are onetime items versus persisting?

Yes, sure. I think they're declining...

Declining...

Sorry, sorry, did I say decline.

If anybody is taking...

We like what you...

Everybody's taking notes -- so for 250 basis points, that's right. So a couple of things. #1, I think on the positive side, we did an ERP transition that's mostly behind us. So we won't be spending that next year. Then also, we have kind of a dichotomy in our company, where we have one business with a higher margin profile than the other that's favoring CS.

GS is going to grow a little faster. So I've got a portfolio impact that is kind of negative. So it offsets that goodness we get from cost. But I think the biggest piece really is the renewal of New York City. And if you think about the renewal of New York City, I think about it in kind of 4 components, and you have to know all 4, I think, for it to make sense.

So we hadn't bid this contract publicly for -- well, not publicly at all for almost 10 years. So there was price discovery and there's different prices in the market now than we were at that time. So there was a price rationalization that was negative to call it the EBITDA margin percent. What we also -- there's an expansion. There's a 1,000 camera expansion that's positive EBITDA dollars over the life of the deal.

And there's also new things, new scope in the contract, things that we didn't charge for previously that now are done not at cost but at margin. So that was positive. If you added all those up on the EBITDA dollar side, it's slightly positive, right? I feel good about that. Well, the other piece of this, and we've been very consistent and the customer has been very consistent that there's a requirement for minority and women-owned businesses.

And that is going to be about a $20 million to $25 million investment per year by the company. So in other words, that's work we used to do in-house that now we do through a third party just to adhere to the contract. That's going to cause a margin step back in Government Solutions, which is what's hitting the overall company. Now that's a onetime thing. I mean it finds a new level, and then, of course, we expect to grow from there.

And to that point, growing from there, margins in 2027, is there any expectation off of that '26 base?

Yes. And I'll do this. I'm not going to do it for the total company level, but I'll do it for Government Solutions because we did kick that out publicly. I think we'll grow Government Solutions margins anywhere from 1 point to 1.5 points per year compounded out through 2028. I think that business, that government business is a high 20s, 30% margin business by the time we're done in the next couple of years.

Okay. Great. Perfect. And segueing here to -- maybe before we go into some capital allocation thoughts. just new wins and opportunities. In terms of new wins, the company called out an automated photo enforcement pilot win in San Jose in Q3. Any updates on how this pilot is going? What metrics municipalities are monitoring during the pilot?

Yes. So that's part of sort of a broader California strategy where we've been working with local legislators to do a couple of things. 1 is to introduce school zone speed, which they did not have previously in the state of California. They now are doing a pilot in 6 cities. The 3 that have RFPs, we have won all 3 at this point, which includes San Jose.

That's early days, so no real numbers. But what they're going to look at is the efficacy of the program or is there a reduction in speeding in school zones and a reduction of citations and/or critical accidents. The other part of the California strategy is also fixing the former red light legislation, which was a little bit onerous for both the DMV and the government as well as for the citizens, and that's been fixed. We expect that will have some growth. Ultimately, big picture, we'd love to see California embrace school zone speed and school bus enforcement across the entire state, which is our objective.

Okay. Awesome. Appreciate you hitting on that. And then I guess longer term, just one, with -- we were talking before coming on here about Waymo and some automated vehicles. I mean, how do you see that impacting the business longer term if you see greater adoption of those types of vehicles?

Yes. Currently, they're really -- it's such a small thing. The statistic I like to share is that there's 230 million or 240 million personally owned passenger vehicles in the United States, none of which are autonomous. If you were to look at the fleet size of Waymo here in Phoenix, I think it's around 500 vehicles. So we're sort of -- it's a bit of a pebble in the ocean at this point.

Longer term, and when I say longer term, that's 20 years from now, I think there'll be a sea change of what that means. It's probably less of the fact that there's a Waymo or the Tesla version of that, which I can't -- cybercab or whatever the name is [indiscernible] excuse me. It's going to be more of the vehicle's ability to self-drive itself. The people would own a vehicle that it can also self-drive. But that doesn't necessarily mean it's going to abide by the speed limit or avoid a school zone or things like that.

So I think for the midterm, so the next 10 years, it's not something that we see as a major impact to our business. It's certainly something we're keeping an eye on. We're actually looking for ways to partner with Waymo and others on some of those things.

Okay. Perfect. And I imagine for tolls, that would still be involved if cars are automated cars, that would be.

I don't think toll roads are definitely not going anywhere. And if you want -- I don't know, if this is in your script, but we just announced a partnership with Stellantis, where we've embedded our tolling technology inside Stellantis vehicles so that people can actually pay for a toll from their vehicle versus having a transponder.

Okay. Makes sense. Perfect. And then -- so I mean, I guess, diving into capital allocation, you've increased the buyback authorization by roughly $150 million to a total of $250 million available through November 2026. I believe you've made no repurchases year-to-date through Q3. Is the increase in that authorization a more definitive signal you're likely to meaningfully ramp up share repurchases in the coming quarters?

No, I think it was just that what we've always said is that our first priority is to invest in the business, which we've done, if you look at the investments we've made, in particular, in our government business, which are starting to bear fruit.

We're always -- we have always maintained an active M&A posture to look for areas that we can expand our growth horizon through highly adjacent and complementary assets. We just haven't found one that meet our criteria, whether it's strategic or financial. So with that, we've shown a pretty strong history of returning capital via share repurchases over the time we've been public.

So this was -- we're effectively arguably underlevered at this point, where we're sitting right at about 2x, I think. So it was an indication of, 1, that the strong cash flow generation capability of the company, our belief that where our shares are currently trading, this is a really good purchase for us because we think they're undervalued. And I think it certainly is -- I don't know that it's a signal to the future, but it's very consistent with the past of how we've treated our capital allocation.

Okay. Perfect. And I guess just expanding on that a little bit. You mentioned kind of that net leverage being maybe below where you've been in the past. Could you walk through how you think about prioritization over the next 12 to 18 months between organic investment, M&A, -- we hit on buybacks a little bit and then just debt repayment, especially in this kind of more benign interest rate environment?

I would say, first and foremost, invest in the business you have. We have a great portfolio of businesses. We want to see them continue to grow and have run rate. So we'll continue to do that, especially on the technology side. Part 2 would be, as I mentioned before, M&A. I think we've -- I think the markets have given us a lot of feedback on how we think about leverage.

So I think our M&A is going to be pretty tight to adjacencies that fit. We don't want to go too high on our leverage. So we want to stay in that probably max 3, 3.5x on any sort of deal. But the business does delever very quickly. But in lieu of that, I think share repurchases, we generate a lot of cash. We could consider restructuring our debt, but we just did a great -- we just did that earlier this year in terms of the term loan and everything else. So I think we're in a really good position on our balance sheet. You want to add to that?

Yes. The only thing I would add to that, Pat, is when we were on stage last year, we said the same thing, and I want to make sure we're consistent because this is really how David and I run the railroad is we commensize our cash flows. We commonize our cash flows. We know exactly I have a covenant-light term loan B, I can prepay at my option. I know what my tax rate is. I know what the return on that dollar out the door is.

This is after we fund everything internally, by the way, with the excess cash flow. The second thing we can do is buy back shares. We have a very live view of the intrinsic value of the company. We know where the screen is at. I have an open authorization. That's another common sized cash flow. Then the third thing is on M&A with the leverage kind of governors that David just talked about is we look at the free cash flow of the deal back at the whack and I compare it, pick the highest one.

That's what we've done. And I would say to anybody researching the company every quarter, we put out an investor presentation after earnings that has a wheel in it that says, here's how we've allocated capital for the last 5 years or last 6 years. And that wheel, each piece of that pie is relatively large because we've done all 3 at different times in the market. So we've paid down over $200 million worth of debt since we went public. We've bought back over $0.5 billion worth of shares, and we've done some pretty marquee deals.

So we keep that live and given the free cash flow generation of the company, which has remained healthy even through our Government Solutions growth cycle here that we're in, we get the opportunity to make that decision every 60 days. We take it really seriously.

And on that, I mean, you touched a little bit on this, but just in terms of M&A, I don't think you've made an acquisition since T2 in December '21. That's right. Is there any update on how the company sees the M&A pipeline at the moment? What parts of the business are you looking to enhance maybe with M&A versus organic?

I think we're sort of -- I don't know that we -- some of this is about what's available to in the market. I mean we have a pretty strict screening criteria. Us not closing a deal doesn't mean that we haven't been remarkably active in M&A. If you looked at the last 10 deals that we went pretty far in a process, 9 of them did not transact. And the reason was for the same reason we walked away, which was price.

So the market still has, I think, an elevated view of itself related to valuation. And so we're not in a hurry. We can be very, very patient and we can continue to buy shares, pay down debt or invest in our own business. So -- but there's also things in -- there's areas of technology and camera technology that we've been really interested in, in terms of the innovation around AI and the capabilities of multiuse cameras at the roadside. So those are kind of -- that's an example of some of the areas that we're looking at.

Okay. Great. And we still have some time left, but just given the audience participation here, I just thought I'd open it up just in case I still have a few questions...

From both of you.

Either way. So I had a few more questions just as it related to the NYC Department of Transportation contract costs. I know you mentioned some of the kind of these onetime readiness investments and then also maybe some of the minority-owned subcontractor costs. But within the minority-owned subcontractor costs, the onetime readiness investments for this contract, one of the cost headwinds was the requirement that at least 30%, I believe, of the total contract is invested in minority and women-owned subcontractors.

The company noted that outside of New York City, only a few major metropolitan areas have the same level of requirements around the use of, example, minority women-owned businesses. But as the company notes, as you noted, they tend to do better in larger municipalities. So as far as you're aware, what other large metropolitan areas that the company aims to work with might have similar requirements here or something down the line that...

New York is very unique. It was a very high percentage and it's a fixed based upon the amount of revenue. That's -- I don't know anyone that does -- that's the only one I know of that has done that so far. But if you look at San Francisco, there is a requirement significantly less as a percentage. But you're going to -- you'll probably see California probably have a bit of that. But I would not say it is industry standard, but it was certainly very important to the city of New York.

Okay. Understood. And I guess on -- we talked about margins a little bit and some of these onetime readiness, but do you expect a similar level of investments for all large-scale projects similar to kind of the NYC contract -- or is the company able to do.

We've already made -- I mean, we talked about a platform called MOSAIC, that's effectively the investment for all other customers. New York is -- it's very unique. It's -- there's no other customer like it. So you really treat it as its own business to some extent because it's so large. They have over 3,000 installed cameras. I think our next largest customer is several hundred. So it's a big -- pretty big magnitude and just the size and scale of the program and the location of it. So you just have to think of it a little bit differently.

Okay. And then last question here. Just expanding TAM. We know legislative decisions are very impactful to the TAM expansion of the business. We talked about California a little bit in those positive legislative changes. Is there any new legislative changes throughout Q4 to call anything you expect on the horizon to come to kind of.

I don't -- most legislatures are relatively quiet this time of the year. They tend to pick up in January and the spring for the most part. I don't see any material change one way or the other. We did -- we released a statement related to Ontario, and they -- we canceled the program there based upon legislative -- they no longer wanted the program, so they shut it down, and we issued a release around that, which was disappointing.

There was quite a few citizens that didn't really like the cameras there. They were actually literally chopping them down. And given that it was our CapEx and the Premier was no longer interested, we decided to pull out. But other than that, that's the only sort of negative one that we could talk to right now.

Yes. Understood. So I mean, we're about at time here. So I really appreciate you both being on stage and being a big part of our conference.

Yes. Thank you for having us. Appreciate it.

Appreciate it. Thank you.

Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's Third Quarter 2025 Earnings Conference Call. My name is Towanda, and I will be your conference operator today. This call is being recorded. [Operator Instructions]

I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please go ahead, Mr. Zindler.

Thank you. Good afternoon, and welcome to Verra Mobility's Third Quarter 2025 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com.

With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A.

Management may make forward-looking statements during the call regarding future events and expectations, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for our cautionary note on forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we do not undertake any obligation to update forward-looking statements.

Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, quarterly earnings presentation, and investor presentation, all of which can be found on our website at ir.verramobility.com.

With that, I'll turn the call over to David.

Thank you, Mark, and thanks, everyone, for joining us. Before I dive into our consolidated financial results, I'll start with an update on our automated photo enforcement contract with the New York City Department of Transportation, which will help contextualize our third quarter financial performance and our revised guidance for the year. We are actively working with the New York City Department of Transportation to finalize the new automated enforcement contract, which was announced at the end of March 2025. As we work to finalize the new contract, we are now in a position to share the key financial expectations.

We expect that the new contract will have a 5-year term, with an option for a 5-year renewal and an estimated total contract value of $963 million. We expect annual service revenue to grow from about $135 million in 2024, to a range of $165 million to $185 million by 2027. Furthermore, the New York City Department of Transportation has elected to purchase its own equipment, which is expected to add $20 million to $30 million in product revenue in both 2026 and 2027. Craig will cover additional financial details in his prepared remarks.

In parallel with working to finalize the new contract, the New York City Department of Transportation has instructed Verra Mobility through a change order process to install up to 250 red-light cameras by year-end 2025, as a part of the legislatively authorized expansion. The new red-light cameras are expected to generate approximately $30 million of revenue in 2025, of which about $10 million is expected to be product revenue and $20 million is expected to be installation services revenue.

The red-light camera expansion program started in the third quarter, and consequently, we generated $17 million of revenue in conjunction with the red-light camera installations in the third quarter, of which approximately $6 million was product revenue and about $11 million with installation services revenue.

We look forward to continuing to serve the New York City Department of Transportation and the citizen safety priorities of Vision Zero. This program has been demonstrated to improve safety on New York City's roads as evidenced by the data showing reduction in crashes and fatalities. Based on 2024 reports published by the New York City Department of Transportation, daily violations at speed camera locations have decreased 94% since the start of the program in 2014. Additionally, the average daily number of red-light running violations issued at camera locations has declined by 73% since the program began in 1994. We look forward to continuing to support New York City's safety mission. The contract is strategically important, and we believe a source of long-term value creation for Verra Mobility.

Shifting now to our third quarter consolidated financials, we delivered a strong quarter with all of our key financial measures ahead of our internal expectations. Total revenue for the quarter increased 16% over the same period last year to $262 million, with all three business segments meeting or exceeding their respective internal plan. The aforementioned New York City red-light expansion change order was a key catalyst contributing $17 million of revenue for the quarter. Moreover, adjusted EPS increased 16% over the prior year period, driven by our operating performance, prior period share repurchases, and the reduction in our interest rate on our term loan debt.

Moving on to segment level financials. Commercial Services third quarter revenue and segment profit increased about 7%, respectively, over the prior year period. Rental Car or RAC tolling increased 7% over the prior year period, driven by increased travel volume and product adoption as well as higher tolling activity compared to the third quarter of last year. The growth in RAC tolling was partially offset by a decline in fleet management revenue of about 3% compared to the third quarter of 2024, due to the customer churn that we had discussed on our second quarter earnings call.

Next, moving on to the macro environment and the implications for our Commercial Services business. As we discussed on our second quarter earnings call, travel demand stabilized and grew modestly in Q3 over the prior year quarter. Third quarter TSA volume increased about 1% over the third quarter of last year, and year-to-date TSA volume is about the same as 2024. Based on the commentary from the major airlines, we anticipate solid fourth quarter travel demand at levels slightly ahead of our guidance provided during our second quarter earnings call.

Moving on to Government Solutions. Total revenue increased 28% over the third quarter of 2024. Total revenue from New York City, our largest government solutions customer, increased 46% over the third quarter of 2024, driven by the new red-light camera installations. Additionally, service revenue increased 11% outside of New York City driven by expansion from existing customers and new cities implementing photo enforcement programs. International product sales increased $4 million over the third quarter of 2024, rounding out the year-over-year growth in revenue.

Next, I'd like to highlight two important pieces of legislation that were passed during the quarter. First, California passed a work zone speed pilot that is expected to deploy up to 35 camera-based systems on state highway construction or maintenance areas. California also reformed its red-light camera enforcement program by shifting the violation from criminal to civil, reducing the fine amount and using certain program operating requirements. These reforms bring California's program more in line with other state safety programs, and we believe they will create additional positive momentum for automated enforcement. We estimate that these two legislative authorizations add an incremental $140 million in total addressable market, the majority of which is driven by the red-light camera reforms and the legislation. This additional addressable market opportunity increases our incremental TAM to approximately $365 million, with the potential to expand to $500 million if California passes additional enabling legislation.

Contracted bookings in Government Solutions continued to be a source of strength in the third quarter. We entered into bookings of about $14 million of incremental annual recurring revenue based on a full run rate, bringing the trailing 12 months total to about $51 million. Notable third quarter bookings include a school bus stop-arm program in Seattle, Washington, a speed program in Phoenix, Arizona, expansion of the school zone speed program in Auburn, Washington, and a new red-light safety program in Modesto, California.

Additionally, subsequent to the end of the quarter, we were notified by San Jose, California, of the intent to award the City's Speed Safety Program to Verra Mobility. We are incredibly honored to partner with the City of San Jose to bring this critical safety technology to the community. This award marks our third California Speed Enforcement Award, following San Francisco and Oakland. We anticipate the three remaining pilot cities, Los Angeles, Glendale and Long Beach to launch their respective procurements over the next several quarters.

We're pleased to report that the San Francisco speed pilot program is demonstrating its intended effects. Through the first 4 months of operations, a San Francisco Municipal Transportation Agency study that tracks vehicle speeds along 15 of the corridors, where the cameras have been installed on an average 72% reduction in speeding, based on data captured before and after the cameras went into effect.

Moving on to T2 Systems, our Parking Solutions business, total revenue increased about 7% for the quarter, driven by a 3% increase in SaaS and services revenue, and a 30% or $1 million increase in product revenue, and these results were in line with our internal expectations.

Moving on to our full year outlook. We are increasing our full year 2025 revenue guidance driven by the New York City red-light camera expansion. We expect this expansion will generate an incremental $30 million of total revenue this year. Additionally, note that our expectations for the remainder of the business remain unchanged as we believe the market for automated enforcement is strong, our Parking business turnaround is ahead of our internal plan, and we expect stable travel demand.

Today, we're also going to provide a preliminary outlook for 2026. As you may recall, our 2025 guidance to date assume New York City revenue would be flat in 2025 compared to 2024. Our outlook assumes that our new contract with New York City is effective in January 2026. Driven by the change order to our existing contract and the red-light camera installation shifting from 2026 into 2025, we expect total consolidated revenue to moderate to mid-single digit growth in 2026.

At the segment level, we anticipate Government Solutions growing high single digits on strong service revenue. Additionally, we expect Commercial Services to grow mid-single digits on modest TSA volume growth combined with the impact of the customer churn we discussed in the second quarter of this year, which impacts FMC revenue through the first half of 2026. Finally, T2 is expected to grow low to mid-single digits next year on moderate SaaS and equipment sales growth.

Additionally, we expect adjusted EBITDA margins to decline 250 to 300 basis points on portfolio mix and impacts from the New York City renewal contract. Craig is going to walk through this detail along with the path to margin expansion as we capitalize on the growth opportunities and cost reduction initiatives currently underway across our businesses.

In my view, 2026 represents a year of transition between the investments made in the business over the past 2 years and the benefits we expect to realize. Over a multiyear period, beginning in 2027, we are poised to deliver strong growth and margin expansion, driven in large part by the growth in forward momentum in Government Solutions and our ability to execute at scale that business -- as well as the continued growth opportunity in commercial services and T2.

Moving on to capital allocation. Due to the conviction in our long-term growth outlook and margin expansion initiatives, our Board of Directors authorized a $150 million increase to our existing stock repurchase program that is available through November of 2026. This brings the available repurchase authorization to $250 million and we expect to commence the buyback in the near term, subject to market conditions and other factors.

Craig, I'll turn it over to you to guide us through our financial results, the New York City contract update, our revised 2025 financial outlook, and our preliminary perspectives for 2026.

Thank you, David, and hello, everyone. We appreciate you joining us on the call today.

We'll turn to Slide 4, which outlines the key financial measures from the consolidated business for the third quarter. Our Q3 performance, which included 12% service revenue growth and 16% total revenue growth year-over-year exceeded our internal expectations. Service revenue growth, which consists primarily of recurring revenue, was driven by the change order for New York City red-light expansion program and service revenue growth outside of New York City in the Government Solutions business as well as increased revenue from RAC tolling and European operations in the Commercial Services business.

At the segment level, Government Solutions service revenue grew 19% year-over-year. Commercial Services revenue increased by 7% over the prior year. In T2 Systems SaaS and services revenue increased 3% compared to the third quarter of 2024. Total product revenue was about $19 million for the quarter, Government Solutions contributed roughly $14 million with $6 million coming from the New York City red-light expansion and $8 million from international product sales. T2 delivered about $4 million in product sales overall for the quarter. On the profitability side, our consolidated adjusted EBITDA for the quarter was $113 million, an increase of approximately 8% versus the same period last year.

We reported net income of $47 million for the quarter, including a tax provision of about $18 million, representing an effective tax rate of approximately 28%.

GAAP diluted EPS was $0.29 per share for the third quarter of 2025, compared to $0.21 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items was $0.37 per share for the third quarter of this year compared to $0.32 per share in the third quarter of 2024, representing 16% year-over-year growth. The adjusted EPS growth was driven by the increase in adjusted EBITDA, a sustained reduction in interest expense driven by our prior year debt repricing efforts and our share repurchases in 2024.

Cash flows provided by operating activity totaled $78 million, and we delivered $49 million of free cash flow for the quarter, in line with our internal expectations.

Turning to Slide 5, we generated $416 million of adjusted EBITDA on approximately $943 million of revenue for the trailing 12 months, representing a 44% adjusted EBITDA margin. Additionally, we generated $153 million of free cash flow or a 37% conversion of adjusted EBITDA over the trailing 12 months.

Next, I'll walk through the third quarter performance in each of our three business segments, beginning with Commercial Services on Slide 6. CS year-over-year revenue growth was 7% in the third quarter. RAC tolling revenue increased 7% or about $5 million over the same period last year, driven by increased product adoption and tolling activity, which benefited from a 1% increase in U.S. travel volume over the prior year quarter. Our FMC business declined 3% or about $500,000 year-over-year, driven by prior period customer churn. Additionally, our European operations contributed $2 million of growth compared to the third quarter of 2024.

Commercial Services segment profit increased 7% over the prior year, representing a 67% segment profit margin. The margin improvement was largely driven by operating leverage created by improved travel volume and increased product adoption.

Turning to Slide 7, Government Solutions saw strong service revenue growth in the quarter, driven by $11 million of installation service for the new red-light camera expansion in New York City as well as 11% service growth outside of New York City. The growth was broad-based across all customer use cases with particular strength in speed, bus lane and school bus stop-arm enforcement programs. Total revenue grew 28% over the prior year quarter, benefiting from about $14 million in product sales, of which $6 million were generated from New York City red-light camera sales and $8 million from international product sales. In total, product sales increased by $9 million over the same period last year.

Government Solutions segment profit was $31 million for the quarter, representing margins of approximately 26% compared to 29% in the prior year period. The reduction in margins versus prior year was primarily due to readiness investments made to prepare the company for execution on the pending New York City contract.

Let's turn to Slide 8 for a view of the results of T2 Systems. We generated revenue of $22 million and segment profit of approximately $4 million for the quarter. SaaS and Services sales increased 3% compared to the prior year, while product revenue increased 30% or $1 million, compared to the third quarter of 2024. Included within SaaS and services, recurring SaaS revenue increased low single digits compared to the third quarter of 2024.

Let's turn to Slide 9 for a view of the balance sheet and take a look at net leverage. We ended the quarter with a net debt balance of $843 million, which reflects the strong free cash flow we generated over the first 9 months of the year. Net leverage landed at 2x, and we've maintained significant liquidity with our newly expanded $150 million undrawn credit revolver. Our gross debt balance at year-end stands at about $1 billion, of which approximately $690 million is floating rate debt.

Subsequent to the end of the quarter, we executed a successful refinancing of both our ABL revolver and our term loan. The market for institutional debt is strong relative to recent historical levels, so we took action well in advance of our term loan going current. We increased the revolver limit from $125 million to $150 million and also added an accordion feature to provide an additional $75 million of liquidity if ever needed in the future, resulting in a potential limit of $225 million. Additionally, the maturity of the revolver was extended 5 years to October of 2030. Given the current favorable institutional debt market conditions, we proactively refinanced our term loan on extending the maturity 7 years to October of 2032, and lowered the interest spread by 25 basis points to 2% flat.

Now let's turn to Slide 10, and have a look at full year 2025 guidance. Based on our year-to-date results and our outlook for the fourth quarter, we are increasing full year 2025 revenue guidance and affirming all other guidance measures. As David discussed, New York City has authorized the installation of up to 250 additional red-light cameras in 2025 under our existing contract, which is expected to deliver about $30 million of revenue, of which about $10 million is expected to be product revenue and $20 million is expected to be installation service. The adjusted EBITDA generated from these camera sales is expected to be offset by onetime readiness investments to support the new contract requirements in New York City. The readiness investments include the development of a world-class real-time camera health dashboard, cloud migration activities for certain legacy data, and minority and women-owned business enterprise subcontractor ramp-up costs. As a result of these investments, we are not increasing adjusted EPS or free cash flow guidance for the balance of 2025.

Excluding the New York City camera installations, our perspective on guidance remains unchanged. The updated full year 2025 guidance ranges are as follows: we now expect total revenue in the range of $955 million to $965 million, representing approximately 9% growth at the midpoint of guidance over 2024. The remainder of the financial guidance remains unchanged and is as follows: we expect adjusted EBITDA in the range of $410 million to $420 million, representing approximately 3% growth at the midpoint over 2024. We anticipate an adjusted EPS range of $1.30 to $1.35 per share. Free cash flow is expected to be in the range of $175 million to $185 million, representing a conversion rate in the mid- to low -- low to mid-40th percentile of adjusted EBITDA.

Moving on to the segment level. Government Solutions is expected to generate low to mid-teens total revenue growth for 2025, driven by the new camera installations for New York City, along with the expansion of camera installations with existing customers and new customers awarded in prior quarters. We continue to anticipate that Parking Solutions revenue will be about flat with 2024 levels. We expect SaaS revenue to grow low single digits, offset by a decline in installation of professional service revenue on roughly flat product sales.

Based on assumption that travel volume will be only slightly elevated in 2025 compared with 2024, we anticipate Commercial Services growing at the high end of mid-single digits. We anticipate CS revenue, adjusted EBITDA and margins to decline sequentially in the fourth quarter, consistent with historical norms based on travel trends.

Our key assumptions supporting our adjusted EPS and free cash flow outlook can be found on Slide 11.

Turning now to Slide 12. I wanted to share the key financial assumptions for the New York City contract, we're in the process of finalizing, along with some updated perspective on the overall Government Solutions business. On March 31 of this year, New York City announced that Verra Mobility was selected as the vendor for their automated enforcement program with an initial term of 5 years with a 5-year extension option. The estimated total contract value for the first 5 years is $963 million, and we are currently in final contract negotiations with New York. We anticipate that New York City will again purchase its own equipment from Verra Mobility with all installation and relocation services included in service revenue and additive to the scope of the contract relative to our existing contract.

We expect to sell and install about 1,000 incremental new red-light and fixed bus lane cameras over the next 2-plus years. New York City service revenue is expected to grow high single to low double digits through 2027, then to level off in 2028 and beyond. New York City product sales post-2027 are expected to be less than $5 million per year.

Total Government Solutions service revenue is expected to grow high single to low double digits over the next several years, leveling at the low end of high single digits, following the completion of the New York City installations.

And lastly, Government Solutions segment profit margins are expected to dip in 2026, to the low to mid-20% range on repricing and primarily due to the contract requirement that at least 30% of the total contract value was invested in minority and women-owned subcontractors. We anticipate that beginning in 2027, productivity improvements and platform consolidation will drive margin expansion and approach 30% in 2028 and beyond.

Now let's move on to a brief review of how we expect 2026 will play out, incorporating preliminary estimates for commercial services in T2 on Slide 13. I'll remind you that our annual operating plan is not yet complete, so these estimates may change. At the consolidated level, due to the New York City red-light camera installations shifting forward into 2025, we're anticipating mid-single-digit revenue growth overall in 2026. Additionally, we're anticipating a 250 to 300 basis point reduction in adjusted EBITDA margins due to a combination of portfolio mix in the New York City renewal contract, partially offset by a year-over-year reduction in ERP implementation costs.

Let me drill down a layer on both of these items. First, on the portfolio mix. This is simply the impact of Government Solutions outpacing Commercial Services growth, which has an approximate 25 basis point impact on consolidated adjusted EBITDA margins. More importantly, the New York City renewal contract is expected to result in an approximate 250 to 300 basis point decline in margins, driven by service pricing changes established through the competitive procurement process in the minority and women-owned subcontractor requirements.

Adjusted EPS is expected to increase low to mid-single digits year-over-year despite the investment in ramp-up costs in Government Solutions, largely due to the expanded stock repurchase plan announced today.

Rounding out the business segments. We expect Commercial Services to grow mid-single digits due to our expectation that TSA volume will grow approximately 1% to 2% over 2025, just as it has year-to-date, so far this year. Additionally, we expect the fleet business growth to moderate to low single digits due to the prior period churn in our FMC business, which will anniversary in the second quarter of 2026. Segment profit margins for Commercial Services are expected to be up about 25 to 50 basis points due to volume leverage and the reduction of the ERP spend in 2026. Finally, we anticipate that T2 Systems will grow low to mid-single digits with segment profit margins up 50 to 100 basis points over 2025.

Looking out beyond 2026, we expect that the Government Solutions platform consolidation that we've discussed over the past several quarters will be a catalyst for margin expansion and general productivity enhancements in 2027 and beyond. This platform, which is highlighted on Slide 14, is an IT initiative to deploy our latest smart mobility platform, termed MOSAIC, internally. MOSAIC is a cloud-based, fully secured application intended to streamline the end-to-end processing of traffic incident events. The platform is expected to provide numerous benefits such as flexible architecture that improves project deployment pipelines, enhanced automation processing, and other productivity improvements and operating efficiencies, and as such, is expected to be a key driver of Government Solutions margin expansion in 2027 and beyond.

As David discussed, our Board authorized the expansion of our existing stock buyback plan by an incremental $150 million, bringing the total authorization up to $250 million. We expect to commence the stock repurchases in the near term, subject to market conditions and other factors.

We are incredibly excited about the future trajectory of the business. As David noted, finalizing the updated New York City contract provides financial predictability and a source of value creation. Additionally, we are poised for growth and profitability across our businesses as the benefits of investing in our platform yields the intended scale and margin benefits.

This concludes our prepared remarks. Thank you for your time and attention. At this time, I'd like to invite Towanda to open the line for any questions. Towanda, over to you.

[Operator Instructions] Our first question comes from the line of Faiza Alwy with Deutsche Bank.

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

Yes, you bet. So let me start first with 2025. So when we talk about those onetime readiness costs, that truly is one time. And the scope of that is approximately $5 million to $10 million depending on where it shakes out. And that's all baked into the guidance. But I think the crux of your question is let's move into 2026. So at the total Verra Mobility level, I expect margins to come down about 250 to 300 basis points, okay? And there's three buckets I want you to think about there. The first bucket is the portfolio mix, which simply means that the GS business, which is a lower-margin business than CS, as you well know, is growing faster than CS in 2026 as compared to '25. That's about 25 basis points at the consolidated level. That's negative.

Then we pick up about 25 to 50 basis points on the positive between two things. Number one is our CS business. We'll still have volume leverage and accrete margins as we've talked about. I don't see any change there. And also, the ERP spending, as we've discussed in the past, the thrust of that spend will be behind us. So we'll get some benefit there. So I get 25 to 50 basis points back. And then the New York City renewal in totality, I expect to be a 250 to 300 basis point reduction in 2026, and that's really two pieces. The first is the price normalization. This was a competitive contract, as everyone well knows. And then the second piece is the cut in of the minority and women-owned business requirements. Now those minority and women-owned business requirements is a recurring cost and that will be to the tune of $20 million to $25 million per year that we did not have previously as we look out for the life of contract.

Understood. And just a clarification, are you going to see -- is there an incremental CapEx spend that's maybe coming from purchase of these cameras? Or does that go through the income statement?

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

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

Yes. I would say -- this is David. I would say that New York City, obviously, given its size and scale makes it -- the impact there is significantly higher. Two, I would say that in general, we are competing at very similar levels across the board that we had in the past. And then what I would say is outside of New York, only a few other major metropolitan areas at this time have the same level of requirements around the use of, for example, for minority and women-owned businesses. So we're not seeing that pop up all across the country and things like that. So I would look at New York City as a bit of a -- as it always has been a bit of a unique one.

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

Our next question comes from the line of Keith Housum with Northcoast Research.

Appreciate the color on New York City here. Any color you can provide on '26 for the cadence of the cameras? Will they be pretty even throughout the quarter -- through the year or you guys need to build off throughout the year?

It's -- we don't know yet. I mean, we'll get to the end of the year and do the planning with it, but it will probably be relatively smooth throughout the year, but there's always fits and starts depending on weather and other things that may go along within the city.

And I think the only thing I would say is that is if we look across all of the years, the thrust of the installs will be done by 2027, is our current -- is where we are currently with a few trickling into 2028. But yes, as David said, we're not at that level of detail where I could kind of give you a view by quarter.

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

I think that we will -- for the...

Say, 2025, not 2026.

Yes, he said '27 and beyond, right? I mean the '27 and beyond you are asking.

2025, sorry.

Yes.

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

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

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

Our next question comes from the line of Louie DiPalma with William Blair.

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

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

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

Yes. I won't go into 2028 free cash flow conversion just yet, Louie. We're still kicking around a potential date for an Investor Day, which will probably be a great time to do that. But as I think of 2026, I think the CapEx spend looks a lot like it did in 2025. And I got to say, I'm really proud of that because we're going to have another year of -- in 2026 for non-New York City high single-digit growth, and I think we'll have a CapEx total that looks a lot like the one that we put in front of investors this year. So as we continue to go out, all I would say is directionally, I expect that our CapEx as a percentage of service revenue, both for the company and for GS, everything I see today, we should have hit the high watermark here in 2025. That's the view I have today. Obviously, when I learn more, I can tell you a little bit more.

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

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

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

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

Our next question comes from the line of David Koning with Baird.

I guess I was wondering, I was looking at the government revenue, if you take total less the New York, so total service less New York service, and when you do that, next year's growth is good, 7%, 8% when you just kind of take your numbers. The year out is really good. It's like 16% in that acceleration -- okay. I guess what's behind that? I mean, that's an amazing acceleration. And is that part of the EBITDA margin expansion because your higher margin work, assuming -- I assume, is going to be accelerating into '27.

Yes. I mean, so the growth -- that's exactly right. So if you think -- that's why we -- in my remarks, Dave, we talked about there's a little bit of a reset because yes, because of the size and what's happening in New York, which is awesome, awesome stuff, it's just going to have a bit of a drag next year. But past that, when you get past the implementation of our technology upgrades as well as all of the winning that we have been doing in the marketplace, our win rate has been significantly higher over the last 12 months that was previously we basically won all of the opportunities so far in California. We're winning great opportunities in school bus. So what I would say is -- but remember, there is a time to book and then a time to realize revenue, which does take a little bit. So what you're seeing is all of the winning in the backlog turning into revenue as we get into early or mid-part of next year, that translated into real growth in '27.

Got you. Okay. No, that's great to see. And then I guess my follow-up, in commercial, you had the second toughest comp of the year, yet you accelerated growth despite the fleet management headwind, and so I'm wondering how you had the best growth for the year so far in Q3 despite both the tough comp and the fleet management. It seems like something is going really well there.

Yes. David, you get annoy with me here on fleet. I'm going to tell you again, it wasn't as bad as I thought. And basically, what that means is tolling activity outside of the churn that we talked about last quarter was as high as we've seen probably in the last 5 or 6 quarters. So the churn didn't have as large of an impact. Let's put it that way. And I do not expect that will be the case as we go into the fourth quarter.

So if you remember, when we were -- all of us, if we remember, 90 days ago, we talked about, I expect that fleet business to have a mid-teens year-over-year negative [ beat ]. I do expect that to come in the fourth quarter. And quite frankly, I expected in the third quarter. However, that tolling activity picked up. But the RACs have been strong. Sitting here today, we are at -- we had a good solid Q3 in TSA throughput at [ $101 million ]. On a year-to-date basis, we're just north of [ $100 million ]. And then the month of October has been really strong. Last I looked on a month-to-date basis, it was plus 4%. So I feel pretty good about how the business is performing. But that fleet -- that fleet thing is going to show up in the fourth quarter, a little bit more than the last quarter.

Our next question comes from the line of Chris Zhang with UBS.

So I wanted to double-click on California a little bit, and I appreciate the legislative update, and the updates across different cities and especially congrats on the San Jose Award. I'm just wondering from the 2026 guidance perspective, is it fair to think that anything from what you've been awarded, including San Jose in the guide, whereas the upcoming pilots or especially -- specifically Los Angeles, Glendale, and Long Beach, those are not in the guidance yet. And can you give us a sense of what's your overall scale in California and what are the potential opportunities you have visibilities to especially those private cities?

Yes, Chris, first of all, welcome. Second of all -- yes. This is Craig. I'll give you the financial piece of that, and then I'll let David talk about the commercial motion that we've seen in California. So the ones that you just spoke of are pilots, right? So those pilots, I think, in totality for the state of California, all the pilots amount to about $10 million of ARR, and roughly half of those have only gone out for RFP. So to the degree that we won 100% of the pilots that have come out to RFP, as David just talked about, yes, that's in our guide, but it's not a significant amount of money.

The other thing is, when you're talking about a new modality even in a state that's an existing customer, typically the time from winning of the contract or the award of the contract to revenue is 12 to 18 months. So even if those had been bigger numbers, the answer would be implicitly, it's in the guide, but it's not a really big number. But outside of that, with the red-light, I think, maybe, Dave, do you want to talk about that?

Yes. I mean I think as I mentioned in my remarks, we still have a couple of pending from the school zone speed program, which we will anticipate first part of next year. The red-light is significant. So we're the largest provider of red light in the state of California currently. But historically, it had always had some unique administrative challenges to a way that it would fully -- with multiple different challenges that I mentioned some in my remarks that I won't go back into.

But -- so we just look at that as an opportunity to reshape the way that we're serving customers already. And because they've removed some of the administrative barriers, we would anticipate some of those programs to expand. We feel like we're in -- California is really something that we've worked really, really hard on as an organization, an enormous amount of focus, partnering with our government relations as well as our local teams as well to produce what we consider is going to be a great outcome for many, many years to come.

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

Good day, and thank you for standing by. Welcome to Verra Mobility's Second Quarter 2025 Earnings Conference Call. My name is James Reyes, and I will be your conference operator today. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand over the conference to your speaker today, Mark Zindler, Vice President of Investor Relations.

Thank you. Good afternoon, and welcome to Verra Mobility's Second Quarter 2025 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market close along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com.

With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A.

Management may make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of risk factors. These factors are described in our SEC filings.

Please refer to our earnings press release and investor presentation for Verra Mobility's complete forward-looking statement disclosure. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we do not undertake any obligation to update forward-looking statements.

Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, quarterly earnings presentation and investor presentation, all of which can be found on our website at ir.verramobility.com.

With that, I'll turn the call over to David.

Thank you, Mark, and thanks, everyone, for joining us. We delivered a strong second quarter with all key financial measures ahead of our internal expectations. Total revenue for the quarter increased 6% over the same period last year to $236 million, with all three business segments meeting or exceeding their respective internal plan.

Adjusted EPS increased 10% over the prior year period, driven by our operating performance, recent share repurchases and the reduction in our interest rate on our term loan debt.

Moving on to segment level financials. Commercial Services second quarter revenue and segment profit increased about 5% and 4%, respectively, over the prior year period. RAC tolling increased 4% over the prior year period, driven by increased product adoption and higher tolling activity compared to the second quarter of last year.

The growth in RAC tolling was partially offset by a decline in FMC revenue of about 2% compared to the second quarter of 2024, primarily due to a combination of customer churn as well as a modest weakness related to enrolled vehicles and tolling activity in early 2Q attributable to macroeconomic factors. We expect incremental weakness in the third quarter and to stabilize and grow from that new level. FMC continues to be a core focus area, and we remain very optimistic about solid growth prospects in this business area.

Additionally, as we noted in our press release in early July, Stacey Moser has joined our executive leadership team and will lead Commercial Services. Stacey is a commercially focused executive, bringing strong experience in sales leadership, product development and international expansion and will be instrumental in leading Commercial Services into its next phase of growth.

Next, moving on to the macro environment and the implications for our Commercial Services business. With consumer confidence levels improving amidst increased increasing clarity on the economic environment, travel demand is stabilizing, albeit at lower levels than our prior forecast.

Second quarter TSA volume declined about 1% over the second quarter of last year, and year-to-date TSA volume is about the same as last year. As a result of these trends and the commentary from the major airlines and expected demand, we have further reduced our travel volume assumptions for the remainder of 2025 relative to the levels discussed in our first quarter call. This is subject to further change, and we are closely monitoring the airline industry, which has historically been a good indicator of trends that impact the Commercial Services business.

Moving on to Government Solutions. Service revenue increased 7% over the second quarter of 2024. Revenue from New York City, our largest government solutions customer was essentially flat year-over-year as we await the finalization of the renewal contract. Service revenue increased 11% outside of New York City driven by expansion from existing customers and new cities implementing photo enforcement programs. Total revenue, which includes international product sales was up about 10% over the prior year quarter, fueled in part by a $3 million increase in product sales compared to the second quarter of 2024. And a note regarding New York City, we are earnestly working toward finalizing the renewal contract. Upon executing the contract, we will hold an update call to discuss the new contracts, key economic terms and the planned red-light expansion program.

Next, I'll discuss the demand for automated photo enforcement, the key driver for our Government Solutions business. We continue to see positive support for photo enforcement programs across the United States. During the second quarter, both Colorado and Nevada passed legislation authorizing school bus stop arm enforcement, adding about $40 million in total addressable market. In total, enabling legislation passed over the past 2.5 years across the United States has added approximately $225 million of TAM with the potential to expand to over $350 million as further enabling legislation allows in California.

Our recent execution against this TAM has been strong. In the second quarter, we entered into contracted bookings of about $21 million of incremental annual recurring revenue at full run rate, bringing the trailing 12 months total to about $60 million. Notable second quarter bookings include the Chicago, Illinois speed camera expansion and a 5-year renewal, Carroll County, Georgia school bus stop arm expansion, Mesa, Arizona speed expansion program and several Florida school zone speed awards.

We believe automated enforcement continues to demonstrate its intended effects. We see proof points that drivers are improving their driving behaviors and traffic fatality rates are slowly decreasing. For example, for our own data revealed positive indicators when we compare 2024 to 2023, 4th of July holiday travel. Key findings included a 26% decrease in total violations from 2023, 24% fewer speeding tickets and 31% fewer red-light violations. Most importantly, the data shows that pedestrian deaths were down 4.3% year-over-year, making the second consecutive annual decline. But with over 7,700 pedestrian fatalities last year it's a stark reminder that more work needs to be done to improve road safety.

Moving on to T2, our Parking Solutions business. Total revenue declined about 4% for the quarter, driven by a reduction in product sales as well as professional services revenue. This result was in line with our internal expectations.

Moving on to our full year outlook, we are maintaining our full year 2025 financial guidance. While travel demand appears to be stabilizing, we remain cautious that a further modest decline in travel volume may cause us to trend toward the lower end of the financial ranges as previously provided. Additionally, note that our growth and margin expectations for Government Solutions and T2 remain unchanged as the market for photo enforcement is strong and our Parking Business turnaround is showing some early signs of success. We believe these businesses areas are largely unaffected by economic sensitivity.

Moving on to capital allocation. During the second quarter, our Board of Directors authorized a $100 million stock repurchase program that is available through November 2026. As of the end of second quarter, no repurchases have been made under the new stock repurchase program.

Finally, before I close, a reminder that with summer nearing its close, please drive safely as kids start going back to school this month.

Craig, I'll turn it over to you to guide us through our financial results and additional details on our 2025 financial outlook.

Thank you, David, and hello, everyone. We appreciate you joining us on the call today. Let's turn to Slide 4, which outlines the key financial measures for the consolidated business for the second quarter. Our Q2 performance, which included 5% service revenue growth and 6% total revenue growth year-over-year exceeded our internal expectations. The service revenue growth, which consists primarily of recurring revenue was driven by increased product adoption and higher tolling activities in the Commercial Services business as well as service revenue growth outside of New York City in the Government Solutions business.

At the segment level, Commercial Services revenue grew 5% year-over-year Government Solutions service revenue increased by 7% over the prior year and T2 Systems SaaS and services revenue was essentially flat compared to the second quarter of 2024. Total product revenue was a little over $12 million for the quarter. Government Solutions contributed roughly $9 million in Q2 delivered about $3 million in product sales overall for the quarter.

Additionally, our consolidated adjusted EBITDA for the quarter was $105 million, an increase of approximately 3% versus last year. We reported net income of $39 million for the quarter, including a tax provision of about $14 million, representing an effective tax rate of approximately 27%.

GAAP diluted EPS was $0.24 per share for the second quarter of 2025 compared to $0.20 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items, was $0.34 per share for the second quarter this year compared to $0.31 per share in the second quarter of 2024, representing a 10% year-over-year growth.

The adjusted EPS growth was driven by the increase in adjusted EBITDA, a sustained reduction in interest expense driven by our prior year debt repricing efforts in our share repurchases in 2024. Cash flows provided by operating activities totaled $75 million, and we delivered $40 million of free cash flow for the quarter, in line with our internal expectations.

Turning to Slide 5. We generated $407 million of adjusted EBITDA on approximately $906 million of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin. Additionally, we generated $189 million of free cash flow or a 46% conversion of adjusted EBITDA over the trailing 12 months.

Next, I'll walk through the second quarter performance in each of our three business segments, beginning with Commercial Services on Slide 6. CS year-over-year revenue growth was 5% in the second quarter. RAC tolling revenue increased 4% or about $3 million over the same period last year, driven by increased product adoption and tolling activity, partially offset by a 1% decline in travel volume.

Our FMC business declined 2% or about $300,000 year-over-year, driven by customer churn and macroeconomic weakness related to enrolled vehicles and tolling activity in early Q2. As David mentioned, we anticipate that FMC revenue dollars will further decline in the third quarter, and then that we expect to stabilize and grow from that level. Commercial Services segment profit increased 4% over the prior year. The CS revenue growth was partially offset by nonrecurring ERP implementation costs.

Turning to Slide 7. Government Solutions had solid service revenue growth in the quarter, driven by 11% growth outside of New York City. The growth was broad-based across all modalities with particular strength in bus lane and school bus stop arm enforcement programs. Total revenue grew 10% over the prior year quarter, benefiting from about $9 million in product sales, which increased by $3 million over the same period last year.

Government Solutions segment profit was $30 million for the quarter, representing margins of approximately 28%. The reduction in margins versus prior year was primarily due to the mix impact of increased international camera sales, ERP conversion costs and project implementation costs for newly awarded programs.

Let's turn to Slide 8 for a view of the results of T2 Systems. We generated revenue of $20 million and segment profit of approximately $3 million for the quarter. SaaS and services sales were essentially flat compared to the prior year, while product revenue declined 18% or $700,000 compared to 2024. Breaking the T2 and SaaS services revenue down a bit further, recurring SaaS revenue was flat compared to the prior year quarter and offset by a decline in installation and other professional services due to the reduction in product sales over prior quarters. On a year-to-date basis, recurring SaaS revenue has increased low single digits over the same period in 2024.

Okay. Let's turn to Slide 9 for a view of the balance sheet and net leverage. We ended the quarter with a net debt balance of $893 million, which reflects the strong free cash flow we generated in the first half of the year. Net leverage landed at 2.2x, and we've maintained significant liquidity with our newly expanded $125 million undrawn credit revolver. Our gross debt balance at year-end stands at about $1 billion, of which approximately $690 million is floating rate debt.

Okay. Let's now turn to Slide 10 and have a look at full year 2025 guidance. Based on our first half results and our outlook for the remainder of the year, we are reaffirming all guidance measures. As David discussed, our primary consideration in the economic -- in this economic environment is the potential impact to travel demand. While we are reaffirming guidance, we would like to highlight that there is a risk of moving to the lower end of the ranges if travel demand worsens from current levels. In the event that the U.S. economy weakens, and we see a material move downward in TSA volume, we will reassess and update the market accordingly.

As a reminder, the full year 2025 guidance ranges provided on our fourth quarter 2024 earnings call were as follows: we expect total revenue in the range of $925 million to $935 million, representing approximately 6% growth at the midpoint of guidance over 2024. We expect adjusted EBITDA in the range of $410 million to $420 million, representing approximately 3% growth at the midpoint over 2024. We anticipate an adjusted EPS range of $1.30 to $1.35 per share, and free cash flow is expected to be in the range of $175 million to $185 million representing a conversion rate in the low to mid-40th percentile of adjusted EBITDA.

Moving on to the segment level. Government Solutions is expected to generate high single-digit total revenue growth, driven by the expansion of camera installations with existing customers and new customers awarded in fiscal year 2024. Recall that this growth forecast includes an expectation of flat service revenue from New York City in 2025 under the legacy contract while we work through negotiations for the renewal contract. We also expect increased product revenue in 2025.

Taken together, both New York City service and global product sales comprised nearly 40% of total Government Solutions total revenue. The remaining 60% of Government Solutions revenue is expected to grow low double digits overall in 2025. We continue to anticipate that Parking Solutions revenue will be about flat with 2024 levels. We expect SaaS revenue to grow low to mid-single digits, offset by a decline in the installation and professional service revenue on roughly flat product sales.

Based on an assumption that travel will be flattish in 2025 compared with 2024, we anticipate Commercial Services growing at the high end of mid-single digits. We anticipate CS revenue, adjusted segment profit and margins will improve sequentially in the third quarter, followed by modest declines in the fourth quarter, consistent with historical norms based on travel trends.

Other key assumptions supporting our adjusted EPS and free cash flow outlook can be found on Slide 11.

Before we close out, I'd like to give you an update on our ongoing ERP implementation. I am pleased to report that the project is on schedule and on budget. We have several smaller processes to transition over the next several quarters, but the most complex portion of the project is largely complete.

In closing, we're very pleased with our first half performance. We exhibited solid execution across the board, and we're delivering strong free cash flow and earnings. As we head into the final months of 2025, there's a lot to be excited about. Stabilizing travel trends, finalizing the contract with New York City Department of Transportation and strong demand for automated enforcement.

This concludes our prepared remarks. Thank you very much for joining us on the call today. I'd now like to open the call for questions.

[Operator Instructions] Our first question comes from the line of Faiza Alwy from Deutsche Bank.

Great. So I wanted to just flesh out some of your commentary around Commercial Services. And it sounds like there's a few moving parts. First, just on travel, just want to put a finer point on. Are you essentially run rating sort of where Q2 travel funds were or sort of where you -- maybe where you exited 2Q? So just give us a better sense of what you're assuming for travel in the back half. And then secondly, you mentioned -- okay, I'll let you answer that, then I'll follow up.

Yes. Thanks. I'll do the first part first. Faiza, first of all, we had a little technical issue at the beginning of the call. Can you hear me okay? It's, Craig.

Yes.

Excellent. Okay. So if we back up to the end of the first quarter, I'll get to your question, but I want to start with a little context, right? So last time we were on the call, we talked about the guide for the company would still stand if TSA volumes stayed at around flat to last year to down a handful of points, okay? Now bringing that forward 3 months, we're still in the exact same place. What we saw in the second quarter, the TSA throughput was about 99%, that stepped up and got a little better in July at just north of 100%.

And if you look at it, as David said in his script, on a year-to-date basis, we're right at about 100%. So that's the state of play. I think the other thing that's different is the backdrop or the sentiment on travel is stronger than it was 90 days ago. I think we all heard that from the airlines and the hotels. So now to your question. What we've done for demand go forward is we've taken in essentially the 2Q exit rate, which is somewhere between 99% and 100% and left that as the throughput rate for the back half of the year, which still puts us within the range of guidance that we set at the beginning of the year, and that's what it looks like the consensus is for travel in the near term in the market today.

All right. Understood. Makes sense. And then just on some of the other moving parts, right? Like you mentioned fleet management, some maybe macroeconomic factors and churn. So give us a sense of, I mean, it seems pretty small given the revenue amount that you gave us, but -- like is this going to get worse in 3Q? And just give us a bit more color on sort of how -- what needs to happen for things to stabilize in 4Q?

Yes, sure. I think you said it well, Faiza. So yes, there -- we saw a small decrease in our 2Q results. So it was only $300,000 or about 2%, and that was the result of some macroeconomic headwinds and some churn. Now that is going to accelerate as we get into the third quarter. So we expect that to be fully baked into our run rate by the third quarter. So we'll be down again here in the third quarter. And then I think from a total demand standpoint, that will be the base from which we will then again grow.

All right. Great. And then just my sort of second question was really around -- it sounds like -- so you raised the guide for Government Solutions. Just give us some color on like what got better. Is it just better or earlier execution or conversion of the -- some of the ARR to revenue? Or is it something else?

I'm sorry, Faiza, are you asking about the commercial activity?

No, I was asking about the Government Solutions and the slight guidance raise there. And if you were seeing faster conversion from ARR to revenue or if it was something else that was driving the increase?

Yes. As I think about it, there's really broad-based strength, it's across both. So product is going to be higher than we anticipated at the beginning of the year. And that's a bit of a positive and negative, right? So that's positive on the revenue line. If I look at the mix of that business, that's going to be a little bit dilutive on the margin line. You could see that in the results in the second quarter, not materially 100 basis points in the quarter, but still you'll see it.

And as we go forward and look at the demand for photo enforcement, that honestly has done nothing but accelerate -- throughout the year. So when we started the year, we said high single digits is pretty much what we thought the non-New York City service revenue would grow. We feel comfortable today saying that's going to be in the low double digits.

So the short answer is both of those things. And I think the final piece to that is, if we think about the commercial activity we talk about it in terms of loosely define this backlog or what is that ARR that we've built up in the last trailing 12 months. That number is sitting at $61 million. The TTM basis of that 6 months ago was in the 40s or 50s, right? So we continue to see this bow wave of the move to photo enforcement continue to move in the company's favor and we've been capitalized.

Our next question comes from Daniel Moore from CJS Securities.

Congrats another solid quarter. I wanted to pull on the string of margins in Government Solutions a little bit. You just gave good color regarding the mix pressure in the quarter. How much setup costs are in that and are sort of in the guide as we think about some of these new opportunities, you generally have to invest a little bit ahead of revenue.

So what I'm getting at is sort of as we think about full year margins, whether that's a new baseline from which will be flat to up or expand from as we think about kind of fiscal '26 and beyond in the Government Solutions piece of the business?

Yes. Thanks, Dan. It's Craig again. Let me answer with a very detailed answer for the quarter and then give you an idea how I think this looks, okay. So, a, if I just look at year-over-year, we're down 250 basis points. So if you look at that on the face of it, that's a rough number, but let me break it down, about 100 basis points of that is simply mix. That is we are up 46% in product sales to international customers year-over-year.

I love that. It's just lower margin and it's just lower margin that hit the quarter. So we kind of take that away from the 250. Another 100 basis points, now we've built up 200 of the 250 is from the ERP cost that we incurred in the second quarter. That's going to hit both CS and GS. That was the thrust of the activity. So now we've got 50 basis points left, which is exactly what you asked, that is the incremental, if you will, set up cost.

Now I hesitate to go up to 2026 simply because we are not yet through contracting with New York City. Once we're done contracting with New York City, I think we can lay all of that out. But what I will tell you to hopefully help you a little bit farther down the path is if we kind of set New York City to the side for a second, the way we think about this is if the business continues to grow outside of New York City at low double digits, that will probably be slightly margin dilutive until we get most of the way through 2026.

And what I mean by that is if we go back to the last 12 to 18 months, we talked about the platform consolidation that's going on in GS. That's still going up. We're still investing in that, not a material year-over-year amount of money, but it's not live yet. So the confluence of that against the low double-digit growth will help us be able to accrete and grow our revenue and maintain margin until that point, I can get there. That's the temporary answer. Obviously, we'll reset the whole mark once we have the view with where New York City is going to be.

Perfect. Really helpful. I'm sure the answer is no comment, but any update just in terms of timing around the New York City renewal? Or the finalization metric.

Dan, it's David. And no comment seems a bit rude given our long-standing relationship. But what I would say is that we honor the state of the contract that is with our customer. And so we're working toward a resolution. So obviously, sooner than is better, but we'll just -- as soon as it is done, we will announce it and give all relevant information to the market.

I look forward to the call. Lastly, obviously, the balance sheet continues to improve. Leverage ticking down towards 2x. Maybe just touch on M&A pipeline and borrowing position, given more likely to pick up the pace of share buybacks rather than let leverage continue to tick lower below the kind of low end of your target range?

Yes. Thanks, Dan. I don't think anything has changed in our strategy that we've laid out, which is we still think to 3x is the level of flight plan for the company. We've got an open share repurchase. We're going to be opportunistic with that. But I would just say that M&A activity has really started to pick up.

And so we continue to look at really interesting businesses across multiple segments. And so we'll continue to play our strategy, but only -- we're only going to do a deal when it makes sense for our shareholders. So if not, we'll always go back to investing in the business or potentially buying back shares. So we're going to kind of keep doing exactly what we've been doing.

Our next question comes from Keith Housum from Northcoast Research.

David, I think it might be in the first quarter, I recall European operations being called out in CS. And then, of course, you guys had a press release announcing an agreement with [ 6 ] during the quarter, I believe it was with Italy. Perhaps maybe you can dimensionalize about some of the success you're having with Europe. I understand it's still early stages, but perhaps the contribution and how you think about that over the next year or so.

Yes. Thanks, Keith. I actually just got back from there a couple of weeks ago and was meeting with customers. And what I would say is, as you've been with us for a while, you know about the ice thawing. And I would say that there's water on the side of the glass is maybe the best way I describe it is that we are definitely, we are starting to roll out in Italy with some of the customers like Avis Budget. The value proposition is compelling to our customers.

And so I think it's starting to move up. Again, it's not going to be material. I think next year, we'll probably be able to dimensionalize that in terms of total contribution, but we are starting to see multiple deployments in multiple countries. And so it's actually getting pretty exciting. And the greatest part of that, obviously, Keith, is the customers are telling us that they really like it.

Yes. Congratulations. I know it's been a long haul, and you guys have been working hard on that. So good to see. Outside of Italy, is there any other countries that are getting close to doing it as well or as far as long as Italy.

Yes. So we have -- I believe it's 7 countries total. Italy is -- you really wanted Italy, one of the bigger ones because it was -- it's moving to cashless. And because of our Pagatelia asset we're able to do transponders in Italy as well as others. So that's part of it. We are also -- France is the other big one. But we also work in Portugal, Spain, Ireland, France, Italy. So those are the ones that we're working in today.

Okay. And I've got to ask this question more just to make sure we're covering our basis here. But as you guys are adding new cameras to the portfolio here, there's no tariff issues or obligations that we have to worry about impacting costs going forward, do we?

Would you drill that in a little bit more, Keith, in terms of what kind of costs you're talking about?

Yes, I'm sorry. In terms of purchasing cameras for the photo enforcement program, as you've been adding new agencies here, are there any tariffs that perhaps will reduce your profit on the cameras?

No, I don't think so. I mean if anything, I like where we're heading on the volumes. And I think the other piece is, when we talk about platform consolidation is a multiyear project that's going to bear some fruit for us here in the back half of next year, which is going to work really well with the generation of cameras that we've been buying. So I think, I'll say what I said a little bit earlier, Keith, because I think it bears repeating is, if the business continues to grow in the low double digits, which let me be crystal clear, I've every intention that it will. I certainly hope it does. We are going to continue to see those installation costs, small incremental installation costs come ahead of revenue, especially in the greenfield area. So we talked about, David mentioned, Colorado and Nevada, I believe, earlier. But outside of that, I don't see anything structural coming down the pipe.

Our next question comes from Louie DiPalma from William Blair.

You have discussed over the past several years, and everybody has witnessed the TAM or the photo enforcement market expanding. And I was wondering, could you provide some commentary on the pipeline in that you announced very strong bookings this quarter and strong bookings over the past trailing 12 months. And -- but in terms of your bids outstanding and some of the newer markets, are -- how does the RFP process? And do you have more bids outstanding today than you did a year ago? And how is everything translating in terms of bookings converting into actual revenue?

Yes. So I think Craig had said that we had $60 million of ARR run rate that we've added. So a big picture, Louie, is it's going very well. I think California is sort of our great sign of -- we laid out a playbook. We talked about opening legislation, we were able to support the state and enabling that legislation at a pace that was higher than we would have anticipated. We've been able to work with great cities, including San Francisco and Oakland and some of the others.

And so I would say that all those are starting to translate. They are moving toward revenue recognition reasonably well, but that also speaks to the issue that Craig was talking about just a moment ago where we -- when they say go, we start working as fast as we can, but the revenue doesn't start until the cameras turned on. So that's part of that reality. So we're seeing very, very strong pipeline movement, very strong conversion in our win rate, and all that's going to flow down to revenue and the $60 million is certainly an indication of that.

Fantastic. And for the Commercial Business, you discussed the slowdown in travel. And I was wondering, as it relates to the overall algorithm with all things being equal, can investors assume a general 5% alpha outperformance of your revenue growth above travel volumes.

As Craig and David and Mark, you previously discussed how, in addition to travel volumes, there's other variables such as the shift to cashless more toll roads, total inflation and the bundled pricing. But has there been any other slowing for those other secular trends in terms of the shift to cashless or increased toll roads? Or are those other secular trends healthy?

Louie, they are. So let me try to answer your question that you started with, succinctly as I possibly can. But I love the way you framed it, can I put a 5% alpha on travel demand and say, run macro, and that's going to go forecast on Commercial Services. What I would tell you is for this year, that's going to hold. It might not next year. It might be bigger, it might be smaller. So I would say that's the state of affairs where it is today.

And let me equate that back to what we talked about 2 quarters ago and last quarter, right? We talked about growth in this business as 1/3, 1/3, 1/3. 1/3 of that growth to get to high single digits, right? 1/3 of that growth was GDP-ish travel growth. If we have 99% to 100% in the back half of the year, we did 99% in the second quarter, a little over 100% in the first quarter, you average that out, it looks a lot like 100%.

So I don't have that 2.5% this year, right? So I see how you're getting there. I would say that -- and all of those secular tailwinds that we've talked about in the past, they are absolutely still occurring. Absolutely, the trend is unmistakable. However, sometimes there's fits and starts, right? Sometimes it grows a little faster, sometimes it grows a little slower. So that growth will be there, whether it will be a 5% alpha in 2028, I can't sit here and definitively tell you that.

Our next question comes from David Koning from Baird.

Good job. And I guess, first of all, I wanted to just look at CapEx. It was like clockwork kind of $10 million to $15 million a quarter for many quarters kind of through really 2022 through 2024 mostly. And then by late 2024 and into this year, it's, I'd say, over doubled. And I know that's in preparation for demand but it's not like revenues doubled yet. And just I'm wondering like what's the relationship there? Like if it's double, why shouldn't revenue be double? Or is it just a shorter-term kind of build and then 6 months from now, we'll see better growth? Like how should we think of that relationship?

So I get it, Dave. Thanks for the question. So a couple of things, right? Is that CapEx tends to -- while the depreciable life of that CapEx is 5 to 7 years, the useful life to that CapEx could be 10 plus. So I think just from linear mathematics, we're going to have -- always going to have a disconnect on that piece.

The second thing I would say is when -- you're right, right, that grew like $15 million to $18 million like clockwork, you nailed it. At time, the growth rate of the business was in the mid-single digits, especially outside of New York City, it might have been closer to low single digits. That today has grown at 12%, and that 12% is compounded on double-digit growth last year, right? So the vast majority -- so that's a buildup. Now let me go and kind of tear it down from the top down.

If you think about a roughly $100 million capital expenditure for the business, you take out the ERP, the platform consolidation, you're going to end up with -- we're going to spend somewhere between $60 million to $80 million. I know that's a big range, but the business is really moving quick right now, $60 million to $80 million worth of CapEx into the Government Solutions business, which is roughly 2.5x what it was in the past, and the business could be that size with this kind of growth 5 to 7 years from today. That's how I look at it.

Yes. No, that makes sense. And certainly, leading to better -- to good growth, better growth, it's great. And then my follow-up, big kind of nerdy question. D&A has been running $28 million, $29 million a quarter in the last couple of quarters. Full year guidance, I think, is $110 million, that implies lower back half D&A unless I'm looking at something wrong.

I think -- I don't think you're looking at something wrong, what you're starting to see, that's not on the D side, it's on the A side, right? So what we're starting to see is, look is, this is something else we talked about earlier in the call, right, with the company hasn't done a deal in 3 years plus years. So some of the amortization from the deals that we did in the late teens and even into 2020, that the customer list amortization noncash expenses are starting to run off.

And if you take a look at -- I know you do, if you look at our Q and our K, you could see the useful life of those are starting to get down to low single digits where a couple of years ago, they were 5, 6, 7 years.

I'm showing no further questions at this time. So this concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.