Verra Mobility Corporation (NASDAQ:VRRM) Q3 2024 Earnings Call Transcript

Verra Mobility Corporation (NASDAQ:VRRM) Q3 2024 Earnings Call Transcript October 31, 2024

Verra Mobility Corporation beats earnings expectations. Reported EPS is $0.32, expectations were $0.31.

Operator: Good afternoon, ladies and gentlemen, and welcome to the Verra Mobility Third Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mark Zindler, Vice President, Investor Relations. Please go ahead. [Technical Difficulty]

David Roberts: demonstrating what we view as the predictable strength of our portfolio of businesses. Based on our year-to-date financial performance and our outlook for the remainder of the year, we are reaffirming full year 2024 revenue, adjusted EBITDA, and adjusted EPS guidance, while increasing the adjusted free cash flow guide to the upper end of the range. Craig will elaborate on the details in his remarks. Today, we’ll highlight four value drivers underpinning our businesses. The current sentiment from the major airlines continues to suggest resilient travel demand, albeit off the first half of 2024 highlights. Second, the demand for automated photo enforcement is strong and growing. Third, the company continues to generate robust free cash flow, providing optionality for capital allocation.

And fourth, we are putting measures in place to stabilize the T2 Parking business and rejuvenate its growth trajectory. Starting with travel demand, year-to-date TSA passenger volumes as of September 30th stood at about 106% of 2023 volume for the same period, driven by strong consumer and business demand. However, travel has decelerated in September and October, particularly in the last week of September and the second week of October due to the hurricanes. We have seen a recent reacceleration of travel back to the levels assumed in our guidance, so we feel comfortable about travel volumes as we close out the year. Additionally, the current sentiment from the major airlines, along with the independent surveys we have reviewed indicates resilient demand, suggesting TSA volume growth commensurate with GDP type growth next year.

These domestic travel trends had a strong impact on our Commercial Services business. We delivered outstanding results driven by strong performance in RAC tolling and continued solid performance in the Fleet Management business. Third quarter revenues of $109 million grew 11% over the prior year quarter and segment profit margins of 67% were up about 30 basis points over the last year period, due primarily to the strength in RAC tolling. The third quarter travel demand drove solid growth in adopted rental agreements and tolls incurred, all of which resulted in a 6% increase in RAC tolling revenue. Additionally, our FMC business generated revenue of $18 million for the quarter, representing 9% growth over the prior year period, primarily driven by enrollments of new vehicles and increased tolling from FMC customers.

Moving on to Government Solutions Service revenue, which reflects 95% of total revenue for the quarter and is primarily recurring revenue, grew 7% over the same period last year. The service revenue growth was driven by program expansion from existing customers and new cities implementing photo enforcement efforts to improve road safety. To this point, outside of New York City, we drove 12% service revenue growth due to these factors. Total revenue, including international product sales were up about 6% over the prior year quarter. Looking at the big picture, the demand for automated enforcement has never been stronger. We generated a strong third quarter in contract awards and saw additional legislative actions supporting automated enforcement.

In the third quarter, we won contract awards representing about $22 million of incremental annual recurring revenue at full run rate, bringing the year-to-date incremental ARR total to $45 million. The largest award came through our partnership with Hayden AI, supporting automated bus line and bus stop enforcement with our share representing approximately $8 million of the incremental ARR. Our partnership with Hayden AI demonstrates the new and expanding opportunities for automated enforcement beyond speed and red light enforcement. Additionally, we were awarded contracts in Florida, representing about $3 million of incremental ARR and in Washington state, which represented about $2 million of incremental ARR. Other notable awards include speed enforcement programs in Australia and Canada, which combined, represent about $5 million in total incremental ARR.

As we shared in our press release earlier this month, I’m excited to report that the San Francisco Municipal Transportation Agency awarded us the contract to manage its speed safety program. This is California’s first automated speed safety program under the state’s legislative authorization. Under this contract, we will design build, operate, and maintain a speed safety program with cameras at 33 sites across San Francisco. The goal is to have a fully operational program — a fully operational program in early 2025. Additionally, we anticipate competing for the other California City speed enforcement pilot programs over the next year. These pilot programs are a pivotal step in what we expect will be a broader initiative to expand speed safety across the state as more citizens demand solutions from lawmakers to help make roads safer in California.

Moving on to New York City, we look forward to submitting our proposal for the automated traffic enforcement program. New York City is the leader using automated enforcement technology to make road safer and more efficient, and they have trusted us to be their technology partner for a highly complex program for many years. While the program is subject to a very competitive procurement process, we remain confident that our scope of services and the support meet the specifications for the program today, and we remain ready to meet the city’s evolving needs quickly should we be afforded the ongoing opportunity. We’re also excited that New York’s Red Light Expansion Bill was signed into law earlier last week, allowing for the expansion of cameras at 450 additional intersections in the City of New York.

This is an important milestone to goals and objectives of Vision Zero. Next, a brief update on T2 Systems. We generated revenue of approximately $21 million for the third quarter, slightly below our internal expectations. Segment profit was $4 million for the quarter with segment profit dollars and margins growing sequentially over the second quarter as we anticipated. In August, we announced that Lin Bo joined our executive leadership team to lead T2, bringing valuable experience in enhancing operations, driving growth and leading business transformation efforts. As a reminder, our strategic thesis around T2 revolved around the strong and durable recurring revenue of permits and enforcement for cities and universities. We expect this time to increase over time with the unique challenges related to urbanization and current management.

To-date, we have encountered several challenges since we closed the acquisition in December of 2021. First, the parking industry has experienced a transition away from hardware and related services, which historically represented about 45% of revenue to focus on software and mobile payment solutions. This is expected to benefit our business in the long-term, but has impacted short-term revenue growth. Additionally, we expect to see a greater conversion of our SaaS pipeline of backlog and revenue generation, and Lin is earnestly working on retooling the organization to drive execution in this area. The market opportunity for T2 is significant, and we’re taking the steps needed to drive long-term execution and performance. We also added another talented and experienced executive to our leadership team.

We appointed Harshad Kharche as the Senior Vice President of Business Transformation. In this role, Harshad will ensure the continuing adoption of the Verra Mobility’s business operating system and help enhance our culture of continuous improvement company-wide. Next, we reported a record quarter of free cash flow generating $85 million for the third quarter. This provides significant optionality for capital deployment. We have been actively evaluating M&A opportunities in current and adjacent technology sectors, and we also have approximately $50 million remaining under our existing share buyback authorization. Next, our long-term outlook remains intact relative to the revenue and adjusted EBITDA targets we provided at our July 2022 Investor Day.

As we’ve indicated, there will be years where we exceed the growth rates and other years where we’re at or modestly below our growth targets. Based on our current views of travel demand next year and the cadence of converting Government Solutions backlog to revenue, we anticipate year-over-year revenue growth at the low end of our 6% to 8% long-term guide in 2025. In addition, we expect growth in 2025 adjusted EBITDA dollars to be in the low to mid-single-digits compared to 2024 as we continue to invest in business development and complete the customer installs in front of expected strong revenue generation as we exit 2025 and into 2026. Craig will elaborate on the key drivers in his remarks. In summary, the first nine months of the year have been great, and we are very excited about our long-term outlook.

We’ve done exactly what we said we would do in terms of financial performance. Additionally, travel demand appears to remain solid, albeit off the 2024 highs and the bid pipeline for automated enforcement is strong and growing. This is a great business with a bright future, and I look forward to sharing additional updates as we continue to execute against our growth strategy. Before I conclude, I’d like to share a road safety reminder that tonight’s Halloween festivities can be potentially dangerous as kids are trick-or-treating at dusk. The risk of pedestrian fatalities is 43% higher on Halloween compared to any other night according to research published by the Journal of American Medical Association, so please drive safely and responsibly.

Craig, I’ll turn it over to you to guide us through our financial results, current year guidance, and a high-level preview of the 2025 financial estimates.

Craig Conti: Thank you, David, and hello everyone. 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 third quarter. Our Q3 performance was right on plan, which included 8% services revenue growth and 7% of total revenue. The service revenue growth, which was primarily recurring revenue, was driven by strong third quarter travel demand in the Commercial Services business and service revenue growth outside of New York City and the Government Solutions business. At the segment level, Commercial Services grew 11% year-over-year, Government Solutions Service revenue increased by 7% over the prior year, while P2 Systems SaaS and Services revenue declined 4% over the third quarter of last year.

Product revenue was $8 million for the quarter, GS contributed $5 million, and T2 delivered about $3 million in product sales overall. Our consolidated adjusted EBITDA for the quarter was $105 million, an increase of approximately 8% versus last year with margins flat. We reported net income of $35 million for the quarter including a tax provision of about $14 million, representing an effective tax rate of 28%. This rate includes certain discrete items, which favorably impacted the tax rate for the quarter. For the full year, we’re anticipating an approximate 30% effective tax. GAAP EPS was $0.21 per share for the third quarter of 2024 as compared to $0.18 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation, and other nonrecurring items, was $0.32 per share for the third quarter of this year compared to $0.29 per share in the third quarter of 2023, representing 10% year-over-year.

Cash flows provided by operating activities totaled $109 million and we delivered $85 million of free cash flow for the quarter, which was above our quarterly run rate due to a catch-up on cash collections and other non-recurring working capital items. Turning to Slide 5, we generated $391 million of adjusted EBITDA on approximately $869 million of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin. Additionally, over the trailing 12 months, we generated $172 million of adjusted free cash flow or a 44% conversion of adjusted EBITDA on a weighted average base of approximately 168 million shares. Next, I’ll walk through the third quarter performance of each of our three business segments, beginning with Commercial Services on Slide 6.

CS year-over-year revenue growth was 11% in the third quarter. RAC tolling revenue increased 6% or about $5 million over the same period last year, driven by strong travel volume and increased rental volume. Our FMC business grew 9% or about $1 million year-over-year, driven by the enrollment of new vehicles and tolling growth from the existing and newly enrolled FMC customers. Additionally, the combination of title and registration, violations management in Europe contributed approximately $4 million of revenue growth in the quarter [ph]. Commercial Services’ segment profit margins expanded about 30 basis points to 57%, driven by volume leverage from the summer driving season. Turning to Slide 7, Government Solutions had strong service revenue growth in the quarter, driven by 12% growth outside of New York City.

Total revenue grew 6% over the prior year quarter. Segment profit was $28 million for the quarter, representing margins of 29% and — the reduction in margins versus the prior year is primarily due to increased spending on business development efforts, the non-capitalized portion of our platform investment, and a favorable nonrecurring bad debt adjustment in the prior year period. Let’s turn to Slide 8 for a view of the results of T2 Systems, which is our Parking Solutions business segment. We generated $21 million — we generated revenue of $21 million in segment profit of approximately $4 million for the quarter. SaaS and Service sales were down 4% or $700,000, from the prior year quarter, while product revenue was down 7% or $300,000 compared to last year.

Breaking the SaaS and Services revenue down a bit further, pure SaaS revenue grew low single-digits over the prior year quarter. However, offsetting this increase was a decline in installation and other professional services due to the reduction in product sales over the past three quarters. Okay. Let’s turn to Slide 9 and discuss the balance sheet and take a closer look at leverage. As you can see, we ended the quarter with a net debt balance of $844 million, down significantly on a sequential basis due to our strong free cash flow generation this quarter. We ended the quarter with net leverage of 2.2 times, and we have maintained significant liquidity with our undrawn credit revolver. Our gross debt balance at year-end stands at about $1.1 billion, of which approximately $700 million is floating rate debt.

Based on the SOFR forward yield curve, we opted to utilize our early termination option and cancel the entirety of our float for fixed rate spot. Consequently, the term loan is now fully floating. In addition, subsequent to the end of the third quarter, we completed a successful repricing of our $700 million term loan B. The repricing was materially oversubscribed and we achieved a 50 basis point reduction in the coupon rate, lowering it to SOFR plus 2.25%. The transaction yields about $10 billion in cash savings net of fees over the remaining life of the debt. On our total debt back, this lowers our weighted average cost of debt to about 6.5% at current SOFR levels. This was our second successful debt repricing this year the cumulative effect being a reduction in our spread of a full 100 basis points this year.

Let’s turn to Slide 10 and have a look at full year 2024 guidance. Revenue, adjusted EBITDA, and adjusted EPS remain unchanged. However, we are increasing adjusted free cash flow to the upper end of the range. For purposes of review, I’ll give you a quick run-through of our total year guidance by major category. We expect total revenue growth of approximately 8% and adjusted EBITDA dollars growth of approximately 9% compared to 2023. Adjusted EPS is expected at the upper end of the $1.15 to $1.20 per share rate. Adjusted free cash flow is now anticipated to be at the upper end of the range of $155 million to $165 million, driven by lower CapEx spending. We expect to spend about $75 million in 2024 CapEx. The lower CapEx spend is partially offset by an increased use of working capital.

And finally, we expect net leverage will land at approximately 2 times and assuming no additional capital allocation investments beyond the investments we’ve made through the third quarter. Our revenue guidance incorporates a modest reduction in RAC tolling driven by historical fourth quarter travel trends as well as certain temporary Florida toll road suspension stemming from hurricane. Government Solutions service revenue is expected to be up slightly in the fourth quarter due to customer installs generating incremental ARR. Finally, Parking Solutions revenue is expected to be about sequentially flat in the fourth quarter. Additionally, at the total company level, we expect sequential margin expansion in the fourth quarter, in line with our existing guidance.

Other key assumptions supporting our adjusted EPS and adjusted free cash flow outlook to be found on Slide 11. Now, let’s move to a brief preview of how we expect 2025 will play out. I’ll remind you that our annual operating plan is not yet complete, so these estimates may change. As David mentioned, we currently anticipate revenue growth at the low end of our 6% to 8% long-term guide next year. This is largely driven by three factors. First, we’re anticipating that TSA passenger volume growth will decelerate and will be in line with GDP type growth next year, which impacts overall commercial services revenue. Second, we expect flat revenue from our largest customer, New York City, while we await the outcome of the competitive procurement. And lastly, while we’ve had a terrific year generating new ARR bookings in our Government Solutions business, it may take up to 18 months to convert this backlog into full revenue–.

From a profit perspective, we expect adjusted EBITDA dollars to grow low to mid-single-digits in 2025, driven primarily by portfolio mix, TAM execution costs, and financial infrastructure investments. Let me give you a little bit of detail on between these drivers. The TAM execution cost item is largely driven by our government business as we incur incremental business development costs and project go live costs in advance of converting our growing backlog trend. The financial infrastructure item relates to our previously discussed in-flight replacement of our aging ERP. We expect to incur about $5 million non-capitalized costs in the first half of the year to complete this project. These project costs are one-time in nature and will not continue past 2025.

The portfolio mix is primarily in our Commercial business where we expect travel growth year-over-year. However, that growth will be moderated relative to other growth drivers in the business, limiting margin expansion. From a cash perspective, at the total company level, we anticipate our 2025 free cash flow to adjusted EBITDA conversion to be about 40% to 45%. Finally, as Dave indicated, we have approximately $50 million left on our open share buyback authorization. Consistent with our past practice, we will evaluate the optimal returns to capital deployment and execute reporting. In summary, the core fundamentals of the business are solid. We think travel demand is resilient and our bookings in GS are healthy, leading to strong recurring revenue growth in the future.

Additionally, we have identified a path to recovery and growth in the Parking business. On the basis of these trends, we anticipate that our long-term outlook remains intact relative to the revenue and adjusted EBITDA targets we provided at our July 2022 Investor Day. This concludes our prepared remarks. Thank you for your time and attention today. At this time, I’d like to invite Aludi to open the line for any questions. Aludi, I going to send it over to you.

Q&A Session

Operator: Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Nik Cremo with UBS. Please go ahead.

Nik Cremo: Congrats on the strong results, David and Craig. First, I just wanted to touch on the New York City RFP. So, we know that Barra has a strong track record of renewing large customers on the RAC side of the business, but I think it would be helpful just to hear about what you see as there as many competitive advantages relative to competitors going after this RFP including some of the investments you’ve been making in the platform and how that shapes up to your level of confidence of successfully winning this renewal relative to some of the other large renewals in the past? And also any update on when we could hear back? Thank you.

David Roberts: Yes. I mean — it’s David. Thanks for the question. I guess the way that I think about it is, one, we’re obviously under an RFP, which really limits our ability to respond to a lot of different types of questions. So, within that, what I would say is New York like our other customers that we’ve served for quite some time, I think it comes down to a couple of things. One is we feel really good about our technology as we serve customers around the world that we have best-in-class technology. And I think with that, we have also best-in-class support related to those. I think the last part of your question was related to win. The RFP is due next week. I would not expect responses anytime right away. The responses are quite thorough. And I would anticipate that the City will need some time to respond to that. We would not anticipate probably real clarity on that to maybe Q2 of next year, just to give you some perspective.

Nik Cremo: Got it. Thanks for all the color on that. And then just on the preliminary 2025 outlook, can you just discuss like the cadence of growth throughout the year? Like should we maybe see an acceleration in the back half of 2025 as some of the ARR that you’re winning comes online? And also, how should we think about the Government Solutions business ex-New York City for next year? Thanks.

Craig Conti: Yes. Let me take the — this is Craig, Nik, thanks for the question. So, let me take the second part first. New York City, we’re going to plan to look just like 2024. Everything that we talked about for 2025 has New York City flat year-over-year with as David just said, the RFP is live, and we won’t know what the outcome is that of that is until we’re well into the year. As I think about the cadence, I want to do a little bit more work on it. The one piece — if you go back to the three drivers, and I’ll talk about profit for a second. I talked about the portfolio mix, the TAM execution, and the financial infrastructure piece of this. The one thing that is clear is the financial infrastructure spend is definitely in the first half.

So, I would expect that we’ll incur that in the first six months. We won’t see that back half. As I think about the pacing of this, I do — I would expect — and again, this is in the absence of a completed plan, I would expect to see sequential growth in the Government Solutions business as some of those new TAMs that we’ve talked about start to take foot over the back half of 2025. But again, we’re going to see the larger thrusted increase in revenue in 2026 once those are installed and started.

Nik Cremo: Got it. Thanks for all the color Craig.

Operator: Your next question comes from the line of Daniel Moore with CJS Securities. Please go ahead.

Daniel Moore: Yes, thanks, again, for taking the questions. Probably self-evident, but given the outlook for fiscal 2025 — for 2025, it fair to assume if just in terms of rank ordering the growth? Are we thinking about Commercial Services maybe kind of mid-single-digit, low to mid-single-digit with Government Solutions a little bit higher than that? And what are your underlying assumptions for T2?

Craig Conti: Yes, I would say that — let’s go business by business at a very high level. I fully understand where you on the question. I think sees the way to think about it, it would be on the lower end of the long-term guide that we put out for Investor Day, right? I don’t think it’s to be anywhere near — I don’t see low single-digits today whatsoever. So, let’s just say the low end of the long-term guide and that — and the assumption that underlies that is travel growing at GDP-like growth year-over-year. On the GS business, I think that’s going to be on the high side of our long-term guide. We’ve talked about the strength. I think that we pick up some of that revenue in the back half of the year. And I think we’ll see growth rates similar to 2024 and 2025 for GS is my best view today.

T2 is going to be a little bit more episodic. They’re pressured on equipment sales as we’ve seen this year. I do think we’ll see growth, but frankly speaking, if we grow at mid-single-digit or low single-digit, I don’t think it’s really going to change the calculus at the consolidated level. So, that’s how we rack and stack it what I can see today.

Daniel Moore: Makes sense. And then the — obviously, you can’t talk too much about the RFP, but some interesting legislation, the New York Governor just — as you alluded to, signed legislation increased Red Light Camera program by 450 by 2027. Curious if you expect New York to purchase cameras that they have in the past and how you think about the scale or magnitude of the opportunity set both in New York City, but also as enabling legislation opens up across the rest of the state? Thank you.

David Roberts: Yes, I mean, the legislation just passed this week, so I don’t think we’ve had any direct conversations, but I would anticipate up and until the RP is finalized, that New York will probably you sit on the sidelines related to that. And they’ll make that determination at that time. I wouldn’t have a read into the cities.

Craig Conti: And if you remember, we did talk about in the past, and I know this was public from some of the Q&A is that New York is actually looking at the people place whether they would buy or whether they would ask for the build own operating model that we have in the rest of the country. So, again, that’s how we’ll quote it. And New York City will make their choice as they will. With respect to the other part of your question is I don’t see a direct camera purchase being any more prevalent in the United States in the future than it has been in the past. So, now is the simple answer to the first part of your question.

Daniel Moore: All right. Maybe just last one, I’ll jump out, but with leverage now approaching 2 times by year end. Just talk about priorities for reinvesting cash flow and barring a meaningful M&A, would you continue to pay down debt? Or maybe accelerate investments and/or return cash to shareholders rather than push low leverage further or below the kind of long-term target range? Thank you again.

David Roberts: Yes, I mean, ultimately, I don’t think there anything has changed in terms of our prioritization. The first thing is growth, and we want to continue to look for ways to continue to perform at the business level. So, we’ll be looking both at opportunities to invest in the business as well as opportunities to invest via M&A. I think we’ve been very, very active on that. And I think our cash balance just gives us a really great position as we think about different types of transactions. Based upon the timing or what we calculate as the returns related to those, we’re always open to looking at both share repurchases. We have a $50 million authorization outstanding as we sit today. And as Craig mentioned earlier, we’ve done debt twice — we refinanced the debt twice this year.

So, I think we’re pretty open to whatever makes sense. And we have — because of the cash flow generation of the company, we’re able to make those decisions kind of in a quarterly view. So, — right now, we’re really comfortable with our cash position, and we remain active on the M&A front.

Craig Conti: I would add just to that is that we still have a target of 3 times net leverage, right? So if we land at 2 times, if we don’t do any incremental capital deployment from where we were at the end of the third quarter, as I said in the prepared remarks, that’s going to be a result, not a target. So, the thought on target net leverage for the company hasn’t changed.

Daniel Moore: Understood. Thank you.

Operator: Your next question comes from the line of Faiza Alwy with Deutsche Bank. Please go ahead.

Faiza Alwy: Yes, hi. Thank you. So, Craig, I was hoping you could give us a little bit more color on the incremental cost that you talked about for 2025. And I think you mentioned portfolio mix and some costs. So, just if you can help frame some of those things for us, that would be helpful.

Craig Conti: Yes, sure. So, I’ll take them one by one, Faiza. So, — and thanks for the question. So, on portfolio mix, this is really the CS business with GDP-like growth in travel, there are other parts of the business that are at a different mine. I can’t go too specific on margin percentages for competitive reasons, as I know we’ve crossed in this call before. So, there will be parts of the business that grow a little faster than travel, the travel facing parts of the business next year, which will put a little bit of pressure on the margins, not extremely material, but we won’t see the kind of margin accretion that we saw in 2024 — in 2023 because of the travel recovery. That’s the mix. The second part is TAM executions in the GS business.

So, a couple of things going on here. We’ve talked about previously going up through, I think, the third quarter of 2024 about lobby, legislation and sales costs. Those continue. We continue to open new TAMs. So, that’s a piece that’s going to be there, but I also think that’s in the run rate. Probably the bigger piece is if you think about the ARR win announcements that we’ve talked about, they’ve really ramped in the back half of the year. And so the revenue is going to follow that, right? So, if we go 12 to 18 months beyond that, we’re talking about late 2025 revenue, early 2026. The other piece of that is, as we go to install these, there’s R&D costs that goes as part of every install that we’re going to incur. And let me tell you about what some of those things are.

So, things like signage at the roadside, multiple camera angles that needs to be customized, certain municipalities want different camera angles, and custom evidence packages. These are new costs. We incur these all the time for every implementation that we do. But since we have this really favorable [Indiscernible], if you will, of installs, that’s building towards the back of this year into next year, those costs are going to precede revenue a little bit. So, when I myopically snap the chalk in 2025, we’re going to see incremental cost in advance of revenue. And then the final piece is on the financial infrastructure side. So, we’ve talked about this for about a year, but this is the final thrust of implementing a new ERP for the company, about $5 million of noncapitalized costs that will incur in and around the first six months of 2025.

Faiza Alwy: Okay. Understood. That’s all very helpful. I just have two quick follow-ups. One is on the — are you expecting a higher level of CapEx spending also then in 2025?

Craig Conti: Yes, marginally. And I would bracket it by saying, I’m still working that out, Faiza, here’s how I would bracket it. I think that free cash flow conversion as a percentage of adjusted EBITDA is going to be in the 40% to 45% range next year. We’re going to be at the high end of that range this year. So, by widening that range a little bit, that would tell you, I probably am going to have a little bit more CapEx, but those installs as we get to the back half of last year, could push like they did this year in terms of timing. So, I think the CapEx will be roughly similar, but higher year-over-year.

Faiza Alwy: Okay. Okay. And then just last one, this might be difficult to answer, but I’m curious, as you’re winning these new contracts and the new ARR you mentioned the installation costs, but how should we think about like just margin mix with these new contracts? I know there is quite a bit of competition in some cases, are you finding — like as we look ahead over a longer period of time, do you think these are margin dilutive to the Government business? Or are you getting them at a similar margin profile than where you are currently — or at least were last year?

David Roberts: Yes, I would say it’s going to depend on the size of the program. I mean some of the programs that are much larger, like New York have higher levels of cost. And certainly, some that are smaller, just it’s going to depend. So, what I would say is that, generally speaking, we are winning the deals at prices that have been relatively similar to where they have been in the last several years, and so we would continue to hope to win and maintain margin outside of the investments that Craig mentioned earlier.

Craig Conti: Yes. And I think it’s right out, David. As I look at it, as I look at the margin percent of the business in the low 30s today, we may have — we have a heavy install here that could go to the very tippy top of the high 20s, right? But that’s because you have to incur the cost ahead of the revenue coming in. I don’t think about this business being sub-30%, though, as we go out a couple of years, Faiza. So, it’s very variable, not only by municipality, but also by the mode that we’re selling. I mean we don’t sell one product, we sell multiple. But as I look at it, in general, in total, in consolidation, I think about this as a low 30s business as we continue to scale that on volume go forward.

Faiza Alwy: Great. Thank you so much.

Operator: Your next question comes from the line of Dave Koning with Baird. Please go ahead.

Dave Koning: Yes, hey guys. Thanks for doing this and taking my call. So, first of all, just on parking, the service part of parking had been flat to up for, I think, almost all the quarters since you bought it. But this quarter, I believe it was down about 4% year-over-year just on the service side, too. Maybe refresh on what that was or why that is and does that kind of get back to growth mode pretty soon?

Craig Conti: Sure. That service contains two things. They’re installation services and warranty services, which tend to follow the equipment side of the business also within there is the pure SaaS component. So, in the prepared remarks, we tried to bifurcate those. If I look at just the pure SaaS component, which is roughly 50% of the business, that grew year-over-year. Even as we’re in this pressured environment, that grew a couple of percent year-over-year. The service component — true service of what we call services and consolidation was down, what, Mark, 4%, 5%, something like that mid-single-digits — was down mid-single digits because that’s — those are the services that are following the equipment side of the business, which is, as you know, been pressured in the back half of the year.

Dave Koning: Got you. Okay. And then I guess my follow-up question, it’s like super nerdy, but in the filing, the last couple of quarters, a little over half of the commercial growth was tolling and then a third or so is fleet. And then just a little bit was kind of other stuff. This quarter, about half was tolling, only $1 million was fleet, and then about half of the growth was actually it looked like title registration, violations, all that other stuff. So, this quarter was really big on that stuff compared to the last many quarters. Am I reading that right? And maybe why were some of those things strong this quarter?

Craig Conti: I think we had a one-timer last year that was in that I think could be messing up the comps on that. There’s not really a story there, to be honest with you. We’ve seen relatively — let’s talk about the TSA throughput that is probably the best way to say it, right? For the first three quarters of the year, we’ve been $106 million, $106 million, $104.5 million. So, the tolling side of the business tends to follow that and the violation side tends to follow that. The one thing on T&R that I think is probably a little bit to call out is we have seen less registrations thus far this year. The RACs will be reporting tomorrow, so you can hear all about that from them. But if I bring it back to the total CS level, I don’t think that there’s a story there to tease out.

Dave Koning: Yes. Got you. And tolling overall was good, it looks like. So, I appreciate that all. Thank you.

Operator: Your next question comes from the line of Keith Housum with Northcoast Research. Please go ahead.

Keith Housum: Good afternoon guys. Just first off, a little bit of housekeeping in terms of the fourth quarter. In terms of the disruption in terms of the Florida toll result of the hurricanes, can you quantify what kind of headwind that’s presenting for you guys in the quarter?

Craig Conti: Yes. Our best guess on that is $1 million to $2 million, probably towards the upper end of that range, Keith, if I were a betting man here. I haven’t seen it all come through that. That’s why I can’t give you a precise answer, even though the storm hit 23 days ago, but it will be around $1 million to $2 million.

Keith Housum: Great. Appreciate it. And then just in terms of the international business, I think, David, you might have called out Australia and Canada is having some nice ARR wins. But perhaps you just go through each of your segments and talk about the importance of international, both in terms of what it is today and perhaps how it’s growing compared to the rest of the business?

David Roberts: I mean I think ultimately — I mean we continue to have a lot of really strong — like in the Government Solutions business, principally, we’re talking about Australia. We have one of our largest customers in the entire globe in New South Wales that continues to — we continue to work with them and grow. So, I would say that’s really, really important to the Government Solutions business over the horizon. We use that as a sort of launching pad to win some work in New Zealand. I think we talked about that last quarter, if I recall, but we still — so those are important there. Obviously, Europe is principally for Commercial Services, which remains a good business. We’re still continuing to work some pilots across multiple RACs as well as multiple countries.

Some of those RACs are actually coming up for extension. So, we’re excited about that. We have some things going into Italy, which is one of the real big areas of tolling. So, as we’ve mentioned in previous quarters, we’re starting to see that thought. So, again, I would still say that, that’s very important to the long-term growth of the company.

Keith Housum: Got you. Appreciate it. And last question for you. Do I understand it right that New York City also has a pilot out there for your CrossingGuard product that I think you might be doing with one of your competitors. Can you maybe perhaps clarify if it’s part of the larger New York City proposal that we’ve been talking about here earlier or is that a separate proposal you guys are working on?

David Roberts: I’m not familiar with the combined–

Mark Zindler: Yes, I mean there’s a separate procurement for school bus stop arm.

David Roberts: You said pilot.

Mark Zindler: Yes, there’s not a pilot program.

Keith Housum: Okay. And that’s separate from the New York City RFP that we’ve been talking about in terms of Red speed cameras, et cetera, correct?

Mark Zindler: Yes, it would be a second submittal.

Keith Housum: Okay. All right. That’s all I got. Appreciate it.

Operator: And your next question comes from the line of James Faucette with Morgan Stanley.

Shefali Tamaskar: Hi, this is Shefali Tamaskar, asking a question on behalf of James. Thanks for taking my question. So, great to see so much strong free cash flow this quarter. So, want to touch upon capital return. You provided a little bit in your prepared remarks about looking into adjacent technology sectors. And I just want to get a sense of in the pipeline, what types of assets you might be looking for and how valuation in this space is looking generally? Any new ways you’ve been thinking about it?

David Roberts: Yes, I think generally, the framework by which we look at is still the same, which is we start with our core and are we able to use capital to strengthen our position in the core in both the products as well as the geographies that we serve. So, that’s kind of number one. I think that’s probably number one of most people’s list. Number two is adjacencies. So, we talked about last quarter that we really started to look at a slightly broader aperture because we recognize things like government software and public safety are kind of different markets that we’re not necessarily in today, but there’s a lot of overlap with customers and both customers as well as technology. So, those will be some of the areas that we’re looking at today inside of what we call urban mobility. And then in Connected Fleet, we continue to look for vehicle payments and things like fleet management, fleet software, and telematics are areas that we continue to look at.

Shefali Tamaskar: Great. Thank you.

Operator: Your next question comes from the line of Noah Levitz with William Blair. Please go ahead.

Noah Levitz: David, Craig, and Mark, good afternoon. This is Noah on for Louie DiPalma. To start off, I wanted to — first of all, congratulate you on winning San Francisco. That’s awesome news. What’s the timing on the rest of the California pilot cities being awarded? And can more cities or towns outside of the six that’s been announced get awards before now and the pilot has ended?

David Roberts: Yes. So, I mean I think you’ll start to see more — San Francisco really was a thought leader in getting the legislation passed. That’s why they jumped on it quite early. What you would potentially anticipate as other cities that are included in the pilot language would use the RFP that San Francisco submitted as sort of a template as it were — as they think about it. And so I think we’re going to start to see some acceleration there probably shortly. Outside of that, [Indiscernible] new legislation as it stands today, those are the cities that are named in the legislation are the ones that can do it. But we certainly think that there’s already a strong demand that may open up that state for late — sooner than later for all cities that would want to participate in that they could.

Noah Levitz: Got it. And then staying in Government Solutions, can you talk a little bit about how the State of Florida is looking in terms of business development activity? Thanks.

David Roberts: Yes, continue — we had some wins. We talked about — I think it was last quarter, if I remember correctly. It’s — it’s a state that we’re continuing to see some wins in as well as still a lot of competitors there — more competitors there than we’ve seen in other places. So, — but yes, overall, we feel very good about our position there, especially in some of the larger procurements.

Noah Levitz: Got it. That’s great. And then just one final question. You mentioned in your prepared remarks about an $8 million ARR contract with Hayden AI. Can you talk a little bit more about that and what it involves? Thanks.

David Roberts: Yes. So, Hayden is a partner, they have an outstanding capability related to the cameras that they use. And so they’re able to do a mobile bus lane enforcement and so that we are effectively serving as their back-end processing capability for their front end with their outstanding technology.

Noah Levitz: Great. Thank you very much.

Operator: Thank you. And there are no further questions at this time. This now concludes today’s conference call. Thank you all for participating. You may now disconnect.