Verra Mobility Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 7, 2025

Key Takeaways

  • Q1 financials beat expectations: Total revenue rose 6% YoY to $223 M and adjusted EPS grew 11% to $0.30, driven by strong operating performance, share repurchases, and lower interest expenses.
  • New York City contract progress: Selected as vendor to manage NYC’s automated enforcement programs for an expected five-year term, with final contract negotiations underway and clarity expected within 60–90 days.
  • Government Solutions momentum: Booked $6 M of incremental annual recurring revenue in Q1, bringing trailing 12-month ARR additions to $52 M, supported by $185 M in expanded TAM and a 97% contract renewal rate.
  • Travel demand headwinds: Consumer confidence pullback led to only 1% TSA volume growth in Q1 and flat Q2-to-date volumes, prompting expectations of modest travel volume deceleration in H2 2025 and potential revenue risks.
  • 2025 guidance reaffirmed: Full-year targets of $925 M–$935 M revenue, $410 M–$420 M adjusted EBITDA, $1.30–$1.35 adjusted EPS, and $175 M–$185 M free cash flow, though management cautions potential skew to the lower end due to economic uncertainty.
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Earnings Conference Call
Verra Mobility Q1 2025
00:00 / 00:00

Transcript Sections

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Operator

and thank you for standing by. This concludes Verily's First Quarter twenty Results Conference Call. My name is Michelle, and I'll be your conference operator today. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

You would then hear an automated message by asking your hand is raised. To withdraw your question, please press 11 again. Please be advised that today, Mark Zinlis, Investor Relations. Please go ahead.

Mark Zindler
Mark Zindler
Investor Relations at Verra Mobility

Thank you. Good afternoon, and welcome to Veramobility's first quarter twenty twenty five 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 and A.

Mark Zindler
Mark Zindler
Investor Relations at Verra Mobility

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.

Mark Zindler
Mark Zindler
Investor Relations at Verra Mobility

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 will 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.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Thank you, Mark, and thanks everyone for joining us. We delivered a strong first 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 $223,000,000 driven by outperformance in all three business segments relative to our internal plan. Adjusted EPS increased 11% over the prior year period given our operating performance, recent share repurchases, and the reduction in our interest rate on our term loan debt.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Before I elaborate further on our financial performance, I am pleased to report that the New York City Department of Transportation identified Veriability as the vendor to manage New York City's automated enforcement safety programs for what is expected to be a five year period after the company's current contract expires in December of twenty twenty five. We are honored by the opportunity to continue serving as New York City's trusted technology provider on a world class transportation safety program. This remains an active procurement as we are currently engaged in contract negotiations with the New York City Department of Transportation. As such, we do not intend to make any additional disclosures about the program until the contract is finalized. Moving on to the segment level financials, Commercial Services first quarter revenue and segment profit increased about 64%, respectively, over the prior year period.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

RAC tolling increased six percent over the prior year period, driven by a modest 1% increase in TSA travel volume, increased product adoption, and higher tolling activity compared to the first quarter of last year. Additionally, FMC revenue grew 12% compared to the first quarter of twenty twenty four, primarily due to the increased vehicle enrollment as well as higher tolling activity. Looking ahead, we anticipate that FMC growth rates will moderate due to tougher comps over the balance 2025. Government Solutions service revenue increased 4% over the first quarter of twenty twenty four. Revenue from New York City, our largest government solutions customer, was essentially flat year over year, as we await the finalization of the aforementioned contract.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Service revenue increased 7% outside of New York City, driven by expansion from existing customers and new cities implementing photo enforcement programs. Total revenue, including international product sales, was up about 8% over the prior year quarter, fueled by a $4,000,000 increase to product sales compared to the first quarter twenty twenty four. Moving on to T2, our Parking Solutions business, total revenue increased about 2% for the quarter, driven by increased revenue from SaaS product offerings and a modest increase in product sales, partially offset by lower professional services revenue. Next, I will move on to the macro environment and the implications to our business. We monitor domestic travel demand as it directly influences our commercial services business.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

We are experiencing a broader pullback in consumer confidence levels and the impact on travel demand, as evidenced by The U. S. Air carriers cutting their forecasts. As I mentioned, first quarter TSA volume increased about 1% over the first quarter of last year and second quarter to date is about 100% of the same period last year. In this uncertain economic environment, we anticipate that discretionary spending may be impacted, and travel demand may soften as a result.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Consequently, we have incorporated a modest deceleration of travel volumes in the second half of twenty twenty five in our current assumptions. This is subject to further change and we are closely monitoring the airline industry, which is often a good indicator of trends that impact the Commercial Services business. Next, I'll discuss the demand for automated photo enforcement, the key driver for our Government Solutions business. We continue to see positive support of photo enforcement programs across The United States. In total, the enabling legislation passed over the prior two point five years across The United States adds approximately $185,000,000 of TAM, with the potential to expand over $300,000,000 as further legislation allows in California.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Our execution against this TAM has been strong. In the first quarter we booked about $6,000,000 of incremental annual recurring revenue at full run rate, bringing the trailing twelve month total to $52,000,000 Notable first quarter bookings include Windsor, Colorado, Red Light excuse me, Windsor, Colorado, Red Light and Ontario Candid speed expansion programs, along with Carroll County, Georgia school bus stop arm expansion. Moreover, our pipeline for Q2 is attractive, as we have a number of awards awaiting contract execution. Our Government Solutions annual recurring revenue bookings typically materialize into revenue over a twelve to eighteen month period, In conjunction with an approximate 97% contract renewal rate, we believe this demonstrates a strong and predictable recurring revenue stream. Moving on to our full year outlook.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

We are maintaining our full year 2025 financial guidance. However, recognizing that there's a risk with uncertain travel demand, we may trend towards the lower end of the ranges previously provided. Our guidance ranges factor in a level of travel demand variability, and we will continue to reevaluate as the summer travel season kicks off in earnest. 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 early signs of success. We believe these businesses are areas are largely unaffected by economic sensitivity.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

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

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Thank you, David, and hello everyone. I appreciate you joining us on the call today. Let's turn to slide four, which outlines key financial measures for the consolidated business for the first quarter. Our Q1 performance exceeded internal expectations, which included 5% service revenue growth and 6% total revenue growth year over year. The service revenue growth, which consists primarily of recurring revenue, was driven by a modest increase in travel volume, increased product adoption and higher tolling activity in the commercial services business, as well as service revenue growth outside of New York City the government solutions business.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

At the segment level, commercial services grew 6% year over year, government solution service revenue increased by 4% over the prior year and key to system staff and services revenue was essentially flat compared to the first quarter of twenty twenty four. Total product revenue was 11,000,000 for the quarter. Government solutions contributed roughly 8,000,000 and P2 delivered about 3,000,000 in product sales overall. Additionally, our consolidated adjusted EBITDA for the quarter was $95,000,000 an increase of approximately 3% versus last year. We reported net income of $32,000,000 for the quarter, including a tax provision of about $12,000,000 representing an effective tax rate of 28%.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

GAAP diluted EPS was $0.20 per share for the first quarter of twenty twenty five compared to $0.17 per share for the prior year period. Adjusted EPS, which excludes amortization, stock based compensation and other non recurring items was $0.30 per share for the first quarter of this year, compared to $0.27 per share in the first quarter of twenty twenty four, representing 11% year over year growth. The adjusted EPS growth was driven by an 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 activities totaled $63,000,000 and we delivered $42,000,000 of free cash flow for the quarter, ahead of our internal expectations. Turning to slide five, we generated $4.00 $4,000,000 of adjusted EBITDA on approximately $893,000,000 of revenue for the trailing twelve months, representing a 45% adjusted EBITDA margin.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Additionally, we generated $174,000,000 of free cash flow or 43% conversion of adjusted EBITDA over the trailing twelve months. Next, I'll walk through the first quarter performance in each of our three business segments beginning with commercial services on slide six. CS year over year revenue growth was 6% in the first quarter. RAC tolling revenue increased 6% or about $4,000,000 over the same period last year, driven by modest travel demand growth and increased product adoption and tolling activity. Our FMC business grew 12% or about $2,000,000 year over year driven by the enrollment of new vehicles and tolling growth from existing and newly enrolled FMC customers.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

As David mentioned, we anticipate that FMC growth rates will moderate over the balance of 2025 due to tougher comps. Commercial services segment profit increased 4% over the prior year. Revenue growth was partially offset by ERP implementation costs, as well as higher bad debt expense driven by a non recurring write down of aged receivables. Turning to slide seven, Government Solutions had solid service revenue growth for the quarter, driven by 7% growth outside of New York City. Total revenue grew 8% over the prior year quarter benefiting from about $8,000,000 in product sales, which was a $4,000,000 increase over the same period last year.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Government Solutions segment profit was $29,000,000 for the quarter, representing margins of approximately 29%. The reduction in margins versus the prior year is primarily due to increased marketing and business development costs, project information costs for newly awarded programs and ERP implementation costs. Let's turn to slide eight for a review of the results of T2 Systems. We generated revenue of 20,000,000 segment profit of approximately 3,000,000 for the quarter. SaaS and services sales were essentially flat compared to the prior year, while product revenue was up 13% or $400,000 compared to 2024. Breaking the t two SaaS and services revenue down a bit further, recurring SaaS revenue grew about 5% 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 prior quarters.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Okay, let's turn to slide nine and discuss the balance sheet and take a closer look at leverage. We ended the quarter with net debt balance of $935,000,000, which reflects the strong free cash flow we generated in the first quarter. Net leverage landed at 2.3 times and we've maintained significant liquidity with our undrawn credit revolver. Our gross debt balance at year end stands at about $1,000,000,000 of which approximately $690,000,000 is floating rate debt. Okay, now let's turn to slide 10 and have a look at full year 2025 guidance.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Based on our first quarter results and our outlook for the remainder of the year, we are reaffirming all guidance measures. As David discussed, our primary consideration is the uncertain economic environment and potential impact to travel. Ultimately, on our strong first quarter performance and our ability to withstand some level of travel volume variability, we are reaffirming guidance. Recognizing that there's a risk of moving to the lower end of guidance the guidance ranges of travel demand continues to worsen from current levels. In the event that The US economy enters a recession, and we see a material move downward in TSA volume, we will reassess and update the market accordingly.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Additionally, we have evaluated potential tariff exposure and we expect the direct impact to be immaterial to our business in the near term. However, as we've discussed, the indirect impact to consumer and business spending may impact travel demand in our commercial services business. As a reminder, the full year 2025 guidance ranges provided on our fourth quarter twenty twenty four earnings call were as follows. We expect total revenue in the range of $925,000,000 to $935,000,000 representing approximately 6% growth at the midpoint over 2024. We expect adjusted EBITDA in the range of $410,000,000 to $420,000,000 representing approximately 3% growth at the midpoint.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

We anticipate adjusted EPS in the range of $1.3 to $1.35 per share. And free cash flow is expected to be in the range of 175 to 185,000,000 representing a conversion rate in the low to mid fortieth percentile of adjusted EBITDA. Moving on to the segment level, we are reaffirming that government solutions is expected to generate the high end of mid single digit total revenue growth, driven by the expansion of camera installations with existing customers and new customers awarded in fiscal year twenty twenty four. Recall that this growth includes an expectation of flat service revenue from New York City in 2025 under the legacy contract while we work through the contract negotiations. Additionally, we expect product revenue to be largely flat 2024 levels.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Taken together, both New York City service and global product sales comprise nearly 40% of total government solutions revenue. The remaining 60% of government solutions revenue is expected to grow low double digits in 2025. We continue to anticipate that parking solutions revenue will be about flat to 2024 levels. We expect SaaS revenue to grow low to mid single digits, offset by decline in installation and professional service revenue on roughly flat product sales. Any variability is expected to come from commercial services and specifically RAC tolling contingent on TSA volume.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Historically, in the combined CS business, the first quarter is forecast to be our lowest revenue generating quarter, followed by sequential revenue increases in the second and third quarter, followed then by a revenue decline in the fourth quarter as the summer driving season comes to a close. However, given the current economic uncertainty, these trends may play out differently in 2025. 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 going well and the vast majority of processes are now live in the new platform and the implementation is on schedule and on budget.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

In closing, we're very pleased with our first quarter performance. We exhibited solid execution across the board and we're delivering strong free cash flow and earnings. As we head into the back half of twenty twenty five, we remain cautiously optimistic about our outlook and we'll be monitoring the economic environment and travel demand very closely. This concludes our prepared remarks. Thank you for your time and attention today.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

At this time, I'd like to invite Michelle to start the Q and A session. Michelle, over to you.

Operator

Thank you. And our first question comes from Nick Cremo with UBS. Your line is open.

Nik Cremo
Nik Cremo
Executive Director, Lead Equity Research Analyst - Payments & FinTech at UBS Group

Thanks for great update and all the incremental color here. First, just a quick one on the New York City contract. I realize you guys can't share any real details, but when's the expectation as to when this contract will be finalized and when we'll have greater clarity on the impact on your business?

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Yeah, good question. Nick, it's David. I would say probably in the next sixty to ninety days is probably a reasonable bet.

Nik Cremo
Nik Cremo
Executive Director, Lead Equity Research Analyst - Payments & FinTech at UBS Group

Got it. Thanks for that. And then I was hoping just to get a little incremental color on the attractive pipeline that you referenced in the prepared remarks. You have coming in Q2? And then also just any updates on the city level RFPs going on in California, if there was any updates there? Thank you.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Yeah, think what we've seen is the activation of the TAM that we worked really hard to do has translated to pipeline. We've been I think we are well ahead of where we hope to be from a pipeline, and now it's really just the translation of that pipeline to revenue. So our bookings are running ahead of our internal plan. California is going very well. We're waiting right now for some final updates from a couple of RFPs that we've submitted for San Jose and for Oakland.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

And so but overall, we feel very good about our position there.

Nik Cremo
Nik Cremo
Executive Director, Lead Equity Research Analyst - Payments & FinTech at UBS Group

Got it. Thanks very much.

Operator

Thank you. Our next question comes from Daniel Moore with CJS Securities. Your line is open.

Daniel Moore
Director of Research at CJS Securities

Thank you, Dave and Craig. Good afternoon. Thanks for taking questions. Maybe I think you've probably covered this, but just parsing the updated commentary around guidance. Are you seeing Travel and Commercial Services revenue slow in real time and that's causing you to point to the low end?

Daniel Moore
Director of Research at CJS Securities

Or is it more just the anticipation of softer volumes perhaps in the back half of the year, given some of the revised outlooks from the airlines?

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Dan, thanks for the question. This is Craig. I see exactly where you're coming from. And I think it's more of the latter than the former. Let me contextualize it this way.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

As we exited, well, me tell you how we planned. We expected the year when we talked last time to be somewhere in the 102%. It's a 2% growth versus last year if we look and leveled it over the year. As I look out today, we ended the quarter Q1 at about 101%. April was right around that level.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

May is trending a bit lower. So the short answer I would say is we're starting to see a very small decline, but not big enough to anything that I would call material. So as I think about the back half of the year though, we look at some of our peers and some of the other market participants that David mentioned in his prepared remarks. And we don't exactly know what we don't know. So the way that we've thought about the guide is we're okay at, call it, flattish type demand from this point forward to the balance of the year, and maybe even a point or two worse than that.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

But if it goes further than that, we'll have to come back to you. And I think that's really in line with what we've seen year to date, and what we've heard from other market participants.

Daniel Moore
Director of Research at CJS Securities

No, that helps. Certainly. And then, know, your RAC tolling revenue specifically, growth continues to comfortably outpace TSA volume growth. And I recognize that travel volumes might be a little lower, but is that a trend you expect to continue for the balance of the year that sort of outperformance versus the market?

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

That's always a tough one, and I fully appreciate the question. I understand what you're getting at there. And here's the reason, is there could be a disconnect between how our business performs versus how the TSA performs For the simple reason that TSA covers the entire country, and the entire country doesn't have toll roads. So I think as I've said before, five states make up two thirds on some quarters as high as 80% on other quarters of our revenue. So it's all about if that travel is going to be down or up in the areas where variability does the most business.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

So, I have to take that kind of as it comes. I can't look forward and anticipate that at this time.

Daniel Moore
Director of Research at CJS Securities

One more and I'll jump back in queue. Government solutions, obviously, nice to see continued growth in RFPs in the pipeline. This has been a little bit of an investment or setup year in that business. How should we kind of think about the opportunity for margin expansion, maybe not specifically '26? I know you don't want to get into that, but beyond over the next, call it, two, three years? And thanks again for the color.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Yeah I mean I think what you see is with all of the TAM that we mentioned, and that's with just the pilot in California, it was $185,000,000 I think just the last couple years going up to 300. So you would say that relative to a tailwind, that that is about as good of a tailwind as you can have inside of that business, which is we have a market leadership position and an expanding market with new opportunities as well as expanding use cases. So I would say that the next couple of years based upon both the pipeline as well as the work we've done to sort of lay the groundwork from a legislative perspective sets us up really, really well in that business.

Operator

Thank you. Our next question comes from Louis De Palma with William Blair. Your line is open.

Louie Dipalma
Research Analyst at William Blair

David, Craig and Mark, good afternoon, and congrats on the preliminary New York City renewal.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Thanks, Louie.

Louie Dipalma
Research Analyst at William Blair

For for David, as you are well aware, one of the major autonomous vehicle fleet operators has a a major facility in your neighborhood of of Mesa. It seems autonomous vehicles have been making significant strides recently on on different earnings calls and and rollouts in different cities. For the long term, what are your thoughts on driverless fleet operators being like potential, like, tolling partners of yours?

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Yeah, so if you drive around the city of Phoenix, you'll definitely see some unique camera laden cars that are no driver and people on the back. I think one is while there is certainly some I think autonomy has actually made some nice traction the last couple of years after being really silent, or not growing to what people had thought. You still have over 200,000,000 vehicles in The United States that are being driven today that do not have any autonomy. So I still think that's a longer way out relative to significant impact. In the short term relative to partnerships, we're really focused on developing partnerships with the car manufacturers so that we can embed our technology with them.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

And so that I would say that as we think about the longer term future, it's probably in partnership with the manufacturers.

Louie Dipalma
Research Analyst at William Blair

That makes sense. And secondly, you have disclosed the camera photo enforcement bookings for the past five quarters. And I was wondering, how should we think of how your camera backlog has built in terms of cameras that are under contract that are awaiting installation? And related to this, how should we think of any potential churn, whether temporary or permanent, that may have taken place, such as trying to connect the dots between all the ARR that you've added and your future revenue?

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Yeah, Louie, this is Craig. I'll take a crack at that one. I would think of that camera backlog a lot like we talk about the ARR backlog. And the one thing I would remember on that one is it takes twelve to eighteen months for that to translate into revenue. But if you take even the longer end or short term or the shorter end or medium term view, that's a great way to think about it.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

So I think the number that we kicked out in the prepared remarks was $52,000,000 of ARR growth over the TTM period. And then if you kind of compare that to the overall consolidated revenue of Government Solutions, get an idea. You get an idea of what that revenue looks like. And if anything, we've continued to see that accelerate.

Louie Dipalma
Research Analyst at William Blair

Okay. And so is one able to just add that $52,000,000 of ARR to your current ARR to get your future ARR?

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Short answer is yes. The slightly longer answer is you can't do it for the next ninety days or for the next twelve months specifically. But over the next twelve to eighteen months, that's what that reported number means. That is over the last twelve months, we've signed up new customers that will generate a $52,000,000 of annual recurring revenue. And I think on your second question, I want to make sure I come back to answer exactly what you asked.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

On the second question, in terms of churn, this is a 97%, ninety eight % renewal business. It's been that way for quite some years and it stayed that way today. So our stick rate on these cameras is very, very high.

Louie Dipalma
Research Analyst at William Blair

Great. A third potential question, if I may. You mentioned how there could be a recession. A lot of analysts also think that. How does that influence your thinking on your long term leverage target? Craig?

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Yeah, I'd say the best indication of that is let's look at what happened in the past, right? So when we went out for Investor Day, and wow, this was 2022. That's incredible. Four years ago, you know, you're telling me, Louie, is we were a three and a half times net leverage was the target leverage for the company. Know, and as we looked at interest rates ran from that point, credit markets froze up a little bit, we brought that down to three times net leverage.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

I still think three times net leverage for a company that generates low to mid 40% conversion of free cash flow to adjusted EBITDA, it still makes sense. But we will absolutely re snap that chalk line in response to wherever the macro environment is at the given time. We've done in the past and we would do it again. We're not in that space today, Louie, but certainly it's something that we'll keep an eye on.

Louie Dipalma
Research Analyst at William Blair

Great. Thanks for all the questions. Thanks, everyone.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Thank you.

Operator

Our next question comes from David Koning with Baird. Your line is open.

David Koning
Senior Research Analyst at Robert W. Baird & Co

Yeah. Hey, guys. Great job. And I guess, first of all, Commercial Services, the presentation shows guidance still high single digit growth. And I'm wondering if that does weaken in towards the low end of total guidance, do you still mean for that to be the lower end of high single digits?

David Koning
Senior Research Analyst at Robert W. Baird & Co

Or if it weakens, would it be a little less than high single digits?

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

I think it'd be a little less than high single digit, Dave, is my guess today. It's right where we sit today, we're on the cusp. So if travel were slow and it were slow in the states that are most material to bear mobility, then that would likely drag that growth rate down with it.

David Koning
Senior Research Analyst at Robert W. Baird & Co

Yeah, okay. And then secondly, it seems like super high quality earnings this quarter. You looked through the press release, you didn't add hardly anything back anymore in terms of like transition costs. And it looks like you called out on the call something that shows up in the cash flow statement about $8,000,000 of bad debt expense, I think that you like included in your numbers, I believe and just maybe talk through that and maybe what that was and then it seems like next year's setting up well because you won't have the ERP, you won't have this most likely, etc.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Yeah, so the one that we called out, thank you for that observation. The one that we called out in our script was simply some age bad debt at commercial services. This was more an accounting reconciliation thing than anything else. Wouldn't equate it to current operations in any way shape or form and it was relatively small. Know, one thing we've really tried to do is we're really sparse on what we spike out here, right?

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

And we have a lot of internal processes to make sure what ends up on our adjusted list is something that is commonly adjusted for other places in the market. So I appreciate you calling out that it's clean. Remind me, I'm sorry, Dave, what was the second part of your question?

David Koning
Senior Research Analyst at Robert W. Baird & Co

Yeah, just next year, it seems like some things like the ERP conversion, maybe some of this bad debt expense, etcetera, falls off and sets up for nice expansion.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

It should. All depends. We've got a contract negotiation ongoing, as David mentioned in his prepared remarks. We'll see what travel does here in the back half. Still looks like it's okay right now.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

But for sure, we've got a handful of millions of dollars that we spent on the ERP this year, which again is going very well, that will not be there next year. So all else being considered constant, I would say you're right.

David Koning
Senior Research Analyst at Robert W. Baird & Co

Yep, great. Thanks guys. Good job.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

Thank you.

Operator

Thank you. Our next question comes from Keith Housum with Northcoast Research. Your line is open.

Rodney McFall
Senior Equity Research Associate at Northcoast Research

Hey, thanks guys for taking my questions. This is Rodney McMullen on for Keith Housum today. So I'm just curious, what initial steps you guys are taking in T2 to improve that business, since the management change? Did that contribute to growth at all in the quarter? Thanks.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Yeah, it did. Mean, was a small growth, but it was definitely in the right direction. I think what the management team has done is really gotten their arms around the business and the customers. We reinvigorated our commercial leadership as well as our execution there. I think by using the VeriMobility operating system to help to deploy some really good metrics and KPIs and kind of a cadence of discipline behind it, it's really turned into a good story, one that we're really excited about for the future.

Rodney McFall
Senior Equity Research Associate at Northcoast Research

Got it. Got it. And then just a quick follow-up. Looking at the potential for lower travel demand, is there any color around how exposed you are to international travel versus domestic travel? Like, I'm I mean, I'm assuming that that, you know, most of, you know, the benefits that you guys get from travel is domestic, but just curious if you guys had any color on international travel as well. Thanks.

David Roberts
David Roberts
President and Chief Executive Officer at Verra Mobility

Yeah, it's really we probably look at just sort of gross TSA numbers as our real barometer. I mean, certainly it coming down will have some impact, but we sort of look more domestically because principally there's about five states where all the tolling activity is and we really are looking at travel inside those states, not necessarily people coming from out of the country to someplace else.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

That's right. Rodney, I just add one thing on that. When you're in the market listening to other market participants a lot of times, especially airlines, say airlines, is when they talk about international travel, lot of times that commentary is on the outbound international travel. For variability would be more on the inbound international travel. Right.

Craig Conti
Craig Conti
Chief Financial Officer at Verra Mobility

So but at the end of the day, as we think about travelers, we're agnostic to where that traveler actually came from is just our folks at the airport because that translates to folks at the car rental counter.

Rodney McFall
Senior Equity Research Associate at Northcoast Research

Got it. Understood. Thanks. That's all the questions I have.

Operator

Thank you. I'm showing no further questions at this time. This does conclude the question and answer session. Thank you for your participation. You may now disconnect. Everyone, good day.

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