2023-12-01 02:30:02 ET
Summary
- Verra Mobility reported solid Q3 results, driven by increased travel, cashless tolls, and government initiatives for highway safety.
- Recent California legislation could present a significant growth opportunity for the firm.
- VRRM stock remains a "Buy" given its strong execution and growth potential.
Back in February , I placed a "Buy" rating on Verra Mobility ( VRRM ), saying the company should benefit from an uptick in travel and the increased use of speed and red-light cameras. With the stock up about 27% since then, outpacing the nearly 14% gain in the S&P, let's catch on the name, which reported its Q3 results earlier this month .
Company Profile
As a refresher, VRRM is a smart mobility technology solutions firm that operates in three segments. Within its Commercial Services segment, it provides toll and violation management for rental and fleet vehicles. The company has relationships with the big three rental car companies as well as over 50 tolling authorities in the U.S.
With its Government Solutions business, VRRM offers solutions such as speed cameras, school-bus stop-arm cameras, safety cameras, and red-light cameras. The company generates most of its revenue in this segment from service fees, which can be in the form of a per camera per month basis or as a revenue share per citation basis. In its Parking segment, meanwhile, VRRM provides end-to-end parking management solutions to aid customers in running their gated, gateless, and license plate recognition-based parking lots and garages.
Q3 Results
For the most recent quarter, VRRM saw its revenue increase 6% to $209.9 million. That topped the analyst consensus calling for revenue of $209.0 million. Service revenue climbed 11% to $201.0 million, while product revenue fell -48% to $8.9 million.
Adjusted EBITDA rose 7% to $97.4 million from $90.0 million a year ago. Adjusted EPS also rose 7% to 29 cents from 27 cents a year ago, topping the consensus by 2 cents.
In the Commercial segment, revenue jumped 14% to $86.1 million. Segment profit climbed 16% to $56.4 million. Rental car tolling revenue increased 18%, helped by the increased adoption of its all-inclusive pricing plan, longer rentals, and the secular trend of more toll rolls and cashless lanes. Fleet management company ((FMC)) revenue, meanwhile climbed 20%, as it expanded its sales team to focus on this area and built new distribution channels.
In the Government Solutions segment, revenue edged up 1% to $90.3 million. Recurring revenue, which is 94% of the total, climbed 10%, helped by the expansion of New York City's photo enforcement expansion efforts. Segment profit fell -6% to $28.6 million from $30.4 million a year ago.
The Parking segment saw a -2% decline in revenue to $21.9 million. SaaS and service revenue rose 4%. Segment profit fell -17% to $3.5 million from $4.2 million.
Turning to its balance sheet, VRRM had $1.04 billion in debt and $114.4 million in cash and equivalents on its balance sheet. The company paid down $100 million in variable debt in the quarter. The company also became completely de-SPACed in the quarter, with all warrants now converted into shares. The company's board also authorized a new 18-month $100 million share buyback.
VRRM generated $62.4 million in operating cash flow in the quarter and had $52.0 million in free cash flow. Through the first nine months of the year, it had generated $170.4 million in operating cash flow and $129.9 million in free cash flow.
Looking ahead, the company forecast that it expects full-year revenue to come in at the upper range of its prior guidance of $800-810 million. It also projected that its adjusted EBITDA would come in at the high end of its $365-370 million guidance. VRRM bumped up the low end of its prior adjusted EPS guidance, taking it to $1.05-1.10 versus a prior range of $1.00-1.10. The company continues to guide for free cash flow of between $145-155 million.
At the start of the year, VRRM had originally guided for 2023 revenue to be between $7870-800 million and adjusted EBITDA to come in between $360-360 million. At the time, it was also looking for adjusted EPS of $1.00-1.10 and free cash flow of $135-155 million.
In the Commercial segment, VRRM is expecting revenue to continue to grow in the high single digit range moving forward. The company said travel-related companies see no signs of a domestic travel slowdown and for business travel to continue to pick up. Meanwhile, it expects its FMC growth to be similar to the overall segment, as it still sees low penetration levels in small to medium-sized fleets.
Discussing current growth opportunities in its Government Solutions segment on its Q3 earnings call , CEO David Roberts said:
As we look toward the future, we are anticipating significant growth in our Government Solutions TAM. We continue to experience a favorable legislative environment as states are increasingly turning toward enhanced automated enforcement to increase traffic safety for their citizens. In October, California signed into law legislation for a speed safety pilot program in 6 major cities including Los Angeles, San Jose, Oakland, Glendale, Long Beach and the city and county of San Francisco. We currently estimate the potential annual recurring revenue opportunity associated with this pilot program to be greater than $10 million per year. However, as the program demonstrates its efficacy, we anticipate that additional legislative authority may expand the scope of the speed program in future years. We estimate the total recurring revenue opportunity could be greater than $100 million annually within the next few years if legislation allows. Additionally, in Pennsylvania, we're seeing continued positive momentum for the automated enforcement. The legislation is seeking to enable new use cases, including school zone speed and school bus stop arm as well as extend and expand existing use cases for work zone speed and highway speed enforcement. As we previously discussed, Florida passed school zone speed and school bus stop arm legislation in May, and we are actively monitoring how cities seek to operationalize the new legislation and subsequent RFP announcements. We continue to anticipate generating revenue from initial awards and deployments in the back half of 2024, and we'll provide more color when we provide 2024 guidance on our fourth quarter earnings call."
While there were some fewer product sales, this was a solid quarter from VRRM that saw double-digit service revenue growth. The Commercial segment is benefiting nicely from increased travel and more cashless tolls, while the company continues to benefit from its prior NYC win in the Government sector. VRRM continues to generate strong free cash flow, which it used to help continue to pay down debt. Deleveraging should remain an opportunity for the firm moving forward.
The recent legislation in California, meanwhile, looks like a nice growth opportunity. The state is doing a pilot program in some major cities, and if effective, it could expand the program more widely. VRRM would still need to win these contracts, but its success in NYC certainly is a great reference. The company also has some nice opportunities in areas such as school bus stop-arm cameras, as more municipalities implement these solutions.
Valuation
VRRM trades at approximately 11.5x 2023 consensus EBITDA of $370.4 million, 10.8x the 2024 consensus of $397.4 million, and 9.8x the 2025 consensus of $437.6 million.
On a revenue basis, it trades at an EV/Sales multiple of 5.6x 2023 service revenue of $770 million and 5.2x 2024 service revenue of $820 million, and 4.9x 2025 service revenue of $880 million.
It's projected to grow revenue 9% since year, 6.5% next year, and 7.3% in 2025.
It has a free cash flow yield ((FCF)) of nearly 5%.
VRRM ended the quarter with leverage of 2.6x. Its nearest debt maturity of significance isn't until 2028.
I'd place a fair value of $23.50 on VRRM, which is a 12x multiple on 2024 EBITDA, and expect a $100 million reduction in debt or shares. That's up from my original target of $22.
Conclusion
VRRM has been performing well, benefiting from the positive trends in its core business. In the Commercial segment, this is increased travel, the return of business travel, and more cashless tolls. VRRM has also done a nice job of penetrating fleet management companies recently, helping power growth. On the Government side, it is benefiting municipalities funding highway safety initiatives, like red light and speed enforcement cameras. California looks like it could be the next big opportunity here.
Overall, my VRRM thesis has been playing out as anticipated, and the company has done a really nice job of lowering its debt and taking leverage down as well. My new $23.50 target keeps the stock as a "Buy."
The biggest risk to the stock would be a slowdown in travel or the loss of contract from a major rental car company. In the quarter, the company just re-upped with Enterprise for 3 years on similar terms. Its next big contract renewal with a rental car company will be with Avis Group ( CAR ) in 2025.
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Verra Mobility: Recent California Legislation Could Be Next Big Opportunity