Verra Mobility Corporation

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

A leading provider of smart mobility technology solutions across the United States, Australia, Canada, and Europe, focusing on automated safety, enforcement, and parking management through its proprietary software and services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Verra Mobility (VRRM) operates primarily in the intelligent transportation systems (ITS) sector, providing technology and services to government agencies and commercial fleets. The company’s core operations revolve around managing traffic enforcement, toll and violation management, parking management, and related administrative solutions.

Business Overview:

  • Revenue Distribution: VRRM operates under three main business segments: Commercial Services, Government Solutions, and Parking Solutions. Commercial Services offer solutions to large commercial fleets, enabling them to automate toll and violation management. Government Solutions provide end-to-end violation management systems, including camera enforcement and processing software to government and municipal clients. Parking Solutions, acquired through the merger of T2 Systems in December 2021, provides a software platform to manage parking operations and technology including mobile parking payment.
  • Industry Trends: The Intelligent Transportation Systems (ITS) sector is experiencing growth due to increasing urbanization, technological advancements, and a growing emphasis on traffic management and public safety. The desire for improved automation and real-time data analytics is driving demand for the services offered by companies like VRRM. The COVID-19 pandemic accelerated digitalization trends, prompting more organizations to adopt touchless, digital payment and enforcement methods, particularly in the parking sector.

  • Competitive Landscape: The ITS industry is fragmented with a mix of established players and emerging companies. However, the companies that can create innovative and specialized technology that increase convenience while decreasing costs will tend to win more market share. The focus on end-to-end solutions and recurring revenue through subscriptions are becoming increasingly valuable attributes.

    • Key Competitors for VRRM: Xerox (formerly Conduent), Conduent Transportation LLC, Cubic Transportation Systems, etc.
  • What Makes VRRM Different: The company leverages its strong relationships with governmental entities and expertise in high-volume transaction processing. The acquisition of T2 Systems in 2021, positions VRRM as a significant player in both the enforcement and parking technology markets providing a diversified revenue stream. Additionally, VRRM emphasizes solutions that are easy to use and quick to implement, which appears to attract repeat clientele.

Moat Assessment: 2.5 / 5

VRRM possesses certain characteristics that contribute to a modest, though not fully resilient, economic moat:

VRRM focuses on niche-specific areas that have high barriers to entry and rely on a mix of contracts with governmental entities and commercial clients, resulting in recurring revenue.

  • Network Effects: While not a pure network effect, VRRM’s platforms in government solutions, parking, and commercial solutions do see incremental value with increasing network size. For example, the more municipalities and agencies utilize its parking enforcement system, the more valuable the network becomes to all its users because of the increasing database of available data on parking violations. In commercial solutions, with an increasing adoption of the service, the database of toll information grows, as well as the convenience of the service for commercial drivers. This network effect is moderate and could diminish if alternative solutions were to provide an interoperable, universally-accepted format.
  • Switching Costs: The company’s core solutions are deeply integrated in the workflows of their customers. For government agencies, transitioning to a new vendor means retraining personnel, establishing new processes, and dealing with new integrations. Similarly, commercial fleet companies are reluctant to switch solutions because of the disruptions that arise from having to reconfigure their software and payments. Also, many of these companies rely on VRRM to generate and keep track of their accounting, meaning that the switching costs for these companies are very high.
*   The switching cost is moderate because its customers, although sticky and are unwilling to leave (retention rate of more than 90%), can find ways to integrate their data from a new vendor if they are priced out of the market, but will face serious hurdles and costs in that process. *   **Intangible Assets:** VRRM possesses intellectual property that includes several patents, which protect its technology, and creates a barrier against competition. Government Solutions, Parking, and Commercial Solutions all have proprietary algorithms and methods that aren't readily reproducible by its competitors. Moreover, the company’s long track record means that it has built relationships with customers and regulators, that cannot be recreated easily. However, all of these attributes are only moderately strong.

However, the company faces notable competitive challenges that limits its moat:

  • Competition: The ITS industry is quite competitive, with many small and medium players who are competing against VRRM. These include large technology companies, startups, and established players, as well as many new competitors with innovative technologies. The level of competition means that it can be hard to maintain pricing power and gain market share in the long-run.
  • Ease of Replication: Despite its technology, much of what VRRM provides could, in theory, be duplicated. The solutions are not unique and may be replaced by substitutes, though such substitutes may be imperfect and face limitations with economies of scale.
  • Dependence on Government Entities and M&A: The reliance on contracts with governments means that revenue streams are not entirely consistent or predictable and are also dependent on government budgets, policy, and regulations. The company’s growth strategy is partially reliant on mergers and acquisitions to broaden offerings and gain new customers, which exposes it to integration risks.
  • Reliance on limited pool of customers: The bulk of Verra’s revenue comes from a handful of customers, especially large cities, governmental agencies, and commercial fleets, which gives these customers more negotiating power with Verra and places them at a high dependency risk.

Risks and Resilience:

  • Technological Disruption: The ITS industry is constantly evolving. Thus, VRRM faces the risk that its existing technologies could become obsolete or be rendered ineffective by new alternatives. Companies in this space have to continually reinvest in research, innovation, and development, to remain relevant and keep up with customer needs.
  • Regulatory Changes: The company is susceptible to regulatory changes that could either create new hurdles or opportunities. Regulation in different countries can vary dramatically and there is no guarantee that policies and new laws from governments would align with Verra.
  • Economic Downturns: An economic downturn can reduce public and private spending, which can impact revenues on both the commercial and governmental side of the business. A sudden decline in economic activities could result in lower toll collection and reductions in the number of parking transactions.

  • Security and Data Privacy: Due to its nature, a lot of valuable data is collected on VRRM’s network. Cybersecurity incidents could disrupt the services, leading to reputational damage, or lead to legal liabilities stemming from privacy violations.

    • The company has identified a risk of cyberattacks and data privacy and are continuously implementing new security measures to minimize this risk.
  • Integration Risks: Given that much of the company’s strategy involves mergers and acquisitions, the company is exposed to integration risks that could come from its acquisitions. Such risks include lack of profitability, lack of synergy, integration problems and culture clashes.
  • Business Resilience: The company’s strong focus on recurring subscriptions provides a relatively predictable income stream, enabling them to overcome minor setbacks. Its diverse revenue streams, in different geographies and markets, also provides a cushion against economic downturns or negative shifts in specific parts of the industry. Management has taken a serious tone towards cybersecurity, and have been active in investing in the latest security technologies to protect their system from cybersecurity threats.

The company’s management is focused on improving profitability through cost optimization strategies and by increasing revenues through acquisitions and increased marketing efforts.

Financials Analysis:

All figures are in millions, unless otherwise stated.

  • Revenue Growth: In the three months ending on March 31, 2023, the company reported a 7.4% increase in revenue, driven primarily by the increase in commercial services and parking solutions segments (6% and 42% respectively.) In the nine months ending on September 30, 2023, the company reported a 22.1% increase in revenue, which is indicative of long-term growth momentum.
  • Gross Margin: VRRM reports gross margins at around 70%, which indicates that they’re generating a lot of earnings from every sale, which helps maintain high profitability. The gross margin is also somewhat volatile from quarter to quarter.
  • Net Income: The company’s profitability has improved considerably, since, for the three months ended on March 31, 2023, their net profit margin was 11.7%, and for the six months ended September 30, 2023, their net profit margin was 21.2%.
  • EBITDA: In the nine months ended on September 30, 2023, EBITDA grew by 18.5% relative to the same period a year ago. The YOY growth for the prior year period was also impressive, coming in at 21.2%. This is indicative of growing revenue and more efficient operations in the company.

  • Leverage: The company’s long-term debt is $1029.6 million at the end of September 30, 2022, this is a relatively large figure in comparison to the current earnings, which can create a degree of financial risk.

    • However, the company has demonstrated the ability to service this debt using its cash flows. This mitigates the aforementioned debt risk, especially since they generate positive free cash flows consistently.
  • Free cash flow: Verra is a consistently high FCF generator with around $170 million in FCF in the most recent 12 month period. This cash can be put towards deleveraging, growth, or to return value to investors.

Understandability: 3 / 5

VRRM’s business model is somewhat complex because of its various segments and its presence in both commercial and government markets. The technology, pricing, and recurring subscription plans can be difficult to assess from an outsider’s perspective. However, the nature of value creation is easy to understand and its revenue model can be easily followed.

Balance Sheet Health: 4 / 5

VRRM’s balance sheet shows a relatively strong cash position, with the capacity to service its current liabilities. However, it also has high amounts of long-term debt that should be monitored going forward. It is also good to note that the goodwill and other intangibles account for roughly 60% of total assets. The level of liquidity is also good, and they have shown an ability to generate a good amount of cash on a consistent basis. Overall, the balance sheet is stable, but could be improved by a further reduction of debt and reduction in acquired goodwill over time.

Recent financial reports and earnings calls have brought to light several noteworthy facts. Inflation is having a higher impact on the transportation market than others and the company is closely monitoring this situation. While demand continues to be strong in their main markets, the company notes that their customers have to manage their own increasing operational expenses and inflation and are closely monitoring these trends. The company’s management also stated that they’re closely monitoring the possibility of a recession and its implications on their business. The management has indicated that they expect revenue and margins to remain strong for the rest of the year. Their growth trajectory will be fueled by new contracts and acquisitions, with additional cost efficiencies achieved throughout operations. They expect to continue to be acquisitive, and plan to buy smaller companies that will synergize well with their business.