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David Roberts

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 million, 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 a reduction in our interest rate on our term loan debt. .
Before I elaborate further on our financial performance, I am pleased to report that the New York City Department of Transportation identified Verra Mobility as the vendor to manage New York City's automated enforcement safety programs for what is expected to be a 5-year period after the company's current contract expires in December 2025. 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 6% and 4%, respectively, over the prior year period. RAC tolling increased 6% 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 2024, 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. We Government Solutions service revenue increased 4% over the first quarter of 2024. Revenue from New York City, our largest government solutions customer was essentially flat year-over-year, as we await the finalization of the aforementioned contracts.
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 million increase to product sales compared to the first quarter of 2024.
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. 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 forecast. 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, consequently we have incorporated a modest deceleration of travel volumes in the second half of 2025 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 pass over the prior 2.5 years across the United States adds approximately $185 million of TAM with the potential to expand over $300 million as further legislation allowed in California.
Our execution against the TAM has been strong. In the first quarter, we booked about $6 million of incremental annual recurring revenue at full run rate, bringing the trailing 12 months total to $52 million. Notable first-quarter bookings include Windsor, Colorado Red Lake, excuse me, Windsor, Colorado, Red Lake in Ontario, Canada 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 12- to 18-month period. in conjunction with an approximate 97% increase in contract, approximately 97% contract renewal rate, we believe this demonstrates a strong and predictable recurring revenue stream.
Moving on to our full year outlook. We are maintaining our full year 2021 financial guidance. However, recognizing that there is a risk with uncertain travel demand, we may trend towards the lower end of the range as previously provided. Our guidance range is 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, and as the market for photo enforcement is strong and our parking business turnaround is showing some early signs of success. We believe these business areas are largely unaffected by economic sensitivity.
Craig, I'll turn it over to you to guidance through our financial results and additional details on our 2025 financial outlook.

Craig Conti

Thank you, David, and hello, everyone. I 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 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 volumes, increased product adoption and higher tolling activity in the commercial services as well as service revenue growth outside of New York City in the Government Solutions business.
At the segment level, Commercial Services grew 6% year-over-year. Government Solutions service revenue increased by 4% over the prior year and T2 Systems SaaS and services revenue was essentially flat compared to the first quarter Total product revenue was $11 million for the quarter. Government Solutions contributed roughly $8 million, and T2 delivered about $3 million in product sales overall for the quarter. Additionally, our consolidated adjusted EBITDA for the quarter was $95 million, an increase of approximately 3% versus last year.
We reported net income of $32 million for the quarter, including a tax provision of about $12 million, representing an effective tax rate of 28%. The GAAP diluted EPS was $0.20 per share for the first quarter of 2025 compared to $0.17 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items, was $0.30 per share for the first quarter of this year compared to $0.27 per share in the first quarter of 2024, 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 million, and we delivered $42 million of free cash flow for the quarter, ahead of our internal expectations.
Turning to slide 5. We generated $404 million of adjusted EBITDA on approximately $893 million of revenue for the trailing 12 months, representing a 45% adjusted EBITDA margin. Additionally, we generated $174 million of free cash flow or a 43% conversion of adjusted EBITDA over the trailing 12 months.
Next, I'll walk through the first-quarter performance in each of our three business segments, beginning with Commercial Services on slide 6. CS year-over-year revenue growth was 6% in the first quarter. RAC tolling revenue increased 6% or about $4 million 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 million year-over-year driven by the enrollment of new vehicles and tolling growth from existing and newly enrolled FMC customers. 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 nonrecurring write-down of [these] receivables.
Turning to slide 7. Government Solutions had solid service revenue growth in the quarter, driven by 7% growth outside of New York City. Total revenue grew 8% over the prior year quarter, benefiting from about $8 million in product sales, which was a $4 million increase over the same period last year. Government Solutions segment profit was $29 million 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 are newly awarded programs and ERP implementation costs.
Let's turn to slide 8 for a review of the results of T2 Systems. We generated revenue of $20 million and segment profit of approximately $3 million for the quarter. SaaS and services sales -- 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 T2 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.
Okay. Let's turn to slide 9 to discuss the balance sheet and take a closer look at leverage. We ended the quarter with a net debt balance of $935 million, which reflects the strong free cash flow we generated in the first quarter. Net leverage landed at 2.3x, and we've maintained significant liquidity with our undrawn credit revolver. Our gross debt balance at year-end stands at about $1 billion of which approximately $690 million is floating break debt.
Okay. Now let's turn to slide 10 and have a look at full year 2025 guidance. 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 demand. Ultimately, based on our strong first-quarter performance and our ability to withstand some level of travel volume variability, we are reaffirming guidance, recognizing that there is a risk of moving to the lower end of guidance, of the guidance ranges as travel demand continues to worsen from current levels.
In the event that the U.S. economy enters a recession, and we see a material move downward in TSA volume, we will reassess and update the market accordingly. 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 2021 earnings call were as follows: We expect total revenue in the range of $925 million to $935 million, representing approximately 6% growth at the midpoint over 2024. We expect adjusted EBITDA in the range of $410 million to $420 million, representing approximately 3% growth at the midpoint. We anticipate adjusted EPS in the range of $1.30 to $1.35 per share. And free cash flow is expected to be in the range of $175 million to $185 million, representing a conversion rate in the low to mid-40 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 2024. Recall that this growth includes an expectation of flat service revenue from New York City in 2025 under the legacy contract while we worked through the contract negotiations.
Additionally, we expect product revenue to be largely flat to 2024 levels. Taken together, both New York City service and global product sales comprised 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 a 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.
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 10.
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 on the new platform and the implementation is on schedule and on budget.
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 2025, 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. At this time, I'd like to invite Michelle to start the Q&A session. Michelle, over to you.

Question and Answer Session

Operator

(Operator Instructions)
Nik Cremo, UBS.

Nikolai Cremo

Thanks for the 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 what'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

Yes. Good -- Nik, it's David. I would say probably in the next 60 to 90 days is probably a reasonable bet.

Nikolai Cremo

Got it. And then I was hoping just to get a little incremental color on the attractive pipeline that you referenced in the prepared remarks that 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?

David Roberts

Yes. I think what we've seen is the activation of the TAM that we've worked really hard to do is 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 headed -- 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. But overall, we feel very good about our position there.

Operator

Daniel Moore, CJS Securities.

Dan Moore

Maybe, I think you 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? 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

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, but let me textualize it this way. As we exited -- Well, let me tell you how we planned.
We expected the year when we talked last time, it'd be somewhere in the 102%, it's a 2% growth versus last year, if you look at a level a bit over the year. As I look out today, we ended the quarter Q1 at about 101%. April was right around that level, 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. 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.

Dan Moore

No, that helps. Certainly. And then 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 the sort of outperformance versus the market?

Craig Conti

That's always a tough one. And I fully appreciate the question. I understand what you're getting out there. And here is 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 (inaudible), right? 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. So I have to take that kind of as it comes. I can't look forward and anticipate that at this time.

Dan Moore

Understood. One more, and I'll jump back in queue. Government Solutions, obviously, nice to see the 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, one, two, three years.

David Roberts

Yes. 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 was $185 million, I think, just the last couple of years going up to $300 million. So you would say that relative to a tailwind, but that is about as good of a tailwind you can have inside of that business, which is we have a market leadership position in 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

Louie DiPalma, William Blair.

Louie Dipalma

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

David Roberts

Thanks, Louis.

Louie Dipalma

For David, as you are well aware, one of the major autonomous vehicle fleet operators has a major facility in your neighborhood of Mesa. It seems autonomous vehicles have been making significant strides recently on different earnings calls 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

Yes. So yes, if you drive around the city of Phoenix, you'll definitely see some unique camera-laden cars that are no driver and people in the back. I think one is while there is certainly some -- I think autonomy has actually made some nice traction in the last couple of years after being really silent or not growing to what people had thought. You still have over 200 million 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 a significant impact.
In the short term, relative to partnerships, we're really focused on developing partnerships with the car manufacturer so that we can embed our technology with them. And so I would say that as we think about the longer-term future, it's probably in partnership with the manufacturers.

Louie Dipalma

That makes sense. And secondly, you have disclosed the camera photo enforcement bookings for the past 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 like 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

Yes, 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 12 to 18 months for that to translate into revenue. But if you take even the longer end of short term or the shorter end of medium-term view, that's a great way to think about it.
So I think the number that we kicked out in the prepared remarks was $52 million of ARR growth over the TTM period. And then if you kind of compare that to the overall consolidated revenue, of Government Solutions, you get an idea of what that revenue looks like. And if anything, we continue to see that accelerate.

Louie Dipalma

Okay. And so are you -- is one able to just add that $52 million of ARR to your current ARR to get your future ARR?

Craig Conti

Short answer is yes. The slightly longer answer is, you can't do it for the next 90 days or for the next 12 months, specifically. But over the next 12 to 18 months, that's what that reported number means. That is over the last 12 months, we've signed up new customers that will generate a $52 million of annual recurring revenue.
And I think on the second question, I want to make sure I come back to answer exactly what you asked. On the second question, in terms of churn, this is a 97%, 98% 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

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

Yes. 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, I guess it was 2022, that's incredible. Four years ago, is we were 3.5x net levered was the target leverage for the company, and as we looked at interest rates ran from that point, credit markets rose up a little bit, we brought back down to 3x net leverage.
I still think 3x 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 resnap that chalk line in response to wherever the -- whatever 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, Louise, but certainly is something that we'll keep an eye on.

Operator

David Koning, Baird.

David Koning

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 towards the low end of total guidance, do you still mean for that to be the lower end of high single digits? Or if it weakens, would it be a little less than high single digits?

Craig Conti

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 to slow and it were to slow in the states that are most material to Verra Mobility, then that would likely drag that growth rate down with it.

David Koning

Yes. Okay. And then secondly, it seems like super high-quality earnings this quarter. You look 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 million 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 is setting up well because you won't have the ERP, you won't have this most likely, et cetera.

Craig Conti

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

Yes. Just next year, it seems like some things like the ERP conversion, maybe some of this bad debt expense, et cetera, falls off and sets up for a nice expansion.

Craig Conti

It should, it should. It 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, 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, right? So all else being considered constant, I would say you're right.

Operator

(Operator Instructions)
Keith Housum, Northcoast Research.

Rodney McFall

This is Rodney McFall on for Keith Housum today. So I'm just curious what initial steps you guys are taking in Q2 to improve that business since the management change? And did that contribute to growth at all in the quarter?

David Roberts

Yes, it did. I mean, it was a small growth, but it was definitely in the right direction. I think what the management team has done, has 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 Verra Mobility 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

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 mean, I'm assuming that most of the benefits that you guys get from travel is domestic, but just curious if you guys had any color on international travel as well.

David Roberts

Yes. 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

That's right. Rodney, I'd just add one thing on that. When you're in the market, listening to other markets just spends a lot of time, especially airlines. Like say airline is when they talk about international travel, a lot of times, that commentary is on the outbound international travel, for Verra Mobility, it would be more on the inbound international trial, right?
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 (inaudible).

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.