Verra Mobility Corp

NASDAQ:VRRM

Earnings Call Transcript 2020-Q1

[Operator]

Greetings, and welcome to the Verra Mobility First Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Marc Griffin. Thank you, Griffin. You may begin.

[Marc Griffin, Investor Relations]

Thank you. Good afternoon, and welcome to Verra Mobility’s first quarter 2020 earnings call. Today, we’ll be discussing the results announced in our press release issued after the market closed. With me on the call this afternoon is David Roberts, Verra Mobility’s Chief Executive Officer; and Tricia Chiodo, Chief Financial Officer. They will begin with prepared remarks, and then we’ll open up the call for Q&A.

During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers and other statements regarding our plans and prospects.

Forward-looking statements may often be identified with words such as we expect, we anticipate or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements.

Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our Annual Report on Form 10-K, and quarterly report on Form 10-Q, which are available on the Investor Relations section of our website at ir.verramobility.com and on the SEC’s website at sec.gov.

Finally, during the course of today’s call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the market closed today, which is located on our website at ir.verramobility.com and on the SEC’s website at sec.gov.

With that, let me turn the call over to David.

[David Roberts, Chief Executive Officer]

Thank you, Marc, and thank you to everyone for joining us on the call today. Before we dive into our first quarter results, I would like to spend some time on the current environment. As you are all aware, the COVID-19 pandemic continues to create challenges for countries, towns, businesses and families around the world. Beyond the impact of global human health, the virus has not spared the global economy. Markets and businesses around the world are struggling with high levels of uncertainty, while also struggling with decreases in demand for products and services.

As we navigate this uncertain environment, we will do our best to remain thoughtful and transparent in sharing as much as we can about what we are seeing in our business. And finally, our thoughts and prayers go out to those families that have been impacted, and our gratitude goes out to the dedicated medical staff that are on the front lines helping fight the virus.

We are pleased with our execution in the first quarter and look forward to sharing those results, which show relatively minor impacts from COVID-19. That said, before we get into our Q1 results, we want to provide transparency to our customers, employees and shareholders on the effects COVID-19 is having on our business and how we are addressing it.

In our Commercial Services segment, the majority of our revenue comes from agreements with the three largest rental car companies. The rental car industry has experienced significant declines in activity given the overall reduction in global travel. We are highly correlated to travel activity and are expecting a material decline in tolling revenue as a result. For some perspective, the RAC industry is said to be down 80% for the month of April. We are expecting a similar impact to our correlated RAC revenue for the entire second quarter and significant compression for the remainder of the year.

Moreover, once the travel restrictions are lifted and the economy starts to recover, we believe the travel industry will recover more slowly than other parts of the economy, but nonetheless, should begin to recover during the year. As we exit 2020, we will most likely still be below the historically high levels we saw in 2019 and are not anticipating a return to 2019 volumes until 2021.

Clearly, this is a point-in-time update and our assumptions are made based upon the best available information as the year progresses, we will update with more timely data analysis. As we have highlighted in the past, we’ve been working towards the geographical expansion of our RAC tolling product to Europe and believe we have the – had built the necessary foundation exiting 2019. That said, we anticipate that our European tolling efforts will be slow due to travel restrictions in Europe and given our customers and potential customers’ priorities have shifted to address more immediate business pressures.

Our Government Solutions segment executes photo enforcement programs for local municipalities and school districts, 40% of which are in variable photo enforcement contracts, which, in turn, means that we are anticipating fewer paid citations, which will impact revenue. As the economy recovers, we expect paid citations to return to normal levels over the course of the year.

Additionally, CrossingGuard, our school bus stop arm camera program, is also experiencing a decline in activity resulting from a variety of school closures nationwide. We are hopeful this program will resume closer to normal activity in the fall, assuming schools return to traditional schedules. In response to the coronavirus and the resulting stay-in-place orders that are causing material decline in our business, we have implemented a number of cost-saving initiatives. The austerity measures included are the elimination of discretionary spending and nonessential corporate travel and a hiring freeze on all nonessential positions through Q3 of this year; the elimination of all discretionary capital expenditures.

In April, approximately 30% of our employees were furloughed for 90 days, primarily those employees whose workflows were correlated to the decrease in volume of our customers. Finally, I am forgoing my entire salary for Q2 and salaries for employees at the level of Vice President above as well as cash compensation for our Board were reduced for the same period.

On the positive side, while our business is facing extreme challenges, like most of the global economy, we continue to believe we have built a highly resilient business that has incredible upside. The expansion of the school zone speed program in New York City is tracking slightly ahead of schedule as we are continuing to install cameras at the same pace as 2019.

At this time, we are not expecting any bottlenecks in the process and are not anticipating a slowdown in camera installations. The most important aspect of these programs is safety and recent reports have highlighted that even though traffic volumes have dropped in New York City, people are able to speed through the empty streets, which has increased the number of violations issued.

Finally, I would like to highlight that we ended the quarter with $113.6 million of cash on the balance sheet, and we have not had to tap any of our lines of credit. Our current model, which includes the implementation of the cost-saving initiatives outlined previously, shows us remaining cash flow positive for the year.

Now moving on to our Q1 results, which Tricia will discuss in detail later during this call, first quarter revenue grew 19% year-over-year to $116.7 million, and our adjusted EBITDA came in at $54.9 million, up 7% year-over-year. The Commercial Services segment declined 2% year-over-year to $61.2 million and reported adjusted EBITDA of $33.6 million, down 12% year-over-year. This decline reflects the impact of COVID-19 on our business during the second half of March.

In Europe, we recently completed the integration with Rent A Car and are currently executing tests and preparing for an early summer pilot launch, depending on how COVID-19 progresses in conjunction with the corresponding travel restrictions. As we had highlighted in the past, geographical expansion of our RAC tolling product to Europe will be a meaningful growth driver of all of our Commercial segment in the future.

The next phase of our expansion, including other proof-of-concept pilots and back office integrations are on hold as rental car companies reassess their investment priorities. Our Government Solutions segment grew revenues 55% year-over-year to $55.5 million and reported adjusted EBITDA of $21.2 million, up 61% year-over-year.

Growth in the Government Solutions segment this quarter was primarily driven by the expansion of the school speed program in New York City, which included additional product revenue and subsequent service revenue associated with newly installed cameras. Our work with the New York City Department of Transportation to expand the number of schools on speed enforcement areas continues on pace, and we are excited to be able to bring this important public safety initiative to fruition even during these challenging times.

We installed 218 cameras in the first quarter, an average of 73 per month. Additionally, we installed nine new bus lane camera systems. During the quarter, we renewed two large and important photo enforcement programs with the city of Chicago and Washington, D.C., as well as signed new customers such as Morningside, Maryland for school zone speed.

Last quarter, we announced two Georgia schools on speed contracts, Carroll and Spalding counties, we are pleased to announce that implementation has begun for roughly 40 cameras across both of those counties. Overall, we believe there are many more opportunities in Georgia, which we will pursue once school districts open back up.

On March 17, we withdrew our full year 2020 guidance due to the uncertainty surrounding the global outbreak of the COVID-19 virus, its duration and overall business impact. That uncertainty remains, and we will not be issuing full year guidance at this time. Clearly, our business is impacted by global travel restrictions and school closures. We will continue to monitor these measures closely for positive changes that point toward a recovery.

In summary, we executed well in the first quarter and implemented strong countermeasures to ensure Verra Mobility’s long-term strength in these challenging times and beyond. While it remains uncertain how long COVID-19 or its impact on our customers and our business will persist, we are confident in the resilience of our employees and our ability to manage through these turbulent times. We look forward to updating all of our stakeholders, from our employees and customers to our shareholders on a continued progress as the stay-at-home policies and are ultimately relaxed and our business begins to return to normal.

With that, let me hand it over to Tricia to walk through the financials in more detail.

[Tricia Chiodo, Chief Financial Officer]

Thanks, David, and good afternoon, everyone. I’ll provide a more detailed overview of our first quarter financial performance and then open up the call for questions. We’ve provided a short earnings deck on our website that has reconciliations of GAAP to non-GAAP results that we may be discussing today. If you’re following along in the earnings deck, I’m on Slide 2, which outlines revenue and adjusted EBITDA performance by business segment.

Let’s start with the Commercial Services segment, which delivers tolling, violation processing and title and registration services to rental car companies and fleet management companies in the U.S. and processes violations in Europe. Total revenue for this segment declined 2% to $61.2 million in the first quarter of 2020 from $62.6 in the same quarter of the prior year.

This business derives the majority of its revenue from tolling services provided to rental car companies. We saw growth in this segment for January and February. And then year-over-year declines of approximately 12% for the month of March due to reduced demand resulted from stay-at-home orders and travel restrictions.

We’ll talk more about current revenue trends later in the call. Adjusted EBITDA for the quarter of $33.6 million declined $4.4 million or 12% year-over-year from $38 million in Q1 of 2019. The profitability of this segment was impacted by bad debt, which increased by $3.3 million year-over-year due primarily to the company’s implementation of CECL, a new accounting standard for credit loss. Even with the declines in revenue and impact of new accounting standards, the adjusted EBITDA margin of the Commercial Services showed considerable strength at 55%.

Moving to our Government Solutions segment, which operates photo enforcement programs for municipalities and school districts with end-to-end solutions. Their total revenue was $55.5 million in the first quarter and grew 55% year-over-year to $35.9 million in the first quarter of 2019.

Total revenue is comprised of service revenue, the monthly fees generated from the operation of photo enforcement programs and product revenue, which results from selling and installing camera system. Service revenue for the quarter was $38.3 million and grew 8% year-over-year from $35.5 million in the first quarter of 2019. We continue to show strength in our speed portfolio, which grew $5.9 million. Speed will be our largest service line by the end of 2020.

Red light declined by $2.7 million during the same period due to the loss of certain Texas programs. Product revenue of $17.2 million for the quarter was up from $391,000 for the same period last year. The increase was primarily driven by the installation of those 218 school zone speed cameras for New York City.

Adjusted EBITDA of $21.2 million increased $7.9 million or 61% from $13.2 million for the same period in the prior year. Adjusted EBITDA margins for this business grew to 38%, up from 36.9% in the prior year. The large increase in product sales is benefiting both the top and the bottom line of this business segment.

Turning to the next slide. We show our consolidated results for the quarter. The combined results of the business segments we just discussed generated total revenue of $116.7 million for the first quarter, and grew $18.3 million or 19% from $98.5 million for the same prior year period. We’re proud to post the strong growth numbers in these very uncertain times. Adjusted EBITDA of $54.9 million increased by $3.6 million or 7% from adjusted EBITDA of $51.3 million in the prior year.

First quarter adjusted EBITDA margins were 47%, a decline from 52.1% margin reported in the first quarter of 2019. Our adjusted EBITDA growth was muted in light of the strong revenue performance. If you recall in our last earnings call, we anticipated 2020 to be a year of growth and an investment back in the business. Facing an abrupt turn in the economic conditions, we halted investment, cut discretionary spending, furloughed nearly 200 employees and cut executive pay. The impact of these changes will be realized in Q2 and the back half of 2020.

The company reported net income of $6.7 million in the quarter compared to $2.8 million in the same period of the prior year. EPS for the current quarter was $0.04 per share compared to $0.02 per share for the same period of 2019. Tax expense for the quarter was $3.2 million, representing an effective tax rate of 32.5%. The increase in the effective tax rate was driven by reserves against European NOLs.

I want to spend some time discussing our liquidity position. The company generated $14.8 million in cash flow from operating activities during the first quarter of 2020 compared to generating $37.4 million in the same period of the prior year. The change resulted from increased AR due to high volume of camera installations and the reduction in liabilities as we made payments in the quarter of certain expenses that had been accrued throughout 2019. We spent $8.1 million in CapEx for the first quarter of 2020 compared to $9.2 million in the prior year, and we repaid $22 million of debt. These activities brought our cash flow on hand to $113.6 million.

As of March 31, we had debt of $872 million. And if netted against the cash on hand, it was $758 million, which was 3.1 times trailing 12-month adjusted EBITDA of $245 million. Earlier in Q1, we repriced our first lean term loans, lowering the interest rate from LIBOR plus 3.75% to LIBOR plus 3.25%. This change is expected to lower cash interest by $4.5 million annually. The credit facility has a maturity in 2025 and is covenant light, affording us a lot of flexibility, including an accordion feature. We also have a $75 million ABL that is currently undrawn. We believe that we have sufficient liquidity from operations and cash on hand to run the business for the next 12 months and beyond.

As David highlighted, we withdrew our full year 2020 guidance in March due to the uncertainty surrounding global outbreak of COVID-19 virus, its duration and overall business impact. That uncertainty remains, and we will not be issuing full year guidance at this time. That being said, we wanted to discuss the trends of the business experienced in April to provide you some context for how our business could trend throughout Q2.

Keep in mind that these numbers are mid-quarter and reflect our internal results based on information not at this time. We previously mentioned that some of the rental car companies we serve have indicated business declines of approximately 80% in April or Q2. In April, our Commercial Services segment saw revenue declines of 64% over the same month in 2019. Total revenue for the Government Solutions segment in April grew by 49% over the same month in the prior year.

Service revenue was relatively flat, showing growth in our speed portfolio, offset by losses in the Red light program and CrossingGuard. But product revenue continued to be strong. As David mentioned, we continue to execute on our existing order of 720 camera systems. COVID-19 has not impacted our supply chain or installation cycle. And as of today, we’ve installed an additional 17 systems in Q2, bringing our full year total to 290.

During this time, we, like most companies, are focused on liquidity, and I’m pleased to report that our cash on hand has increased from $113.6 million at March 31 to nearly $127 million as of today. In summary, we continue to believe that Verra Mobility remains well positioned for the long-term and has operating discipline to manage through the current volatility in our business.

With that said, we’ll open up the call for questions.

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ashish Sabadra with Deutsche Bank. Please proceed with your question.

[Ashish Sabadra, Deutsche Bank]

Thanks for taking my question and thanks for the color on April trends. My question on the commercial. So looks like the commercial revenue growth or decline of 64% has been trending even better than the RAC volumes. I was wondering if you could give any color on what’s driving that slightly better performance? Is it penetration, pricing? And any other color that you can provide around adoption of new product, including your unlimited tool product? Thanks.

[Tricia Chiodo, Chief Financial Officer]

Yes. So I think, Ashish, what we’re seeing is that we are seeing declines within our toll products, although a little less than within what the rental car companies had said. So call it, 70% or so or 75%. But we didn’t see similar declines in our violation business, either in the U.S. or in Europe. And so that’s sort of shoring up, to some extent, the overall revenue, at least in the month of April. We do believe that, that violation business will see declines, but we think it will experience later in the quarter.

[Ashish Sabadra, Deutsche Bank]

That’s helpful. And any color on penetration or any color on product, new – pickup for new products, including your unlimited tolling product?

[Tricia Chiodo, Chief Financial Officer]

No. Because when you look at the fact that the rental car companies are down by 80%, there’s not a lot that our product initiatives are going to do in order to increase that. What we are seeing is that there’s continued to be tolling within the FMC business. That’s a smaller business for us. But we are continuing to see that the other fleets that we serve outside of RACs, which are generally service vehicles, so I think sales vehicles or service repair vehicles, are out there on the road and continuing to toll. So we’re seeing a little bit of benefit from that as well. But there’s not going to be a lot of mix shift within our RAC tolling that’s going to cause any sort of silver lining there.

[Ashish Sabadra, Deutsche Bank]

Okay. That’s helpful. And then on the New York City side, I think the 70 cameras per month, that’s a good trend there. And it’s even higher than, I believe, your original expectation of 60 cameras per month. Is that the new run rate that we should think about going forward? Thanks.

[David Roberts, Chief Executive Officer]

No. I would keep it at the original. We were able to get ahead of a couple of things. But just given everything that’s going on, we would continue to anticipate the same. But we do anticipate it to continue to operate at the same pace, which is the 60.

[Tricia Chiodo, Chief Financial Officer]

The 60. And we said that we installed 72 cameras in Q2 to date, that’s through today. 60 of them were in April and 12 of them were in May. So you can cut of that 60 is the right range.

[Ashish Sabadra, Deutsche Bank]

Okay. That’s helpful. And maybe a final question for me on the cost saving measures. Again, thanks for all the color on that front. I was just wondering, is it possible for you to quantify the benefit from the cost saving measures on a monthly basis? Thanks.

[Tricia Chiodo, Chief Financial Officer]

No, we don’t have that number broken out for you, Ashish. But you could say that we – from our financial statements, we furloughed some 30% of our employees or 200 people and taking other measures. A lot of the things that we’re doing to sort of turn off expenses are really shutting down that investment cycle that we had started earlier in this year.

[Ashish Sabadra, Deutsche Bank]

That’s very helpful. Thanks and congrats again on a pretty strong first quarter. Thank you.

[David Roberts, Chief Executive Officer]

Thanks, Ashish.

[Operator]

Thank you. Our next question comes from Steven Wald with Morgan Stanley. Please proceed with your question.

[Steven Wald, Morgan Stanley]

Great. Thanks for taking my question and I hope you guys are safe and healthy. Maybe just to start out, I think Ashish was sort of touching on the cost savings piece. But if we could talk through the trends, I know you guys walked through Commercial down, I think you said 64% through April and the rental car is down 80%. Government, you’re seeing sort of go a decline over time. But could you walk through how you’re thinking about the incremental and decremental margins on that? I know, David, you mentioned sort of being cash flow positive for the year, but it sounds like that shouldn’t move in a straight line. But quarter-to-date, you’re up. So could you just walk us through how you see that moving directionally over the course of the year?

[Tricia Chiodo, Chief Financial Officer]

Yes. So you could surmise that the incremental decremental margins within this business are fairly high. The Commercial Services business unit had margins last year of 63% across the entire year. But if you look at the peak season that they had in Q3 of 2019, the margins were 66% because that top line increase in seasonal revenue flows directly to the bottom line. So there’s very little natural cost that comes out of the business as volumes either grow or shrink, which is why it was so important for us to take sort of decisive actions to change the structure of the business early on as we saw the business falling off in Q2.

[Steven Wald, Morgan Stanley]

That’s helpful. And maybe just switching gears towards some of the activity side that you guys are talking about in terms of winning new contracts and anything like that. Are there any disruptions, whether it’s in Government Solutions? Obviously, a lot of governments – states have shut down unnecessary interaction at the government level. Are you seeing any disruptions there in terms of getting new contracts awarded or even being in dialogue for those or anything on the Europe side in terms of your expansion plans? Can you just talk through anything you’re seeing there?

[David Roberts, Chief Executive Officer]

Yes. I mean I think in general, what you’re seeing with government entities as well as with the RACs in Europe is a general sort of slowness because of there’s still a reasonable level of uncertainty as to what’s going to happen by when. And each state, obviously, that we operate and has a different mandate as to how it’s going to open back up. Certainly, I think that we’re actually quite bullish on the opportunities related to photo enforcement going forward because, one, the opportunity to keep police officers out of harm’s way and sort of personal interaction related to traffic enforcement is one of the things we’ve always espouses a benefit of our technology, and we think that that’s only going to get stronger.

And we would still anticipate Europe happening because of – it does generate revenue. It’s a program that doesn’t exist today. We’re still actually planning on a June launch for – I mean, a 10 of June launch for our French rental car company because they still want to get that operation moving. But again, all of these companies are in such a dynamic decision-making environment. We don’t want to put anything too hard in the ground because they certainly can move just given the other priorities that they have related to battling the virus directly.

[Steven Wald, Morgan Stanley]

That’s super helpful. I appreciate the comments on Europe. If I could just squeeze a quick one in. I noticed you guys kept and actually added to the M&A slide that you’ve previously included. Just curious, your updated thoughts, I know your cash has been rising quarter-to-date. And certainly, you guys feel like you’re in a good liquidity position with valuations becoming potentially more rational around the smart transportation space. Anything you guys are – what are your updated thoughts on that?

[David Roberts, Chief Executive Officer]

Yes. I mean, I think we are clearly – as M&A has always been very important to our overall strategy, we would say that it is more so now. And we will continue to look for opportunities, given your – I think, one is, I think there’s going to be a lot of opportunities on the buy side as we go into the back half of the year. I think – but part and parcel to that, I think that financing has to loosen up. And right now, financing, at least in more traditional centers, are still a little tight on the credit markets, but I suspect that, that will start to loosen up. And we will clearly – I guess what I would say is we have in no way slowed or stopped our desire to continue to do deals, and we would like to continue to be very aggressive on that front. Because I agree with you that valuations have come back into more reasonable frames of mind than they were four or five months ago.

[Steven Wald, Morgan Stanley]

Great. I appreciate it. Thanks.

[David Roberts, Chief Executive Officer]

Yes, sure. Thanks.

[Operator]

Thank you. Our next question comes from Ryan Cary with Bank of America. Please proceed with your question.

[Ryan Cary, Bank of America]

Good afternoon. Hope you’re all well. Thank you for taking my question. I cite all the color on the trends you see in April and while I realize have difficulties to know with any certainty, from your perspective, does it feel like the worst is now behind you and trends are stabilizing? Or can things continue to get worse before they get better?

[David Roberts, Chief Executive Officer]

I don’t know that they’ll get worse. I feel like it’s more of – we’re probably bouncing around the bottom a bit. And it feels like – I don’t know that we’re big believers in the V-shape recovery. I suspect we might be at the bottom a little longer given the, one, if you listen to our rental car partners announcements publicly, if you listen to the airlines publicly, they’re sort of anticipating a pretty slow or muted recovery for travel towards the back half of the year. So we would be directly attached to that. But we do believe that overall, we’re probably – April is probably a good indicator. The question is how long will April repeat itself is TBD, but we think at least a couple more months.

[Ryan Cary, Bank of America]

Got it, okay. And I was hoping you could discuss just the broader implications on your business in the event of a bankruptcy from one of your larger rental car customers. How do you think about the impact to rental car days in the event one of those customers does go under? Is it fair to assume those rental car days would be soaked up by a competitor? I’m just trying to get a sense of how that I think both kind of your business would be impacted in the industry as well. Thank you.

[David Roberts, Chief Executive Officer]

Yes, I think the best way to think about it is, if you look at the end of 2019, the two publicly held ones had really good years and solid growth inside their businesses because they were operating very, very well, and they were – had adjusted well to the new mobility. COVID-19 caught them just like caught everybody else, but there was still a fair amount of volume associated with both public plus the private rental car companies that are out there.

In the case of bankruptcy, we would assume that they would continue to operate and that our program would be essential to their programs because they have to have the ability to pay tolls for their rental car – for their customers. So that’s part one. Two, it is a revenue-generating piece of business for them. That’s something that you would anticipate that they would want to keep going. So in a reasonable case, you would just say we would continue to operate, albeit under the context of bankruptcy. In the worst-case scenario, you would anticipate that those rental car days are going to get filled by one of the other two, one or both of the other two, excuse me.

[Ryan Cary, Bank of America]

Makes sense. Thanks for taking my questions.

[David Roberts, Chief Executive Officer]

Yes, sure.

[Tricia Chiodo, Chief Financial Officer]

Okay.

[Operator]

Thank you. Our next question comes from Daniel Moore with CJS. Please proceed with your question.

[Daniel Moore, CJS]

Thank you. Good afternoon, and thanks for the color again David and Trish. I think I heard on the Government Services side, it sounded like citations were up. Wondering if citations in New York are running – that you experienced so far year-to-date quarter date are ahead of your expectations? And maybe just remind us the non-product revenue portion of government services, roughly what percentage is tied to transactions versus more of the fixed price?

[Tricia Chiodo, Chief Financial Officer]

Yes. So New York is actually tied to – David did say this is – overall speeding citations within New York are up. New York is a fixed fee client, so the volume doesn’t change the revenue for the service side of that particular business. We do have, if you include ancillary revenue associated with it, we have probably 40% of our overall revenue stream coming in from variable type clients and that includes ancillary revenue associated with it. That revenue can be impacted by a couple of things. It can be impacted by the total number of citations issued. So if those are going down, you would expect revenue would go down approximately 30 days later. It can also be influenced by, generally, we get paid based on paid citation.

So as payment rates go down, meaning the number of people who actually pay their tickets go down, that can impact us as well. What we are seeing is that some of these municipalities are extending the time frame for which they can allow their citizens to get paid. They understand the economic conditions that their citizens are under, so it may not be that this revenue was lost but somewhat delayed within that cycle. But through the end of March and going into April, we have seen some declines, but not dramatic declines in those statistics.

[Daniel Moore, CJS]

Very helpful. And then, Trish, just maybe elaborate on the uptick in bad debt relative to the implementation of CECL. If you explained it previously, and I missed it, I apologize. But maybe a little color and any impact that, that might have in Q2 or the rest of the year?

[Tricia Chiodo, Chief Financial Officer]

Yes. So the implementation of CECL, which is the new accounting standard associated with credit loss, requires us to think a little differently about how we reserve or create bad debt reserves. So they’re actually reserved at the time that the revenue is generated rather than a specific identification of items later on. And in making that change in Q1 of this year, it impacted the Commercial Services business, I think by about – I think they had $3.3 million of increase in bad debt, $3 million of it was related to CECL. And then there was probably another couple of hundred thousand that impacted on the government solutions side of the business.

We would anticipate that you’d have slightly higher bad debt as we move through the year because we will use the expected percentages of bad debt for the rest of this year. And we did consider that we would have rising bad debt in relation to the customers not being able to pay because of their economic conditions due to COVID-19. So we sort of baked a lot of that into Q1. So you might have slightly higher bad debt as we move out throughout the year, but not to the extent that you saw in this quarter.

[Daniel Moore, CJS]

So not even necessarily as a similar percentage of revenue going forward. You took – a chunk of go in Q1, essentially?

[Tricia Chiodo, Chief Financial Officer]

We did. Yes, we did.

[Daniel Moore, CJS]

Got it. Perfect, okay. And then this is housekeeping, but the 200 employees furloughed, were they furloughed as of April 1? Or will you get sort of a partial quarter benefit there?

[Tricia Chiodo, Chief Financial Officer]

So most of them were furloughed. We did two sets of furloughs, so call it, like, call it, 130 people in April and another 70 early in May.

[Daniel Moore, CJS]

Got it. I think that’s it from me. Thanks for the color. Good luck, and I appreciate it.

[David Roberts, Chief Executive Officer]

Yes. Thanks, Dan.

[Tricia Chiodo, Chief Financial Officer]

Thanks, Dan.

[Operator]

Thank you. Our last question comes from David Koning with Baird. Please proceed with your question.

[David Koning, Baird]

Yes. Hey guys, thank you. And I guess, yes, first of all, just on the ticket business, do municipalities basically just have kind of a set number of tickets. So no matter how much driving or school buses are on the road or not on the road, they’re going to get their revenue no matter what and so you end up basically being pretty insulated by that? Or are they pretty sensitive to traffic declines? They aren’t willing to like change their standards, I guess?

[David Roberts, Chief Executive Officer]

No, they only get whatever their cameras take. So there’s no – if there’s less being taken and they will have less revenue. There’s no guarantee for them.

[Tricia Chiodo, Chief Financial Officer]

Yes. So the systems are designed to reduce speed. And if they’re working effectively, they should have fewer citations after they’re installed in the year after they’re installed than they did when they were first installed, so.

[David Koning, Baird]

So they don’t change from 10 miles an hour over the speed limit to take a picture to 5 miles an hour over just to get more revenue?

[Tricia Chiodo, Chief Financial Officer]

No.

[David Roberts, Chief Executive Officer]

No.

[Tricia Chiodo, Chief Financial Officer]

No, that’s not something that they normally do. They take this very seriously, and they’re looking after their citizen’s safety.

[Operator]

Okay. It looks like he has dropped off the line at this time.

[David Roberts, Chief Executive Officer]

Okay. Are there any other questions?

[Operator]

There are currently no further questions at this time.

[David Roberts, Chief Executive Officer]

Okay.

[Tricia Chiodo, Chief Financial Officer]

All right.

[David Roberts, Chief Executive Officer]

We can wrap it up and thank you so much.

[Tricia Chiodo, Chief Financial Officer]

Thank you.

[Operator]

All right. Ladies and gentlemen, thank you for your participation. This concludes the end of the telecast. You may now disconnect your lines at this time. Have a great day.