Prepared remarks
Good day, and welcome to the Verra Mobility Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Mark Zindler, Vice President of Investor Relations. Please go ahead.
Thank you. Good afternoon, and welcome to Verra Mobility's second quarter 2026 Earnings Call. Today, we will 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 Jon Keyser, Verra Mobility's interim chief executive officer and Craig C. Conti, our chief financial officer. Jon will begin with prepared remarks, followed by Craig, and then we will open up the call for Q&A. Management may make forward-looking statements during the call regarding future events and expectations 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 earnings presentation for our cautionary note on forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs as of 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 measures is included in our earnings release and quarterly earnings presentation, both of which can be found on our website at ir.verramobility.com. With that, I will turn the call over to Jon.
Thanks, Mark, and good afternoon, everyone. This is my first earnings call as interim CEO of Verra Mobility. I want to start by saying thank you to our shareholders. I appreciate the opportunity to speak with you today. Having served Verra Mobility in several leadership roles, I know our business, our people, and the value we provide to our customers. I also recognize the responsibility that comes with leading the company at this important moment. My approach to leading Verra Mobility is straightforward: establish clear priorities, act decisively, communicate candidly, and deliver on our commitments. These principles have guided me throughout my career. From my service as a military officer in which I served in combat in wars in Iraq and Afghanistan, through my extensive legal career as a mergers and acquisitions attorney, roles at large multinational corporations, my time as Verra Mobility's chief legal officer, leading market expansion for our government safety business via our government relations function, and my experience as Verra Mobility's chief transformation officer.
My leadership has been developed and battle tested in times of crisis when the stakes are high. And although the ultimate stakes in business are clearly not the same as they are in war, some leadership principles transcend military service and leadership in business. On my first day as CEO, I set up a series of leadership principles and I discussed them with our employees. Those included integrity first, customer centricity, acting with urgency, and the belief that technology, like AI, is a force multiplier. I shared these principles as a guide to how our leaders will lead, how we will make decisions, and how we will hold ourselves accountable. I am very pleased to say that over the last few months, we have been building momentum. We have achieved meaningful wins and we have been putting those principles into action. I have three immediate priorities for our company. First, we are working hard to broaden and deepen our customer relationships.
Second, we are realigning our cost structure and improving how we operate. And third, positioning Verra Mobility for future growth and long-term value creation. We have already made tangible progress against each of these priorities since I stepped into the interim CEO role at the end of May. So let me start with customer relationships, beginning with our tolling and large fleet customers. Verra Mobility operates at the center of a complicated, multi-jurisdictional mobility ecosystem. We connect rental car companies, large fleet operators, governmental tolling authorities, and millions of drivers. We manage vehicle identification, toll transactions, violations, payments, data, and customer service across a large number of locations. That capability has been developed over decades and we believe it is very difficult to replicate at scale. The clearest example of our focus on customer relationships is our new agreement with Avis Budget Group.
Following ABG's termination notice in May, we listened carefully to their concerns and strategic priorities, and we rapidly deployed teams from across our organization to develop a path forward. I am pleased to report, as we said in our press release on July 28, we have reached an agreement with ABG on the key contractual terms for a new seven-year tolling and violation services contract, extending a relationship that had already spanned nearly two decades. I believe this is a really important outcome for Verra Mobility. It demonstrates the value of our technology for our customers and our ability to listen to our customers and adapt to their needs. I want to say thank you to Avis Budget Group for their renewed faith in us and the new relationship we are building together, including at the most senior levels of both companies. I also recognize there have been many questions about the approaching expiration date from our contract with Hertz.
Today, I am also pleased to announce that we have entered into a new five-year agreement with Hertz that provides long-term visibility for both companies and establishes a strong foundation for the next phase of our relationship. Hertz is an important and long-standing customer with a highly engaged and very talented team that is modernizing, strengthening, and building Hertz's business. I am honored that they have chosen to extend their relationship with us. I believe this is a vote of confidence in Verra Mobility's technology, operating capabilities, integrations and scale, as well as the work that our teams have done to develop a more flexible and customer-focused partnership. I want to thank the senior leadership at Hertz for their collaboration and trust in Verra Mobility as a technology partner for years to come. Together, the ABG and Hertz agreements represent meaningful progress toward stabilizing our commercial services customer base.
We are thrilled to continue to provide Verra Mobility's capabilities and expertise at scale to help our customers mitigate risk and achieve success. With respect to some key developments in our government safety business, I would like to highlight that we announced recently that we were selected as the automated speed safety vendor for the City of Los Angeles, California. We are negotiating and hope to finalize that contractual agreement. Once completed, I will be proud to say that with the passage of Assembly Bill 645 in California, which authorized speed enforcement in the state, Verra Mobility will have been selected as the technology partner for six out of the six cities that were authorized by that legislation. Verra Mobility is honored to serve these customers and help them achieve their goals for safer, more efficient transportation and our shared mission of saving lives. As we discussed in our national stop-on-red press release on Monday, one of the most rewarding aspects of our work is seeing the real-world impact of our technology.
Across the communities we serve, we are seeing measurable improvements in driver behavior and roadway safety, including a 28% reduction in red light violations within the first 60 days of San Jose's program and a nearly 50% decline in traffic fatalities in Merced. This reinforces that automated safety enforcement is one of the most effective tools available to make roads safer and help save lives. Our focus on customers extends well beyond individual contract negotiations. In June, we appointed Stacey Moser as chief customer officer and unified our sales, account management, and marketing leadership across our largest commercial and government businesses. This change creates a stronger, more consistent voice of the customer within Verra Mobility and allows us to identify issues earlier, respond more quickly, and bring the full breadth and capabilities of our company to every customer relationship.
Customer centricity also requires that leadership responsible for product and engineering, operations, and our unified customer-facing organization be as close as possible to the CEO. We are dramatically improving our customer centricity and that will be one of the primary measures of success for this new organization. Over the past several months, our board's transformation advisory committee has worked with management on a review of our organization, our operating model, and strategic priorities. That work reinforced an important conclusion. While Verra Mobility has historically been organized around separate business units, we increasingly operate as one integrated mobility technology company, and doing so is a far more efficient way to operate. Our customers do not think in terms of reporting segments. They come to Verra Mobility to help solve problems regardless of whatever product, technology, or service delivers the solution.
Increasingly, our competitive advantage comes from a combination of our technologies, our customer relationships, and our operational capabilities, not from individual business lines. So that reality is reflected in how we are managing the company. We are confident our continued transformation will enable faster decision-making, greater operational leverage, and an even stronger customer experience. After increasing our customer focus, the second major priority we identified in our leadership transition has been furthering our transformation efforts by realigning our cost structure and improving how we operate. Consistent with the leadership principle I discussed earlier, our organization acted with urgency. We completed the principal labor and certain non-labor cost takeout efforts in a rapid fashion that was made possible by the transformation work we started months prior. This was also benefited by the interaction between management and the transformation advisory committee.
These decisions are always difficult. They affected capable colleagues who made meaningful contributions to Verra Mobility and we did not take these decisions lightly. But the actions were necessary. They were necessary to help us align our organization and cost structure with our current priorities, speed decision-making and accountability, and to ensure we have an organization that is poised for future growth and success. We have now moved into the next phase of the program with an increased focus on non-labor spending, third-party costs, procurement, organizational complexity, and opportunities to further improve the efficiency of our processes. While we transform to reduce lower-value and duplicative activity, we believe strongly in investing in technology, product development, customer service, and implementation capabilities. Transformation cannot be a series of isolated cost actions.
It must be a disciplined, sustained effort to improve how we allocate resources, how we prioritize, and how we serve our customers to generate returns and new growth. I want to spend a moment on AI. In the last couple of months, our transformation has been pursuing two principal bodies of work related to AI. The first is using AI to improve how we operate. We are evaluating and experimenting with using AI to help accelerate software development, automate repetitive work, improve forecasting, identify operational abnormalities, and help employees analyze information more quickly. Our objective in deploying AI is not simply to deploy new technology for the sake of technology; it is to improve the speed, consistency, and quality of our work and allow our employees to spend more time on customers, complex decisions, and innovation. The second body of work is incorporating AI more deeply into the products and services that we provide.
This is critical to how I see the future of Verra Mobility. Verra Mobility operates one of the largest connected transportation technology platforms in North America. Across our network, more than 28,000 intelligent edge sensors—cameras, radars, LiDAR, and monitoring sensors—capture real-world transportation activity. We process over 230 million toll transactions and 56 million traffic events annually. We issue approximately 50 million parking permits and support these operations with more than 16,000 connected devices. This combination of connected infrastructure and sensors, proprietary transportation data, and mission-critical software creates a unique foundation for AI. Unlike organizations that are just beginning to collect data on a rolling basis, we have over 10 petabytes of transportation data and years of operational intelligence generated through real-world customer workflows at significant scale.
Over time, we believe AI will allow us to transform this data into increasingly valuable insights: improving image and sensor interpretation, predicting operational conditions before they occur, understanding changes in conditions, optimizing transportation and enforcement operations, automating complex decision-making, and delivering more intelligent software and edge hardware for our customers. We believe this positions Verra Mobility not only to improve the efficiency of our own operations, but also to create a new generation of AI-enabled transportation solutions that strengthen customer outcomes, improve roadway safety, increase the long-term value of our technology platform, and ultimately help save lives. Before I turn it over to Craig, I want to say a heartfelt thank you to our employee population. While I have been out on the road visiting and engaging with our customers, I have also been traveling to many of our sites across the U.S. with all levels of employees.
This has been a difficult past few months, and our employees have responded with resiliency and confidence. Their hard work and dedication energize me and inspire the rest of our executive team. At Verra Mobility, we are one team. With that, I will turn the call over to Craig to discuss our second quarter financial results, our outlook, and the financial implications of the actions that we have underway. Craig?
Thank you, John, and good afternoon, everyone. As John outlined earlier, the second quarter reflected strong execution across the business. I will spend the next few minutes walking through the financial results, discussing performance across each of our businesses and then updating our outlook for the balance of the year. Let's turn to Slide 4, which outlines the key financial measures for the consolidated business for the second quarter. Our Q2 performance was ahead of internal expectations with total revenue, adjusted EBITDA dollars, margin, and adjusted EPS landing stronger than expected. Our results were bolstered by New York City camera installation timing, operational improvements across the enterprise, and strong advancements in commercial services collection performance. Let me begin with our revenue performance. Government solutions service revenue increased 17% in the quarter driven by New York City camera installations and 8% growth outside of New York City.
Within New York City, incremental net-new camera installation growth exceeded the updated contract pricing change, generating 36% service revenue growth in the second quarter versus last year. As you may recall from our last discussion, inclement Q1 weather drove a delay in our expected installation volumes under our new expansion contract. Our team is fully caught up with the second quarter, and we are now back to where we originally expected to be by the close of the first half of 2026. Commercial services revenue returned to growth, increasing 6% year over year driven by strength in both rental car tolling and fleet management. Total parking solution service revenue increased about 1%, primarily on SaaS revenue. Total product revenue was $17 million for the quarter. Government solutions contributed roughly $14 million and T2 delivered about $3 million in product sales overall for the quarter.
Consolidated adjusted EBITDA for the quarter was $111 million, stronger than our internal expectations and largely driven by the New York City camera installations I mentioned earlier. We reported a GAAP net loss of $48 million for the quarter, which reflects a non-cash goodwill and intangible asset impairment charge of $104 million for the carrying value of T2 Systems. The tax provision of about $6 million, after adjusting for the impairment and other nonrecurring expenses, represents a normalized effective tax rate of about 28%. GAAP diluted EPS loss was $0.32 per share for the second quarter of 2026 compared to $0.24 of income per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation, and other nonrecurring items, was $0.38 per share for the second quarter this year compared to $0.34 per share in the second quarter of 2025. The adjusted EPS favorability versus prior year was driven by the increase in adjusted EBITDA and a reduction in shares outstanding, partially offset by increased depreciation expense.
Another point John emphasized was the resiliency of our business model, and our cash generation during the quarter continued to reflect that strength. Cash flows provided by operating activities totaled $56 million and we delivered $33 million of free cash flow for the quarter, which was in line with our internal expectations.
Next, I will step through the performance of each of our businesses, beginning with Commercial Services on Slide 5.
Commercial Services year-over-year revenue increased 6% in the second quarter. Rental car tolling revenue increased 5% over the same period last year, driven by increased product adoption and tolling activity despite a 1% decrease in U.S. travel volume over the prior year quarter. Our fleet management business increased 3% or about $1 million year over year, more than offsetting the prior period churn we experienced in the second quarter of last year. Segment profit margin improved 100 basis points over the prior year, driven by operating leverage and continued success in lowering bad debt expense on improved cash collections.
Turning to Slide 6, Government Solutions service revenue increased 17% in the quarter driven by New York City camera installations and 8% growth outside of New York City.
Total revenue grew 20% over the prior year quarter as product revenue increased about $4 million year over year. Government Solutions segment profit was $31 million for the quarter, representing margins of approximately 24%. The decline in segment profit margins is primarily attributable to the New York City pricing change. While this represents a reduction in segment profit margins over the prior year, this performance was better than expected due to the pacing of the New York City camera installations I discussed earlier. Additionally, we generated another strong quarter of contracted bookings in Government Solutions, reflecting continued demand from municipalities seeking technology solutions that improve roadway safety and traffic management. During the second quarter, we booked $25 million of new annual recurring revenue and contract awards.
Notable bookings were concentrated in several work zone speed and school bus stop-arm programs. Over the trailing 12 months, new incremental ARR bookings totaled approximately $74 million, reflecting sustained demand and stronger conversion across our pipeline. Let's turn to Slide 7 for a review of the results of Parking Solutions.
We generated revenue of $20 million and segment profit of approximately $2 million for the quarter. SaaS and services sales increased about 1% compared to the prior year, while product revenue was effectively flat compared to 2025. Parking Solutions segment profit margins declined 65 basis points versus last year, driven primarily by product sales mix and the timing of operating expenses. Okay. Let's turn to Slide 8 and discuss the balance sheet and take a closer look at leverage. We ended the quarter with a net debt balance of about $1 billion, which declined sequentially due to second quarter free cash flow. Net leverage landed at 2.4 times, which reflects the in-quarter repayment of our credit revolver which is 100% undrawn at present. Consistent with John's comments regarding disciplined capital allocation, we have $66 million available under our $250 million share repurchase authorization.
However, our priority today remains strengthening the balance sheet while maintaining financial flexibility through building cash reserves. Finally, let me turn to our outlook for the remainder of 2026. As John discussed earlier, our business continues to perform well operationally. However, the recently completed Avis Budget and Hertz renewals include revised commercial terms that are materially less favorable to us than the prior agreements and affect our financial outlook. Accordingly, we have updated our full-year guidance as follows. We expect total revenue in the range of $945 million to $965 million. We expect adjusted EBITDA in the range of $360 million to $370 million, or an adjusted EBITDA margin of about 38%. Importantly, as discussed earlier, the changes to our outlook are largely attributable to revised pricing associated with the Avis Budget and Hertz renewal agreements. Our underlying operating performance across the business remains consistent with our expectations.
We expect 2026 non-GAAP adjusted EPS to be in the $1.11 to $1.17 per share range. And lastly, free cash flow is expected to be in the range of $105 million to $115 million for 2026. The free cash flow guide anticipates higher CapEx spending versus prior guidance, driven by the accelerated timing of the Los Angeles Metro contract award and several accelerated school bus stop-arm awards. The vast majority of the CapEx will be spent in Government Solutions to implement newly awarded photo enforcement programs. Additionally, we anticipate a $30 million use of working capital primarily related to both our recent rental car contract renewals and the timing of expenditures and collections of our ongoing installation in New York City.
Moving on to the segment level for total year 2026: Government Solutions is expected to generate the high end of mid-single-digit total revenue growth, which reflects the blended growth rate across the segment. This includes low double-digit revenue growth for service revenue outside of New York City, and high single-digit growth for total revenue within New York City as new expansion installs and product sales more than offset price normalization. Overall product revenue for Government Solutions is expected to be roughly flat. The outlook for Government Solutions margins is unchanged. We expect segment profit margins to contract by approximately 450 to 500 basis points compared to 2025, primarily due to the New York City renewal contract, including service pricing adjustments from the competitive procurement process and the inclusion of minority- and women-owned subcontractor requirements by the City of New York. We expect third quarter margins to contract to comparable levels as Q1 then ramp up to the mid-20s by Q4 2026, fueled by volume leverage, Mosaic cost savings, and school bus stop-arm seasonality. We still expect Government Solutions margins to land in the low twenties overall for total year 2026, consistent with what we shared on our prior calls.
Consistent with John's earlier comments regarding our long-term customer partnerships, we are very pleased to announce both the renewed Avis Budget and Hertz agreements and look forward to expanding our partnership with each of these long-standing and highly valued customers. While the new agreements provide greater contractual visibility over term, they were executed at lower pricing levels than our existing relationship and include an option for the customers to modulate their fleet volume. Additionally, we have reduced our full year TSA assumption such that full year volume is expected to be around flat with 2025, representing a 1% to 1.5% reduction from our prior TSA assumption. As a result, commercial services revenue growth is expected to decelerate over the back half of the year in each of the third and fourth quarters, and we expect overall growth will be in the high single-digit range for the year in total versus 2025.
Commercial Services segment profit margins are expected to contract over the balance of the year as well, with the full-year total expected to be in the low 60% range. We continue to anticipate that Parking Solutions revenue will be up low- to mid-single digits versus 2025 levels, driven by growth in SaaS, subscription, and professional services offerings. Lastly, we expect Parking Solutions margins to be slightly accretive to 2025. As John discussed earlier, we have taken action to realize the cost reduction initiatives that we committed to earlier this year. In total, this represents about $20 million of annualized cost we expect to take out of the business. I would expect to generate full run-rate savings beginning in 2027. Other key assumptions supporting our adjusted EPS and free cash flow outlook can be found on Slide 10. Before I wrap up, I would like to briefly touch on our segment reporting.
As John discussed earlier, we are continuing to evolve how we manage the business. As part of that process, we are evaluating whether changes to our organizational structure and the way our leadership team reviews financial performance could affect our operating and reportable segments. For the second quarter, nothing has changed. We continue to report our results as we have historically. This evaluation is still underway. If it ultimately results in a change to our segment reporting, including potentially reporting as a single operating and reportable segment, we would communicate that at the appropriate time and recast prior period information as required. Before I turn it back to John for his closing comments, I will add that our second quarter results demonstrate the operational momentum John described earlier. While we have updated our outlook to reflect the economics of two important customer renewals, the underlying execution across the business remains strong. Our balance sheet continues to strengthen and we remain focused on disciplined execution during the second half of the year. John?
Thanks, Craig. Let me close by returning to the commitments we made when I assumed the CEO role. First, we said we would broaden and deepen our customer relationships. I would highlight that we have reached a new seven-year agreement with Avis Budget Group and renewed Hertz under a new five-year agreement. We are also awarded the new contract in the City of Los Angeles, which once operational will represent one of the largest speed enforcement programs that we have at Verra Mobility. Second, we said we would accelerate our transformation with an urgent focus on organizational changes to make us faster and more efficient. We have realigned the customer organization, combined and catalyzed the product and engineering organizations, completed significant cost-out actions, and established clear operating accountability. We are igniting the use of AI to help us improve our operations and the products and services we offer to our customers in the future.
While these are important early steps, we believe the results of these swift actions will help create stability, predictability, and shareholder value. I intend to continue to lead Verra Mobility with deliberate intent to make this company more focused, more efficient, and more of a transportation technology leader. When we do that, I believe we will create value for our shareholders. Thank you again for your time and attention today. At this time, I would like to invite Sheri to open the line for any questions.
Questions and answers
Thank you. To withdraw your question, press star 11 again. Our first question will come from the line of Tomohiko Sano with JPMorgan. Your line is open.
Hello, and congratulations, Jon, on the new role.
Appreciate that.
On the Avis contracts, could you please walk us through the circumstances that led to the initial termination notice and then what were the primary factors that ultimately drove Avis to rescind the notice and enter into an extension, please?
Thank you. Tomohiko, as we disclosed, we received a termination notice from the customer. That was deeply disappointing, of course. After a series of leadership changes, I took it upon myself and the management team to reapproach Avis and we listened. We better understood what they were trying to do and I am very pleased to say that after a series of meetings and negotiations we built what I think is a very strong basis for a constructive long-term relationship going forward that takes into account their strategic priorities and the value of our technology platform and operations. The arrangement de-risks their operations and delivers better services to their customers. This outcome speaks to the value of broadening and deepening our customer relationships and is a very large focus for me and for the organization.
Thank you, John. And then follow-up: following the Avis and Hertz renewals, could you summarize the key economic changes versus the prior agreement like pricing, any variable components, and volume assumptions? And if you could give us any updates with Enterprise as well. Thank you.
Hey, Tomohiko, I will start. Everything we said was in our prepared remarks, but I will summarize. Hertz is a five-year extension that was done early; it was not up for negotiation until the summer of 2027. ABG is a seven-year deal. Financially, we are thrilled to partner with both customers. We are very happy to continue these relationships. As we stated, they are on less favorable terms. There may be some ability for the customers to modulate fleet volume; that is consistent with how they run their businesses. We cannot disclose the exact contract specifics for competitive reasons. These contracts strike the right balance of competitive pricing and the differentiated value Verra provides—scale, reliability, and innovation. The contracts are tailored to each customer and represent long-standing, deeply integrated partnerships that were reinforced during our recent leadership engagements.
I will add that I am very impressed by the Enterprise mobility teams and their work. We are engaged in positive discussions with Enterprise. For our large rental car customers, we are engaging at the senior levels in their organizations. They are recognizing that they can use us as an accelerator, particularly around technology. We are a technology leader and we are providing new technology avenues to help them transform and improve the end-customer experience. Our goal is to make their operations easier and improve their customer outcomes, which will, in turn, drive mutual success.
Thank you, Craig and Jon. Appreciate it.
One moment for our next question. That will come from the line of Daniel Moore with CJS Securities. Your line is open.
Thank you. Good afternoon, John. Good afternoon, Craig. Appreciate all the color this afternoon. I know you are limited, but maybe ask one or two more questions about the new contracts and then move on. Are there new floors or minimums in terms of fleet volumes or percentages of customer volumes dedicated to Verra that would provide you some base level of revenue visibility from a budgeting and planning perspective?
I cannot disclose the specific contractual floors or minimums, Dan, because we have different contracts with different customers and we do not disclose customer-specific contract terms for competitive reasons. We did note there is some ability to modulate fleet volume. We are in daily contact with our customers and we work closely with them, so we have good visibility and experience to forecast. As we gain experience under the new contracts over time, we should be able to provide more clarity, but right now we are in the middle of implementing these renewals and major updates, so I cannot provide more specifics today.
Understood. And the changes have gone into effect immediately, correct, or is there a delay? Just making sure I get the revised guide.
Maybe just in terms of the City of Los Angeles: can you talk a little bit more about the scope of the revenue opportunity? How would you think about it ramping? Are you selling cameras or leasing cameras as you traditionally would? Any thoughts about margins relative to where Government Solutions is currently running?
I am really excited about what is going on in California. To step back, the long-term opportunity in government business has been expanding because photo enforcement programs and automated safety programs typically require legislative authorization at the state level. We have worked through the government relations function for many years to help expand the total addressable market. Assembly Bill 645 authorized speed enforcement in California via a pilot in six major cities, and six out of six of those cities selected Verra Mobility as the technology partner. That speaks to our credibility and ability to deliver results. When I think about Los Angeles specifically, there is only one Los Angeles and one New York City, and I am excited to serve that customer. We are expecting $10 million in ARR from that agreement once it is finalized. We received the award from the city and are working through contract negotiations and implementation details. We are honored to expand our work out west and to continue to further our mission of saving lives while expanding commercially.
Really helpful. One more since there has been a lot of change: given the write-down of T2 in Parking Solutions, what is your sense of the future of that business from your perspective? Is it a vehicle for growth or could it be a potential divestiture candidate at some point?
Thank you. I will acknowledge that over the past couple of years the Parking business has not performed as we would have liked. That said, it is growing and it is generating cash, so it remains part of our portfolio. There is significant opportunity to improve the business and it is one of the areas we will be focusing on. We will evaluate strategic options over time as we continue our transformation, but right now our focus is on improving performance and driving cash generation across the business.
Our next question will come from the line of Faiza Alwy with Deutsche Bank. Your line is open.
Hi. John, I wanted to get your perspective on what you think changed over the last few years from either a technology, competitive, or end market perspective that led to these contracts being signed at much less favorable terms than before. We would love to hear your thoughts on what really happened.
Faiza, this was a surprise to us, but since I took the role I have engaged directly with the senior leadership of the customers we serve and we now have a much better understanding of their priorities and decision-making processes. They are undergoing transformation themselves. It is important for shareholders to know that we also have additional technology that will help lay the basis for continued future success. The fact that we were able to renew these agreements and rebuild the relationship with Avis is a testament to the soundness of our technology platform and our ability to execute and de-risk what can be very problematic for large fleets operating across jurisdictions. When issues arise—tolls, parking, citations—they can be disruptive for fleets. Senior executives at these companies view us as a partner who can deliver reliably and support their transformation, which is why they extended the relationships.
As I think about EBITDA margins for the Commercial segment, do you think those margins will stay at the lower levels implied by the back-half guide, or are there cost initiatives to rightsize the cost base given the new contracts? What are some areas of opportunity?
Faiza, I will take that. I am not going to go beyond 2026 guidance right now. We discussed that our margin percent will be lower than we thought at the beginning of the year due to the new contract economics. However, we relooked at our cost base and, in a short period of time, we identified a solid number of cost reductions. We expect about $20 million of annualized cost reductions, potentially more, as we look at our run rate for 2027. We're not done yet. Headcount actions are substantially complete, but we still see opportunities in sourcing, procurement, and how we serve customers at the roadside. We will continue to optimize the company and drive further savings over time.
Great. Thank you so much.
I am showing no further questions at this time. This concludes today's program. Thank you all for participating. You may now disconnect.