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Edited Transcript of CUB earnings conference call or presentation 20-Nov-19 10:00pm GMT

Q4 2019 Cubic Corp Earnings Call

SAN DIEGO Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Cubic Corp earnings conference call or presentation Wednesday, November 20, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anshooman Aga

Cubic Corporation - CFO & Executive VP

* Bradley H. Feldmann

Cubic Corporation - Chairman, CEO & President

* Kirsten Nielsen

Cubic Corporation - VP of IR

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Conference Call Participants

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* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Jonathan Phaff Raviv

Citigroup Inc, Research Division - VP

* Kenneth George Herbert

Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst

* Louie DiPalma

William Blair & Company L.L.C., Research Division - Analyst

* Mark Wesley Strouse

JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Cubic Corporation Fourth Quarter and Full Year Fiscal 2019 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Kirsten Nielsen, Vice President of Investor Relations. Thank you. Please go ahead.

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Kirsten Nielsen, Cubic Corporation - VP of IR [2]

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Hello, everyone, and thank you for joining Cubic's webcast. I'm joined today by Brad Feldmann, Chairman, President and Chief Executive Officer; and Anshooman Aga, Executive Vice President and Chief Financial Officer.

Before we begin, I'll remind everyone that our presentation contains forward-looking statements that are made pursuant to the safe harbor provisions of the federal securities laws. Our most recent SEC filings include risk factors that could cause the company's actual results to differ materially from our expectations. In addition, we have included non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix to today's presentation.

With that, I'd like to turn the call over to Brad.

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [3]

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Thank you, Kirsten. Thank you, everyone, for joining us today. I will start with a summary of our record performance for fiscal 2019 followed by an update on our strategic priorities, including today's announcement to exercise our options to acquire the remaining stakes in 2 companies, Pixia and Delerrok. Pixia enhances our C2ISR offering, while Delerrok is driving our entry into the public transportation mid-market. Then I'll turn the call over to Anshooman who will cover the financial results and fiscal 2020 guidance.

Turning to Slide 3. We delivered record level results for sales and adjusted EBITDA in the fourth quarter, capping a record year for Cubic. We're very pleased with our full 1-year results, with sales up 24%, adjusted EBITDA up 40% and adjusted earnings per share up 43%, reflecting strong project delivery on our major transportation contracts, strong demand across the Mission Solutions portfolio and the impact of our recent acquisitions, which performed in line with our expectations.

With these strong results, we achieved our full year guidance. For guidance, we have assumed constant currency, and when adjusting our results for FX impacts, we exceeded the midpoint for sales, adjusted EBITDA and adjusted earnings per share.

Turning to Slide 4. In the third quarter, we purchased a 20% stake in Pixia. And today, we announced that Cubic has exercised the option to acquire the remaining 80%. The valuation of $250 million reflects a 2020 EBITDA multiple of less than 11x and is expected to be accretive to adjusted EPS in fiscal 2020. Anshooman will discuss the expected financial impact of the acquisitions for fiscal 2020.

Pixia has been experiencing strong growth, driven by customer demand to provide efficient access to Wide Area Motion Imagery. Pixia further enables our real-time battlefield cloud strategy to provide information to the edge of the battlefield. We expect double-digit adjusted EBITDA growth over the next few years with superior margins and potential upsides as an enabling technology for the Department of Defense's Internet of Battlefield Things, artificial intelligence strategy.

Turning to Slide 5. As we've discussed on prior calls, Cubic owns a minority stake in Delerrok, a leading fare collection-as-a-service and platform solution for small to mid-market public transportation agencies. Today, we announced that Cubic has exercised their option to acquire the remaining 82.5%. This acquisition accelerates NextCity 2.0 by enabling our immediate entry into small and mid-sized cities in North America. By combining Delerrok with Cubic's NextBus solution, we can offer an integrated vehicle information, operations and One Account payment solution as a subscription-based service at an affordable price point.

Today, this market is largely unaddressed, with over 70% of transit agencies in North America still dependent on cash and paper-based fare products. Having already secured more than 15 customers, Delerrok has demonstrated that they have a proven solution to capture a significant share of upcoming procurements, which we anticipate being in excess of $200 million over the next 5 years. While Delerrok is not expected to have a meaningful financial impact in the near term at scale, which we would anticipate getting to in less than 5 years, we expect Delerrok to deliver as-a-service economics, with adjusted EBITDA margins north of 30%.

Turning to Slide 6. We continue to deliver on our key priority of winning the customer. Over the last several quarters, we have been investing in our ISR-as-a-Service capabilities and recently conducted a successful first flight and endurance testing of Cubic's unmanned air vehicle. We also signed a cooperative research and development agreement with the United States Special Operations Command to mature this capability.

In defense training, I'd like to recognize our teammate, Greg Franklin, who received an award from our customer in Japan in recognition of his outstanding support for over 10 years.

In transportation, we are collaborating with Miami-Dade transit to launch Cubic Interactive ahead of the Super Bowl. Cubic Interactive is a digital loyalty and advertising platform, capable of displaying advertising on any digital device from a ticket vending machine, gate, TV stream and on the transit agency mobile application. Cubic Interactive is at its core technology a Software as a Service loyalty platform that enables transit agencies to incentivize utilization of public transportation and reward user loyalty. We are very excited about this collaboration and the launch of Cubic Interactive, a key foundational pillar for our digital pivot in transportation.

Turning to Slide 7. Our major transportation projects in New York, Brisbane and the Bay Area are all progressing to plan. Following a very successful public pilot, we'll soon begin further installations at the New York OMNY system.

We have also made significant progress with restructuring the Boston contract.

In October, we were awarded a 5-year extension to upgrade Chicago's Ventra fare collection system. The service's extension together with the system upgrade increases the value of our contract by $377 million. Ventra 3.0 will continue to position the Chicago transit authority as the cutting-edge of transit payment technology with enhancements of account management features, equipment replacement and with the implementation of open architectural standards with APIs to set this foundation for Mobility as a Service.

We continue to advance our mid-market strategy, and we are currently finalizing an agreement with San Francisco Muni, our largest customer of NextBus, to implement the next-generation system.

Lastly, we announced an agreement with Google to integrate contactless transit cards with Google Pay, making it fast and easy for travelers to use their mobile phones to pay for their journeys.

On Slide 8, our Mission Solutions team had an outstanding year and continues to see strong momentum. In October, GATR was awarded a 10-year IDIQ contract worth up to $325 million to deliver the Marine's next-generation troposcatter solution, a great win for Cubic. As the prime contractor, we will deliver 172 systems and provide test support, logistics, training and field support. Our next-generation troposcatter solution provides over 200 megabits per second, an order of magnitude improvement over the legacy system, while reducing the size, weight and power by more than 90%.

In C2ISR, we were selected by Sigma Defense Systems for an IDIQ contract with a ceiling valued at approximately $100 million to integrate its Atlas modular suite of baseband communications equipment as the core hardware and software within Sigma's Stingray solution for the U.S. Department of Defense.

Additionally, our ongoing advancements with Cubic's multi-link communications technology led to a network contract with the Air Force Research Lab. Our solution positions Cubic to support the emerging joint area layer network, which seeks to advance airborne networks for contested and congested airspace.

Turning to Slide 9. In defense training, we received key awards worth more than $115 million at the end of Q4 and at the beginning of fiscal 2020. These include key air training programs for Korea, Qatar, Japan and the United States Air Force. These bookings will support near-term growth and position for additional opportunities.

Additional future growth opportunities include new Live, Virtual, Constructive, LVC applications, leading toward training recapitalization for the United States Army and the United States Navy.

For the U.S. Army, we were selected for the live training environment under the Synthetic Training Environment, STE, which provides a new laser-less geo-pairing solution and for Soldier/Squad Virtual Trainer, which is the future squad virtual solution.

For the U.S. Navy, we were awarded a sole source basic ordering agreement, $90 million-plus IDIQ to deliver SLATE capabilities in support of exercise Trident Warrior in FY '20 and for an early operational LVC capability at Naval Air Station Fallon, the home of Topgun.

Turning to Slide 10. I'm always proud when Cubic's innovative technologies are deployed to help those in need. After Hurricane Dorian struck the Bahamas in September, our Mission Solutions teammates provided satellite communications, ruggedized IoT and Radio over IP technologies to restore connectivity so that first responders and those aiding recovery efforts could quickly access data, video and voice communications.

I'm pleased to welcome 2 new Cubic Board members, Denise Devine and Carolyn Flowers, who will join our Board effective November 21. Denise is the founder and CEO of FNB Holdings and the co-founder of RTM Vital Signs and brings to Cubic an extensive and unique background in innovation, entrepreneurship and financial leadership.

Carolyn brings to Cubic extensive leadership in transportation and in the infrastructure space, currently serving as the American Public Transit Association's Board of Directors and formerly serving as the Federal Transportation Administrator, CEO and Director of Public Transit for the Charlotte Area Transit System and the Chief Operations Officer for the Los Angeles County MTA.

I'm also pleased to welcome Hilary Hageman to our leadership team as Senior VP, General Counsel and Corporate Secretary. Hilary, the former Deputy GC for SAIC, brings a wealth of experience in corporate law on a global scale as well as deep industry experience in government and commercial contracting and M&A. Hilary succeeds Jim Edwards who will be retiring next June. On behalf of Cubic, I would like to thank Jim for his leadership throughout his 11-year tenure at Cubic.

Lastly, we are launching several initiatives focused on fostering inclusive and diverse environments to strengthen our company culture, generate the most innovative ideas and in turn best serve our customers. It is an honor to be recognized in the Forbes 2019 lists for Best Employers for Diversity and America's Best Large Employers as a reflection of our ongoing efforts to create an inclusive and highly engaged work environment.

Turning to Slide 11. In the next evolution of our strategy, Cubic's digital pivot seeks to enhance our growth initiatives and lays the foundation for long-term value creation. Today, Cubic primarily delivers innovative customer solutions with design, build and operate, maintain revenue streams. Through our digital pivot, Cubic aims to win customers by delivering scalable products built on platforms that generate recurring and as-a-service revenues with higher profit margins. In the near term, our digital pivot will leverage Cubic's existing software-focused and cloud-focused solutions.

In CTS, we are pivoting the business to a platform approach, where the platform will be available to cities of any size and delivered on an as-a-service basis. Our mobile suite will be the forefront of our transportation solutions, offering a fully integrated ecosystem of transportation information and payment capabilities to enrich the travel experience for both travelers and service providers.

In Mission Solutions, we will focus on capitalizing our C2ISR cloud edge to develop multi-domain platform solutions.

In NextTraining, we will build upon our current digital platform projects, including SPEAR, Nexus and CATS, and leverage our core experience in game-based training to expand in new commercial verticals. We've already seen strong customer interest for those training solutions, including upcoming demonstrations for both military and commercial customers to provide a game-based training digital platform.

Defense training has also sold its first 3 licenses for its human/machine performance platform, SPEAR. We look forward to discussing our digital pivot and our next strategic growth plan Goal 2025 during an investor conference in the summer of 2020.

Next, I'll ask Anshooman to describe our financial results in more detail.

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [4]

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Thank you, Brad. Please turn to Slide 12 where I'll begin with a summary of the fourth quarter. Sales in Q4 were $471 million, a quarterly record, and up 26% year-over-year on a constant currency basis, driven by strong organic growth from Transportation and Mission Solutions and the impact of our Trafficware and GRIDSMART acquisitions. The new revenue recognition standard had a favorable impact of $37.8 million, largely driven by the Boston project. Excluding Boston, ASC 606 increased reported sales by $13.9 million.

Adjusted EBITDA for the quarter was $76.6 million, also a quarterly record for Cubic and an increase of 59% on a constant currency basis. This quarter, FX continued to negatively impact our results, including a $7 million headwind to sales and a $1.5 million headwind to adjusted EBITDA and a headwind of $0.05 on adjusted EPS.

Free cash flow was $37 million in the fourth quarter. And adjusted free cash flow, which excludes the impact of the Boston consolidation, was $52 million. Free cash flow was supported by strong shipment of GATR in our Mission Solutions business and improvement in working capital in the Transportation business.

Our net leverage is down to less than 2.3x, reflecting our strong Q4 adjusted EBITDA, freeing up capacity for the announced acquisitions of Delerrok and Pixia. Lastly, our backlog remains strong at $3.4 billion or approximately 2 years' revenue.

Slide 13 provides a year-over-year comparison of the fourth quarter results, which I've mostly covered already. I'll point out that last year's Q4 bookings included nearly $400 million from the San Francisco Bay Area award in transportation.

Adjusted net income was $58.3 million or $1.86 per share in the fourth quarter, a 36% increase year-over-year on a constant currency basis, reflecting higher adjusted EBITDA, which more than offset increases in shares outstanding and income taxes.

Moving to the full year results on Slide 14. As Brad discussed, we delivered record results for the fiscal year and achieved our guidance for the year. After adjusting for FX headwinds, which is consistent with our guidance, our sales, adjusted EBITDA and adjusted EPS exceeded the midpoint of guidance. Full year sales grew 27% on a constant currency basis. Excluding the impact of the acquired businesses, growth was 20% on a constant currency basis. Adjusted EBITDA increased 44%, driven by higher sales and the impact of the Trafficware and GRIDSMART acquisitions. This reflects a year-over-year increase of 110 basis points despite meaningful investments in the Mission Solutions business, which I will discuss in a moment.

Adjusted net income was $95.6 million or $3.13 per share in fiscal 2019, up 49% year-over-year, reflecting higher adjusted EBITDA and a lower effective tax rate, which more than offset increases in shares outstanding and interest expense.

Finally, free cash flow was negative $36 million and adjusted free cash flow, which excludes the impact of the Boston consolidation, was positive $14.1 million including meaningful improvement in the fourth quarter. We expect cash flow to improve in fiscal '20.

Moving to the Transportation segment results on Slide 15. Sales grew 35% on a constant currency basis in Q4. Sales growth for the full year was driven by the New York, Boston, Brisbane and San Francisco Bay Area projects and by $74.4 million from the Trafficware and GRIDSMART acquisitions.

Adjusted EBITDA margin increased meaningfully in the fourth quarter, leading to a 210 basis point increase for the full year, driven by higher volume, sales mix and the impact of Trafficware and GRIDSMART.

Moving to Slide 16. Our Mission Solutions business reported another solid quarter with robust growth, rounding out a very impressive year. Sales for the full year grew 59%, reflecting strong growth across the portfolio. Adjusted EBITDA margin in the fourth quarter and the full year reflects incremental investments including ISR systems, accelerated investments on new franchise wins in protected communications and additional investments in new technologies.

Turning to Slide 17. As we've discussed on prior calls this year, performance in Cubic Global Defense has been impacted by the delay of international orders, leading to flat sales for the fourth quarter and full year. Margin improvement in the fourth quarter and full year reflects strong project execution and disciplined cost management.

Defense training is off to a good start this fiscal year with strong recent bookings including key international air training programs, which should lead to growth in fiscal 2020.

Turning to Slide 18. For fiscal year 2020, we expect sales in the range of $1.58 billion to $1.64 billion including approximately $40 million of sales from the expected acquisitions of Pixia and Delerrok. Before factoring in growth from the acquisitions, this performance is in line with our Goal 2020 target.

For adjusted EBITDA, we expect a range of $170 million to $190 million with the midpoint of $180 million, reflecting our continued focus on margin improvement and continued investments in innovation.

Our EBITDA guidance includes $15 million from Pixia and Delerrok.

We expect adjusted EPS in the range of $3.10 to $3.70 including a $0.20 combined contribution from Pixia and Delerrok.

Lastly, our guidance assumes a defense budget is reached no later than mid-fiscal Q2.

We expect Q1 adjusted EBITDA to be lower than Q1 of fiscal 2019, impacted by a onetime accelerated investment charge in the quarter for the initial troposcatter order and timing impacts from orders and respective deliveries due to the continuing resolution.

Now I'll turn the call back over to Brad.

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [5]

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Thank you, Anshooman. Turning to Slide 19. In summary, we delivered record financial results in Q4 and fiscal year 2019, and we expect to deliver another strong year in fiscal 2020.

CTS continues to lead the market in fare collection and is further advancing NextCity through significant progress with our mobile applications, advancements, developing our mid-market solution and strong performance from our intelligent traffic management acquisitions.

Our acquisition strategy and organic investments in C4ISR are paying off, with outstanding growth and key franchise program wins. Defense training is positioned for growth with our recent wins and strong growth potential across several opportunities for our Live, Virtual & Constructive solutions. As we enter fiscal year 2020, the final year of our 5-year strategic plan, I am proud of what our teams have accomplished together and remain very optimistic about Cubic's future.

Now let's proceed to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Jim Ricchiuti of Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [2]

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Just a question on the guidance for Q1, the adjusted EBITDA would be down year-over-year. I'm wondering, can you maybe size the investment as it relates to troposcatter?

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [3]

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Yes. The initial win that we got will have a forward loss or investment just over $2 million, about $2.5 million. And after that, all the orders that we'll be getting for the IDIQ that Brad mentioned of about $325 million will be highly profitable.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [4]

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Got it. And then on backlog, looks like the backlog in CMS, sequentially, it was down a fair amount. And I'm just wondering -- I know you've gotten some -- I think it sounds like you have a pretty healthy pipeline. But can you talk a little bit about how you see that backlog being replenished for CMS? And more broadly, maybe if you could, talk about both CMS and CGD business as we think about the seasonal pattern of that business in fiscal '20? Will it be as back-end-loaded as we saw last year?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [5]

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Jim, this is Brad. So a lot of the backlog is down because their revenue was way up. So they shipped out an awful lot this year and we're -- in CMS, and we're very proud of the growth. They have programs of record. And when we get a budget that those orders will come in and we intend to ship them this year and it will be somewhat backloaded again as well. In the defense training business, you might note that we, just after the fiscal year booked, I think, about $115 million of new work. And so that will -- is less susceptible to shipment-based revenue calculations. It's cost-on-cost. And so it will be less back-end-loaded and will grow throughout the remainder of the year. Both of the businesses, we're very excited about the possibility in Cubic Mission Solutions. As you probably noticed, we have invested quite a bit in R&D there and the pipeline is very, very robust. And in the defense training business, we're very savvy about that as well. I think we talked about that returning to growth. And with these orders and other things that they've won, we're very optimistic about growth going forward.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [6]

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Got it. And one final question, and I'll jump back in the queue. I think you gave the revenue contribution for Trafficware and GRIDSMART for the full fiscal year. Now I may have missed it, but did you provide the contribution for the fiscal fourth quarter?

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [7]

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We did not. For the full year, they were about $18 million in adjusted EBITDA Trafficware and GRIDSMART.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [8]

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The revenue contribution, I was looking for.

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [9]

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That was the adjusted EBITDA. The revenue number...

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [10]

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Jim, I think we will get back to you with the revenue number.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [11]

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Yes, that's fine. That's fine. We can circle it back offline.

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Operator [12]

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Your next question comes from Jon Raviv of Citi.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [13]

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One quick clarification on the free cash flow. Anshooman, I think you mentioned that it should be better in FY '20. Can you just clarify on what measure the adjusted versus nonadjusted? And then also, can you comment as to how much of that includes some monetization of receivables, please, which I think you started doing in recent quarters?

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [14]

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Just on free cash flow, I would look at the number of adjusted free cash flow, because that's the real cash flow, because the Boston cash we receive, from free cash flow perspective, we cannot count it. But even we eliminate that and we count the adjusted free cash flow because that's nonrecourse debt to Cubic and it should be really considered as free cash flow. So I would focus on the free cash flow number, and that will be the improved number.

The receivables, we do factor a little bit, and we do that based more on a decision of interest cost. The cost for factoring our receivables is lower than the cost of our revolver, and we benefit from that and reduce our interest cost and manage cash. So it's really a decision based on that.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [15]

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Heading into next year, the improvement should come from the underlying as well as potentially some continued factoring?

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [16]

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The factoring would be probably in the line with what we factor right now, but it won't be significantly different. But -- so it's really underlying cash performance improvement.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [17]

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Got you. I appreciate that clarification. And then sort of looking ahead to fiscal '20, we appreciate you achieving Goal 2020. Can you comment first on the organic growth? I mean pretty good number in FY '19, but I'm trying to get our heads around with the implied organic growth this next year. It looks like it's 3% to 7% excluding Delerrok and Pixia, maybe less if you exclude GRIDSMART and Trafficware. Can you just give us some sense of how you're looking at organic growth in FY '20, please?

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [18]

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Our organic growth, if you were to eliminate the 2 acquisitions we just announced, should be about 5%. And that's coming off very strong comparables for 2019. We had robust growth in all our businesses. If you look at our Transportation business, grew 30% top line. If you look at Mission Solutions, it grew 59% top line. And we're operating under CR right now. So there's some variability because of that. So based on that, we have given guidance of about 5% organic.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [19]

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Okay. And then similar question on margin. I think if I -- and again exclude the acquisitions, the lower end of that range is about 10.1%. You did 9.8% in FY '19. What are some of the moving pieces going forward, just as what we would have assumed where the various production programs picking up, I suppose, offset by some of the investments? Can you just kind of give us a sense for why margin might not be better? And also in the context of your Goal 2020, which I think sort of pointed to 11% to 12.5% margin in 2020?

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [20]

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Yes. So let's use the midpoint number. So with Pixia and Delerrok, we'd be (inaudible) and without them, we're at (inaudible) in our -- in the technology road map towards our digital footprint. So we're absorbing those investments probably in the $15 million range that are leading to continued growth. And when you talk -- look at our last slide where we're talking about double-digit growth going into 2025, that's driven by investments that we're starting to make in our digital pivot and a little bit Brad teased about during this call and more to come on that during our Investor Day over the summer.

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [21]

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We think the digital pivot is significant in the sense that all of our businesses have a lot of data. And we're doing some experimentation as we speak with customers to create digital platforms. I chatted a little bit about that. And so we're definitely increasing our R&D investment to continue to grow the company at a robust rate going forward. And so that's contributing some to the margin.

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Operator [22]

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Your next question comes from Mark Strouse of JPMorgan.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [23]

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So appreciate all the color on the organic versus the inorganic numbers here. Just wanted to go back to the comments around GRIDSMART and Trafficware. I think you said about $18 million in EBITDA. Can you talk about that versus your expectations? Are those acquisitions in line with your original expectations? And I understand you're making investments in R&D. So maybe that's kind of the bridge, but that number seems just a bit light to me. So I just wanted a bit more color there.

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [24]

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Yes. What we provided was $20 million for the year. We're a couple of million light at $18 million, but that was basically one order slipped out of the fiscal year, international order, which will come in relatively soon. We're in pilot with that customer, and it's just a country where it takes a little bit of time to get that orders. And besides that, we've accelerated some investments since we made the acquisitions, both in driving synergies across the portfolio in terms of sales and also international sales, and we've had some success out there. So overall, the businesses, both are performing well. They've a positive adjusted EPS contributions to our business, and we're very happy with their performance.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [25]

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Okay. And then I believe you said Chicago, the extension closed in October. So is it right to assume that, that is not included in the backlog that you just reported?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [26]

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Yes. It's not in backlog, but we're very excited about getting that upgrade in Chicago, and it points to -- or money or money -- value creation thesis of annuities with customers and getting upgrades and the like. And so we're very proud of that in how we can serve the CTA.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [27]

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Okay. And then just real quick, lastly. A lot of moving parts below the line with the JV and whatnot. But can you just help us tie between the EBITDA guidance and the EPS guidance as far as tax rate, noncontrolling interest, those kind of things?

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [28]

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Yes. So when you really start thinking of going from this year's numbers to next year from below the line, going from adjusted EBITDA to adjusted net income, obviously, we're going to have higher interest expense, given the fact that we're buying Pixia and Delerrok using debt. Our effective tax rate this year was 21%. Next year, we're forecasting it to be a couple of points higher. And so there will be a little bit of impact from a higher tax rate. So those are the 2 big drivers. Additionally, depreciation, as you saw on our slide, is $5 million higher versus last year.

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Operator [29]

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Your next question comes from Ken Herbert of Canaccord Genuity.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [30]

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Brad, I just wanted to first start on the MTA and the work in New York City. It sounds like you've completed Phase 1 with the launch there. I know you're up against a fairly aggressive schedule. Can you just talk about from 2 angles: one, the next upcoming milestones and how that project is going; but then second, the buffer you've got and sort of where you stand in terms of profitability on that project relative to plan and the implications of that or what's implied in fiscal '20?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [31]

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Sure. So as you pointed out correctly, we did beneficial use 1 earlier in the year, and we're very proud of that, and we're rolling into beneficial use 2. And over the next year, we'll be rolling out our equipment through all the stations within that the MTA has cognizance over. So we're on track, we're moving out and will expand throughout that whole network.

What I would say, as you know, we don't give profit by contract or anything like that. But what I would say, just to put color on it, we have the lion's share of risk behind us. And so I would expect some improvements. So that's what I would expect.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [32]

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Okay, that's helpful. Yes. This is not so much profitability on the specific contract, but really the risk relative to your initial assumptions and buffer you may have. And just to ensure that, that program, both New York and Boston as well, I guess, are tracking to plan or if there's anything incremental that's come up that would be a particular headwind to your goals in fiscal '20 on those programs?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [33]

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Yes, I would say, some statements broadly, Ken. First off, I think we have the majority of the risk behind us. As you can see, we're rolling stuff out in New York. And as you remember, last year, we're fortunate to win in Boston and in Brisbane and in San Francisco. And the systems build upon one another. There's high reuse. And so we've done a lot of the heavy lifting already in New York. So I would expect improvements in the business as we go forward broadly.

Specifically regarding Boston, where the customer has wanted more equipment, and we're in the midst of restructuring that, and we're very close to getting done. You might remember, it's a little complicated with financing partners and the like. So even after we sort of shake hands, then we have to go get that financing all accomplished. I would expect next quarter, maybe it will leak a little bit into the next quarter. These financing things are always challenging and fun, but things are all on track, Ken.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [34]

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Okay, that's great. And if I could, I just wanted to ask a final question on the fiscal '20 guidance in a slightly different way. Is there anything else besides the digital pivot and investments around that you've called out as we try and parse out the sort of the implied margins by various segments? And I don't expect you to maybe get down to that level today, like you had in the initial '20 guidance, your Goal '20. But I'm just wondering if that digital pivot in those investments are applicable more to -- it sounds like more to CMS than Transportation, maybe training as well. But how do we think about those from a margin standpoint? And anything else you'd call out that's at least initially pushing you to the lower end of the sort of the initial '20 guidance you provided?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [35]

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Yes. So the reason it's lower as we're investing more in the business, so I think that's absolutely correct. As you know, the R&D has increased significantly, and we've seen very good growth as a result. You probably remember, when I started this about 5 years ago, it was in the $15 million band and now we're in the $50 million band and continuing to invest within the company. You probably noticed in the K, there's a bunch of information about that, new information. And so yes, we are investing more. In terms of is it in this business or that business, I think a lot of -- about half of it is going to be in the CTS business, and the rest is kind of equally split in the 2 defense businesses. Having said all that, what I would say is that the margins -- I expect the margins to continue to improve. And the reason is something we just talked about a second ago, is I think a lot of the risk of delivering the few billion dollars of backlog of those 4 big contract wins in the CTS, we've slayed a lot of that risk already.

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Operator [36]

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Your next question comes from Michael Ciarmoli of SunTrust.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [37]

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Just staying on this 2020. So you've got the Pixia and Delerrok contributing $15 million of EBITDA. I mean that's a substantially high margin. Is that an expected run rate for these businesses that we can think of going forward? Or is there any sort of onetime items in that contribution in the current year?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [38]

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There -- these are higher-margin businesses. The Pixia business is a software licensing, subscription-based kind of business and so has much higher margins. The Delerrok business, as pointed out in the script, is our entry into the mid-market in a serious way. And our intent is to team (inaudible) cities and get a piece of each ticket. And so it will be a much more annuity recurring. And so as you scale that and you add more cities, the cost at an additional city is small compared to the scaling of the revenue. So I mentioned in the script that we would expect north of 30% once we get going, but it'll take us a couple of years to get the kind of penetration that we think to get that kind of scale. So both of those business will achieve much higher margins than the existing Cubic portfolio.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [39]

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Got it. And then just on the EPS, that bridge for fiscal '20, I mean, you obviously just covered some of the interest expense, tax and investment. But can you give us more maybe the puts and takes of what brings us down to the low end of that guidance? What are the risk factors in there? Does that -- I know you've sort of contemplated the continuing resolution and maybe passage in your second quarter. But maybe a little bit more color there on what could bring that EPS down to the low end or conversely the high end.

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [40]

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Yes. So the biggest variability in our earnings is timing of getting some of the orders, especially in our CMS business and getting the shipments out. Our business is back-end-loaded. And while we have good visibility on what our customers will buy, the CR puts pressure on getting stuff later in the year and getting it shipped out. So I would say the biggest risk factor for us in terms of the high end or the low end is getting shipments out based on when we get the orders from our customers.

In our transport business, a significant part of our revenue is already in backlog, Brad's already talked about. Execution is going well on our projects. A significant amount of derisking happened on the projects with our beneficial use 1 milestone in our New York project. So we continue to do well in our CTS business. And so it really comes down to timing of getting the orders and shipment again.

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [41]

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Let me just mention on the orders and the timing and so forth. All of this stuff are -- is program of record stuff. It's all funded in President's budget, and we have very, very high visibility. What we don't know is when the Congress and the President will come together and sign a Defense Appropriations Bill. We don't know that exactly by any means. But -- so none of the orders and the revenue itself is at risk. It's a timing thing.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [42]

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Understand. But is there -- if we see a full year continuing resolution or if this drags on, does that introduce more downside? Or do you think you've kind of captured that in the outlook?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [43]

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Yes. So what we've said -- Anshooman said in giving the guidance was one of our assumptions was that in the second quarter, that, that's what it's based on. So if it goes to third quarter or fourth quarter, then that creates headwinds for us.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [44]

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Got it. Okay. And then maybe just last one. Can you give us an update on Nuvotronics and kind of what's been happening there on the hardware side, any new incremental opportunities you're seeing with that deal?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [45]

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Yes. As a matter of fact, the Board and myself have been at Nuvotronics. We just got back last night, and we're very proud to show that off. Just as a reminder, Nuvotronics makes the best RF components in the world. They're 100x the size. So very, very small. They have better electrical characteristics. And so given that they can produce much better parts, and what they're trying to do is move up the value chain, go from parts to subsystems to systems, anywhere in frequency ranges above say Ku band, so 30 gigahertz, if you will, these parts are better than anybody in the world by a lot. And so applications where this technology can be used are -- is in the satellite market, and we're supporting customers today. We certainly see an expansion there in the satellite market, simply because, as we know, there's going to be a lot of new constellations, LEO and MEO and so forth. And we have lots of customers that are interested in that.

Also in the 5G arena, we're working with the 5G infrastructure providers, providing them parts, and we're actually in their designs. And these very high frequencies will need a lot of filters. And so we see tremendous growth there. We see potential in hypersonics. We're about providing communications in hypersonics. And then, as you might remember, when -- all the things I'm speaking about are sort of gravy. There's sort of a vertical integration opportunity within our GATR product of having a new feed that is exquisite. And so we see tremendous upside in Nuvotronics and would expect it to scale and throw off lots of cash.

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Operator [46]

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Your next question comes from Louie DiPalma of William Blair.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [47]

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GATR appears to be doing well with the program of record. Investors that are interested in the progress of your other recently acquired assets for Mission Solutions. I was wondering for 2019, if you could break out the organic growth for Mission Solutions excluding GATR, just to get some sort of progress on how DTECH and Nuvotronics and TeraLogics and all those other things are doing?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [48]

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I'll say broad statements. Everything grew quite a bit. So the DTECH business, as you read in our script in Slides 1, the future command post for the Army, the future command post for the Marine Corps and the future command post for SOCOM. And so that's like all the ground forces in the U.S., and those projects start out small and then they expand. And so we've seen some of that revenue, but they had very good growth in DTECH. In fact, they had a record year. TeraLogics continues to grow at a very high rate. I think we advertised in the past that all of these acquisitions had grown more than 30%, and that continues to do there well also.

With regard to the data linking capability, the common data link capability, we're very happy that we won a number of franchise programs this year. So we won on the F-35, we won on the MQ-25, we won MH-60, and we won anti-jam waveform, which we call Boomslang. All of that will lead to great growth going forward. And we just had a little so far. But that grew as well. So all of the businesses that we've been fortunate to buy within CMS are doing really well and are certainly accretive for our shareholders.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [49]

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Great. And Anshooman, you mentioned that the Cubic Global Defense division is off to a strong start for fiscal 2020. After a very challenging 2019, should we expect the Cubic Global Defense division to achieve positive growth this year?

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [50]

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Yes. We started off late Q4, early this quarter already with over $115 million of bookings in our air training business. And a lot of the investments that we've been talking about in the international orders, that will lead to growth in the business. And this business is back on the growth trajectory.

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [51]

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And Louie, just to add to that, they won some significant awards that will lead to even further growth. They start out very small. So you might remember, we did this technology demonstration for Live, Virtual, Constructive in the air. We've been awarded a Navy contract to continue that. So that's significant. We won a live other transactional authority with PEO Strive for the future of MILES. So we won that, that we'll do some experimentation. And my prediction is that will lead to the future of MILES. And I might point out, since we won the MILES gear -- or contract many, many years ago when we were fortunate to beat a very large company, we only shipped 0.5 billion pieces of kit over a number of years. And then we also won OTA, Other Transaction Authority, for the future of our engagement skills trainer for squads. And so I would expect that to grow as well. So not only the international, the $115 million that came in, but some very significant sort of kernel contracts that are going to grow.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [52]

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Okay. And another one from me, the MTA in New York City awarded TransCore a contract for congestion pricing. What role do you expect to play for congestion pricing in New York City and potentially other markets?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [53]

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Yes. So what the MTA did was they broke the problem up into pieces. The first part that they awarded was an infrastructure piece. And quite frankly, we didn't bid that. The second piece has to do with the back office, and we're keen on that, Louie, and are all in.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [54]

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Sounds good. And one final one that's more -- I think it's more broad. But one of the virtues of your transportation contracts is that you have long-term visibility, assuming that you hit your milestones on time. And I was wondering if we...

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [55]

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Louie, we've never gone home, just to put it in perspective.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [56]

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I was wondering if you could group your recent big 4 contracts together and provide approximately like how much in total revenue they represented for in 2019 and how much the big 4 are expected to grow over the next several years?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [57]

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We typically don't provide contract-level details.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [58]

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You can group them together.

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [59]

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Louie, what I would say broadly, right, is I think it will grow next year and the year after, if you look at the phases where this stuff is done. A lot of revenue, of course, is when you're producing equipment and installing equipment. And so we're in that phase. If you -- earlier on in the call, I think Ken asked me about how it was going in New York. And I said we've done B1, which was a few of the lines, and now we're going to do them all. So you would expect in doing them all. And so all of the contracts are headed towards the build phase over the next couple of years. So I would expect that to ramp.

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Operator [60]

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Your last question comes from the line of Jon Raviv of Citi.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [61]

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Just on the 5% organic growth in FY '20, can you give us some color by segment? I mean CGD is pivoting the growth. CTS, sounds like there's a lot of growth with the ramps and whatnot. So is CMS going to have a really tough comp? Could we see negative in any of the segments in '20?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [62]

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There's no negative.

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Anshooman Aga, Cubic Corporation - CFO & Executive VP [63]

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All of them should see some growth.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [64]

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Okay. And then on the -- just on the digital pivot, can you just provide some perspective on the payoff for these investments, especially at CMS? We certainly appreciate that this supports growth, but kind of when (inaudible) organic sales growth versus margin expansion from that digital pivot?

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [65]

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Yes. So we haven't given that at all. And what I did say in the call is we would have an Investor Day in the summer, and we'll roll that out with a lot more detail. But I would -- but what I would say broadly is we're looking at hundreds of billions of dollars in revenue over time with different revenue models -- or excuse me, different business models that are much more profitable. I would say that broadly.

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Operator [66]

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There are no further questions at this time. I will turn the call over to Brad Feldmann for closing remarks.

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Bradley H. Feldmann, Cubic Corporation - Chairman, CEO & President [67]

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We had a great year and are on track for continued growth in fiscal 2020 and beyond. I'd like to thank my outstanding teammates for their focus on winning the trust of our customers. Thank you all for your partnership and for joining us today.

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Operator [68]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.