Lionheart Holdings (CUB) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Cubic Corporation First Quarter of Fiscal 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Kirsten Nielsen, Vice President, Investor Relations. Thank you. Please begin.

Hello, everyone, and thank you joining Cubic's webcast. This morning we reported our first quarter results for fiscal 2019. I’m joined by Brad Feldmann, Chairman, President and Chief Executive Officer; and Anshooman Aga, Executive Vice President and Chief Financial Officer. I’ll remind everyone that statements made on today’s call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of Federal Securities Law. You can find risk factors that could cause the company’s actual results to differ materially from our expectations listed in our most recent SEC filings. 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'll turn the call over to Brad.

Thank you, Kirsten. Thank you, everyone, for joining us today. On today's call, I will start with a brief overview of our financial results, followed by a strategy update. Then I'll hand the call over to Anshooman who will cover the financials in more detail. Starting with slide three. We had a good quarter with strong growth, coupled with our meaningful progress on our strategic goals. In the first quarter, we achieved sales of $305.3 million, a 23% increase compared to the first quarter last year. Adjusted EBITDA was $20 million, a 74% increase compared to the first quarter of last year. Performance was fueled by strong organic growth and the acquisition of Trafficware. The adoption of the new revenue recognition standard also impacted our results positively. Major project execution is on track and we remain laser-focused on meeting our commitments. Additionally, our recent acquisitions advance our NextCity strategy to the next level, by establishing Cubic as the United States' market leader for intelligent intersection management. Turning to slide four. I would like to provide some more detailed insights into the strategic logic behind the acquisitions of Trafficware and GRIDSMART. Our NextCity vision has been to develop technologies and analytics, with the goal of optimizing urban travel and reducing congestion by improving the flow of passengers, vehicles and traffic through cities. CTS is already the global leader in many components of this strategic objective. We have been aggressively investing in our existing traffic and congestion management capabilities that led to the win of the first-of-its-kind Sydney's Integrated Congestion Management Program last quarter. The acquisitions of Trafficware and GRIDSMART firmly has established us as the leader of the U.S. urban intelligent intersection management market, with our fully integrated suite of intelligent intersection technology. Ours is the most advanced solution for intersection traffic detection and response, designed to optimize the flow of travelers and traffic through intersections. By combining the newly acquired intersection management technologies into our regional congestion management systems, Cubic will have the capability to optimize intersections on arterial roads, urban quarters and grids. Our technologies capture a broader view of traffic patterns across an entire region, enabling local authorities to predict volumes of inbound traffic from highways and freeways and into the urban domain. Equally important, we now have the largest most technologically advanced connected vehicle network in the arterial traffic management market. We manage approximately 3,000 connected intersections across 10 locations in the U.S. and our user base is growing. Our connected and autonomous vehicle product is the most advanced data-streaming technology currently available and is capable of streaming signal data from the intersection to the vehicle in about a second. This real-time performance enables several opportunities to operationalize the data across a variety of communication pathways to support connected and autonomous vehicle applications such as, reading, logistics, emergency services and rideshare to improve mobility, optimize efficiency and enhance safety. We welcome both Trafficware and GRIDSMART to the Cubic family. Next on slide 5. I'd like to share with you the progress on our contract with The New York Metropolitan transportation authority. During fiscal year 2018, we were on schedule through all our design review milestones, and in Q1, we completed the factory acceptance testing. We are currently in integration testing, which will be followed by field testing and piloting ahead of the public launch at select subway stations and on select buses in 2019, followed by progressive installation that will result in a complete rollout of contactless open payments for the MTA in October 2020. In Boston, we've worked with the Massachusetts Bay Transportation Authority to complete the conceptual design review. We plan to complete the preliminary design review in April. Vehicle installation is scheduled to begin in mid-2019 with an initial pilot phase-in to begin at the end of 2019. We are scheduled to begin the transition to the new MBTA system in 2020. Turning to slide 6. We are very pleased to be recognized by our customers for our innovative systems and solutions. Cubic Transportation Systems received the 2018 Business App of the Year award from the Mobile Breakthrough Awards Program. In Mission Solutions, we have been investing in the expansion of our modular small factor computing and network solutions for our customers. These investments have resulted in dramatic increases in the computing, storage and memory of our command post computing offering and for other solutions aimed at C2i Solutions at the edge of the battlefield. This strategy has resulted in a recent string of current command post computing awards two in the Department of Defense, and one in the international market. And in defense training, we received a National Training and Simulation Award in Live Virtual and Constructive training systems for the future of Air Combat Maneuvering Instrumentation Systems. On slide seven, we continue to advance our NextCity strategy. We launched contactless open payments on the Sydney rail system, which is an expansion from its initial rollout on ferry and in light rail. In mobile, we are looking forward to app launches in Chicago, DC and Los Angeles this year. We are also pursuing mid-market expansion with NextBus opportunities and with the technologies I previously discussed, Intelligent Transport Management acquisitions. In Mission Solutions, we continue our outstanding growth with key awards in line with our stated strategic objectives. We received $7.8 million in awards for the airborne intelligence surveillance and reconnaissance systems and deployments. On our Transportable Tactical Command Communications, T2C2 contract that has a large remaining ceiling, we received an additional delivery order of $36.5 million. Also in our SATCOM business, we were awarded a New Zealand Defense Force, 10-year IDIQ to provide expeditionary SATCOM systems and logistics support. For the first set program, we delivered over 1,000 Vocality Radio over Internet Protocol units to AT&T dealers to provide seamless, critical communications between first responder radios and the FirstNet cellular network. In defense training, we won additional instrumentation work for $8 million on our Canada combat training center program. For Canada and the United States Marine Corps, we were also providing geo-pairing capabilities as part of our development for the future direct and indirect fires options. We also received two far-reaching DARPA programs. The first is for adapting cross-domain kill webs program. With this program we will support the agency to develop an overall framework, algorithms and software prototypes for decentralized construction and an adaptation of multi-domain kill webs. The second award is on Proteus Ultra with initial funding of $4 million. The goal of the prototype resilient operations test bed for expeditionary Urban Operations program is to create and demonstrate tools to develop and test agile expeditionary Urban Operations concepts, based on dynamically, compostable force packages. Our work will help develop virtual test environment software for simultaneous and dynamic, real-time task organization, force package combination and configuration and tactics planning suitable for implementation in devices available to the Marines in the 2030 to 2040 time frame. The software tools and concepts developed in the Proteus program will enable assessment and exploration of new approaches to combined arms operation involving coordination of effects in multi-domains. Finally, we completed the delivery of the L 118, Artillery Simulation System to the British Army, a system that includes a tool for integrated data analytics and performance assessment for live exercises over an LTE network. All these effects continue to highlight our global leadership in ground training and the advances we are making in providing advanced LVC training environments and real-time performance feedback and data analytics in the training context. Next I'll ask Anshooman to describe our financial results in more detail.

Thank you, Brad. Please turn to slide 8 to cover a few highlights for the quarter. We delivered solid results this quarter reflecting strong organic growth inclusion of two months of Trafficware and a positive impact from the new revenue recognition standard of ASC 606. Operating results was somewhat better than our expectations, partially due to some early shipment in our Mission Solutions business that we had originally anticipated in the second quarter. Free cash flow of negative $73.2 million in the first quarter and adjusted free cash flow of negative $67.4 million and factored by the timing of milestone payments from a New York and Boston project. Till date, we have more than $60 million of working capital tied up in these two projects. We expect cash flow to improve materially in the second half of the year as we collect on the milestone payments. As Brad discussed, we made two acquisitions Trafficware on October 24 and GRIDSMART on January 2. We expect both acquisitions to be cash EPS accretive in the first year. In November, we completed an underwritten public offering of 3.8 million shares of common stock with gross proceeds of $228 million. The proceeds will use to deliver the balance sheet, which provides us with increased financial flexibility to pursue our growth strategy. Lastly, we continue to rationalize Cubic's real estate footprint which I will discuss in a moment. Turning to slide 9 for the consolidated first quarter results. As a reminder, last year's Q1 bookings included The New York transportation award of $554 million. Sales grew 25% on a constant-currency basis including a $28.4 million increase from the adoption of ASC 606. Adjusted EBITDA was $20 million in the first quarter, up from $11.5 million in the first quarter of last year reflecting strong performance and inclusion of two months of Trafficware result and $3.3 million from ASC 606. Net income attributable to Cubic was a loss of $6.6 million or a negative $0.23 per share which includes $10.6 million of amortization of intangible and $2.5 million of acquisition-related costs. Moving to the segment results on slide 10. Transportation systems delivered strong results. Sales grew 27% on a constant-currency basis driven by our major fare collection projects inclusion of Trafficware and ASC 606. Margins improved 160 basis points reflecting higher sales, improved execution and the impact of Trafficware. Moving to Slide 11. Our Mission Solutions' business has impressive results with higher year-on-year bookings across the segments and robust sales growth of 40% driven by GATR. Turning to Slide 12. Cubic global defense bookings declined year-on-year driven by the timing of international order entry. The increase in sales and adjusted EBITDA, primarily reflects the adoption of ASC 606. Turning to Slide 13. We continue to optimize our real estate footprint. We will be consolidating our two San Diego campuses onto one existing site and modernizing that campus accommodate growth and implement necessary facility improvements. We have entered into a synthetic lead arrangement where an investor will 100% fund and own the new building. We also plan to sell the vacated site in San Diego which along with the planned Orlando campus sale will free up cash. Turning to Slide 14 for our fiscal 2019 guidance. We are maintaining our guidance for fiscal 2019 with an update for the GRIDSMART acquisition. We're expecting another year of strong growth in sales and adjusted EBITDA driven by the ramp up of transportation projects, the impact of the Trafficware and GRIDSMART acquisition and continued growth in C4ISR. Overall, we expect sales in the range of $1.4 billion to $1.475 billion and adjusted EBITDA in the range of $140 million to $160 million. For the second quarter, we're expecting adjusted EBITDA to be slightly higher year-on-year due to the timing of shipments that drove Q1 to be slightly higher than expected. Also second quarter adjusted EBITDA is expected to be negatively impacted by the accelerated recognition of costs from new contract awards for airborne platform and common data link communication system. These investments were included in our 2019 outlook and are expected to lead to the execution of profitable production option simultaneously awarded. Also, as we have said on prior calls, the timing of discretionary government spend impacts the CMS business pointing again to a strong Q4. In fiscal 2018, Cubic generated 47% of our total adjusted EBITDA in Q4 and we expect seasonality to be broadly similar this year. Now I'll turn the call back over to Brad.

Thank you Anshooman. Turning to Slide 15. In summary, we have a strong quarter as we continue to execute on our strategy. Our transportation acquisitions of Trafficware and GRIDSMART position Cubic as the leader in the U.S. urban intelligent intersection management market and propel our NextCity vision to help reduce congestion. We have declared FY 2019 as the year of meeting our commitments and as such, we are laser-focused on execution. We continue to execute our strategy and that we believe with our large backlog and on use T2C2 contract ceiling, we have a very clear path to achieving Goal 2020. We strongly believe Cubic is well positioned for its next wave of value creation by building technology driven, data-focused, market-leading businesses. In closing, I'd like to thank my Cubic teammates for their strong performance and commitment to driving long-term value for our customers and shareholders. Now let's proceed to the Q&A session.

Thank you. [Operator Instructions] And thank you. Our first question comes from the line of Ken Herbert with Canaccord. Please proceed.

Hi. Good morning, Brad and Anshooman and Kirsten.

Hi, Ken.

Hey, Brad. I just wondered if you could provide a little bit more detail. You've got some pretty important milestones coming up within CTS and specifically on The New York City, the MTA contract in 2019. Can you just provide a little more detail on these milestones and any sort of risks around any of the milestones? Or how we should think about that program now here that you've been on it and going for a few months?

Yes. We recently -- so we've -- as I stated, we've been clicking off the milestones. In fact, we just successfully are getting through what people call factory integration testing. So that's another one behind us. There's a phase that happens where there's friends and family that use the system for a couple of months. And I'm sure we'll find some things there to improve upon and then we go into this beneficial use test, I think, in May. So those are what we're working on. The team's doing well. We're working very hard, getting all the equipment. The validator is one of the pieces of that we're continuing to work on yet to get a bunch of certifications from not only credit card companies, but also for cellular reception and the like and we're more than halfway through that. So touchwood, Ken, things are looking good.

Sounds good, Brad. Is it fair to say, you've sort of worked through any of your buffer on this program this year? Or is the risk profile changed materially from how you would have viewed it maybe a quarter or two ago?

Yes. What I'd say is that there have been some of these certifications have taken a little bit longer. But these friends and family period those two months is a little bit of buffer that's built in. So we anticipate things to go well, Ken.

That's great. Thanks. And if I could Anshooman, you made a comment regarding free cash flow and how you expect a -- I think, you said a significant improvement in the second half of the year. I know a lot of working capital build and significant use of cash in the first quarter. Can you just provide any more detail on the cadence we should expect? And if you could commit to? Or how should we think about the full year free cash flow profile?

Yes, Ken. So, as I mentioned, over $60 million of working capital tied up on The New York and Boston project. And if you go to our slide 5 it showed some of the coming milestones. You'll see there's a big milestone in May in New York and there's a cash tied to that project. So what you're going to see is the $60 million is going to turn slightly positive by the end of the year and we'll see an improvement in our cash flow by the end of the fiscal year. Overall, again, as we go through the implementation of projects cash flow will be muted this year. But again, going into fiscal 2020, we'll see significant improvements in cash flow.

Okay. Very helpful. And if I could just one final question. Margins within CMS as you're seeing really nice top line acceleration there. It sounds like the ceiling is providing some incremental upside. Can you talk about any of the sort of full year assumptions on margins? Or is the kind of improvement pace that we've seen something we should expect moving forward within that segment?

So, we've said the business should be growing in the mid-teens and by 2020 the margin should be between 14% to 16%. Last year, we were I believe about 12%. And so you'll see a progression towards the 14% to 16% by next year. So we should have higher margins this year, and the business will continue to grow.

Great. Thank you very much. Nice quarter.

Thank you.

Thank you. Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed.

Thank you. I was wondering Anshooman, if you can quantify the amount of revenue that you've benefited in CMS from just some what sounds like a little bit of a really pulling in business in the quarter.

Yeah. So it was handful – little over a handful million of revenue that we pulled in from Q2 into Q1, just based on the timing of the shipments.

Okay. Any kind of impact on – meaningful impact on EBITDA? I wasn't sure if you quantified that as well. Your EBITDA is better than expected.

Yes. So I would say this commercially placed products high margins so if FX a little above the handful million in revenue of those margins are pretty good that flow to the bottom line. So hopefully that gives you a feel for the pull in.

Okay. And then just with respect to the fiscal Q2 EBITDA guide. It sounds like you're going to have some – I just want to characterize it as some upfront costs associated with some contracts, but I guess you'll see the benefit of in the second half. I'm just wondering if there's a way to quantify that for us?

Yeah. So we'll be taking that's $3 million to $4 million charge in Q2 related to two programs that we expect to win. These are first of its kind as our first airborne SATCOM software-defined radio and there's a video for that project that we expect to win. These were in our R&D plans for the year. But the way accounting works is when you win the first program, which is usually a low-rate production order. You have to book a reserve for the whole development costs of the program. So we'll be booking that. These programs the initial order will be for low-rate production units, but these are platforms that we're building that will lead to many, many orders in the longer term for us and will be very profitable business for Cubic.

Got it. And then maybe this is for you, but just looking out at the second half of the year you do have the revenues skewed more to the second half operating results skewed more to the second half, similar to, I guess, what we saw last year. But how confident are you in the parts of the business that sometimes are a little tougher to protect the timing on some of these defense awards?

We have a very high visibility into what's coming. We know when it's coming, so there's some orders coming some delivery orders and our team is prepared to make those shipments. So, net-net, I have very high confidence.

Terrific. Thank you.

Thank you. Our next question comes from the line of Mark Strouse with JPMorgan. Please proceed.

Hi everyone. Thanks for taking our questions.

Hi Mark.

Hey Brad. Just want to start with the acquisitions. So, will the Trafficware and the GRIDSMART offerings kind of be sold as kind of separate offerings, but under one roof? Or is the plan will eventually develop kind of more integrated holistic solution? If it's the latter, can you just kind of talk about timing of when that might be available? Just trying to get a sense for when we could see some revenue synergies here.

Yes, so the facts are that GRIDSMART and Trafficware are actually have been working together before Cubic met them. So, there were -- and GRIDSMART just review provides instrumentation that goes in the ground. And the GRIDSMART guys provide a camera that is visually -- is able to visually see cars coming in and out of intersections. And apparently if your traffic management genius you have opinions on which technology is best. And so the companies will -- so the offering depends upon what the customer wants. But we will see some revenue synergies starting -- that's always hard to say, but in a bit later this year for sure we will. We're sharing distribution networks of how this stuff is sold and so there'll be some cost benefit as well that was part of our valuation thesis. And probably more excitingly they're both involved in connected vehicles and as we all know connected vehicles are going to be part of our future. And so this is the idea that someone in the vehicle could be alerted to when traffic signals are going to change and so forth. So, really help people move around the city. So, we're very excited. And these are the top two technologies. There are some folks using radar. That's not used as much. But these are it and -- so we are thrilled to have this on the Cubic platform.

Okay, that's really helpful. Thank you, Brad. And then I appreciate the timeline that you guys gave for the New York and Boston contracts. Maybe not in as much detail, but can you give kind of a high-level overview again of the Brisbane and San Francisco contracts and what the shape of that revenue curve looks like in timing?

Yes, both of those contracts are relatively early days. What I mean is we're doing design kinds of activities. And so in those design activities you have less engineers, you have system engineers. So as the development continues, you get more engineering and then the revenue goes up quite a bit when you start delivering equipment. And so, the time horizons for those, those will start picking up steam a little bit later in the year, but they'll pick up a lot of steam next fiscal year.

Okay. Thanks, Brad. And then, if you don't mind, if I just squeeze in one more for Anshooman. The benefits that you received in the first quarter to revenue and EBITDA from ASC 606, were those already contemplated in the prior guidance? Or is that something new?

Yes. Yes, they were contemplated. And it's a little bit quarterly, because there're certain things which were unit delivery which become percentage of completion for us, for example. So delivery would have happened later in the year. So when we've done our plans and guidance, we had factored in them then back to 606.

Okay. Perfect. Thank you very much.

Thank you. Our next question comes from the line of David Williams with Drexel Hamilton. Please proceed.

Hi. Thanks for the time guys. Certainly appreciate it and congrats on the quarter. I wanted to ask about the customer upgrade activity and just kind of what you're seeing there. Is that still fairly positive? And are you expecting perhaps anything that could come in through the remainder of the year? Just how you're thinking about the upgrade from your existing customers?

Yes. As your question is good and nuanced, there's a lot of revenue that comes in with upgrades, particularly within CTS. So there are a number of cities we have proposals in to provide upgrades. And as you would imagine, margins are a little better in those cases. So we have quite a number of opportunities.

Okay, great. And then, you talked, I guess, last quarter, or some time about the efforts to reduce your supply chain, kind of, the overhead cost there. Any update on that? Any further progress? Or anything we should be thinking about going forward?

Yes, we're continuing to make good progress. We've actually bid out large part of our supply chain already. Responses are coming in and we're taking out cost and our thesis of the amount of cost we'd take out, which was part of our guidance, remains very much intact and makes us more confident that we're going to achieve our cost-out program numbers.

Yes. And I think approach is different than it has ever been done at Cubic. We invited all our suppliers by commodity class through a supplier conference and we had way too many suppliers. And we're going to whittle down to a few and cut good business deals, both for them and for us. And we'll see significant recurring savings on a recurring basis.

Okay, great. And then lastly, just if you kind of look at the horizon, what do you think the largest growth opportunities are between now and maybe, say, two years from now? Where do you think the largest growth will come from?

Yes. So we have very good visibility into where that growth is. CTS last year booked I think $2.5 billion give or take. And so those big four contracts including all the mobile work that they won is going to be delivered over the next N number of years. So I think in our 2020, we've kind of implied what that business would grow to. I think it has an 8 in front of it in terms of revenue. So that's a key area of growth. The other key area is in this unused ceiling in our CMS business, specifically in the ground SATCOM T2C2. The government weighs the ceiling. They doubled it last year. And these are all rounded numbers from like $500 million to $1 billion. And the unused ceiling I think was about 3/4 of a billion dollars when we started the year and so we've burned some down. This quarter we've got some delivery orders in. And so that's another area. But we're growing. We grew everywhere this year in the first quarter and we expect that to continue. So we're quite savvy about the business.

Thanks for the questions and good luck on the quarter.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Louie DiPalma with William Blair. Please proceed.

Good afternoon, Brand, Anshooman and Kirsten.

Hello, Louie.

Last week, Uber announced it is now incorporating bus and rail payments into its app in Denver and it's trying to integrate several modes of transportation into one unified app which seemed similar to what you guys are doing in Los Angeles in addition to four other contracts that you've won. So I was wondering how you view large technology providers such as Uber trying to get into this space and become the platform for public transit in terms of your own strategy.

Yes, so good luck to them I'd say that. But I would also say that as you know, if you look at the market share we have in the U.S. we have 9 of the 10 top cities. I think someday we'll have 10 out of 10. The one place isn't doing that well quite frankly. And so we have decades of relationship with our customers. And as we know mass transit is not going away. And so the way that we sort of view the problem is that mass transit is sort of in the center of this and there's a first mile, last mile problem. And so I would expect us to be partnering with the likes of rideshare and bikeshare. And you fill in the blank to be able to deal with that first and last mile issue so that we can provide our customers simplify their journeys. And one of the advantages of course that we would have is we have very good information with regard to mass transit in general. So -- and you probably know we're not doing anything in Denver at this point. So you're probably aware of that.

Great. And for Anshooman based upon the ASC 605 reconciliation table that you presented on Slide 23, revenue for the global defense segment seemed to have decline $10 million relative to last year. And I was wondering just -- what's driving the overall decrease in that division? And like related to that, you expect the F-35 training contract ramp and SLATE to result in a turnaround for that segment?

Yes. So, the 605 to the 606 obviously some timing going from units of delivery revenue recognition to percentage of completion. So what we’ve talked about on our defense training systems business at the year-end call, some of our programs had completed. And what's happening is, we have had a very successful demonstration with Live Virtual Constructive Technologies and we expect to start getting some orders around that technology probably in Q3. Additionally there is some timing of some large international orders. We are making a lot of headwind of getting a lot of tailwind for international orders from Asia and in the Middle East and we expect a large order out of Asia in beginning of Q3. So all of that's going to start driving revenue and we expect the business to stabilize and start delivering growth, even if you ignore the revenue recognition standard. But it was just timing of revenue. This revenue would have come into the fiscal year anyway.

Great. And lastly, related to the first question that was asked on implementation risk. I was just wondering at a high level, how different are the systems that you're implementing in New York and Boston from the systems that you've already successfully installed in Chicago and London?

Well, there's obviously some similarity right? There are different requirements amongst the cities. But you'll probably remember Louie that, a few years ago we intentionally put the strategy in place to build LEGOs if you will. And so, New York builds an awful lot of functionality for Boston. When you put New York and Boston together builds a lot of functionality for Brisbane. And those three properties build an awful lot of functionality for the San Francisco Bay area. So we're getting more and more visibility. And when we used to run the business that way Louie we delivered separate projects. And so anyway, they'll be more and more reusability going forward. The benefit of course is, it drives down risk for our customers. It also drive down -- drives down risk for us.

Sound’s good. Thanks.

[Operator Instructions] It appears we have no further questions in queue at this time. Allow me to hand the floor back over to Mr. Feldmann for closing remarks.

Thank you for joining us today. We remain very optimistic about the future and we look forward to you joining us on the next call.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.