Ladies and gentlemen, thank you for standing by, and welcome to the Cubic Corporation First Quarter Fiscal 2020 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, ma'am.

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.

Thank you, Kirsten. Thank you, everyone, for joining us today. For today's call, I'll start with a summary of key themes and address performance for the first quarter and provide an update on our strategic priorities. Anshooman will then discuss financial results in greater detail in our fiscal 2020 outlook. Turning to Slide 3, our strategic priority is to remain squarely focused on building technology driven, market leading businesses, and system consistently delivering on our customer commitments through excellent project execution and positioning for the future by investing in digital platforms and agile product innovation to better serve our customers and to accelerate revenue and margin growth. Turning to Slide 4; first quarter sales of $328.8 million increased 8% year-on-year, reflecting growth across all segments. adjusted EBITDA of $11.4 million and adjusted loss per share of 12 cents represents declines year on year, largely due to necessary upfront growth investments with our mission solutions business in key long term profitable contracts. Overall, our performance was in line with the updated expectations we communicated on January 14, at the Needham conference. At that time, we also communicated that Q1 would be impacted by delayed orders in our Mission Solutions business as a result of the continuing resolution. Despite a later time frame, we remain confident in the full year outlook due to our significant backlog that provides strong visibility as well as expected orders in Mission Solutions, which will be second half weighted. On January 6, we closed the acquisition of Pixia and Delerrok that we announced in November and discussed on our Q4 earnings call. In transportation, we signed an agreement with Moovit to codevelop next-generation mobile solutions for public transit agencies. So a lot of strategic execution this past quarter to position Cubic for long-term success across our businesses.…

Thank you, Brad, and hello, everyone. Please turn to slide 12 to cover the financial highlights for the quarter. Sales in Q1 were $329 million, up 8% as reported and 6% on an organic basis driven by growth in all three segments. Adjusted EBITDA for the quarter was $11.4 million, which reflects growth in transportation and defense training and incremental investments in Mission Solutions. Foreign currency translation did not have a meaningful impact on adjusted EBITDA this quarter. Adjusted loss per share was negative $0.12 reflecting lower adjusted EBITDA and higher taxes and depreciation. Our effective tax rate for Q1 was negative 64%, which differs from the effective tax rate of negative 31% for the first quarter of last year and the statutory rate of 21%. We recognize tax expense on a pretax loss primarily due to jurisdictional mix of earnings as foreign income resulted in foreign tax expense, whereas U.S. losses cannot be benefited due to the valuation allowance in the U.S. We also recorded an increase in U.S. BEAT and state cash tax expense. Adjusted free cash flow was negative $34 million in the first quarter, an improvement over the first quarter of last year. Our net leverage at quarter end was 2.6x, and our pro forma net leverage with the Pixia and Delerrok acquisitions, which both closed in January, is 3.8x. Turning to slide 13. Our primary focus is on integrating our acquisitions and driving strong growth while lowering our net leverage ratio, but we will continue to give consideration to disciplined, highly strategic, transformational acquisitions to further enhance our portfolio. We also expect to significantly improve our free cash flow and are targeting a three-year average free cash flow conversion of approximately 100% of our GAAP net income, recognizing that we are project-based business, and year-to-year…

Thank you, Anshooman. Turning to Slide 18; I am pleased with our first quarter sales growth and additional contract wins and strategic progress across each business while we continue to make incremental growth investments in Mission Solutions. We remain confident in our expectations to deliver another strong year of growth in fiscal '20. Now let's proceed to the Q&A session.

[Operator Instructions] And your first question comes from the line of Michael Ciarmoli.

Hey, good evening, guys. Thanks for taking the question here. Maybe either Brad or Anshooman, I guess. Maybe can you just give us - as you're looking at the remainder of the year, we got an earlier passage of that defense budget. But what are some of the puts and takes to the low end and the high end of the EPS range? What - clearly, I'm thinking, I guess, some order delays, things don't come in on time, but maybe if you could kind of just square us up on that?

Yes, this is Brad. I'll speak broadly, and Anshooman will provide some detail. In our Cubic Mission Solutions business, there's a lot of products and the revenue is shipment-based, and we know that the orders are in the budget. And we know that they're coming because contracting officers are doing what contracting officers do. And so we expect all of these orders to come in and the cycle time to get the orders out as in time for the fiscal year. So it's - order delay is primarily there. In addition, we're ramping up, as you remember, we won those four large contracts: New York and Boston and Brisbane and San Francisco. And New York has been ramped up quite a bit. We're ramping up in Boston and the other two contracts, so that's how we'll see revenue growth in the second half.

Just to add to what Brad said. Our CTS business and our CGD business has greater than 80% of its revenue in backlog. There is some timing of the remaining book-to-bill. But again, the strong visibility into the backlog that will drive growth. And then, the CMS business is basically tied to the shipments, which leads to the range in our full year adjusted EBITDA.

Got it, helpful. And then maybe just one more, Brad. I mean, you mentioned the partners' additional revenue streams, I guess, Apple, Google, Moovit. What's the process for integrating those and extracting the value from either current transportation customers or even upselling new customers? I mean, can you just walk us through, maybe, for example, the Moovit relationship. How soon do you think you kind of start monetizing those partnerships?

I'll speak to Moovit directly at first. As you might know, Moovit has the largest amount of transit routing data that's multimodal and we, of course, lead with payments. And so the strategic - or thought process is by combining payments and information, we can create a much better user experience for people traveling around the city. And we also can provide information to transit agencies so that they can deal with congestion, perhaps they can nudge people off of congested times with changes in rates and the like. And so because congestion is growing in cities, we see this as a great strategic move. So the first part of the partnership had to do with API calls to their routing engine, and we're working on that. I would expect us to have a technical solution in a couple of quarters. And I would expect there to be revenue growth and margin growth next year as a result of just integrating those APIs.

Got it, that's helpful. Great, thanks, guys. I'll jump back in the queue here.

Your next question comes from Jon Raviv.

Good afternoon. On the CMS investments, I don't think I've asked about this before. But just is there any pattern or sort of parallel between the investments that you made at troposcatter or MQ-25 or other items that you've identified? Just trying to see if there is sort of like a connective tissue as to why these things are deserving of more money in what I would say, a not unexpected, but maybe unplanned - in an unplanned way?

So, let's break the two investments out into individual pieces. So for troposcatter, we were announced as the winner of a $325 million IDIQ, and we got the first order for $29 million, where we have all the nonrecurring engineering costs charged to that. And as a result, we have a forward loss on that. When you think of the remaining orders that will come after the first $29 million, those will be for production units, and those are going to be profitable and accretive to Cubic's margins. The same thing when you start thinking of the MQ-25, these are the initial units delivery where you're taking all the engineering costs upfront on these units. What this leads to is an opportunity to drive low-10s to mid-10s of millions of dollars of revenue a year at good accretive margins to the CMS business. So these are long-term profitable franchise programs that once you're in, you're in for a very long duration that leads to good margins for the business and good growth for the business.

The idea is that on the non - and both of these were competitive and nonrecurring. We felt like it was worthwhile to make an investment because on the recurring units that are in the President's budget and the POM. There's great visibility on these units. We make margins considerably higher than the portfolio.

Do you need funding to come through for both of those programs in order to get those production mix there? Or is that kind of guaranteed at this point? I guess, how much of a risk is this investment, so to speak?

So we have a contract for - with options for the production units. We've already negotiated, the deal is set. And once you've done the engineering, and you're on the platform, given that the business arrangement has already been negotiated, the probability of you getting thrown off is near nil. So the risk factor is if the government continues those programs and it's in the President's budget, then these programs are needed and there's extreme visibility on how many units they're going to buy. And then what tends to happen, you know this, once you're on these franchise programs, a number of years down the road they make changes. And so they'll buy more units or they want to change to the units because the mission might change some. And so that's why we call these franchise programs. These programs, platforms, in the Department of Defense tend to go like for 50 years or something. So they, like, go a long time.

Great. They thought back in the shoe as well.

Your next question comes from Mark Strouse.

Yes, good afternoon. Thank you very much for taking our questions. Hey, Brad, how you doing?

Good.

So you seem to be making some good progress with Matt Cole's NextCity vision. Can you just kind of update us on where you are in the hiring process to replace them and the type of candidate that you are seeking? Are you looking for a visionary to maybe expand on that vision? Or are you really looking for somebody that has more operational expertise to really drive home the vision as it stands?

Yes. So as you know, we appointed Laurent Eskenazi the acting President, and he's certainly in the mix of candidates. We're also headed to market, and we have some good candidates that we're looking at. We're looking for a proven P&L leader that has run large businesses that are either transportation or IT-centric. I think we are very glad to have Matt in the company, and we wish him well, and he did a great job with the NextCity vision, but we need to execute and deliver on that. You also note that we hired Kevin Eagan last year, who was the Chief Digital Officer at IBM. And the idea being that we would think about modifying our business model and start showing Mass as a Service, if you will. And so you saw an acquisition we did with Delerrok in the smaller cities. We're combining that with our NextBus offering, so that we can get paid, if you will, by something like the ticket and increase the velocity of revenue in the cloud. So I would say, we're trying to implement Matt's vision, and we're trying to expand it by introducing platforms in the mix.

Okay, that's helpful. And then, just Anshooman, I believe you said the Pixia and Delerrok deals closed on January 6. Was any of the debt for those deals taken on in this quarter, you just reported? Or should we kind of adjust our balance sheets for the full $236 million on top of what you just reported?

The $236 million is incremental for the quarter, the debt was not in our Q1 results.

Perfect, that's it for me. Thank you very much.

Thanks, Mark.

Your next question comes from Jim Ricchiuti.

Hi, gentlemen. How are you, Brad? I just wanted to ask you about the R&D level. Just given what you're working on across the three businesses? I was struck by the R&D team looks like down year-over-year. I apologize, I'm listening to this call, outside of the office, if that number is right. And maybe you could talk a little bit about what's driving that? And where do you see R&D going forward over the balance of the year?

Yes. Jim, so R&D was down for the quarter, but part of the reason it was down was related to these franchise programs, where we're doing the nonrecurring engineering by winning the troposcatter, which we had already started. When we got the first order for troposcatter, the R&D costs stopped being R&D from a P&L perspective and moved to cost of sales as part of the forward loss. So while we continue to spend incrementally in innovation and the company, it just comes down to accounting classification between the cost of sales line for some of these franchise programs and the R&D line on the P&L.

Jim, pragmatically, we're continuing to invent new things, hopefully, quicker than our competitors to provide the very best solutions. And they might be in different pockets, if you will, but we're continuing the same thing.

Okay. And just thanks for - by the way, for some of the directional guidance as it relates to the March quarter. But curious, is there anything you can say about - I think we can appreciate the back-end loaded portion of the business on the defense side, particularly, Mission Solutions. But I'm wondering how we might think about the distribution of revenues over the course of the balance of the year at CTS?

So CTS will have some ramp in revenue driven by the timing of programs. Though one of the things that we did call out also when we gave guidance was that we have included the Boston reset negotiations with the customer to conclude in Q3, and that does have some revenue and profit impact as we've taken some costs and continue to incur some costs, which we get recovery for as part of this bigger contract reset that happens. There is a small potential that, that gets accelerated into March, but we expect Q3 for now.

Okay. Thank you.

Your next question comes from Louie DiPalma.

Hello. With your acquisition of Delerrok now closed, do you have the assets and infrastructure necessary to penetrate the Tier two cities with the public transit payment solutions? And I was also wondering, what does the pipeline look like for Tier two cities in terms of RFPs and your positioning to win them?

Yes. So we're obviously ready. You probably remember that we actually bought a piece of Delerrok earlier, some smaller percentage of the company. So we investigated how we would go-to-market and sales channel and pipeline. And we obviously thought it was a good investment. Otherwise, we wouldn't have closed the whole deal. It's - this pipeline is sizable. We don't reveal that. As you know, I think we've stated publicly, we have 15 cities now and we expect that to grow quite a bit, particularly with our NextBus offering. You might remember, we announced publicly that in San Francisco, the NextBus offering had been selected as the future there, and we had really improved the technology for NextBus, and are using AI algorithms to have a better prediction on when the bus is coming. And so we think the combination of those things will be very, very attractive to our customers.

Okay. And moving to defense; you discussed your involvement in several franchise programs in response to an earlier question. In the Needham conference slide presentation, you indicated that your video data link solution on the F-35 to MQ-25 and the MH-60 that should ramp, you said to, greater than $175 million in fiscal 2023. I was just wondering how that compares to what you're doing now in terms of revenue for those three video link platforms and what the trajectory is supposed to be for that revenue up until 2023? And if it is expected to have a sharp fall off? Or if it's - or if that $175 million level is sustainable after that?

Yes. So I don't know the exact number, but in our sort of data link business portion, I'll just say, it's tens of millions of dollars today. And so as you point out, there will be very good growth with those franchise wins. What tends to happen is, as you know, that was sort of a steady state. That will continue for a few years. And then what tends to happen is there are changes and we tend to provide more capability to customers. So I would expect the majority of the ramp to be sustainable.

Okay, thanks, Brad.

Welcome.

Your next question comes from Ken Herbert.

Good morning, Brad and Anshooman. Anshooman, I just wanted to start out on slide 13 with the sort of free cash flow outlook you provided. It's very helpful. And I'm just curious if you could unpack that a little bit. It looks like, specifically working capital and lower capital spend, ERP should largely be equal as part of that bridge to a 100% conversion. But how do we think about that sort of this year? And maybe how much below the 100% are you running this year? And how does the average spread over the three-year period?

Sure, Ken. So there are deliberately no numbers on there and it's graphical. I'd say the working capital is going to be greater than the lower capital and ERP spend from a cash conversion perspective. Talking about this fiscal year, it's going to be below 100% our conversion. The reason we haven't given specific guidance is, the cash flow in our project business is lumpy and also certain shipments on the defense side, are back-end loaded. So if we ship in September, we get the cash in October versus if we can ship in August, we get the cash in September. It will be better than last fiscal year for sure, and - but it's going to be below 100% this year, ramping up next year and in 2022.

Okay, that's helpful. I mean, it seems like you've obviously got a lot of opportunities to invest for organic growth, which typically implies some working capital use amongst other things. You - what's your confidence level, Anshooman, about sort of hitting this conversion target on an average basis, assuming you've got a lot of opportunities to maybe continue to drive the business organically?

We feel pretty comfortable hitting this number. We have to pay back some of the buildup in working capital that we had in the earlier part of the projects with the big four projects using cash, that as these projects come to a tailwind, that cash unwinds from the balance sheet and gets returned to our shareholders. So we have turned that into cash. So we have factored into this model, our continued growth in the business, which we expect to remain strong. And still believe we'll be able to get to a three-year cash conversion cycle of 100% of GAAP net income.

That's great. And then if I just could, the organic growth in CTS in the quarter, can you just remind us, is it - is New York City down this year relative to last year? Was fiscal '19 the peak or is that maybe flattish this year? And maybe just a couple of the sort of the moving pieces around the 2% growth in the quarter within CTS would be very helpful.

So, New York isn't down this year. It's - we're going to be delivering the BU2 milestone this year, which has a lot of product being delivered. It - again, from a project-based business, there's a certain ramp-up of projects and the timing of those projects. We just booked Chicago in the quarter, that's going to start ramping up towards the end of the year. There's certain ramp in our project in San Francisco, the Bay Area project. So again, it's the timing. Over the course of the year, you'll see some continued growth in the CTS business.

Great, thanks Anshooman. I'll pass it back there.

Thanks, again.

[Operator Instructions] And your next question comes from Jon Raviv.

Thanks for follow-up here. Just thinking about the conversation with CTS clients. Can you talk a little more about the new Ventra upgrade? And if you can sort of apply that kind of approach - how much further do you apply the approach, is that helping your big city strategy, helping your mid-city strategy? Just sort of more on that kind of opening opportunity?

Yes. So in Ventra, the customer wanted new technology that we're delivering in New York and Boston and the like. And so that's what necessitated the upgrade. They also wanted open APIs to apply other kinds of applications, so we're reusing a lot of the capability that we're delivering in New York and Boston. I might point out just generally that this is a pattern with our customers that we put the Ventra system in, I think, half a dozen years ago or so. And then what tends to happen is these customers want to upgrade the capabilities that they have there. And we've seen this pattern go on. I think we've been in this business 50 years, and we've seen those patterns. And so - which is a great thing, both for our customers, the fact that we continue developing things with - in other cities. And it's also helpful for us because it drives down the risk for both them and us. So it's really a great thing. If you think about the - and this play, obviously, is a big city play. If you think about it, in our CTS business, we're building revenue streams that are sort of annuity like. They go on for a long, long time. There is a design and build. There's O&M. And then halfway in the O&M, there's another D&B and, and on and on it goes. So it's a very sticky business, and we're very glad to be in it.

Thank you.

And there are no further questions. I will now turn the conference back to Brad Feldmann for closing remarks.

Thank you, everyone, for joining us today. We appreciate your time and interest in Cubic. Thanks so very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.