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Cubic Aims to Build On Mass Transit Successes

Paris, Montreal and Toronto.

To Cubic Corp., the cities are more than dots on a map. Each could be the next growth opportunity.

The Kearny Mesa electronics firm just netted more than $1 billion worth of business providing fare collection systems in New York City and Boston. With those deals in hand, Cubic is targeting Brisbane, Australia — a metro area with 2.4 million inhabitants — as well as a technology stronghold, the San Francisco Bay Area, for its next deals.

Those metro areas make up the “big four” technology procurement opportunities in the last half of the 2010s, said Matt Cole, president of Cubic’s transportation business unit.

“We’re actually delighted with the start we’ve got,” Cole said. “We’re halfway in and we’ve won two out of two so far.”

In addition to its military training and defense electronics arm, the San Diego business offers fare collection systems for mass-transit agencies. Commuters in London interact with Cubic (NYSE: CUB) electronics to ride the Tube, take the train or ply the medieval street grid aboard the city’s red buses.

Cubic has experience and credentials. The business can point to its advanced fare collection systems in London and Chicago. Commuters in London, for example, can pay their train fares with “contactless” bank cards (which trade information via radio waves) or their mobile phones.

“We feel like we should be in a good position” to get Brisbane and the Bay Area, Cole said — though the executive added that he doesn’t want to be complacent or arrogant. Decisions on those awards are expected in 2018 and 2019.

The Competition

Cubic has been competing for the work against companies such as Conduent Inc., a New Jersey firm that spun out of Xerox Corp. at the end of 2016. With $6.4 billion in revenue, Conduent (NYSE: CNDT) makes as much in a quarter as Cubic makes in a year.

Cole and the Cubic sales force are also thinking further ahead. Beyond the big four.

What they would like is another Boston — a transit agency that chose Cubic over its incumbent provider. (New York is a previous customer that chose in October to continue with Cubic. Brisbane and the Bay Area are existing customers.)

What might be the new Boston? Toronto has one of the biggest transit systems in North America and its system is relatively old, Cole said. Officials there will likely upgrade the fare collection system in the coming years. Toronto uses gear from Accenture, with some technology from Thales.

Montreal, Houston and Detroit are actively thinking about upgrading their fare-collection systems, Cole added. And, he said, Cubic has a team in Paris to gain business in the French capital.

There are actually several ways to grab new business.

A $35.5 million contract for a new rail line in Singapore, which Cubic received 15 months ago, is not an end to itself but a means to an end. Cubic wants “to get a foothold in Singapore and make us part of their future plans,” Cole said.

‘On Its Way to Achieving Financial Goals’

Cubic’s transit business “seems to be putting the shutters on competitors,” wrote Brian Gesuale, an analyst with Raymond James, in a November note that appeared in the wake of the Boston news. Gesuale added that Cubic is “well-positioned” to get work in Brisbane after inking transit contracts in New York and Boston.

Cubic reported revenue of $1.5 billion in fiscal 2017 and wants to grow that to $2 billion by fiscal 2020, with 10 percent margins (specifically in EBITDA, or earnings before interest, taxes, depreciation and amortization).

“We believe the company is well on its way to achieving its financial goals with its recent [New York] MTA and Boston wins,” wrote analyst Brian Ruttenbur of Drexel Hamilton.

New York officials awarded Cubic the $553.8 million design-build contract Oct 25. “This is a huge, huge deal for us,” Cole said — the biggest in North America and “the biggest opportunity there’s ever going to be.”

Revenue for the New York deal will be “bell-shaped” with the peak years in 2019 and 2020, wrote Kenneth Herbert, an analyst with Canaccord Genuity.

Cubic announced the $575 million Boston award — which one analyst characterized as a $723 million deal — on Nov. 21. The Boston win came six months sooner than expected, Ruttenbur said.

Cubic embarked on the Boston project as part of a public-private consortium, with John Laing Group PLC. Cubic’s shareholders might need a little patience with the public-private partnership because of its accounting. Cubic can’t record sales and profits in Boston until the fare collection system is running. There will be no revenue for Boston in fiscal 2018, Cole said, “even though we’ll have a fairly substantial team working on it.”

The accounting rule might be changed, Cole added.

40% of Revenue Is Transportation Related

Forty percent of Cubic’s revenue comes from transportation fare collection equipment and similar businesses. Cubic sees potential business ahead in toll collection electronics. It recently deployed equipment in New Hampshire and expects demand to grow. A one-two punch — the arrival of electric vehicles and more efficient gasoline engines — means that governments aren’t collecting as much gas tax as they used to, Cole said. Meanwhile, the expense of keeping roads in good repair doesn’t go away.

The transportation side of the house also offers electronics to help transit agencies manage their operations.

The other 60 percent of Cubic’s revenue comes from defense. Some 35 percent of Cubic’s business is tied up in defense electronics, including advanced systems for ISR (intelligence, surveillance and reconnaissance). Cubic has been on an acquisition spree and hopes to see growth in that area. Another 25 percent of the company’s revenue comes from defense training.

It’s Not Just the Big Deals

Of course, Cubic can’t expect more than $1 billion of transportation contracts to roll in every year. Many clients — and there are many — want to upgrade their systems gradually.

Such wins “don’t get the same headlines that New York or Boston do, because the contract values are incrementally smaller, but they’re just as significant to us,” Cole said.

For example, in the summer of 2016, Cubic signed a $33 million deal with Miami’s transit authority to upgrade its back-office technology, put its information technology infrastructure in the cloud, deploy a mobile payment solution and set the stage for what Cubic calls “open payments” in the future.

CUBIC CORP.

CEO: Bradley Feldmann

Revenue: $1.49 billion in fiscal 2017, $1.46 billion in fiscal 2016

Net loss: $11.2 million in fiscal 2017, net income of $1.7 million in fiscal 2016

No. of local employees: 1,270

Headquarters: Kearny Mesa

Year founded: 1951

Stock symbol and exchange: CUB on the New York Stock Exchange

Company description: Product and services vendor to military and public transit customers

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