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Cubic Corp  (NYSE:CUB)
Q4 2018 Earnings Conference Call
Nov. 15, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Cubic Corporation Fourth Quarter and Full-Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Kirsten Nielsen, Vice President of Investor Relations. Please go ahead.

Kirsten Nielsen -- Vice President of Investor Relations

Thank you. This morning we reported our fourth quarter and full year results for fiscal 2018. I'm joined by Brad Feldmann, Chairman, President and Chief Executive Officer; and Anshooman Aga, Executive Vice President and Chief Financial Officer.

I will 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 laws. 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've 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 of today's presentation.

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

Bradley Feldmann -- President and Chief Executive Officer

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 our CFO, Anshooman Aga, who will cover the financial results and next year's guidance in more detail.

Starting with slide 3, we had a great year and I want to begin by thanking my teammates for their strong performance and continued focus on winning the customer. In the fourth quarter, we achieved record sales of $379.7 million, a 9% increase compared to the fourth quarter last year. Adjusted EBITDA was also a quarterly record at $49.1 million, an 8% increase compared to the fourth quarter of last year.

For the full year, we achieved our financial guidance, delivering record sales of $1.2 billion, a 9% increase over last year and full year adjusted EBITDA of $104.6 million, an increase of 20% compared to last year. Our backlog continues to grow as it now over $4 billion, another record in Cubic's history.

Turning to slide 4, we recently closed the acquisition of Trafficware to expand our operational and analytics capabilities as part of our NextCity vision. Trafficware is a technology-driven, market leading, intelligent transportation solutions company. They provide a fully integrated, innovative suite of software, Internet of Things devices and hardware solutions that optimize the flow of vehicles and pedestrian traffic through intersections and arterial roads.

As part of their solution, they provide smart infrastructure that will support smart cars in the future. I warmly welcome the Trafficware team to Cubic. We expect revenue synergies going forward as we advance our NextCity strategy together and reduce congestion for our customers. Anshooman will discuss the financial impact of the Trafficware acquisition in fiscal 2019.

Turning to slide 5, with our recent Bay Area transportation win we are pleased to have successfully achieved all six growth catalysts, that we had strategically targeted several quarters ago, including winning New York, Boston, Brisbane and the Bay Area, achieving the T2C2 full rate production and completing our ERP implementation. These wins represent $1.8 billion in new business awarded with $2 billion in potential follow-on business.

Moving to slide 6, along with our major wins, we continue to make progress with our Winning the Customer initiative. As the result show, Cubic's NextCity strategy continues to win customers and improve our execution. We continue to see very strong demand for Cubic's compelling solutions to provide full-motion video to the edge of the battlefield and we continue to make progress combining live, virtual, and constructive simulation techniques to provide efficient, performance-based training to our customers. Lastly, we are working to deliver keener insights to our customers through digitization and developing our platform capabilities in NextCity 2.0, ISR-as-a-service and training-as-a-service.

Turning to slide 7, in NextCity we are celebrating our Bay Area transportation award to deliver our next generation fare payment system to the Metropolitan Transportation Commission. We are honored to continue our long-term relationship with the MTC. Cubic will leverage the investments the MTC and the regional operators have made to deliver new features such as mobile and new bus devices early while completing longer term upgrades to the back office.

Our solution will offer the full range of payment and account management features we are delivering to major cities around the world, including London, New York, Boston, Brisbane, Sydney, Vancouver and Chicago. Each of these new technologies will be powered by Cubic's real-time communications and data analytics supporting the Company's account-based architecture. This technology model opens a variety of new potential partnerships between transit, bike share, ride share, car share, parking and other vertical transportation services falling under NextCity, our mobility-as-a-service strategy.

We also won the Sydney Integrated Congestion Management Program, a first of its kind program to reduce congestion in the city. The new system will enhance monitoring and management of the road network across New South Wales, coordinate the public transport network across all modes, improve management of clear ways and improve incident clearance times, while providing real-time information and advice to the public about disruptions.

This win together with the Trafficware acquisition represents significant momentum for the operation and analytics pillar of the NextCity strategy. We also are expecting customer upgrades to continue, the latest in Los Angeles where we will support two innovative service enhancements planned for a progressive launch over the next 18 months. These include an integrated mobile app and TAPforce, a cloud-based account.

In Mission Solutions, as we discussed on the last earnings call, we have been awarded a $500 million Transportable Tactical Command Communications T2C2 contract increase, doubling the total potential value to $950 million with approximately $750 million unused ceiling. We booked and delivered $55 million in Q4. We continue to expand our secured networking business and we're selected for a new fifth generation technology insertion for the United States Army command post upgrade. We are preparing for build and delivery of our first pilot order of this fielding. We are now receiving orders from AT&T and their partners for our interoperability gateway in support of the FirstNet program.

In Q4, we received approximately $2 million in new orders for this program. In defense training, we led successful joint US Air Force and Navy advanced technology demonstration of next-generation live, virtual, constructive, air combat large force exercise flights at Nellis Air Force Base. Finally, we received a $13 million Instrumented Tactical Engagement Simulation System spares contract as a result of a recent US Marine Corps next-gen training platform demo at 29 Palms.

Moving to slide 8, we are laser focused on meeting our commitments. We're in a fortunate position and that our sizable backlog and program of record visibility is driving strong growth for the Company. We must deliver to our customers efficiently and effectively, while continuing to improve our infrastructure to support future growth.

In transportation, this means delivering on our major projects, further expanding into attractive adjacencies and leveraging our leadership position in the fare collection market with our OneAccount technology advantage. In C4ISR, we will successfully feel T2C2 to full rate production and deliver FirstNet for AT&T, our Radio over Internet Protocol, RoIP, solution, that will allow first responders across the US to use radios with cellphones over the mandated FirstNet network. We will also integrate and grow our recent acquisitions.

In defense training, we will turn SLATE ATD into a program of record, win select synthetic training environment awards and grow our international business. We remain focused on Living One Cubic. We are implementing product lifecycle management through fiscal 2019 to standardize our engineering tools and workflows. The priority of ours is to develop enhanced analytics capabilities.

We are especially pleased with our One Cubic teamwork and the value that our transportation and defense engineering teams deliver as they work together to develop innovative technology solutions. We recently held a data analytics and machine learning summit to further our collaboration in these areas. Lastly, due to our ongoing efforts to reduce supply chain and overhead costs, we expect to further expand margins in FY19.

Turning to slide 9. I couldn't be happier with the transformation progress Cubic has made, but our journey continues. In the mid term, we plan to capitalize on our competitive advantages in transportation to when AFC upgrades with existing customers, pursue new opportunities in cities such as San Diego, Paris, Toronto and Montreal, and continue to expand our presence in adjacent markets of Surface Transport Management, tolling and congestion charging, and our NextBus 2.0 mid-market entry. We will successfully deliver on our recent mobile solution wins and leverage these launches to further monetize NextCity.

In Mission Solutions, we are ramping up on FirstNet with AT&T and preparing for SATCOM convergence as the US Army considers common solutions. In defense training, we continue to develop our synthetic virtual and live multi-domain training environment, part of the Army's modernization priorities.

We strongly believe Cubic is well positioned for its next wave of value creation by building technology-driven, market-leading businesses. We will consolidate across the value chain to create integrated offerings and extend into new and attractive markets, leveraging our core capabilities. We will transform our way of doing business and leverage new digitally enabled business models to help drive top quartile shareholder returns. We believe that our One Cubic platforms will allow us to provide keener, valuable insights to our customers.

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

Anshooman Aga -- Executive Vice President and Chief Financial Officer

Thank you, Brad. Please turn to slide 10 to cover a few highlights for the quarter. As Brad mentioned, we delivered record results this quarter and our backlog has reached another record at $4.1 billion. At the beginning of the quarter, we were awarded a $500 million increase to the ceiling on our T2C2 contract vehicle, leading to approximately $750 million of unused capacity, which is not included in our backlog figures.

We successfully delivered the first tranche of T2C2 at full rate production and execution across all major projects remains on track. On a constant currency basis, fourth quarter sales grew 10% year-on-year, driven by Transportation and Mission Solutions and adjusted EBITDA grew 9%. Free cash flow was positive $29.8 million in the fourth quarter. As a reminder, the milestone payments from the special purpose entity related to the Boston project are not reflected as operating cash flow. If we were to adjust for this, free cash flow would have been positive $36.4 million in the fourth quarter.

Turning to slide 11, we were pleased that we achieved our full year financial guidance for fiscal 2018, delivering strong growth in both sales and adjusted EBITDA, while expanding margins by 80 basis points due to sales growth, strong execution and One Cubic initiatives. At the same time, we grew the backlog by $1.5 billion to secure future growth and we improved our portfolio through disciplined capital allocation decisions to drive long-term shareholder value. We believe our success in 2018 provides a clear path to Goal 2020. Going forward, we will continue to assess M&A opportunities that are in line with our strategy and accretive to shareholders.

On slide 12, we've provided an overview of the consolidated fourth quarter results, which we've largely covered on the prior slides. As Brad mentioned, we achieved a record backlog, record sales and record adjusted EBITDA in Q4. Net income from continuing operations attributable to Cubic was $22 million or $0.80 per share compared to $9.6 million or $0.35 per share in the fourth quarter of last year. The year-on-year increase was driven by the higher adjusted EBITDA, lower ERP-related expenses and a lower effective tax rate.

Turning to slide 13, for the full year, all three segments achieved strong growth in bookings. As Brad mentioned, we achieved a Company record of sales at $1.2 billion, up 8% on a constant currency basis, driven by Transportation and Mission Solutions. We grew adjusted EBITDA by an impressive 17% on a constant currency basis with margins increasing by 80 basis points. Net income from continuing operations attributable to Cubic was $8.1 million or $0.29 per share in 2018 compared to a net loss of $25.7 million or $0.95 per share in 2017. The year-over-year comparison of EPS reflects higher operating income, lower interest expense and a lower effective tax rate.

Moving to the segment results on slide 14. Cubic Transportation Systems delivered excellent results. Fourth quarter bookings were driven by the Bay Area award for $394 million while the full year also includes New York, Boston and Brisbane awards. Sales increased 14% in both the fourth quarter and for the full year on a constant currency basis, reflecting strong growth in both products and services. It's worth mentioning that the fourth quarter of last year included a pick up from a favorable contract resolution. Full year adjusted EBITDA margin increased significantly due to higher sales, operational cost reductions, lower R&D spend and solid execution.

Moving to slide 15. Our Mission Solutions business had impressive results with strong increases in all key metrics, both for the quarter and the year. As expected, we delivered on the first tranche of T2C2 at full rate production. Robust growth was led by GATR, although CMS recorded growth in all sub-segments. Margins improved by roughly 900 basis points in Q4 and 400 basis points for the full year due to higher sales, favorable mix and strong execution, which more than offset higher R&D spend.

Turning to slide 16. Cubic Global Defense delivered 20% growth in bookings in 2018 while sales and adjusted EBITDA declined year-on-year driven by the completion of various programs. As Brad mentioned, we have been investing in the next-generation live, virtual, constructive technologies and had a successful demonstration in Q4 and expect this to turn into a program of record. Full year adjusted EBITDA was comparable to last year, excluding the impact of higher R&D spend, the legal arbitration in Q4 of this year and favorable REA impact in 2017.

Turning to slide 17 for our fiscal 2019 guidance. We expect another year of strong growth in sales and adjusted EBITDA driven by the ramp up of our transportation projects and continued growth in C4ISR. We expect sales in the range of $1.37 billion to $1.45 billion and we expect adjusted EBITDA to be in the range of $135 million to $155 million. The midpoint of our guidance reflects 13% organic sales growth and 24% organic adjusted EBITDA growth.

Our guidance range includes the Trafficware acquisition, which closed on October 24. We expect Trafficware to contribute approximately $50 million in sales and $14 million to $15 million of adjusted EBITDA and to be accretive to earnings per share. Lastly, we expect seasonality to be in line with last fiscal year. You can expect Q1 adjusted EBITDA to be slightly higher year-on-year and ramping sequentially thereafter, driven by the continued ramp in CTS projects, the timing of discretionary government spend which impacts our CMS business and fewer working days in Q1.

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

Bradley Feldmann -- President and Chief Executive Officer

Thank you, Anshooman. Turning to slide 18, in summary, we finished the year on a strong note with record quarterly sales and adjusted EBITDA, leading to record annual sales. We have achieved all six near-term growth catalysts with our award in the Bay Area. We believe we have a clear path to Goal 2020 and have made great progress executing our strategy, demonstrated by our recent wins, historical high backlog, reshaped portfolio and the absolute focus on technology. We expect our upcoming fiscal year 2019 to be another year of strong growth and we will be focused on meeting our commitments and delivering excellence to our customers.

Finally, I'd like to welcome Prith Banerjee who recently joined Cubic's Board of Directors. Prith brings to Cubic an extensive background in academia, engineering, disruptive technology and research and development. Prith is currently the Chief Technology Officer for ANSYS, a leading engineering simulation provider. I look forward to his leadership and insight as we continue to work adjacency expansion and the digitization of our offering to provide keener insights to our customers.

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.

Questions and Answers:

Operator

Thank you, will now be conducting a Q&A session. (Operator Instructions) Our first question today is coming from Mark Strouse from JP Morgan. Your line is now live.

Mark Strouse -- JP Morgan -- Analyst

So on the transportation business, you guys have done a pretty phenomenal job over the last year, year and a half with these big contracts wins that you've had. Just looking forward, I think I get the message that there is going to be higher volume of maybe smaller deals especially with potential synergies with Trafficware, but are there any kind of larger contracts of maybe nothing is equivalent to New York, but looking forward, any larger deals over the next couple of years that we should keep our eyes on?

Bradley Feldmann -- President and Chief Executive Officer

Yes, I think there, a few of them. Paris is fairly a large deal. Montreal and Toronto are large deals as well. I would also expect that -- I think we suggested in a previous call that we had 61% market share regarding mobile ticketing and we would expect, for instance, in the city of Los Angeles where we're putting the TAP card in the phone that we will start getting recurring revenue streams using that card. So I would expect with reusability, mobility, some of these bigger contract areas, we will continue to grow the business and expand margins.

Mark Strouse -- JP Morgan -- Analyst

I guess you've closed the acquisition of Trafficware, you've got a lot of very large contracts.

Bradley Feldmann -- President and Chief Executive Officer

We're very existed about that.

Mark Strouse -- JP Morgan -- Analyst

Yes, it sounds great. So you closed Trafficware, you've got a lot of these big contracts that you're executing on, can you just kind of talk about your ability or your appetite for further M&A over the next year or so, just from a management bandwidth perspective, if nothing else?

Bradley Feldmann -- President and Chief Executive Officer

We continue to look at acquisitions that are in line with our strategy and there are a number of them that we're looking at. And so I would expect us to continue to be acquisitive going forward.

Operator

Thank you. Our next question today is coming from Jim Ricchiuti from Needham & Company. Your line is now live.

Jim Ricchiuti -- Needham & Company -- Analyst

I had a couple of questions on the segment margins. You showed significant improvement in margins in the CMS business and I'm just wondering, just given the seasonality that you see in the business, how should we think about those margins in fiscal '19?

Anshooman Aga -- Executive Vice President and Chief Financial Officer

So the margins reflect our continued growth in the business along with strong execution. So while the seasonality will remain in the business, as the volume is back-end loaded, you'll see higher margins at the end of the quarter, but the margins aren't a one-time thing. We expect the margins to continue to be in line with what you're seeing and potentially grow as the volume grows.

Jim Ricchiuti -- Needham & Company -- Analyst

Just turning to the CTS margins, EBITDA margins, down a bit, certainly from Q3 and I wonder if you could talk to that a little bit?

Anshooman Aga -- Executive Vice President and Chief Financial Officer

So if you remember, last year we had disclosed that in Q4 we had a favorable contract resolution with a customer which had driven the margins up significantly in Q4 last fiscal year. The cost had been incurred during the course of the year and some in the prior year, in fiscal 2016. So when you look at margins, I think the better comparison as year-on-year margins where the CTS margins, adjusted EBITDA margins have increased from 8.4% to 10.9%, so almost a 250-basis point improvement in margins and again we're tracking well toward our Goal 2020 target of being between 13% and 15%.

Jim Ricchiuti -- Needham & Company -- Analyst

Brad, you may not be able to talk specifically about the size of some of these larger deals in the transportation, but I'm wondering can you aggregate the Paris, Toronto and Montreal opportunities and just give us a sense as to maybe collectively what they could represent?

Bradley Feldmann -- President and Chief Executive Officer

The larger opportunities in general, Jim, are in the hundreds of millions of dollars range. I don't know the aggregate number, but that's generally what they are.

Jim Ricchiuti -- Needham & Company -- Analyst

And then final question from me. Your range of revenues and EBITDA for fiscal 2019, not that wide, but I'm just wondering what the various puts and takes might be to getting to the high-end of that range.

Anshooman Aga -- Executive Vice President and Chief Financial Officer

Jim, a part of our CMS business, which you can as higher gross margin is tied to getting the orders and getting it shipped in time. While we do have appropriations this year, it's the timing of some of the order entry in the CMS business. On our CGD business, we've made great progress with the live, virtual, constructive. We're the only one who's been able to demonstrate this technology. We expect to start seeing orders, but again, it comes down to timing of some of these orders. For CTS, most of the revenue is in backlog, it's just about continuing to execute as they have been doing. There is a strong focus on execution that will remain in all our businesses, but for CTS, it's more about executing on the projecst in backlog.

Operator

Thank you. Our next question is coming from Ken Herbert from Canaccord. Your line is now live.

Ken Herbert -- Canaccord Genuity -- Analyst

Brad and Anshooman, I just wanted to dig a little further if we could into the 2019 EBITDA guidance, when I look at the midpoint and I back out the acquisition, it is about $25 million. Should I assume or can we assume that all of that increase, obviously, comes from CMS and CTS. And I wondered if you could give a little more granularity on the assumptions for sort of the EBITDA growth in those two businesses.

And then as a second part to that, obviously Global Defense, is that down again in terms of its EBITDA contribution in 2018 or what is the guidance imply really on a more segment level, if you could?

Anshooman Aga -- Executive Vice President and Chief Financial Officer

Ken, I'll talk in generality since we don't break down our guidance at a segment level. But just looking on the fundamentals of the business, CTS has strong backlog, it's going to continue to grow both in terms of revenue and adjusted EBITDA margins. When you look at CMS, with our T2C2 contract and network convergence that Brad talked about, our potential growth with the FirstNet part of the business with our Radio over IP gateway, we will continue to see growth in that business. We also continue to invest in that business in terms of R&D. So revenue and adjusted EBITDA will grow in that business.

On the CGD side, that's a little earlier in the technology inflection point, if you think of our three businesses with CTS, with OneAccount, with CMS, with GATR and on the CGD side, the live, virtual, constructive. So, we've demonstrated that very successfully. There's a lot of excitement around our technology. And now it's getting to a program of record and driving grow through that business. International pipeline remains strong. So while there won't be significant growth in that business, it's not going to continue to decline. I think you'll see more of a stabilization in that business with upward tick coming in the future years.

Bradley Feldmann -- President and Chief Executive Officer

Ken, all businesses are growing top line and bottom line.

Ken Herbert -- Canaccord Genuity -- Analyst

And then if I could, just within obviously CMS, you've had a great strong end of the year and I think it's very consistent with what you are talking about. Can you just remind us either on sort of GATR or T2C2 or on obviously the network, the work you're doing with AT&T, maybe a couple of the next milestones or how we should think about sort of key potential events as we go through fiscal 2019 in that business?

Bradley Feldmann -- President and Chief Executive Officer

I think one good thing we have just in terms of the environment is we've returned to regular order. We haven't had a budget before the fiscal year starts for more than 10 years. And so we think orders will come to us sooner as a result of that and although it will be back-end loaded, it won't be quite as back-end loaded. We've started to see a convergence, other customers buying this T2C2, GATR solution. And so we'll see some expansion there. We just really started with the FirstNet RoIP expansion and AT&T and Verizon, we hope will sell this like gangbusters for us and those products have terrific margins. And so, those are key things. We have some key proposals out that we hope will win, which will even drive further growth.

Ken Herbert -- Canaccord Genuity -- Analyst

And if I could just one final question, Anshooman. As we look at free cash flow into fiscal 2019, I know obviously it's a little messy with Boston and how you roll that up, but how should we think about free cash flow, either maybe as a conversion or any other sort of metric you would provide as part of the guidance in the 2019?

Anshooman Aga -- Executive Vice President and Chief Financial Officer

We continue to remain very focused on improving our free cash flow. If we exclude Boston, you should see some gradual improvement on free cash flow. One of the things that impacted our cash flow this year was having all the CMS revenue very back-end loaded. So, given that as Brad mentioned, we're moving toward more of a normal order, if we can start getting some of the shipments out in Q3 and earlier in Q4, we will be able to convert that into cash. So, we continue to remain focused. I think you will start seeing improvements in 2019 going into 2020 further in terms of free cash flow conversion.

Operator

(Operator Instructions) Our next question is coming from Brian Ruttenbur from Drexel Hamilton. Please proceed with your question.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

So, Anshooman, if you could help me out a little bit on the quarterly breakdown, you mentioned earlier in your commentary about profitability in the first quarter should be -- you made a statement that profitability is going to start off low, then work high, something along that lines. Can you talk a little bit about maybe revenue, how will work from first quarter to fourth quarter, and will look the same way as this fiscal year and will you be profitable in terms of EPS, because last first quarter you had a negative -- start off with kind of in the whole and then worked your way out.

Anshooman Aga -- Executive Vice President and Chief Financial Officer

Let me try and cover some of your questions in there. So, seasonality, yes, similar to last year, Q1 from adjusted EBITDA, slightly higher than Q1 last year. And revenue seasonality will be in line with that also. Given the fact that when you think of our CMS business being back-end loaded, it drives significant gross margin at the back-end of the year, but when you look at the overheads in term of SG&A, R&D, those are linear, so that impacts the seasonality.

When you think of transportation, a lot of engineering going on, on our projects right now with the four large wins. And Q1 has the least number of working days, which means our cost-to-cost percentage of completion, the least revenue and least profit. So seasonality, similar to last year. EPS, we don't give guidance in terms of EPS, but you could probably translate last year's into this year -- next year also.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

So by translating last year's into this year and looking at a similar EBITDA, we would start off then just go in logically with a negative going to a very big positive. Is that the way you're thinking in terms logically?

Anshooman Aga -- Executive Vice President and Chief Financial Officer

Typically, yes. We also made an acquisition of Trafficware. We haven't done the purchase price accounting at this stage, so I can't comment on what the impact on taxes will be. But if you keep in mind that we have deferred tax assets, which we had to put a valuation allowance against, so we don't show that deferred tax asset on our books. This acquisition does create deferred tax liabilities and when we have deferred tax liabilities, I can release some of the valuation allowance to cover the deferred tax liabilities. So, we should see some pick up in taxes in Q1. Given the fact we haven't done our purchase accounting yet, I can't quantify that number.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Then just as a follow-up another financial question, it's about SG&A, as a dollar amount, we should be seeing a drop because of ERP implementation in 2019, even with this acquisition and all the moving parts, is that correct?

Anshooman Aga -- Executive Vice President and Chief Financial Officer

As a percentage, you'll see a significant drop. In terms of total SG&A, our ERP-related expense will be down. We were at $24 million in fiscal 2018 versus guidance of $25 million, so just under what we had told you. But if you go to the appendix of our slide deck, you'll see it's about $10 million next year. We have also mentioned there will be some restructuring and business optimization charges, which will lead to savings and our One Cubic initiative. But as a percentage, it will be down.

Operator

Thank you. Our next question today is coming from Louie Dipalma from William Blair & Company. Your line is now live.

Louie DiPalma -- William Blair & Company -- Analyst

A lot has been made about lack of formidable competition for Cubic and public transit payment. I'm playing devil's advocate, skeptics believe that the reason there weren't more bidders for San Francisco and Boston is because the margins are low. Can you provide your perspective on why there weren't more bidders for some of these large contracts and related to the (technical difficulty) in London, and Chicago?

Bradley Feldmann -- President and Chief Executive Officer

I missed that last part, Louie. Can you repeat that second part, please?

Louie DiPalma -- William Blair & Company -- Analyst

Yes, I was wondering how significant has it been the fact that you already have (technical difficulty) some of these automated fare collection contracts?

Bradley Feldmann -- President and Chief Executive Officer

Yes, Louie, I think I got most of that all. If I didn't, please help me. What I would say, Louie, a few years ago when I change jobs we significantly increased our R&D investment. I think we were below $20 million and now we're in the $50 million range. And in addition to that, we put a lot more emphasis on co-development with our customers. So we're getting R&D investments, we're co-developing with our customers to significant amounts above that.

And one of the things that we quote-unquote invented is this thing called OneAccount and OneAccount is where transactions are done in the back office as opposed to with a closed loop card, prepaid, touching a reader and doing the math and letting you through. The reason that's significant is because it will allow a city to have one account for all transportation needs within the city and it will allow the operators in the city to have congestion-based pricing because they will have visibility over potentially all of the modes of transport.

And so we made a bet on that and invested in that -- invented that and implemented that in Chicago and in London and in Vancouver. And so when these four big cities came up this current year, they called out OneAccount and we just had invented it and had already made the investments. So another bidder who isn't in that position, their costs go up significantly. So for them, their margins are lower because they have more cost. For us, we're going to make very good money.

And I think, I call it, our legolization strategy of instead of building Bespoke Systems where we are using these codes sets. And so there was a lot of momentum gained as you know when we won New York and Boston and Brisbane and what happened in San Francisco as you know, publicly, is no one else bid. And so I don't think it was -- it's not our margin profile. But I think you're question is quite insightful, they had a huge nonrecurring bill to pay to compete.

Louie DiPalma -- William Blair & Company -- Analyst

And can you discuss in a little more detail the potential revenue synergies associated with Trafficware and do you think Trafficware has value in terms of your ability to cross-sell your transit payment solutions to the Trafficware customer base and potentially go after that the middle market cities?

Bradley Feldmann -- President and Chief Executive Officer

Again, insightful questions, Louie. So you might also notice on the call, we won a job in Sydney called Integrated Congestion Management Program and this is sort of like a Command Center that will take all the feeds of various transportation networks and help the city deal with congestion. It's a control congestion in a city just very simply. It's really helpful to control the traffic lights. And so you can kind of see that this Command Center and Trafficware's ability to control the traffic lights is sort of like ham and eggs, and then on top of that Trafficware has been doing some experimentation and has actually delivered product to test beds, for instance, in Las Vegas, where they're dealing with autonomous cars.

And so the autonomous cars, if you will, the smart cars needed smart infrastructure and Trafficware is providing that. When you take a step back even broader to the NextCity vision, Surface Transport is absolutely in the middle of the fairway of trying to reduce congestion under our NextCity strategy. So we think it perfectly aligns and quite frankly will open up in a bigger way adjacencies and we for sure will see revenue synergy going forward.

Louie DiPalma -- William Blair & Company -- Analyst

And last one, on defense training, do you have any estimate as the potential size of a program of record that SLATE could be and related to this, do you expect that for defense training that the overall growth rate over the next three years will resemble your 3% to 5% growth rate that you articulated in the 2020 Goal presentation?

Bradley Feldmann -- President and Chief Executive Officer

The way I'd answer that question is, if you look at air combat maneuvering instrumentation market, in the previous generation called P5 that was on fourth generation airplanes as well as there's a box on the Joint Strike Fighter, all of those pods and infrastructure and so forth was worth well over $1 billion. And so what will happen is this live, virtual, constructive improvement upgrade next-generation will replace all of that.

And so it'll be well north of $1 billion over time. And the reason it's so significant is that we can now efficiently and effectively stress fighter pilots more and the way we do that is by putting synthetic threats in the cockpit. Heretofore, the cockpit would only speak to the pod out. Now, the pod speaks into the cockpit and we can synthetically create enemy forces, if you will, such that -- and every time Air Force's fly a (inaudible), fly a airplane, it's at least $20,000, the JSF is up to $50,000. So if you can synthetically create these entities, you can save the government an awful lot of money.

Operator

Thank you. Our next question is a follow-up from Ken Herbert from Canaccord. Your line is now live.

Ken Herbert -- Canaccord Genuity -- Analyst

Just a quick follow-up Anshooman, if you could. Can you just talk about expectations, your assumptions in the guide for FX in 2019. I know, obviously the UK continues to be I think about 20% of your sales. Are you doing anything different in terms of your currency exposure and what are you seeing or what are the assumptions in the guide around FX?

Anshooman Aga -- Executive Vice President and Chief Financial Officer

From a FX perspective, our guidance assumes constant currency or constant FX. In terms of managing our FX risk, we do manage it in the sense that we try and see local revenue, local currency cost. If we don't have local currency cost, we do hedge foreign currency risks over a certain amounts. So we do manage our foreign country currency exposure, but just from a conversion perspective to US dollars, we use in constant currency.

Ken Herbert -- Canaccord Genuity -- Analyst

But what should we assume as a tax rate for fiscal 2019?

Anshooman Aga -- Executive Vice President and Chief Financial Officer

Ken, we haven't given tax rate guidance. There's a couple of things to think about though from a tax perspective. One, as we've said in the past, we are basically investing in the US with our ERP investments, our R&D investments. So we're in a cumulative loss position in the US making most of our money overseas. What happens is we are paying taxes overseas, but any deferred tax assets, we don't put on the books in the US, we put a valuation allowance.

So when thinking 2020 and beyond, we turn profitable, we'd be able to release these deferred tax assets. So temporarily our tax rate is higher. On the flip side, what I mentioned, we haven't done our purchase accounting yet, but we will see some valuation allowance released on those deferred tax assets based on this acquisition we did because it does generate deferred tax liabilities. So, I think you'll see some clarity on the impact of the acquisition in Q1.

Operator

Thank you. Our next question is a follow-up from Brian Ruttenbur from Drexel Hamilton. Your line is now live.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Yes, this is for Brad. Just a real quick follow-up, maybe a low macro on 2020 DoD budgets. Can you talk about, there's been a whole lot of talk from a lot of my companies about budgets fight going on already for 2020, can you talk about what you see going on with the training budgets with the -- it appears that the military is getting larger, training is going to be more, but I want to hear what you have to say about budgets and the battles to come?

Bradley Feldmann -- President and Chief Executive Officer

So, as you know, we returned to regular order this year and the (inaudible) was expecting increases in 2020. And you also know that recently there's been chatter out in the White House and we have more divided government. What I would say is that the first comment I'd make is that $700 billion is a lot of money. Whether the number is $733 billion or $716 billion or 7 something, $700 billion is a lot of money. I also would say that the joint chiefs are fairly vocal about readiness.

So I think moneys will continue to be invested in the readiness of the work for -- of the forces. I'd also say that we're in good areas within the budget, I don't see C4ISR -- I see continued growth and I also see growth in training readiness. And then, taking your step back, having said all that, as you know there has been tremendous pressure on our NATO allies to increase their defense spend in line with their GDP. So, I don't see it as a significant issue for us given that $700 billion is a lot of money and we have many customers outside the US.

Operator

Thank you. We've reached end of our question-and-answer session. I like to turn the floor back over to Brad for any further or closing comments.

Bradley Feldmann -- President and Chief Executive Officer

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

Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Duration: 54 minutes

Call participants:

Kirsten Nielsen -- Vice President of Investor Relations

Bradley Feldmann -- President and Chief Executive Officer

Anshooman Aga -- Executive Vice President and Chief Financial Officer

Mark Strouse -- JP Morgan -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Ken Herbert -- Canaccord Genuity -- Analyst

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Louie DiPalma -- William Blair & Company -- Analyst

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