Q4 2022 Kratos Defense and Security Solutions Inc Earnings Call

February 23, 2023

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Okay.

Yeah.

Good day and thank you for standing by welcome to the greatest Defense and security solutions fourth quarter 2022 earnings Conference call.

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I would now like to hand, the conference over to your Speaker today, Marie Mendoza, Senior Vice President and General Counsel.

Thank you.

Afternoon, everyone and thank you for joining us for the Crisp defense and security solutions fourth quarter 2022 conference call with.

With me today is Eric Demarco, Kratos, President and Chief Executive Officer, and Deanna Lund criticize executive Vice President and Chief Financial Officer.

Before we begin the substance of today's call I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release.

This paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements. We will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives.

Market opportunities operational outlook and financial guidance during today's call.

Today's call will also include a discussion of non-GAAP financial measures is that terms defined in regulation G.

non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.

Accordingly at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.

I'll now turn the call over to Eric Demarco.

Thank you Marie.

Afternoon.

Greatest its position as the leading disruptive technology company.

<unk> developing and fielding relevant systems product and solutions continues to progress.

Reflecting the trust our customers have in your company.

Credits, along with our strategic partners vendors and suppliers are aligned.

Moving rapidly to address the evolving threat not with Powerpoints press releases on scripted publications.

But with real systems that we will discuss today.

We believe that 2023 will be a transition year for creatives to greater revenue profit and cash flow with.

With significant prior year investments in technology products and systems transitioning from development, R&D TNT or L. Rep to funded programs contracts or full rate production.

Which will result in increased revenue profit and operating cash flow for the company.

Includes today's announcement that <unk> be QM 177 unmanned aerial target drone.

Now entering full production.

And Kratos is rocket systems business, where we have also made significant investments. We have now received two important new hypersonic system related program Awards.

And Mark TB with our partner Dianetics.

Under the Moc TV contract, which we announced in November Credo, Cinemark TB team will work to develop an affordable and responsive hypersonic testbed platform and national hypersonic testing capability in an effort to dramatically increase our nation's capacity for ground and flight testing of hypersonic techno.

<unk> and payloads.

Under the mayhem or expendable hypersonic multi mission ISR and strike program Tradeoffs will support the Air Force Research Laboratory as development of an Arab reason hypersonic weapons system.

Kratos is an industry leader in flight proven agile engineering capabilities with experienced and high performance propulsion hypersonic exotic materials and air vehicle design, which we are applying to win large new program opportunities like may have been marked TB.

Kratos has previously successfully developed and flown several hypersonic systems and our internally funded hypersonic investments in unique and proprietary systems in vehicles, including <unk> and <unk>, We believe will be disruptive game changers for our customers and our country and our.

Beginning to pay dividends for <unk> stakeholders, including with these recent program awards.

<unk> rocket systems business recently successfully integrated and launched for ballistic missile targets with our government partner, which included the successful intercept test of a medium range ballistic missile target by a standard missile three block two way fire from the J S Mayo, marking the first time that the Japanese <unk>.

Our class destroyer is fired at SM three block two way.

We believe the successful test as representative of <unk> industry, leading position in the rocket system missile defense and ballistic missile defense areas and create OS is affordable relevant disruptive high technology rocket systems, and we expect <unk> rocket system business to be one of our fastest growing in 2023 <unk>.

Given by the increased global interest in air and missile Defense systems.

<unk> recently received the initial $30 million in funding on a new potential $250 million C. Five ISR production program and the microwave electronics area.

This program is classified.

<unk> microwave electronics business had a record backlog at year end, including a focus on missile Air Defense and radar systems, and we expect this business to be create us as one of our fastest growing for 2023.

Great Awesome <unk> ISR business is also expected to be one of our fastest growing in 2023 with expected growth coming from several missile and air defense radar and other programs, including GBS, the Sentinel with our prime strategic partner Northrop Grumman.

Other kratos five ISR business programs include high Mars Titan Patriot Fad.

BCS if pick in <unk>.

<unk> has recently been selected as the engine design team of the boom led collaboration on a new supersonic propulsion system called Symphony.

Sustainable and cost efficient and Jennifer booms planned overture supersonic airliner with symphony being a bespoke design leveraging proven technologies and materials to achieve optimal supersonic performance and efficiency.

Booms overture, New Symphony propulsion system is expected to operate at net zero carbon and meet chapter 14 noise levels and when compared to derivative approaches.

He is ultimately expected to deliver a 25% increase in time on wing and significantly lower engine maintenance costs and is also expected to reduce overall airplane operating costs for airline customers by 10%.

On the Symphony program Cradles will utilize at supersonic engine design experience and expertise working under a standard commercial time and material type contract arrangements with no credo investments.

The Credo Symphony team will include key creative personnel and engineers that were directly involved in supporting the design of the F 119, and F 135 supersonic engines.

The power of the F 22, and the F 35.

<unk> is also supporting Rolls Royce on the B 52 re engine program with Rolls Royce and B 52, being certain of <unk>, most important strategic partners and a program.

Another growth area for <unk>, as new space and related launch vehicles and propulsion systems, where <unk> is currently under contract on multiple D O D government and commercial space system related programs.

Involving credo is hardware and products in support of some of the most technologically advanced propulsion systems in the world.

And the drone missile empowered munitions area <unk> have made important progress over the past several months, including technically delivering engines to a confidential customer for a yet to be announced UAS and received an award from a customer regarding the future opportunity for up to thousands of.

<unk> engines, which we are jointly working to address and Katie is forecast to be one of <unk> fastest growing businesses in 2023.

<unk> space and satellite communications business, our company's largest is also forecasting significant future organic growth and is expected to generate some of the tradeoffs as highest margins, including as related to <unk> is first to market software based open space Virtualized <unk>.

And satellite ground systems, which continue to gain market acceptance in both the national security and the commercial market areas.

Satellite communications industry is focused on virtualized, the entire ground infrastructure in order to be efficiently compatible with cloud based on other standardized networks equipment and systems, including importantly, five G, which is another credo is focus area here.

Converting hardware to software that is installed and managed remotely via third party data centers are on standard compute devices is expected to provide satellite operators increased flexibility over their networks improving the response time to customer demands. This conversion to software is exactly what <unk> is open.

Base and open edge is focused on for example, today satellite terminals consist of purpose built hardware components that are limited to performing a dedicated function for example, a satellite modem performing modulation and demodulation functions.

<unk> is open edge satellite terminals the devices that end users employ at the far edge of the satellite ground network to transmit and receive data have been purpose built hardware devices that seriously restrict functionality and flexibility at the network edge.

Kratos is open edge disrupt these limitations by employing software virtualized modems that can run on general purpose off the shelf compute devices and open edge adds far more power and versatility by enabling additional apps to run right up the network's edge.

Tradeoffs as open edge uses a different model for operating at the edge Wombat employee standards already widely adopted across the larger global telecommunications industry to expand terminal functions and make them more flexible these.

These standards that cradles is open edge employees are what enable mobile devices, such as smartphones to support roaming use cloud based functions inter operate with other networks and do much more.

While satellite present, a complex technology challenge.

The goal of <unk> is open space and open edge is to help satellite operators make their services as mainstream as cellular communications.

To capitalize on new services, such as <unk>.

Which is why Intelsat will be one of tradeoffs as first partners to supplant traditional satellite terminals with Kratos is open edge.

I Hope you can see why here at <unk>, we're so excited about our satellite business and future prospects.

<unk> target drone business is performing well with major credo sole source programs, including the air Force's asset program, featuring the <unk> 167 target in the United States Navy SaaS program, featuring <unk> 177 target drone, where on both programs. We have recently received additional large.

Production Awards.

Additionally, and very importantly, the recent United States Navy SSAT 177 program award includes target drones or missions for both Australia, and Canada to new Kratos, <unk> 177 target drone customers.

We are currently in pursuit of certain new domestic target drone opportunities that if we are successful could provide the next growth step function for the business.

And we have recently seen a number of potential new international target drone opportunities that we believe are a result of current global conflicts and threats, including in the Ukraine and the related ongoing global recapitalization of strategic weapon systems.

Excuse me.

Yeah.

And the tactical drone area.

Kratos has recently received a contract for an initial two valkyrie from the United States Marines, along with sensors weapons systems payloads et cetera under the affordable Autonomous cooperative Killers program the.

The killers program as a new program for creators, which we have not yet been able to formally announce or discuss and I encourage you to review the Navy contract award announcement and other available publications, including as related to the Usmc for additional information including related to the significant import.

<unk> and the future prospects of the sole source contract award to creators.

We believe that one of the primary reasons. The killers program was awarded to Kratos sole source is that we have available now valkyrie jet drones coming off our active production line and that the Valkyrie is cost and price points are known not on a hoped for Powerpoint slide which estimated costs our competitors routinely change an increase.

After the fact of which we believe certain of our customers are clearly beginning to take note.

<unk> Valkyrie is also a demonstrated low runway independent system, not requiring a runway to take off or land and Credo says jet drones are also routinely ship launched all of which we believe are becoming more of a differentiator for kratos.

It was also recently reported that the United States Air Force's 40 Flight Test Squadron and Eglin Air Force base has now taken ownership of Valkyrie aircraft with a valkyrie ability to autonomously operate over vast distances can be evaluated along with certain other objectives.

<unk> recently published photographs of tradeoffs as Valkyrie flying with manned F 16 fighters and emphasizing the Valkyrie is rail launch runway independence and precision parachute recovery certain of which were approved for us to publish today.

None of <unk> as potential competitors have runway independent capability with the competitors competing systems. All currently having or plan to have landing gear to be dependent on a runway, which I believe will be completely untenable and appear conflict.

It was also recently reported that the U S government customer is working with multiple industry partners to integrate leading edge autonomy capabilities into the execute 50, a day as Kratos Valkyrie and all credo surrounds have an open system architecture, meaning a variety of autonomous and AI cores can be integrated into.

Our system open system architecture is another competitive differentiator for <unk> versus our competitors at the customers do not want to be vendor locked.

It was recently reported that the Valkyrie has now entered a time critical test period with a U S government customer related to certain manned unmanned teaming which flight and testing are planned to be completed by the end of this year.

The U S. Air Force is now state of the Skyboard and the Golden Horde Vanguard programs, both of which <unk> is involved in or transitioning to become programs of record and are expected to form the nucleolus of new combat systems, including collaborative combat aircraft or Ccas.

Both Kratos Valkyrie and the Mako tactical jet drones have performed under the Skyboard program and the Golden Horde program has demonstrated how our group of unmanned aircraft or weapons can communicate with each other and operate collectively rather than singularly.

In addition to the the.

The recent Valkyrie contract awards and this progress we are now in contract negotiations with another new customer on a new program for the acquisition of multiple Valkyrie, which we believe we will have under initial contract by the third quarter of this year.

Additionally, we are also now currently in contract negotiations with the customer were laid out a kratos valkyries valued at several tens of millions of dollars, which we also expect to be completed and under contract by the third quarter of this year.

And we have now also provided a kratos valkyrie aircraft to an additional potential new customer for systems assessment and review and we are in discussions as to potential next steps, including purchasing leasing services type or other contractual arrangements.

And we are also continuing discussions with another potential new customer related to the acquisition of several valkyrie.

It is important to emphasize that with each of these valkyrie related opportunities that similar to kratos as target drone business. It is extremely important that in addition to an initial valkyrie aircraft acquisition that the flight recovery support and other system related equipment and infrastructure is also being acquired and dipped.

Floyd by the customers as this upfront investment represents a customer commitment to the system, which returned to the customer has increased obviously by additional future execute 58 a.

Aircraft acquisitions.

We are currently performing under multiple Valkyrie related government funded contracts or programs with a key element, including the continued mission as Asian and Operationalization of the Credo execute 58, a system and we are working closely with our customers on the optimal funding utilization and contracts.

<unk>, including the funding allocation between acquisition of aircraft system related infrastructure, <unk> and Operationalization in order to achieve the strategic strategic objective.

There was also recently been increased interest in certain other kratos tactical drone systems. In addition to the Valkyrie, which I believe is as a result of what is occurring in the Ukraine. Also included is related to affordable mass warming and drone attrition rates.

So now importantly key to our strategic tactical drone strategic decision, making include Great OS is the only company that has affordable relevant systems flying now not just powerpoints concepts designs in press releases and cradles Hasnt active production lines for jet drone aircraft today with <unk> having produce.

Over 1100 high performance unmanned jet target and tactical drone aircraft to date, representing another important differentiating competitive advantage for <unk> and another key reason why cradles customers Trust US we have demonstrated that credo Tan and is delivering jet drones in quantity.

Now at real known price points.

So as a result of this progress.

We've now moved forward with our second serial production run of at least 12 of the next generation block of Kratos Valkyries.

This decision is important for several reasons, including having execute 58 systems available to immediately meet expected customer demand and supporting Credo is first to market leadership position.

We also want to ensure that there was no break in the current Valkyrie production line. So that we can continue to improve on the learning curve efficiencies and related declining cost experience. We have gained and achieve the target costs. We are now providing in proposals to potential customers.

The cost per pound of <unk> jet drone aircraft. We believe is currently far below our competitors.

I think we know it and they know it and we expect to continue to drive <unk> drilling costs down significantly, including with the continued actual production of aircraft to the benefit of <unk> customers and to the to the detriment of certain competition, especially when the customers compare what it actually cost our competition.

To produce jet drone aircraft not what our competitors say are indicating their proposals.

As I mentioned this new group of at least 12 serial production Valkyries will be the next block upgrade version, including multiple enhancements based on the numerous successful flights we have completed with our customers their input and feedback and also including certain enhancements or modifications that <unk> Ghost works has been <unk>.

<unk>, including to specifically address certain potential competitive adversarial threats, including in the Pacific.

I continue to believe that <unk> Air Gapped Ghost works entity is truly a crown jewel of Creatives and in my opinion, it's a national asset for our country.

<unk> affordability of the technology and <unk> Ghost works is by far the clear industry leader in high performance unmanned aerial jet powered aircraft and systems and the real live application of relevant cost effective digital engineering practices.

So to wrap up based on our backlog our significant new program awards on $10 billion opportunity pipeline, we expect it up and to the right future organic growth trajectory for <unk> with no currently planned acquisitions as we focus on execution, obtaining and retaining qualified personnel.

Which remains our primary operational challenge and continuing to bid on and win new program opportunities.

As we begin 2023 every kratos business is expecting organic growth and we are forecasting <unk> consolidated 23 over 22 revenue growth of approximately 10% with increased margins reduced internally funded investments and increased cash flow.

Anna.

Thank you Eric and good afternoon as we have included a detailed summary of the fourth quarter and full year financial performance for FY 'twenty, two and the first quarter and full year 2003 financial guidance in the press release published earlier today I will focus on the highlights of my remarks today.

Revenue for the fourth quarter with $249 3 million up from $211 6 million in the fourth quarter of 'twenty, one, reflecting a 17, 8% increase.

Excluding the impact of the FRE cosmic and CTC acquisition, which contributed $29 1 million in revenues in the fourth quarter of 2002, <unk> revenues grew organically four 1%.

Fiscal year 'twenty to revenues of $898 3 million increased $86 8 million from 811 5 million or 10, 7% increase.

Fiscal 'twenty channel, excluding the impact of the acquisitions, which contributed revenues of $95 5 million during the year.

Excluding the impact of the legacy training services business, which was down $21 5 million from $40 1 million compared to FY 'twenty, one revenues grew organically one 7%.

And Aaron knee systems.

<unk> not directly related to certain received and expected new contract awards in the hypersonic system area.

In 2022 in addition to internal R&D costs of $33 million incurred in our space and satellite business. We also invested approximately $7 6 million in software development costs related to our open space and Virtualized software product.

Contract mix for fiscal 'twenty, two we're 70% revenues from fixed price contracts, 24% from cost plus type contracts and 6% related to time and material contracts.

Revenues generated from contracts with the U S. Federal government during the quarter were approximately 70%, including revenues generated from contracts with the Dod.

Non DMV federal government agencies.

And that new contract.

In fiscal 'twenty, two we generated 11% of revenues from commercial customers and 19% from foreign customers.

Moving on to financial guidance.

Our first quarter and full year 2003 financial guidance. We provided today includes our current forecast and business mix and our.

<unk> related to the expected continued impact of challenges related to obtaining and retaining qualified personnel.

Apply chain disruptions inflation and related expected constant price increases that are currently and expected to continue impacting both the industry and creatives throughout.

Throughout 2022 and in the first quarter of 2023 greatest has experienced continued impacts from supply chain disruptions and cleaning cost increases for materials supplies transportation and utilities and fulfillment delays, causing increase in costs and inefficiencies related to manufacturing including in our.

Two indirect manufacturing range.

That's our contract mix is predominantly firm fixed price.

Required to absorb these additional costs until the period of performance is completed on existing backlog and new contracts are negotiated with current pricing.

Accordingly, as we transition to new contracts out for 2023, we expect margin rates to continue to be lower in the first half of the year and superior performance on existing backlog is executed with an expectation of margin improvement in the second half of this year as a mix of newer recently priced contracts are expected to increase.

Our revenue guidance range for the first quarter of 'twenty, three, but let's say, 12% to 17% increase over the first quarter of 2000, and our annual revenue guidance for fiscal 'twenty, three let's say, 9% to 11% increase over fiscal 'twenty two.

Consistent with what we have stated on our previous earnings calls.

Aircastle performance of our tactical unmanned aerial systems business, we remain conservative and will only include contract awards, we have received.

Or with respect to which we are in final negotiations with the customers.

Accordingly, including in our guidance range today is a relatively flat revenue of approximately 220 $225 million, our unmanned systems division as compared to FY 'twenty two.

This range includes an estimated increase in valkyrie related revenues from $32 million in FY 'twenty two to approximately $43 million in FY2023.

The recent U S Navy Slash Marine Corps contract.

This forecasted increase is offset by a reduction of approximately $15 million non valkyrie related tactical development program. As we have previously discussed on our Q3 earnings call that the customer informed us in 2022 that future funding was not.

Oh.

The FY 'twenty revenue guidance range for kgs of $760 million to $775 million with let's say, 12% to 14% increase from FY 'twenty two revenues.

Chris any forecasted revenue growth across every business unit in kgs.

Most notable forecasted growth in our space and satellite T. Five ISR turbine microwave products and hypersonic related business areas.

Based upon funding production delivery and execution schedules second half 'twenty three revenues are expected to ramp at least sequentially.

Sequentially greater than the first half 'twenty three with margins expected to expand in the second half of the year on increased revenue volumes and based on the expected mix of revenues, including a new fixed price contracts, which include more recent cost estimates.

Operating cash flows are expected to be stronger in the second half of the year as well driven by the expected expansion in margins and the expected conversion of inventory films from FY 'twenty two in the first half of 2023 and based upon estimated milestone payment schedules.

Eric very.

Very good.

Thank you Deanna.

We will turn it over to the moderator for any questions.

As a reminder to ask a question. Please press star one one on your telephone.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Mike Crawford with B Riley.

Thank you I have a few quick questions. So one what happened operationally in Oklahoma after this.

Second 12, Valkyrie I guess, that's a block to Valkyrie production spiral.

Particularly if you get these additional orders contracts you're supposed to have by Q3 like what would be a full re one production line once it's continuous.

More of a backward production down there.

Okay. So under the current construct Mike because if you recall the facility has a base facility and then there are contiguous additional facilities that we have options on.

Under the current configuration.

Without expanding anymore okay.

And assuming the similar number of tactical fire Jets and fire just that we're building in Oklahoma, because we're building those there to now we can do annually.

35 to 45 drones a year in the current configuration.

We can if we exercise the next option.

And if we haven't if we do that and.

We can we can easily double it.

Quickly.

Okay.

Thank you and just regarding other.

Competitors.

Maybe not as affordable aircrafts, but.

Uh huh.

Like isn't it isn't there like it goes back that might be out there.

Today.

Mike I haven't seen.

Or read anything on the goes back in.

Six months or more.

So I'm not sure what's going on.

With that someone sent me something.

A month or two ago.

It said that it was it was not going to be considered in the U S.

That's something I read.

I don't I don't really know Buddy.

Okay and then.

Uh huh.

Just real quick what should we be looking for in the administration's budget request regarding getting these former vanguard programs into programs of record and.

Next generation air dominance or CCA.

Is there anything specific relating to valkyrie that we should be looking for are you hoping to see.

Yes so.

In my opinion based on most recently with four Star Chief of staff Brown said last week. He said that when the 24 budget is submitted and now I understand thats coming in the first or second week of March that the public we should all see a significant it.

Increase and a significant commitment.

To Ccas he was talking collaborative combat aircraft.

And in that interview that he did he talked about our family of them of all different types and sizes and cost points. So based on that I think that we should all see.

Significant additional funding based on what the chiefs of staff said.

Okay excellent. Thank you very much.

Yep.

Our next question comes from the line of Ken Herbert with RBC capital markets.

Yes, hi, good afternoon, Eric and Deanna.

Hi, Kevin.

Hey, Eric I wanted to follow up on your comments on on Valkyrie cost it sounds like you're.

Pushing a lot to take cost out can you can you maybe help with some if you think about the second block versus the first block.

How much maybe is cost down and.

How much of that are you able to keep versus how much of the lower costs are you are you sharing with your customer.

Yes.

So as you can imagine in the past couple of years because of what's going on with inflation and supply chain and labor costs everything has gone up including the cost of our.

Drones, that's been happening while the learning curve on the production rate has been coming.

Down.

So we are expecting.

And we've seen this with our target drones from development to L. Rep to production. So we have all the experience in the historical data on these production learning curves on the jet drones.

We expect.

Not to say it will not be a significant drop with this 12.

But it will be a drop in the knee in the curve.

Consider.

Considering that we continue to do this we will come in the next block when and if we decide to do that and then there would be a significant knee in the curve now.

Yeah.

We obviously are very close to the industry, we're very close to the customers and our competitors. We are highly confident that cost per airplane and cost per pound. We are orders of magnitude less costly than what they really are irrespective of what they are telling potential customers and potential customers are either.

Learning that or they're going to learn it real soon in some instances.

And we're really going to push this as youre alluding to is a competitive advantage with actual costs not forecast that are baked in Switzerland.

No. That's helpful. And then as you think about either now or with with block III. If you eventually go there.

As the Valkyrie profitable on a per unit basis, or what's it take maybe to get to that point.

On the most recent contract awards that absolutely is profitable absolutely.

Great.

That's very helpful and just one final question.

Can you maybe.

Great work with the Navy it sounds like and what's the release you put out today. It sounds like there is a lot happening in terms of flight test activity and certainly public discussion around the requirements within CCA in other areas is multiplying what's been the latest feedback you've been getting from your air Force customer.

And is there any.

You can share just around specific within the tactical portfolio level.

A level of enthusiasm and maybe how they're viewing your efforts and then the valkyrie in particular.

Yeah, So Mike I'm going to answer the question not specific to the Air Force I cannot as I've talked about before the things have really been buttoned up here, they've really been buttoned up so my comments are going to be.

General.

To all of our existing customers and the customers that I said today I expect to have under contract in the second half of this year.

Here's the feedback youre, the only guys that have a jet aircraft flying today.

The propeller claims they've been great to kill terrorists Theyre, all going to get shut down they're not survivable.

Tied to a runway as an absolute nonstarter irrespective of what people say, it's a nonstarter obviously the runways are all targeted and we have the information no no the numbers alright.

That.

Quantities matter, we've learned that in the last 12 months in the Ukraine.

Quantities matter and the only way you can achieve quantities is if you have affordability.

And then the last one Mike is back to the Ukraine.

The Russians have been using their <unk> 57, which is equivalent to RF 22 F 35, they have been using their kids all in there of Vanguard hypersonic weapons, so they've been using their exquisite to no or little effect on the battlefield, because they are too expensive and they are not enough of them.

And I think a lot of people are rethinking our mix of Hum exquisite one exquisite versus for the same cost 100 jet drones.

That's the feedback we're getting and I think a lot of that is tying into.

The progress we've made since our last call.

Great. Thanks, Eric.

Okay. Thanks, Ken.

Okay.

Our next question comes from Seth Sigman with J P. Morgan.

Great.

Okay. Thanks, and good morning, good evening Alright.

Of course I have it.

Hi.

So I wanted to ask about.

I wanted to make sure I got this right and thank you for providing the segment guidance.

The <unk>.

Unmanned segment was to be.

<unk> flattish in 'twenty three.

Okay.

<unk> to 'twenty.

Correct.

Last one to $2 2500, 25, right and so with some growth in the.

Small amount of growth in the tactical drones.

What's happening I'm, sorry, yes on the types of what's happening with the target drones in 'twenty three.

Yes so.

We have there is approximately a 5% growth assumed in the estimate.

Okay for the target trial.

But the target drones, yes.

Okay.

The tactical drones or down or the tactical drone was going up from 32% to 43 or was that down from.

It's actually down to that.

Valkyrie related tactical drones is 32.

From 30 to $2 43, but there was a headwind of $15 million, which is a non.

Okay.

Okay Tactical accounting, yes.

Understood understood.

Great.

That's helpful.

And then just I.

If you think about these orders.

That are coming up hopefully in the third quarter of this year and you think about kind of the cycle time for those and then how those get booked.

Eventually as revenue and earnings should we think about that as something that's going to drive.

Is that something that drives 2024.

And does it encompass all.

All of the kind of second line I think you are building does it kind of take you into the third lot.

How should we kind of think about.

What those quantities might be.

Yep.

So Seth I went into some detail on.

The infrastructure the launch equipment.

Flight equipment, the recovery equipment, the sustainment equipment.

To operate these jet drones.

And how the customers now are starting to look at that and they are acquiring that from us very similar.

The strategic asset we have in our target drone systems getting that infrastructure out there.

In addition to that I went into some detail again on purpose on the on the customers are now funding significantly the mission <unk> and Operationalization of the aircraft.

Which all of these obviously strategically are very very important that they are making the investment in the infrastructure and their mission <unk> and operational utilizing the aircrafts. So please keep that in mind because as these contracts come it is not totally clear to me yet how much of it is going to be for aircrafts and how much of it is going to.

For the support.

Equipment, the large equipment the mission of <unk> the authorization.

So with that being said Deanna go back on if theyre percent complete and the aircraft is done how thats booked yes, yes, so similar to what we.

Yeah.

What we discussed when we started the original 12 line to.

Starting as capital expenditures and when there is a contract that is awarded and it is related to an aircraft sale then whatever.

Value or however, complete we are on that system would be transferred from capital to inventory and then that would determine the percent complete from a revenue recognition perspective.

Save 50% complete on an aircraft that would transfer over and then 50% of the revenue related to that aircraft would be recorded at the time the contract is imported.

Right got it got it okay. Thanks, and then just to wrap up on this point I assume in.

<unk> and kind of support equipment and setting up an infrastructure that that's related.

These aircrafts I imagine is that another area, where you feel like creators has an advantage.

Versus the competition both in terms of where you are in that process.

In terms of cost.

You could see me smiling the answer is absolutely yes.

Yes.

As I've said.

We're the only guy that is anything flowing.

We're the only one that does runway independence.

We're the only one really that as jet high performance drums.

And so for us to get this equipment out there which of course, the pedigree of all the target drones, we know how to do it we do dozens and dozens of missions a year, we're building over 150 aircraft a year or more.

Absolutely.

This is this is finally it appears to be trending in our competitive advantage areas.

Okay.

Excellent.

Thanks very much.

Okay. Thanks.

Yes.

Our next question comes from the line of Noah <unk> with Goldman Sachs.

Hello, everyone.

Yes.

Hi, good afternoon.

Eric can you just.

Tell us how many.

Valkyrie unit deliveries are assumed in the 'twenty three outlook.

What do you think that does in 2024.

Right.

Yes go ahead I'll have Dan answer because there are there are 30% completion that is percent complete so but in total the total revenue base is based on about three to four aircraft.

This year.

Correct Thats in the forecast that's in the forecast.

What do you think that looks like next year.

No.

No as you know a gunshot and I don't want to get ahead of it anymore I don't want to do that.

Sure.

I am just ghansham.

You have a release out.

About valkyrie.

Flight testing capability evolution by refers to a focus on experimentation.

I guess.

Why why is the focus on experimentation.

It felt like you had.

Established product with capability that the customer had said they wanted.

Why is there still so much evolution and experimentation at this point in the lifecycle of that product versus just buying it.

Market My opinion, Eric dependent.

Because this is brand new and it's not replacing anything.

It's brand new.

And as one of the pictures, we were approved to put out today.

How close that F 16 is flying to the Kratos Valkyrie.

And I believe its that comfort level. This is my opinion the comfort level.

Yes, because it's new.

And it's developing and getting comfortable with that that concept of.

Of operations.

That's that's why.

That I believe is the answer to my opinion.

The answer to your question yes.

That makes sense.

And then.

I guess you laid out the pieces of unmanned for the year.

5% growth.

And target and then I guess I guess tactical was essentially flat with some.

Valkyrie growth offset by the $15 million.

That's out.

What whats the status of tactical that's not Valkyrie.

Over the years Theres been a discussion of.

You know a half a dozen other efforts.

Where are those.

Yes.

I have to I have to preface this Noah with.

The secretary of the Air Force a year ago said.

So coming out with the CCA programs and theyre going to be highly classified.

They're highly classified.

He also said.

That all or virtually all I forget his quote of the current and existing drone programs.

We'll be feeders and it will be folded into these classified programs.

In other words, putting a classified bubble over virtually.

Everything.

In my prepared remarks today.

I went out of my way to specifically say that we are making progress with valkyrie.

Mako.

Tactical fire jet or air Wolf.

Those are the areas, we're making progress in that I can talk about.

Got it.

Okay.

And then just lastly, I would like to ask about.

Profitability margins cash flow.

The margins down last year.

If I sort of zoom out and.

Look at margins over time and cash flow over time.

Yes.

Many of the last several years.

GAAP net income that's breakeven or negative.

We add back the DNA, we add back the stock comp on the cash flow statement.

Then there is working capital Thats negative.

Cash flow that's negative.

Recognizing.

A lot of your efforts are early stage, there's a lot of potential long term growth you have to invest in a lot of that effort.

How much longer does the.

The cash flow statement it looked like that I mean, how long does it take before theirs.

Consistently.

Positive GAAP net margin consistently positive cash flow that Curtis.

Yeah, clearly with 2023 is we're expecting to return to cash flow generation for free cash flow.

Albeit at a lower level and that's because we are still making some investments and there is still.

As we transition from development to production, we expect that to increase there.

2022 was.

Unfortunately, a perfect storm from a cash flow perspective, because with the inventory that increases of about $24 million for the year to be able to we've done a lot of advanced inventory purchases to be able to mitigate as much as we could from a supply chain impact.

And we're still seeing some of that in the first half of 'twenty three.

We expect that to start converting through the cash cycle and the revenue cycle by the second half of 'twenty three but.

The first half of 'twenty, three it's going to be.

We're still going to see that that working capital use but we do expect that to turn around in 'twenty, three and expect that to improve as we as we move out of 'twenty into 'twenty four.

No.

I opened up saying I believe 23 is going to be the transition year.

Because we have a number of programs not all of them as Deanna said, but on a number we've left development, where either enel revpar were in full rate production.

So 23 is going to I believe is going to be the year, where we are returning to sustained.

Revenue growth sustained <unk>.

<unk> growth.

Positive cash flow and sustained positive cash flow growth.

I believe 23 is the.

The year.

Can lay that out programmatically.

Okay great.

Great. Thanks, so much for all the detail I appreciate it.

Thank you. Thank you.

Our next question comes from Greg Konrad with Jefferies.

Good evening.

Hi, Greg Hey, Greg Good afternoon.

I feel like I have to ask about Valkyrie, and maybe just to kind of summarize what you've talked about you mentioned a number of valkyrie applications in the beginning of the call is there any way to think about how many efforts are ongoing with valkyrie across customers and when you think about that $10 billion pipe.

<unk>, how much does valkyrie contribute to it and maybe how has that trended over the past year.

[laughter], that's a loaded a loaded question right.

On the.

On the on the first part of your question.

As I said in my comments.

We are under funded.

Government.

Contracts.

On multiple <unk>.

Programs.

Related to Valkyrie.

<unk>.

More than three more than for more on multiple funded.

We expect that.

To increase.

Between now and the end of this year.

Because as I said in the second half of this year. We're in contract negotiations now I wish I could tell you we get them done in Q2, I don't think so I think we'll get them done in Q3.

On a few others.

So that's going to continue to expand.

I'm not going to and I'm, sorry, we're not going to comment.

On what we expect and what we have in our in our pipeline.

It ties into to the other.

Ken's question and Mike's Quest Noah's question Ghansham.

Ghansham I'm not going to get ahead of myself.

We've put together our 2023 plan.

With an absolute minimum.

Of tactical revenue.

Absolute minimum but every other business in the company is firing on all cylinders everyone.

Our space business is.

<unk> great.

Our engine business is doing great I can keep going.

And so we're going to let them all do great, they're going to drive a 10% growth or more.

The tactical stuff happens.

Then we will we'll put it in the numbers.

I mean, and I guess, just a follow up I mean, you mentioned all of the businesses that are kind of among the fastest grower and you've kind of talked about growth being up into the right.

And then just based on kind of your opportunity commentary I mean, what do you expect.

Unmanned to kind of lead the growth as you get through.

Through 2023, and Thats kind of the biggest driver of growth being up into the right as you move forward.

Okay.

If if we say, okay, if things turn out the way I believe theyre going to turn out yes.

But that's not what we're going to forecast until we.

Either signed the contract.

We are in the Red zone.

And then maybe just last question.

Valkyrie or <unk> related just thinking about the space.

You mentioned open space and kind of how that played out in 2022, I think a lot of the larger contracts that you talked about had been awarded and we've seen a lot of these constellation kind of move forward.

Are you seeing in that pipeline in terms of awards and if you think about 2023 and kind of ground stations overall now.

Now that question I'll answer that question.

That's right.

What is happening in the space area commercially and National security.

Is unprecedented.

The technological vision.

Of smaller faster getting it up into space has turned into reality.

And all of these satellites that are going up into space unless they have optical links and even if they do have optical links at some point they got to come down to the ground.

That's where we is.

And.

This this partnership we have with Intelsat.

I think there are the largest operator why don't we felt largest too. Okay. This program. That's a commercial program. This Dod program, we won with Blue Halo scar.

Our initial pieces of 160 <unk> from our initial phase that's a military program. Both have open space that is so important.

That we are penetrating both commercial and <unk> markets with the software product, which has got which were first to market, which is giving us an incredible competitive advantage over anyone else, who we understand are three or four years away.

Our pipeline and our space business.

I think is the biggest in the company.

It is big.

And it's and we keep winning I think the book to Bill our book to Bill for the last two quarters is the one to one.

Three last year.

We're doing it's doing great, which is why I.

I've said I'm going to say it again, our space business.

Our overall space related business I think I said is $13 $14, 15% growth sticking with it.

And so all of the boats rise with the tide going up the tide is going up.

And I believe we have the prettiest both of the fleet right now.

With open space that open edge.

I'll leave it at that appreciate it thanks, Eric.

Our next question comes from the line of Joe Gomes with Noble capital.

Thank you and good evening.

Good day.

Yeah.

Just wanted to start.

Last quarter, you spent a good amount of time talking about staffing and the difficulties in hiring.

New staff in some of the challenges there I was wondering if you can just give us some of our update of more color.

On your success in staffing and where you might still be.

Challenged and adding staff.

Yes, Joe we are seeing some positive traction we had started to see that when we announced.

Our third quarter results and we have.

Winter trending positively with net adds.

Along the path that in our plan that we had expected now.

The traction has been good.

Especially with given some of the layoffs across the tech sector that has been beneficial for our company.

That's absolutely correct.

<unk> overall.

Definitely improving and trending in the right direction.

However.

In areas like hypersonic.

And.

Engineers and technicians getting very high security clearances, including in the manufacturing area.

It's very challenging still and let me tell you.

Why in my opinion.

Because some of these new space companies.

Where people are racing, who is going to be tomorrow first.

They are spending an incredible amount of money hiring as many people as they possibly can to beat somebody else Tomorrow's first with their space ship.

And while that's happening the primes.

And like you know the programs as well as on all of these programs because of geopolitical events are beginning or ramping up there trying to hire the same people too.

And so that is still a.

<unk>.

Three very significant challenge, let me tell you one of our primary ways.

But we're being successful.

One of the primary ways, we're being successful as we say if you come to <unk>, we will not stick you on this program and youll be on it for 40 years and Youll retire on it.

If you go to.

Our company, making a bomber submarine or space.

That's going to happen you come to <unk>.

We're going to work on these four different drilling programs are these five different hypersonic programs et cetera, and that seems to be a winning ticket with at least some people.

Okay.

Okay, great for that.

And then.

You made some of the acquisitions, obviously, you talked about them in the revenue contribution and I was wondering if maybe you could give us a little more color.

What kind of synergies you're seeing from these acquisitions and are they opening.

New opportunities that maybe you werent able to get into previously.

Now that they're part of the Credo family combined with some of the other things that Youre doing.

Are allowing you to maybe even broadened even further the opportunity set.

Yep.

Joe as you know, we're not an acquisitive company and as I've said and as I've said, we're not don't expect us to make any acquisitions for the foreseeable future of any size. We've got an incredible hand of cards right now we have to execute so to your question.

Each of the three.

Are doing incredible in their own way and let me be very specific.

So southern research.

As I mentioned, when we were acquiring them I believe there literally under contract or are familiar with every hypersonic program or initiative in the United States of America, and if im off I'm off by like 110th of 1%.

They were instrumental in credo sweating, Mark TB and incredible sweating made them and they are.

Going to be instrumental in us winning several others that are coming.

This is truly a one plus one equals three.

And this is truly I'm not what do you see people make acquisitions when they say revenue synergies like what the Hell is that okay. Well these are revenue synergies because.

Together, we are our capabilities, we're beating the problems and we have a strategic partner dianetics and with Dianetics and with Southern research we.

I think we are undefeated were undefeated.

Alright, CTG the microwave business.

I'm not going to get into program names, but just recently, we were informed of two new incredible opportunities multiple billions of dollars I believe we're slipping sole source on both.

We are reentering, the microwave area with a focus on space, because we know space.

And if you look at the funding documents and you look at missiles radars satellites values microwave a microwave electronics similar situation of satellites all the boats are rising with the tide.

<unk>, both with CPT is definitely going to rise with the tide.

And microwave businesses typically have some of the highest margins in the industry once they reached critical mass.

And the other one cosmic.

I think 99% of what they do with classified okay. Okay, but they are absolutely instrumental in our penetrating customers, we never had access to or could have access to with our open space on other products.

I was with him Deanna and I and the senior team work with them a few weeks ago.

And it is it is excellent.

Culturally.

So all three are our so far so good integrations have gone well most importantly zero key people have left none everybody appears to be happy.

We have we all have a common mission is to win.

Great. Thanks for those insights and thanks for taking the questions.

Thank you Sir.

Our next question comes from the line of Austin Muller with Canaccord Genuity.

Hi, good afternoon, Eric and Deanna.

Hey, good evening.

So just my first question here on Valkyrie, I know Theres a lot you can say, but if.

If you look at maybe versus Air Force does it seem like the Navy is getting more excited or more aggressive about about looking at valkyrie relative to some of your other customers just given you've got multiple generals out there that are saying that they may see.

Central Taiwan in Beijing in the $2025 to 2027 time timeline and you've already discussed the saturation of the of the runways and the need to be runway independent and of course that goes that doesn't have that so I mean, even even if it's not being used as a wingman. If we if we look at what's going on in <unk>.

Russia, and Ukraine, with Russia, using but you had 136.

It's a SaaS right enemy air defenses.

Clearly it would be valuable as a force multiplier and from that perspective right.

Yes, yes, and yes.

And to answer your question as I is as I alluded to a few minutes ago.

Over the last four months since we last chatted with you all.

There has been a significant movement and momentum.

Across the board, including the Air Force I mean look look at the and I I can only say what we have been approved to say what they've put out but take a look at what we're doing at eglin.

With the Air Force read closely some of the things that have come out about what we're doing what's happening down there why were down there.

It's.

To create OS that's very significant and the Air Force remains a very important part of our very important partner of ours on the Navy Slash Marine Corps they have now.

We've seen publicly they're moving forward with Valkyrie.

And I went through some of the reasons.

Why.

And.

I believe youre going to see over the over the balance of this year.

Significant additional activity with with the Marine Corps.

Routes, specifically relative to the Valkyrie.

Related to their there there.

Re emphasizing what their mission is and how they want to execute it in particular in the Pacific.

You hit.

The key points Buddy on why the Valkyrie is runway independent.

I I love it it's runway independent.

Very low cost orders of magnitude less than what anyone else has on a piece of paper.

And.

And momentum appears right now that would be moving in the right direction.

Okay. That's good to hear and then just my second question here.

On the last earnings call, we talked a lot about supply chain and so I was just wondering where are we on what you see in terms of supply chain lead times for both.

PGA is to support.

So part of your open space programs like the Big Intelsat and the Blue Halo contract and where are we at on.

On supply chain for the central nuclear missile program.

So supply chain delays, we are still seeing that six to 12 months turnaround on that.

<unk>.

We are continuing to see some disruption, which is one of the reasons. We've leaned forward on the inventory purchases to try to mitigate that as much as possible to not disrupt our delivery schedules.

Okay.

Okay and then just one last question. The Valkyrie is for this new block to production is that again being funded by year or is that being funded by customer milestone payments.

So initially on the long leads.

It's being funded by us, but we have.

As I opened up with my comments and I did it for a reason.

Certain of our key partner suppliers, they're working with us.

And so what that means is I believe that there will be my plan. The business plan is that as we build these there will be an alignment of customer funding customer orders as we build these so we will not have to make as much of a lean forward investment as.

We did with the initial 12.

Thats the plan based on customer input and the discussions and negotiations we've had with certain of the key I call them, the crippling the kryptonite suppliers and partners.

Okay. That's helpful to understand thanks for all the color on everything.

Thank you Sir.

That concludes today's question and answer session I would like to turn the call back to Eric Demarco for closing remarks.

Excellent. Thank you all for joining us today and I know this was longer than usual.

Because it was the end of the year. So it's been four months.

And we look forward to updating you again in a few months at the end of Q1. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly.

Lower Johan during Q&A, you can dial star one one.

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Good day and thank you for standing by welcome to the Kratos Defense and security solutions fourth quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one one on your telephone you will then hear.

An automated message advising your hand is raised.

To withdraw your question. Please press star one one again.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Marie Mendoza, Senior Vice President and General Counsel.

Thank you good.

Good afternoon, everyone and thank you for joining us for the Chris Defense and security solutions fourth quarter 2022 conference call.

With me today is Eric Demarco.

President and Chief Executive Officer, and Deanna Lund credits as executive Vice President and Chief Financial Officer.

Before we begin the substance of today's call I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release.

Market opportunities operational outlook and financial guidance during today's call.

Today's call will also include a discussion of non-GAAP financial measures as that term is designing regulation G.

non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.

<unk> at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.

I'll now turn the call over to Eric Demarco.

Thank you Marie.

Afternoon.

<unk> is positioned as the leading disruptive technology company <unk>.

Designing developing and fielding relevant systems product and solutions continues to progress.

Reflecting the trust our customers have in your company.

<unk>, along with our strategic partners vendors and suppliers are aligned and we're moving rapidly to address the evolving threats not with power points press releases in scripted publications.

But with real systems that we will discuss today.

We believe that 2023 will be a transition year for creators to greater revenue profit and cash flow.

With significant prior year investments in technology products and systems transitioning from development, R&D T&D or L. Rep to funded programs contracts or full rate production.

Which will result in increased revenue profit and operating cash flow for the company.

This includes today's announcement that <unk> be QM 177 unmanned aerial target drone is now entering full production.

And <unk> rocket systems business, where we have also made significant investments. We have now received two important new hypersonic system related program Awards Mayhem, and Mark TB with our partner Dianetics.

Under the TV contract, which we announced in November Credo, Cinemark TB team will work to develop an affordable and responsive hypersonic testbed platform and national hypersonic testing capability in an effort to dramatically increase our nation's capacity for ground and flight testing of hypersonic Tech.

Acknowledges and payloads.

Under the mayhem or expendable hypersonic multi mission ISR and strike program.

<unk> will support the Air Force Research Laboratory is development of an air breathing hypersonic weapons system.

<unk> has previously successfully developed and flown several hypersonic systems and our internally funded hypersonic investments in unique and proprietary systems in vehicles, including <unk> and <unk>, We believe will be disruptive game changers for our customers and our country.

And are beginning to pay dividends for credo stakeholders, including with these recent program awards.

<unk> rocket systems business recently successfully integrated and launched for ballistic missile targets with our government partner, which included the successful intercept test of a medium range ballistic missile target by a standard missile three block two way fired from the J S Mayo, marking the first time that a Japanese.

As mayor class destroyer as fired and SM three block two way.

We believe this successful test as representative of <unk> industry, leading position in the rocket system missile defense and ballistic missile defense areas and of creators as affordable relevant disruptive high technology rocket systems, and we expect <unk> rocket system business to be one of our fastest growing in 2023.

Driven by the increased global interest in air and missile Defense systems.

<unk> recently received the initial $30 million in funding on a new potential $250 million C. Five ISR production program and the microwave electronics area.

This program is classified tradeoffs.

<unk> microwave electronics business had a record backlog at year end, including a focus on missile Air Defense and radar systems, and we expect this business to be <unk>, one of our fastest growing for 2023.

Great Awesome <unk> ISR business is also expected to be one of our fastest growing in 2023 with expected growth coming from several missile Air defense radar and other programs, including GBS Sentinel with our prime strategic partner Northrop Grumman.

Other credo C. Five ISR business programs include high Mars Titan Patriot Fad.

<unk> S if pick in <unk>.

<unk> has recently been selected as the engine design team for the boom led collaboration on a new supersonic propulsion system called Symphony <unk>.

Sustainable and cost efficient engine for booms planned overtures supersonic airliner with symphony being a bespoke design leveraging proven technologies and materials to achieve optimal supersonic performance and efficiency.

Booms overture, New Symphony propulsion system is expected to operate at net zero carbon.

And meet chapter 14 noise levels, and when compared to derivative approaches <unk>.

On the Symphony program creators will utilize its supersonic engine design experience and expertise working under a standard commercial time and material type contract arrangements with no kratos investment.

The Credo Symphony team will include key cradles personnel and engineers that were directly involved in supporting the design of the F 119, and F 135 supersonic engines.

The power of the F 22, and the F 35.

<unk> is also supporting Rolls Royce on a B 52 re engine program with Rolls Royce and B 52, being certain of <unk>, most important strategic partners and a program.

Another growth area for <unk>, as new space and related launch vehicles and propulsion systems, where <unk> is currently under contract on multiple Dod government and commercial space system related programs.

Involving credo as hardware and products in support of some of the most technologically advanced propulsion systems in the world.

In the drone missile empowered munitions area <unk> have made important progress over the past several months, including technically delivering engines to a confidential customer for a yet to be announced UAS and receiving word from a customer regarding the future opportunity for up to thousands of.

<unk> engines, which we are jointly working to address and <unk> is forecast to be one of <unk> fastest growing businesses in 2023.

And satellite ground systems, which continue to gain market acceptance in both the national security and the commercial market areas.

Face and open edge is focused on for example, today satellite terminals consist of purpose built hardware components that are limited to performing a dedicated function for example, a satellite modem performing modulation and demodulation functions.

Kratos is open edge disrupts these limitations by employing software virtualized modems that can run on general purpose off the shelf compute devices and open edge adds far more power and versatility by enabling additional apps to run right up the network's edge.

<unk> open Ed uses a different model for operating at the edge Wombat employee standards already widely adopted across the larger global telecommunications industry to expand terminal functions and make them more flexible.

While satellite present, a complex technology challenge.

The goal of <unk> is open space and open edge is to help satellite operators make their services as mainstream as cellular communications and to capitalize on new services such as five G.

Which is why Intelsat will be one of tradeoffs as first partners to supplant traditional satellite terminals with Kratos is open edge.

I Hope you can see why here at <unk>, we're so excited about our satellite business and future prospects.

<unk> target drone business is performing well with major credo sole source programs, including the air Force's asset program, featuring the <unk> 167 target in the United States Navy <unk> program, featuring <unk> 177 target drone, where on both programs. We have recently received additional large.

Production Awards.

Additionally, and very importantly, the recent United States Navy SSAT 177 program award includes target drones or missions for both Australia, and Canada to new creative <unk> 177 target drone customers.

We are currently in pursuit of certain new domestic target drone opportunities that if we are successful could provide the next growth step function for the business.

Excuse me.

Yeah.

And the tactical drone area.

<unk> has recently received a contract for an initial two valkyrie from the United States Marines, along with sensors weapons systems payloads et cetera under the affordable Autonomous cooperative Killers program the.

<unk> and the future prospects of the sole source contract award to creators.

After the fact of which we believe certain of our customers are clearly beginning to take note.

<unk> Valkyrie is also a demonstrated low runway independent system, not requiring a runway to take off or land and Kratos is jet drones are also routinely ship launched all of which we believe are becoming more of a differentiator for <unk>.

It was also recently reported that the United States Air Force's 40th Flight Test Squadron and Eglin Air Force base has now taken ownership of Valkyrie aircraft with a valkyrie ability to autonomously operate over vast distances can be evaluated along with certain other objectives.

<unk> recently published photographs of <unk> Valkyrie flying with manned F 16 fighters and emphasizing the Valkyrie is rail launch runway independence and precision parachute recovery certain of which were approved for us to publish today.

None of Kratos as potential competitors have runway independent capability with the competitors competing systems. All currently having or plan to have landing gear to be dependent on a runway, which I believe will be completely untenable and appear conflict.

It was also recently reported that the U S government customer is working with multiple industry partners to integrate leading edge autonomy capabilities into the execute 58 day as <unk> Valkyrie and all Kratos drones have an open system architecture, meaning a variety of autonomous and AI cores can be integrated into.

Our system open system architecture is another competitive differentiator for <unk> versus our competitors as the customers do not want to be vendor locked.

The U S. Air Force has now stated the Skyboard and the Golden Horde Vanguard programs, both of which Kratos is involved in or transitioning to become programs of record and are expected to form the nucleolus of new combat systems, including collaborative combat aircraft or Ccas bolt <unk> Valkyrie in the May.

<unk> tactical jet drones have performed under the Skyboard program and the Golden Horde program has demonstrated how our group of unmanned aircraft or weapons can communicate with each other and operate collectively rather than singularly.

In addition to the relief that the recent Valkyrie contract Awards and this progress we are now in contract negotiations with another new customer on a new program for the acquisition of multiple Valkyrie, which we believe we will have under initial contract by the third quarter of this year.

Additionally, we are also now currently in contract negotiations with the customer were laid out to kratos valkyries valued at several tens of millions of dollars, which we also expect to be completed and under contract by the third quarter of this year.

And we have now also provided a credo valkyrie aircraft to an additional potential new customer for systems assessment and review and we are in discussions as to potential next steps, including purchasing leasing services type or other contractual arrangements.

And we are also continuing discussions with another potential new customer related to the acquisition of several valkyrie.

It is important to emphasize that with each of these valkyrie related opportunities that similar to <unk> target drone business. It is extremely important that in addition to initial Valkyrie aircraft acquisition that the flight recovery support and other system related equipment and infrastructure is also being acquired and dipped.

Lloyd by the customers as this upfront investment represents a customer commitment to the system, which returned to the customer has increased obviously by additional future execute 58 a.

Aircraft acquisitions.

We are currently performing under multiple Valkyrie related government funded contracts or programs with a key element, including the continued mission <unk> and Operationalization of the Credo execute 58, a system and we are working closely with our customers on the optimal funding utilization and contract.

<unk>, including the funding allocation between acquisition of aircraft system related infrastructure, <unk> and Operationalization in order to achieve the strategic strategic objective.

So now importantly keys to our strategic tactical drone strategic decision, making include <unk> as the only company that has affordable relevant systems flying now not just powerpoints concepts designs in press releases and Credo has an active production lines for jet drone aircraft today with Kratos having produce.

Over 1100 high performance unmanned jet target and tactical drone aircraft to date, representing another important differentiating competitive advantage for <unk> and another key reason why <unk> customers Trust US we have demonstrated that <unk> can and is delivering jet drones in quantity.

Now at real known price points.

So as a result of this progress.

We've now moved forward with our second serial production run of at least 12 of the next generation block of Kratos Valkyries.

This decision is important for several reasons, including having executed 58 systems available to immediately meet expected customer demand and supporting <unk> first to market leadership position.

We also want to ensure that there was no break in the current Valkyrie production line. So that we can continue to improve on the learning curve efficiencies and related declining cost experience. We have gained and achieved the target costs. We are now providing in proposals to potential customers.

The cost per pound of <unk> jet drone aircraft. We believe is currently far below our competitors.

I think we know it and they know it and we expect to continue to drive <unk> drone costs down significantly, including with the continued actual production of aircraft to the benefit of <unk> customers and to the to the detriment of certain competition, especially when the customers compare what it actually cost our competition.

To produce jet drone aircraft not what our competitors say are indicating their proposals.

As I mentioned this new group of at least 12 serial production Valkyries will be the next block upgrade version, including multiple enhancements based on the numerous successful flights. We are completed with our customers their input and feedback and also including certain enhancements or modifications that <unk> Ghost works has been for.

<unk>, including to specifically address certain potential competitive adversary threats, including in the Pacific.

I continue to believe that <unk> Air Gapped Ghost works entity is truly a crown jewel of Creatives and in my opinion, the national asset for our country.

<unk> affordability is a technology and <unk> Ghost works is by far the clear industry leader in high performance unmanned aerial jet powered aircraft and systems and the real live application of relevant cost effective digital engineering practices.

So to wrap up based on our backlog our significant new program awards on $10 billion opportunity pipeline, we expect an up and to the right future organic growth trajectory for <unk> with no currently planned acquisitions as we focus on execution, obtaining and retaining qualified personnel.

Which remains our primary operational challenge and continuing to bid on and win new program opportunities.

Anna.

Thank you Eric and good afternoon as we have included a detailed summary of the fourth quarter and full year financial performance for FY 'twenty, two and the first quarter and full year 2003 financial guidance in the press release, we published earlier today I will focus on the highlights of my remarks today.

Revenues for the fourth quarter were $249 3 million upfront $211 6 million in the fourth quarter of 'twenty, one, reflecting a 17, 8% increase.

Excluding the impact of the FRE cosmic and CTC acquisition, which contributed $29 1 million in revenues in the fourth quarter of 2002, <unk> revenues grew organically four 1%.

Fiscal year 'twenty to revenues of $898 3 million increased $86 8 million from 811 5 million or 10, 7% increase.

Fiscal 'twenty two excluding the impact of the acquisitions, which contributed revenues of $95 5 million during the year.

Excluding the impact of the legacy training services business, which was down $21 5 million from $40 1 million compared to FY 'twenty, one revenues grew organically one 7%.

Included in operating cash flows for fiscal 'twenty, two is approximately $9 million in investments and nonrecurring engineering costs for new rocket systems, hypersonic and related products, including <unk> and <unk> systems, including us directly related to certain received and expected new contract.

Words in the hypersonic system area.

70% revenues from fixed price contracts, 24% from cost plus type contracts and 6% related to time and material contracts.

Revenues generated from contracts with the U S. Federal government during the quarter were approximately 70%, including revenues generated from contracts with the Dod.

<unk> federal government agencies.

And that new contract.

In fiscal 'twenty, two we generated 11% of revenues from commercial customers and 19% from foreign customers now moving on to financial guidance.

Our first quarter and full year 2003 financial guidance, we provided today, including our current forecast and business mix.

Our assumptions related to the expected continued impact of challenges related to obtaining and retaining qualified personnel supply chain disruptions inflation and related expected costs and price increases that are currently and expected to continue impacting both the industry and creatives.

About 2022 and in the first quarter of 2023 greatest has experienced continued impact from supply chain disruptions and cleaning constant crates disparate materials supplies transportation and utilities and fulfillment delays, causing increase in costs and inefficiencies related to manufacturing including in our.

Indirect manufacturing rate.

As our contract mix is predominantly firm fixed price we are required to absorb these additional costs until the period of performance is completed on existing backlog and new contracts are negotiated with current pricing.

Accordingly, as we transition to new contracts for 2023, we expect margin rates to continue to be lower in the first half of the year and superior performance on existing backlog is executed with an expectation of margin improvement in the second half of this year.

Mix of newer recently priced contracts are expected to increase.

Our revenue guidance range for the first quarter of 'twenty three reflects a 12% to 17% increase over the first quarter of 2002, and our annual revenue guidance for fiscal 'twenty three reflects a 9% to 11% increase over fiscal 'twenty two.

Consistent with what we have stated on our previous earnings calls our forecasted performance of our tactical unmanned aerial systems business. We remain conservative and will only include contract awards, we have received.

With respect to which we are in final negotiations with the customers.

Accordingly, including in our guidance range today is relatively flat revenue of approximately 220 $225 million or unmanned systems division as compared to FY 'twenty two.

This range includes an estimated increase in valkyrie related revenues from $32 million in FY 'twenty two to approximately $43 million in FY2023.

The recent U S Navy Slash Marine Corps contract.

The FY 'twenty revenue guidance range for kgs of $760 to $775 million with let's say, 12% to 14% increase from FY 'twenty two revenues representing forecasted revenue growth across every business unit in kgs with the most notable forecasted growth in our space and satellite.

C five ISR turbine microwave products and hypersonic related business in rate base.

Based upon funding production delivery and execution schedules second half 'twenty three revenues are expected to ramp MPC sequentially greater than the first half of 'twenty three with margins expected to expand in the second half of the year on increased revenue volumes are based on the expected mix of revenues, including new fixed price contract.

Which include more recent cost estimates.

Operating cash flows are expected to be stronger in the second half of the year as well driven by the expected expansion in margins and the expected conversion of inventory sales from FY 'twenty two in the first half of 2023 and based upon estimated milestone payment schedules.

Mike.

Very good.

Deanna.

We will turn it over to the moderator.

For any questions.

As a reminder to ask a question. Please press star one one on your telephone.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Mike Crawford with B Riley.

Thank you I have a few quick questions. So one what happened operationally in Oklahoma after this.

Second 12, Valkyrie I guess, that's a block to Valkyrie production spiral.

Particularly if you get.

These additional orders contracts you're supposed to have by Q3 like what would be a fee.

Full re one production line, one shift continuous flow of Valkyrie production down there.

Okay. So under the current construct Mike because if you recall the facility has a base facility and then there are contiguous.

Additional facilities that we have options.

<unk>.

Under the current configuration.

Without expanding anymore okay.

And assuming the similar number of tactical fire Jets and fire just that we're building in Oklahoma, because we're building those there to now we can do annually.

35 to 45 drones a year in the current configuration.

We can if we exercise the next option.

And if we haven't if we do that and.

We can we can easily double it.

Very quickly.

Okay.

Thank you and just regarding other.

Competitors.

Maybe not as affordable aircrafts, but.

Uh huh.

Like it doesn't look like it goes back that might be out there today.

Mike I haven't seen.

Or read anything on the goes back in.

Six months or more.

So I'm not sure what's going on.

With that someone sent me something.

A month or two ago and it said that it was it was not going to be considered in the U S.

That's something I've read.

I don't I don't really know Buddy.

Okay and then.

Uh huh.

Real quick what should we be looking for in the administration's budget request regarding getting these former vanguard programs into programs of record.

And next generation air dominance or CCA.

Is there anything specific relating to valkyrie that we should be looking for or are you hoping to see.

Yes so.

In my opinion based on most recently with four Star Chief of staff Brown said last week.

He said that when the 24 budget is submitted and now I understand thats coming in the first or second week of March that the public we should all see a significant increase and a significant commitment.

To Ccas he was talking collaborative combat aircraft.

And in that interview that he did he talked about a family of them of all different types and sizes and cost points. So based on that I think that we should all see.

Significant additional funding based on what the chief of staff set.

Okay excellent. Thank you very much.

Yes.

Our next question comes from the line of Ken Herbert with RBC capital markets.

Yes, hi, good afternoon, Eric and Deanna.

Hi, Kevin.

Hey, Eric I wanted to follow up on your comments on on Valkyrie cost it sounds like your <unk>.

Pushing a lot to take cost out can you can you maybe help with some if you think about the second block versus the first block.

How much maybe is cost down and.

How much of that are you able to keep versus how much of the lower costs are you are you sharing with your customer.

Yes.

So as you can imagine in the past couple of years because of what's going on with inflation and supply chain and labor costs.

<unk> gone up including the cost of our.

Drones, that's been happening will the learning curve on the production rate has been coming.

Down.

So we are expecting and.

And we've seen this with our target drones from development to L. Rep to production. So we have all the experience in the historical data on these production learning curves on the jet drones.

We expect.

Not to say it will not be a significant drop with this 12.

But it will be a drop in the knee in the curve.

Consider.

Considering that we continue to do this will come in the next block when and if we decide to do that and then there would be a significant knee in the curve now and.

Customers are either learning that or they're going to learn it real soon in some instances.

And we're really going to push this as youre alluding to is a competitive advantage with actual costs not forecast that are based in Switzerland.

No. That's helpful. And then as you think about either now or with with block III. If you eventually go there.

As the Valkyrie profitable on a per unit basis, or what's it take maybe to get to that point.

On the most recent contract awards that absolutely is profitable absolutely.

Great.

That's very helpful. Just one final question.

Can you maybe.

Great work with the Navy it sounds like and what's the release you put out today. It sounds like there's a lot happening in terms of flight test activity and certainly public discussion around the requirements within CCA in other areas is multiplying whats been the latest feedback you've been getting from your Air Force custom.

And is there any color you can share just around specific within the tactical portfolio level.

The level of enthusiasm and maybe how they're viewing your efforts and then the valkyrie in particular.

Yes, so Mike I'm going to answer the question not specific to the Air Force I cannot as I've talked about before.

The things have really been buttoned up here, they've really been buttoned up so my comments are going to be.

General to all of our existing customers and the customers that I said today I expect to have under contract in the second half of this year.

Here's the feedback you are the only guys that have a jet aircraft flying today.

The propeller claims they have been great to kill terrorists Theyre, all going to get shut down they're not survivable.

Tied to a runway as an absolute nonstarter irrespective of what people say, it's a nonstarter obviously the runways are all targeted and we have the information no no the numbers alright.

That.

Quantities matter, we've learned that in the last 12 months in the Ukraine.

Quantities matter and the only way you can achieve quantities is if you have affordability.

And then the last one Mike is back to the Ukraine.

The Russians have been using their <unk> 57, which is equivalent to RF 22 F 35, they've been using their kids all when they're a vanguard hypersonic weapons, so they've been using their exquisite to no or little effect on the battlefield, because they are too expensive and they are not enough of them.

And I think a lot of people are rethinking our mix of Hum exquisite one exquisite versus for the same cost 100 jet drones.

That's the feedback we're getting and I think a lot of that is tying into.

The progress we've made since our last call.

Great. Thanks, Eric.

Okay. Thanks, Ken.

Okay.

Our next question comes from Seth Sigman with Jpmorgan.

Great.

Okay. Thanks, and good morning, good evening Alright.

A portion of it.

Hi.

So I wanted to ask about.

I wanted to make sure I got this right and thank you for providing the segment guidance.

The <unk>.

Unmanned segment was to be.

Flattish in 'twenty three.

Okay.

<unk> to 'twenty.

Correct.

Last one to $2 2500, 25, right and so with some growth in the.

Small amount of growth in the tactical drones.

What's happening I'm, sorry, yes on the types of what's happening with the target drones in 'twenty three.

Yes so.

We have there is approximately a 5% growth assumed in the estimate.

Okay for the target trial.

Target John Yes.

Okay.

The tactical drones or down or the tactical drone was going up from 32% to 43 or was that down from.

It's actually down to that.

Valkyrie related tactical drones is 32.

From 30 to $2 43, but there was a headwind of $15 million, which is a non.

Okay.

Okay Tactical accounting, yes.

Understood understood.

Great.

That's helpful.

And then just I guess, if you think about these orders.

That are coming up hopefully in the third quarter of this year and you think about kind of the cycle time for those and then how those get booked.

Eventually as revenue and earnings should we think about that as something that's going to drive.

Is that something that drives 2024.

And does it encompass all.

All of the kind of second line I think you are building does it kind of take you into the third lot.

How should we kind of think about.

What those quantities might be.

Yes.

So Seth I went into some detail on.

The infrastructure the launch equipment.

The flight equipment, the recovery equipment, the sustainment equipment.

That to operate these jet drones.

And how the customers now are starting to look at that and they are acquiring that from us as very similar.

To the strategic asset we have in our target drone systems getting that infrastructure out. There. In addition to that I went into some detail again on purpose.

The customers are now funding significantly the mission <unk> and Operationalization of the aircraft.

All of these obviously strategically are very very important that they are making the investment in the infrastructure and their mission <unk> and operational authorizing the aircrafts. So please keep that in mind because as these contracts come it is not totally clear to me yet how much of it is going to be for aircrafts and how much of it is going to be.

<unk> four.

The support equipment, the large equipment the mission ovation the authorization.

So with that being said Diana go back on if Theyre percent complete of the aircraft is done how thats booked yes, yes, so similar to what we.

Yeah.

What we've discussed it when we started the original top line to a.

They start in as capital expenditures and when there is a contract that is.

Boarded and it is related to an aircraft sale then whatever.

Value or however, complete we are on that system would be transferred from capital to inventory and then that would determine the percent complete from a revenue recognition perspective.

50% complete on an aircraft that would transfer over and then 50% of the revenue related to that aircraft would be recorded at the time the contract is awarded.

Right got it got it okay. Thanks, and then just to wrap up on this point I assume in.

<unk> and kind of support equipment and setting up an infrastructure that's related.

These aircrafts I imagine.

Another area, where you feel like creators has an advantage.

The competition both in terms of where you are in that process.

And in terms of cost.

Perhaps if you could see me smiling the answer is absolutely yes.

As I've said.

We're the only guy that is anything flowing.

The only one that does runway independence, we're the only one really that as jet high performance drums.

This is finally it appears to be trending in our competitive advantage areas.

Okay. Okay.

Okay.

Excellent.

I'll pass it on thanks very much.

Okay. Thanks.

Our next question comes from the line of Noah <unk> with Goldman Sachs.

Hello, everyone.

Hi.

Right.

Eric can you just.

Tell us how many.

Valkyrie unit deliveries are assumed in the 'twenty three outlook.

Sure.

What do you think that does in 2024.

Right.

Yes go ahead I'll have Dan answer because there are there are a 30% complete yes that was a percent complete so but in total the total revenue base is based on about three to four aircraft.

This year.

Correct Thats in the forecast that's in the forecast.

What do you think that looks like next year.

No.

No as you know a gunshot and I don't want to get ahead of it anymore I don't want to do that.

Sure.

I am just ghansham.

You have a release out.

About Valkyrie flight.

Flight testing capability evolution.

<unk> refers to a focus on experimentation.

I guess.

Why why is the focus on experimentation.

It felt like you had.

Establishing <unk> Prada.

Product with capability that the customer had said they wanted.

Why is there still so much evolution and experimentation at this point in the lifecycle of that product versus just buying it.

Market My opinion, Eric dependent.

Because this is brand new and it's not replacing anything.

It's brand new.

And as one of the pictures, we were approved to put out today.

How close that F 16 is flying to the Kratos Valkyrie.

And I believe its that comfort level. This is my opinion the comfort level.

Yes, because it's new.

And it's developing and getting comfortable with that that concept of.

Of operations.

That's that's why that I believe is the answer to my opinion, yes.

So to your question yes.

That makes sense.

And then.

I guess you laid out the pieces of unmanned for the year with 5% growth.

In target.

Then I guess I guess tactical is essentially flat with some <unk>.

Valkyrie growth offset by the $15 million.

That's out.

What whats the status of tactical that's not Valkyrie.

Over the years Theres been a discussion of.

Half a dozen other efforts.

Where are those.

So I have to I have to preface this Noah with.

The secretary of the Air Force a year ago.

Ed.

All coming out with the CCA programs and Theyre going to be highly classified.

They're highly classified.

He also said.

That all or virtually all I forget his quote of the current and existing drone programs.

We'll be feeders and will be folded into these classified programs.

In other words, putting a classified bubble over virtually.

In my prepared remarks today.

I went out of my way to specifically say that we are making progress with valkyrie.

Mako.

Tactical fire jet or air Wolf.

Those are the areas, we're making progress in that I can talk about.

Got it.

Okay.

And then just lastly, we'd like to ask about.

Profitability margins cash flow with.

The margins down last year.

If I sort of zoom out.

We look at margins over time cash over time.

Yes.

Many of the last several years.

GAAP net income that's breakeven or negative.

We add back the DNA, we add back the stock comp on the cash flow statement.

Then there is working capital Thats negative and cash flow that's negative.

Recognizing a lot of your efforts are early stage. There is a lot of potential long term growth you have to invest in a lot of that effort.

How much longer does the.

The cash flow statement it looked like that I mean, how long does it take before there's a consistently.

Positive GAAP net margin consistently positive cash flow that Curtis.

Yeah, clearly with 2023 is we're expecting to return to cash flow generation for free cash flow.

Albeit at a lower level and thats, because we are still making some investments and there is still.

As we transition from development to production, we expect that to increase there.

2022 was.

And we're still seeing some of that in the first half of 'twenty three.

We expect that to start converting through the cash cycle and the revenue cycle by the second half of 'twenty three.

The first half of 'twenty, three it's going to be.

We're still going to see that that working capital use but we do expect that to turn around in 'twenty, three and expect that to improve as we as we move out of 'twenty into 'twenty four.

No.

I opened up saying I believe 23 is going to be the transition year.

Because we have a number of programs not all of them as Deanna said, but on a number we've left development, where either enel revpar were in full rate production.

And so 23 is going to I believe is going to be the year, where we are returning to sustained.

Revenue growth sustained.

<unk> growth.

Positive cash flow and sustained positive cash flow growth.

I believe 20 of failures.

The year.

Can lay that out programmatically.

Okay great.

Great. Thanks, so much for all the detail I appreciate it.

Thank you. Thank you.

Our next question comes from Greg Konrad with Jefferies.

Good evening.

Hi, Greg Hey, Greg Good afternoon.

<unk>, how much does valkyrie contribute to it and maybe how has that trended over the past year.

[laughter].

That's a loaded a loaded question right.

On the.

On the on the first part of your question.

As I said in my comments.

We are under funded.

Government.

Contracts.

On multiple <unk>.

Programs.

Related to Valkyrie.

Multiple.

More than three more than for more on multiple funded.

We expect that.

To increase.

Between now and the end of this year.

Because as I said in the second half of this year. We're in contract negotiations now I wish I could tell you we get them done in Q2, I don't think so I think we'll get them done in Q3.

On a few others.

So that's going to continue to expand.

I'm not going to and I'm, sorry, we're not going to comment.

On what we expect and what we have in our in our pipeline.

It ties into to the other.

Ken's question and Mike's question.

Noah's question Ghansham.

Ghansham I'm not going to get ahead of myself.

We've put together our 2023 plan.

With an absolute minimum.

Of tactical revenue.

Absolute minimal, but every other business in the company is firing on all cylinders everyone.

Our space business is.

<unk> great.

Our engine business is doing great I can keep going.

And so we're going to let them all do great theyre going to drive a 10% growth or more.

The tactical stuff happens.

Then we will we'll put it in the numbers.

I mean, and I guess, just a follow up I mean, you mentioned all of the businesses that are kind of among the fastest grower and you've kind of talked about growth being up into the right.

And then just based on kind of your opportunity commentary I mean would you expect.

Unmanned to kind of lead the growth as you get through.

Through 2023, and Thats kind of the biggest driver of growth being up into the right as you go forward.

Okay.

If if we say, okay, if things turn out the way I believe theyre going to turn out yes.

But that's not what we're going to forecast until we.

Either signed the contract.

We are in the Red zone.

And then maybe just last question none.

<unk> related just thinking about the space.

You mentioned open space and kind of how that played out in 2022, I think a lot of the larger contracts that you talked about have been awarded and we've seen a lot of these constellation kind of move forward.

Are you seeing in that pipeline in terms of awards as you think about 2023 and kind of ground stations overall now.

Now that question I'll answer that question.

That's right.

<unk>.

What is happening in the space area commercially and National security.

Is unprecedented.

The technological vision.

Of smaller faster getting it up into space has turned into reality.

And all of these satellites that are going up into space unless they have optical links and even if they do have optical links at some point they got to come down to the ground and that's where we is.

And.

This this partnership we have with Intelsat.

I think theres a largest operator why don't we felt largest too. Okay. This program. That's a commercial program. This Dod program, we won with Blue Halo scar.

Our initial pieces of 160 <unk> from our initial phase that the military program. Both have open space that is so important.

Our pipeline and our space business.

I think is the biggest in the company.

It is big.

And it's and we keep winning I think the book to Bill our book to Bill for the last few quarters is the one to one.

Three last year.

We're doing it's doing great, which is why I.

I've said I'm going to say it again our space.

Our overall space related business I think I said is $13 $14, 15% growth sticking with it.

And so all of the boats rise with the tide going up the tide is going up.

And I believe we have the prettiest both of the fleet right now.

With open space on open edge.

I'll leave it at that appreciate it thanks, Eric.

Our next question comes from the line of Joe Gomes with Noble capital.

Thank you and good evening.

Good day.

Just wanted to start.

Last quarter, you spent a good amount of time talking about staffing and the difficulties in hiring.

New staff in some of the challenges there I was wondering if you can just give us some of our update of more color.

On your success in staffing and where you might still be.

Challenged and adding staff.

Yes, Joe we are seeing some positive traction we had started to see that when we announced.

Our third quarter results and we have.

Winter trending positively with net adds.

Along the path that in our plan that we had expected now.

The traction has been good.

Especially with given some of the layoffs across the tech sector that has been beneficial for our company.

That's absolutely correct.

<unk> overall.

Definitely improving and trending in the right direction. Okay. However.

In areas like hypersonic.

And.

Engineers and technicians getting very high security clearances, including in the manufacturing area.

It's very challenging still and let me tell you.

Why in my opinion, it's because some of these new space companies.

Where people are racing, who is going to be tomorrow first.

They are spending an incredible amount of money hiring as many people as they possibly can to beat somebody else Tomorrow's first with their space ship.

And while that's happening the primes.

And I can you know the programs as well as on all of these programs because of geopolitical events are beginning or ramping up there trying to hire the same people too.

And so that is still a.

<unk>.

Three very significant challenge, let me tell you one of our primary ways.

But we're being successful.

One of the primary ways, we're being successful as we say if you come to <unk>, we will not stick you on this program and youll be on it for 40 years and Youll retire on it.

Which if you go to.

Our company, making a bomber a submarine or space.

That's going to happen you come to <unk>.

We're going to work on these four different drilling programs are these five different hypersonic programs et cetera, and that seems to be a winning ticket with at least some people.

Okay.

Okay, great for that.

And then.

You made some of the acquisitions, obviously, you talk about them in there and the revenue contribution and I was wondering if maybe you could give us a little more color.

What kind of synergies you're seeing from these acquisitions and are they opening.

New opportunities that maybe you werent able to get into previously.

Now that they're part of the Credo family combined with some of the other things that Youre doing.

Are allowing you to maybe even brought in even further the opportunity set.

Yep.

Joe as you know, we're not an acquisitive company and as I've as I've said, we're not don't expect us to make any acquisitions for the foreseeable future of any size. We've got an incredible hand of cards right now we have to execute so to your question.

Each of the three.

Are doing incredible in their own way and let me be very specific.

So southern research.

As I mentioned, when we were acquiring them I believe they are literally under contract or are familiar with every hypersonic program or initiative in the United States of America lip balm off I'm off by like 110th of 1%.

Alright.

Instrumental in Credo, sweating, Mark TV and incredible sweating made them and they are going to be instrumental in us winning several others that are coming.

This is truly a one plus one equals three.

And this is truly I'm not one that you see people make acquisitions when they say revenue synergies like what the Hell is that okay. Well these are revenue synergies because.

Together, we are our capabilities, we're beating the problems and we have a strategic partner dianetics and with Dianetics and with Southern research we.

<unk> I think we are undefeated were undefeated.

Alright, CTG the microwave business.

I'm not going to get into program names, but just recently, we were informed of two new incredible opportunities multiple billions of dollars I believe where sotheby's sole source on both.

We are reentering, the microwave area with a focus on space, because we know space.

And if you look at the funding documents and you look at missiles radars and satellites values microwave a microwave electronics similar situation of satellites all the boats are rising with the tide.

<unk>, both with CPT is definitely going to rise with the tide.

And microwave businesses typically have some of the hard highest margins in the industry once they reach critical mass.

And the other one cosmic.

I was with him Deanna and I and the senior team work with them a few weeks ago.

And it is it is excellent.

Culturally.

So all three are our so far so good integrations have gone well most importantly zero key people have left none everybody appears to be happy.

We have we all have a common mission is to win.

Great. Thanks for those insights and thanks for taking the questions.

Thank you Sir.

Our next question comes from the line of Austin Muller with Canaccord Genuity.

Hi, good afternoon, Eric and Deanna.

Hey, good evening.

So just my first question here on Valkyrie, I know Theres a lot you can say, but if.

If you look at Navy versus Air Force does it seem like the Navy is getting more excited or more aggressive about about looking at valkyrie relative to some of your other customers just given you've got multiple generals out there that are saying that they may see.

Potential Taiwan in Beijing in the 2025% to 2027 time timeline and you've already discussed the saturation of the of the runways and the need to be one way independent and of course that goes that doesn't have that so I mean, even even if it's not being used as a wingman. If we if we look at what's going on in <unk>.

Russia, and Ukraine, with Russia, using but you had 136.

It's a SaaS right enemy air defenses.

Clearly it would be valuable as a force multiplier and from that perspective right.

Yes, yes, and yes.

And to.

To answer your question as I is as I alluded to a few minutes ago.

Over the last four months since we last chatted with you all.

There has been a significant movement and momentum across.

Across the board, including the Air Force I mean look look at PMI.

Can only say what we've been approved to say, what they've put out but take a look at what we're doing at Aegon.

With the Air Force read closely some of the things that have come out about what we're doing what's happening down there why were down there.

It's.

Great Thats very significant in the Air Force remains a very important part of our very important partner of ours on the Navy Slash Marine Corps they have now.

We've seen publicly they're moving forward with Valkyrie.

And I went through some of the reasons.

Why.

And.

I believe youre going to see over the over the balance of this year.

Significant additional activity with with the Marine Corps.

Routes, specifically relative to the Valkyrie.

Related to their they're there.

Re emphasizing what their mission is and how they want to execute it in particular in the Pacific.

You hit.

The key point Buddy on why the Valkyrie is runway independent.

I love it it's runway independent.

Very low cost orders of magnitude less than what anyone else has on a piece of paper.

And.

And momentum appears right now that would be moving in the right direction.

Okay. That's good to hear and then just my second question here.

On the last earnings call, we talked a lot about supply chain and so I was just wondering where are we on what you see in terms of supply chain lead times for both.

PGA is to support.

So for your open space programs like the Big Intelsat and the Blue Halo contract and where are we at on.

On supply chain for the central nuclear missile program.

So supply chain delays, we are still seeing that six to 12 months turnaround on that.

<unk>.

Okay.

Okay and then just one last question. The Valkyrie is for this new block to production is that again being funded by year or is that being funded by customer milestone payments.

So initially on the long leads.

It's being funded by us, but we have.

As I opened up with my comments and I did it for a reason.

Certain of our key partner suppliers, they're working with us.

We did with the initial 12.

Thats the plan based on customer input and the discussions and negotiations we've had with certain of the key I call them, the crippling the kryptonite suppliers and partners.

Okay. That's helpful to understand thanks for all the color on everything.

Thank you Sir.

That concludes today's question and answer session I would like to turn the call back to Eric Demarco for closing remarks.

Excellent. Thank you all for joining us today and I know this was longer than usual.

Because it was the end of the year. So it's been four months.

And we look forward to updating you again in a few months at the end of Q1. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2022 Kratos Defense and Security Solutions Inc Earnings Call

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