Kratos Defense & Security Solutions Inc. Q1 2023 Earnings Call
Speaker 1: Good day and thank you for standing by. Welcome to the Kratos Defense and Security Solutions First Quarter 2023 Earnings Conference call. At this time all participants are not listening only mode.
Speaker 1: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today.
Speaker 2: Marie Mendoza, Senior Vice President and General Counsel. Thank you. Good afternoon, everyone, and thank you for joining us for the Critics' Defense and Security Solutions First Quarter 2023 Conference Call.
Speaker 2: With me today is Eric DeMarco, Kratos' president and chief executive officer, Andiana Lund, Kratos' executive vice president and chief financial officer.
Speaker 2: Before we begin the substance of today's call, I'd like everyone to please take notes of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major assurgencies and risks inherent in the forward-looking statements that we will make this afternoon.
Speaker 2: Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential 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 defined in regulation G. Non- GAAP financial measures should not be considered in isolation from or as a substitute.
Speaker 3: Crane was completed Q1 on tracks 2023 as a transition year.
Speaker 3: to expect it to sustain future year-over-year organic growth, increasing profit margins and cash flow. As our company realizes the benefits of the investments we have made, and we transition from development to production and delivery in certain areas.
Speaker 3: to newer, more recent contract award-related revenues, where we negotiated higher rates and costs with our customers, as included in our Q1 and last 12-month 1.1-1 book-to-build ratio. And though the supply chain still has challenges, we have begun to see some stabilization and reduction in lead times and pricing, which is also providing confidence in our future forecast. Highlights since our last report to you include the 2024 DOD budget request was released.
Speaker 3: Along importantly, with the future years defense program or fight-up, are also referred to as the five-year defense spend plan, both which include new or increased funding and growth, including in the space and satellite, hypersonic, missile system and defense.
Speaker 3: low cost tactical just drones.
Speaker 3: where Ghostworks went from a clean sheet of paper to successful first flight in 30 months and additional new systems that Cratos Ghostworks is currently working on. Accordingly, we believe that if a competitor elected to enter this class of affordable tactical jet drones, they're at least three to four years away from first flight and who knows what cost to the customer. Since our last report to you about the U.S. Navy and the Marine Corps have indicated their increased prioritization for high performance jet drones, including what the Navy reportedly stating that they envision up to 60% of the future Navy air wing being comprised of drones.
Speaker 3: So it's now clear that the Pentagon is planning a future that includes significant numbers of affordable high-performance jet aircraft or systems, and the funding is now being requested to achieve this vision as reflected in the 24-budget request in the fight-up.
Speaker 3: Since our last report to you, Kratos has received additional tactical drone contract awards.
Speaker 3: including us related to Cradle's Valpory, and we are in negotiations for additional contract awards, which we expect to receive in the coming months.
Speaker 3: Since our last report, it was reported that one mission, the Marine Corps's Valcreas, are focusing on, include electronic warfare effects in conjunction with the F-35 and certain assault support platforms, all under the penetrating, affordable, autonomous, collaborative killer program. Create else. C greatest is also các
Speaker 3: received an additional USMC Valkyrie contract award related to sensor payloads, mission system and subsystem integration.
Speaker 3: Crados is currently flying and has been flying for several years under U.S. government fund to bond tracks here in the United States. At the Oklahoma Burns flat range facility, Crados' unmanned systems that are of ghost works can fly our drones and exercise systems, including new yet-to-be-disclosed systems that Crados' ghost works is focused on and that the competition or others know nothing about. For example, just this week Crados had a very successful test event at the Burns flat test range with the new system, which I am confident that neither our competition or adversaries...
Speaker 3: aware of in any way. We are completing the first serial production run of 12 Block 1 boundaries in Oklahoma City.
Speaker 3: We have begun the second production run of 12 additional Block II Valkyries, and it now looks like at least half of the Block IIs will be Block IIBs, incorporating a new additional capability based on very recent specific customer input.
Speaker 3: Since our last support to you, Creative System Command Systems was awarded a shared $400 million ceiling IDIQ contract for research and development for the Advanced Aerospace Systems Technology Research Program.
Speaker 3: This contract has multiple awardees with the primary objective of the program to conduct research toward the development, demonstration, integration, and transition of new aerospace vehicle technologies, designs, and integrated systems that will provide advanced capabilities to the Department of the Air Force.
Speaker 3: The Advanced Aerospace Systems Technology Program Contract Award is yet another example of cradles and our ghost works. Continuing to have success, competing for and winning certain of the most advanced capability opportunities for U.S. national security.
Speaker 3: Based on information included in the 2024 DoD funding documents in the FITA, statements made by the government customer representatives, additional information we have received, and the progress we've continued to make, we remain confident in the future success of Kratos' tactical drone business.
Speaker 3: Gratos' target drone business is performing well, driven by cradosis producing and delivering what we consider to be the highest performance threat representative jet drone systems in the world with our primary customers including the United States Navy Air Force and Army.
Speaker 3: The global recapitalization of strategic weapon systems and the requirement to test and train on these weapon systems is providing a strong macro-level catalyst for Kratos' target drone business. Kratos' space satellite and cyber business, our company's largest, continues to receive new program awards, including with Kratos' first-to-market, virtualized and software-based open space family of satellite ground communication systems. I encourage you to review today's release on recent milestones.
Speaker 3: open space, which program can ultimately be worth several hundred million dollars to creatives.
Speaker 3: We believe that this is another representative example of Kratos' disruptive, technology-based, first-to-market strategy success and our leadership position with our open space system.
Speaker 3: The days of the ground satellite segment, trailing space capabilities are ending.
Speaker 3: with the new wave of ground system advances, including Kratos' open space, that can support multi-orbit constellations and the specifications that both 5G and the new generation of high bandwidth satellites require, and also the interoperability needed.
Speaker 3: for the new breed of flexible low-orbit constellations to achieve scale and broad market growth.
Speaker 3: The ground system segment ecosystem.
Speaker 3: including electronically steerable antenna and modem companies, to integrators and network providers, are all leaving legacy siloed standalone ground systems.
Speaker 3: and transitioning to software defined and based virtualized architectures.
Speaker 3: which is exactly where Kratos' first-to-market open space systems are positioned and why we are so excited about Kratos' space and satellite business going forward.
Speaker 3: There are thousands of satellites planned to be placed into orbit into the future, and this is expected to be a key macro and industry catalyst for Kratos' space in satellite business, along with our open space software suite.
Speaker 3: In Cratosis C5 ISR business, the Sentinel program, with Cratosis Key Strategic Partner, the Northrop Grumman, is expected to be one of Cratosis' largest, fastest growing, and most important programs for the foreseeable future.
Speaker 3: Additional well-funded priority programs in Kratos' C5ISR business.
Speaker 3: include SCAR, Space Control Network, Patriot, HIMARS, FAD, IBCS, which has now received full rate production, SHORAD, Enduring Shield, Titan, certain other space and satellite programs, and counter UAS programs and systems.
Speaker 3: which are very relevant in what's going on in the world today. Kratos' turbine technology has continued its outstanding performance in Q1, with KTT being one of Kratos' fastest growing and most profitable businesses, with the multi-billion dollar B-52 re-engine program being one of our most important.
Speaker 3: Additional current growth areas for KTT include supersonic and hypersonic propulsion systems and space and launch related propulsion systems.
Speaker 3: Also, the significant increased funding in the FY-24 budget request and fight-up for drones and also missiles and powered munitions.
Speaker 3: We expect to be a macro industry growth opportunity and driver for KTT and our engine business. Kratos' rocket systems business is also expecting future growth, including as related to our products, technologies, and systems for hypersonic missile defense target.
Speaker 3: 24 months, is that it's strongest in our history, and is representative of Kratos' trusted, disruptive position as they go to rapid, critical launch and other related system provider.
Speaker 3: Kratos is internally funded and soon to be first to market Zeus propulsion and Aranese hypersonic systems remain on schedule and we are far enough along now to disclose to you an additional Kratos vehicle, Dark Fury, now also scheduled for flight next year.
Speaker 3: Prano's microwave electronics business which supports space, missile, missile defense, radar, communication and other systems. Also started off 2023 well, continues to have record near record backlogs and is forecasting future growth and increasing margins.
Speaker 3: We believe our strategy of making internal investments in technologies, products and systems to be first to market with relevant offerings that address real needs and requirements now and today for our customers is demonstrating success.
Speaker 3: As I said before, crados doesn't sell renditions, pictures, or hoped for maybe someday products that who knows what cost, like certain of our competitors with the demonstrated history of doing this, and then failing in future execution.
Speaker 3: Fritos brings real products that actually work with actual costs and pricing to the customer and we believe this strategy is a winner.
Speaker 3: At Kratos, affordability is a technology, and better at some later day, if ever, is the enemy of good enough now.
Speaker 3: We believe that we are at the beginning of a sustained year-over-year up-and-to-the-right revenue growth trajectory, with increasing profit margins and operating cash flow. With the number of large new programs we have received, additional programs we expect to receive, and additional programs we expect to receive, we are looking forward to the next year.
Speaker 3: Our backlog and near record opportunity pipeline at approximately 10 billion.
Speaker 3: We are focused internally on operations and execution, and accordingly we do not anticipate making any acquisitions of size for the foreseeable future.
Speaker 3: Our ability to hire, obtain, and retain qualified engineering, technical, manufacturing, and other personnel remains absolutely key to Kratos achieving our objectives and future financial forecasts. We are laser focused on this and successful execution.
Speaker 3: obtain and retain qualified engineering technical manufacturing and other personnel remains absolutely key to Kratos achieving our objectives and future financial forecasts and we are laser focused on this in successful execution but that I'll turn it over to Diana.
Speaker 2: Thank you, Eric. Good afternoon. As we have included a detailed summary of the first quarter financial performance, as well as the second quarter and full year 2023 financial guidance in the press release we published earlier today, I will focus on the highlights of my remarks today.
Speaker 4: Revenues for the first quarter were $231.8 million, up from $196.2 million in the first quarter of 2022, reflecting an 18.1% increase. Excluding the impact of the SRE acquisition, which contributed $12 million in revenues in the first quarter of 2022, Kratos' consolidated revenue grew organically 12%, including a 22% increase in revenue.
Speaker 4: operating activities for the first quarter of 23 are working capital requirements to support the revenue growth, as well as continued advance purchases of inventory in an effort to mitigate supply chain disruptions and delays.
Speaker 4: Also included in our working capital uses are continued internal investments of approximately 4 million related to non-recurring engineering costs to complete new rocket systems and high-personic and related products including for creative, soos and air needs systems and continued development of certain software products supporting our open space platform.
Speaker 4: Our contract mix for the first quarter was 71% from fixed price contracts, 23% from cost plus contracts and 6% on time and material contracts.
Speaker 4: Revenues generated from contracts with the US federal government during the corridor were approximately 69%, which includes revenues generated with the DOD, non-DOD, federal government agencies, and FMS contracts.
Speaker 4: In the first quarter of 23, we generated 11% of revenues from commercial customers and 20% from foreign customers.
Speaker 4: We continue to make progress in our hiring and retention of skilled technical labor with a notable net increase in headcount of 19 plus an additional 17 clearing the pre-hire process since the end of 2022 in our C5 ISR business and a total increase in consolidated headcount of 58.
Speaker 4: from 36.45 at year-end to 37.03 at the end of the first quarter. Now moving on to financial guidance.
Speaker 4: Our second quarter and full year 2023 financial guidance we provided today includes our current forecasted business mix and our assumptions related to the expected continued impact of challenges related to obtaining and retaining qualified personnel, supply chain disruptions, inflation and related expected cost and price increases that are currently and expected to continue impacting both.
Speaker 4: increased costs and inefficiencies related to manufacturing, including in our indirect manufacturing rates. 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 over 2020.
Speaker 4: Our revenue guidance for the second quarter of 2023 reflects an approximate 3 to 7 percent increase over the second quarter of 2022. Based upon funding, production, delivery and execution schedules, second half 2023 revenues are expected to ramp and be sequentially greater than the first half of 2023, with margins expected to expand in the second half of the year on increased revenue.
Speaker 4: and defense rocket businesses, many of which are highlighted previously. 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 builds from FY22 and for the first half of 2023 and base upon estimated milestone payment schedules.
Speaker 4: instances, many of which Eric highlighted previously. 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 bills from FY22 and for the first half of 2023 and based upon estimated milestone payment schedules. Thank you, Deanna. For more information, visit our website at www.fema.gov
Speaker 1: With that, we'll turn it over to the moderator for any questions. Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.
Speaker 1: Our first question comes from Michael Chiamoli with Truist Securities. You may proceed.
Speaker 5: Hey, good evening, guys. Thanks for taking the questions. Eric or Diana, just on the guidance, the significant increase in operating income, I think, raised the midpoint by 38%. There are some other moving parts in there.
Speaker 5: Is that all tied to kind of what you just talked about, about re-pricing some of the contracts? Because I noticed there were some other changes with stock comp and the net of it is we still have the same EBITDA. Can you walk me through that?
Speaker 4: Yes, Michael, it's predominantly the estimated amortization, depreciation, and stock comp that when we first came into 2023, so that those changes have been flowed through in our current guidance. So the EBITDA remains intact with where we were before, but so those non-cash items impact the difference between just one of the involved and the whole broad array of assets.
Speaker 4: those three categories and then therefore impact operating income just the way it falls out through the income statement.
Speaker 5: Okay, okay. And then Eric, you know, obviously a lot of commentary helpful there. What sort of, I mean, I guess we have the Air Force making the ultimate decisions here with NGAD. It sounds like your customer activity is moving a bit faster than...
Speaker 6: right now.
Speaker 3: I think the way to consider the landscape is
Speaker 3: budgeteering and future amount of budgets going forward.
Speaker 3: and the future amount of budgets going forward. And.
Speaker 3: our services having to have enough aircraft to address
Speaker 3: multiple global threats that are either near-peer or they're already peer threats like Russia and China.
Speaker 3: And I believe the Pentagon has determined, as reflected by the 24 budget requests and more importantly the item. And then commentary I tried to give some examples of that the way to do this.
Speaker 3: And I believe the Pentagon has determined, has reflected by the 24 budget requests and more importantly, the final. And then commentary, I tried to give some examples of, that the way to do this is with.
Speaker 3: high performance jet drones. And in addition to addressing the quantity issue, weapon systems that the adversaries have are increasing lethality. So the drones keep our pilots because we value human life some of our adversaries do not keep the amount of farms way, etc.
Speaker 3: way I think about it is in the way I personally think about it is there is a macro
Speaker 3: shift happening to a brand new system. High performance jet drones with augmented autonomy or if you will, artificial intelligence that can carry weapons, that can do sea-add, and can do D-Add, they can do D-A, all types of missions. And I think the funding, the multiple billions in the fight of period are representative of that. I think that's the best way to think of it, that this is finally happening, it's happening in a big way, and it's a happening.
Speaker 5: across every service branch. Okay, last one just kind of on that topic and I'll jump back in the queue. I mean, you threw out kind of the $20 million price point, you know, that the secretary Kendall mentioned a couple weeks back. I mean, are you thinking about going at this market as
Speaker 5: a prime contractor or would you be better served being a sub to a larger entity and providing an airframe and letting someone else missionize it and take on all those associated risks?
Speaker 3: Right. Michael, it very well may turn out to be both. Let me give you an example. So for example, we are a prime with the United States Marine Corps right now.
Speaker 6: port of lime.
Speaker 3: We're a prime with another customer we haven't talked about. We're a prime.
Speaker 3: And if the best business answers for Kratos and all of our stakeholders is for us to partner with someone and not be the prime of being a partner.
Speaker 3: We will absolutely consider doing that Okay Got it
Speaker 3: We will absolutely consider doing that. Got it. All right, I'll jump back in the queue. Thanks, guys. OK, thank you.
Speaker 1: Thank you. Our next question comes from Mike Crawford with B. Reilly Securities. You may proceed.
Speaker 7: It's nice to see the uptick in bookings and unmanned systems that I believe is related not just to the Valkyries you saw, but also targets, including a plus up for the Navy SSAT. And could you, uh, ready, set, and...
Speaker 7: the uptick in bookings and unmanned systems that I believe is related not just to the Valkyries you saw, but also targets, including a plus up for the Navy FSAT. And could you uh, ready set what.
Speaker 7: amount of revenue you expect to get some targets in coming years and relate to that would be the annual cadence of ESAT drones which I think if we go back like five years ago or so we we thought it might be a little higher than it is now even with this most recent plus up
Speaker 4: Yeah, Mike, so it's consistent with what we guided to when we provided 2023 initial guidance. So approximately a flat full year consolidated unmanned systems with approximately 40 to even 45 million."
Speaker 4: related to tactical drones, primarily Valkyrie related with the balance of that to target drones.
Speaker 3: Right, and so beyond this year, just like in general, where you see targets going, you know, a couple of years from now. So over the next, I'll say over the next couple of years, as reflected by the book to Bill ratio, the 1.9 to 1, which as you pointed out, might correctly, was substantially target drones.
Speaker 3: We expect to see target drone growth now, and it's being driven primarily what's going on over in Europe and the Ukraine.
Speaker 3: We expect to see target drone growth now, and it's being driven primarily what's going on over in Europe and the Ukraine, and with additional countries joining NATO.
Speaker 3: surface to air weapon systems coming back into vogue to defeat drones. And so our target drones are great representative drones for the bad guys. So our target drone business we think is going to grow very nicely because of what's going on with world events.
Speaker 3: And I'm going to remain extremely cautious on the tactical side, as I have for the last couple of quarters.
Speaker 3: And we're literally not a reported as it factually happens, not as we're told or it may be stated by others.
Speaker 7: Okay, thank you. I'm just switching topics a little bit.
Speaker 7: The 400 million IDIQ from the Air Force Research Laboratory mentioned that General Tom X Lockheed, Northrop, Aurora, Warren, along with you. Do you expect like all of those funds to be deployed in that kind of shopping list? And do you have an expectation for, you know, what percent of that you're going to fight? Well, you're going to fight to get whatever you can, but that you might get.
Speaker 8: Yep, I uh...
Speaker 3: Obviously, on the CEO , I drink the Kool-Aid, but I look at this as very similar to the Skyboard program.
Speaker 3: Skyboard program came out in the world like 12 or 15 awardees, but in the end there were three of us that mattered and one of them was Kratos.
Speaker 3: And I see the exact same thing happening here.
Speaker 3: And I think that's reflected by we've already received funding under the $400 million.
Speaker 3: We've already received funding under the $400 million dollars and we're moving forward.
Speaker 7: So I think we're going to do just great, very similar to how we've done, for example, with Skyborg. Okay, thank you. And then one last one, just switching to space. So of all this revenue, how much would you characterize as, say, open space?
Speaker 7: software revenue And then kind of relate to that. Let's just take like the blue halo contract where you're I think going to recognize 160 million of revenue over eight years whether that's something that's More of a straight line or based on milestones or anything you can tell us regarding those points
Speaker 3: Right, so the second one I'll go first. Most of the programs we're on, including the one you mentioned, is like a bell curve. So it starts out on the bell curve going up, and let's use, I think seven or eight years, we'll use the example you gave.
Speaker 3: So for the first couple of years it's kept going on slow, and then in the next couple of years it ramps up quickly to the top of the bell curve. And then once the majority of the systems are deployed and you start maintaining and sustaining them, you start coming down the bell curve. That's very similar to what I believe we're going to see, for example, with Sentinel with North Pole.
Speaker 3: We're going to see an incredible ramp in the next couple three years. Incredible, which is going to be one of our biggest revenue drivers. We're going to go up the ramp. Then this is development phase or EMD. Then after that couple three years, then it's going to start coming down the curve. But I can say now, because it's been announced, L-RIP, which is the next phase on Sentinel, for example, is supposed to be awarded in 26.
Speaker 3: then that bell curve, which will be bigger, will start going up. Very similar to what's going on in our space business. So we're getting layers of these bell curves going, which is what we want to do, and which is why we're confident in the year-over-year, for the next several years, organic growth trajectory. Because we're now layering these bell curve trajectories of these programs on top of each other.
Speaker 3: On the first part of your question, Mike, it's, let me just say it right up front. We would not be winning any of these large programs in the space sector without OpenSpace.
Speaker 3: First part of your question, Mike, let me just say it right up front. We would not be winning any of these large programs in the SpaceX sector without open space. We wouldn't be.
Speaker 3: We are now either the system provider or a major subsystem provider versus a component provider. Alright? We're the system provider or the subsystem provider. We're providing in addition to OpenSpace and the software. We're of course continuing to have to provide some of the legacy hardware because that's what the customers are comfortable with.
Speaker 3: especially in very specialized or unique situations, but also the antennas. The antenna business we acquired several years ago has turned out to be a grand slam home run. So it's embedded within it.
Speaker 3: I think the part of the point where you were going, are we going to start seeing margin increase? And the answer to that is yes. And we're starting to see that now. We're seeing it. You're going to see it more and more as this year goes on. Because the software content, and we're actually licensing the open spaces part of these programs, is becoming more significant as we win more of them. So the margins are going to lift.
Speaker 3: with that licensing increase on OpenSpace.
Speaker 7: Okay, excellent. Thank you very much.
Speaker 9: Thank you.
Speaker 5: Our next question comes from Seth Seifman with J.P. Morgan. You may proceed. Thanks very much. Good afternoon. I wanted to start off asking about unmanned and just thinking about the trajectory for the year. Obviously, there's a lot of growth to come. We can see it in the backlog. But it started off down in the first quarter.
Speaker 5: And just is it kind of a gradual walk higher through the year in unmanned? Or is it that before certain work gets going, it's going to take into the back half?
Speaker 4: Yeah, Seth, it's a gradual walk from Q1 to Q2 sequentially, and then we'll see a more notable increase into Q3 and Q4.
Speaker 5: And that's based upon the execution and the programmatic involved with the backlog that we have. Great. Okay. Cool. And then, you know, similar question about cadence, maybe just in terms of cash. I mean, the one really notable item that stood out was just the receivables in the quarter, and I assume those...
Speaker 4: you know, those get collected through the year, but just is there, you know, if you help us out a little bit on the cash trajectory. Sure. So, as I have mentioned previously, the first half we see as less of a cash flow generation, and that stepping up into the second half, that's going to be based upon the cash flow generation.
Speaker 4: that receivable line, and based on the milestone schedules and payment schedules, we expect to see some of that coming back through in the second half, as well as from an inventory perspective, since we are continuing to build inventory across all of our business units.
Speaker 5: of what inning you think that we're in and where you feel like maybe we'll end the year in terms of these, you know, the various supply chain slash inflationary and labor challenges that are out there. Overall, I think we're in the sixth or seventh inning.
Speaker 3: And by the end of this year, I think the game will be over. And that's assuming that we don't blow the government up and we fund the treasury and everything. And that's assuming that the children come to resolution.
Speaker 3: So I think we're in the sixth or seventh inning. I think that we'll be out of the game by the end of the year. In the specialty metals area, the composites, the resins, etc., we've seen definite stabilization, definite normalization.
Speaker 3: definite price stabilization.
Speaker 3: in some pockets of the electronics and processing areas it's still terrible.
Speaker 3: Okay, but it's, but, but Seth, I think as I said in the last call, it's stabilized at terrible. So we can deal with a stable situation even if it's terrible because it's stabilized.
Speaker 1: Excellent. That's very helpful. Thank you. Yep. Thank you. Our next question comes from Sheila Kayagulu with Jeffries. You may proceed.
Speaker 1: Excellent. That's very helpful. Thank you. Yep. Thank you. Our next question comes from Sheila Kayagulu with Jeffries. You may proceed. Good afternoon. Hey, Eric. Deanna, how are you?
Speaker 2: Hi, Sheila. Good. Hi. So, I wanted to follow up on Seth's question, actually, on the decline in KUS. What was that due to? Was that OBSS? And when you think about the programmatic ramp in 23 and 24 with the funding profile, Eric, how does that kind of, you know, how do we see that skyline shape out? Right. So, on the first part of the question, Sheila, nothing has been announced by any customer yet on the step down, but as we said on last quarter's call,
Speaker 3: We said that we were on a tactical drone program. We expected to receive additional funding for 2023, but the customer did not have that funding. And so we did not move forward.
Speaker 3: Until additional information is put out by a customer, I just can't say any more. I don't want to get ahead of anybody, you know what I mean?
Speaker 3: information is put out by a customer. I just can't say any more. I want to get ahead of anybody. You know what I mean? Sure.
Speaker 2: Okay, and Sheila, what was the second part of the question? Just on like the 2324 ramp, what programs should we see you know, kind of the biggest growth drivers and if you could update on the Skyborg program? Oh yeah, so the biggest growth drivers are going to be GVSD Sentinel.
Speaker 3: It's going to be one. In the target drone area, it's going to be as that.
Speaker 3: And there's another program we have that we don't talk about and I cannot talk about that is going into full rate production now.
Speaker 3: In the space area, SCAR, the Space Control Network Program.
Speaker 3: What we're doing with Intel sat.
Speaker 3: We are on a program on propulsion systems, including supersonic engines. That program is right now is a very strong growth driver in addition to the B-52 re-engine program. As we head into next year, those are all 23s. So as we head into next year, in addition to each of those, and this was the layering on I was talking about.
Speaker 3: We are on a program on propulsion systems, including supersonic engines. That program right now is a very strong growth driver in addition to the B-52 re-engine program. As we head into next year, those are all 23s. So as we head into next year, in addition to each of those, and this was the layering on I was talking about, I expect IFTTT to pick.
Speaker 3: Enduring Freedom, where we're doing all the ground equipment to be a step function growth driver. We expect to receive L-RIP on that later this year. You may have seen Northrop Grumman has now received full rate production on IBCS. That's our program. We expect that one. That's a multi-billion dollar program as has been reported. That is going to be a significant growth driver next year.
Speaker 3: Mayhem is expected to be the hypersonic program, is expected to be a significant road driver for Kratos next year. MOC-TB, which we've won, is expected to be a significant road driver for Kratos next year. Those are the main ones that we have, or under contract, their programs of record.
Speaker 3: and they are going to be the next step function 24 or 23. Thank you very much. Okay, Doug. Thank you. Our next question comes from Ken Erberd with RBC, he may proceed.
Speaker 10: You say good afternoon, Eric, Indiana.
Speaker 10: Okay I wanted to ask you maybe about the the margin guidance adjusted EBIT. It looks like it steps down a little bit or flattish to down slightly in the second quarter but then consistent with your comments you know a nice step up into the back half of the year.
Speaker 10: Is that all as a result of mix from better priced contracts? And I guess my question is really, are there other levers you can maybe pull? And if any of these newer contracts or programs face any delays, does that put the full year margin in EBITDA out with potentially at risk? So it's two things, Kanzo. It's mixed related to the fixed price.
Speaker 10: So assuming the mix holds the same from a product standpoint, I guess that'll, that can be a nice tailwind even if there are maybe delays on the ramp or some of the fixed price side.
Speaker 10: That's correct. Yes. I think about the space business. You obviously call out nice growth. I think a little bit of growth than what we heard from a number of the primes. How does that business in general move through the second quarter or the back half of the year and are you expecting to see?
Speaker 3: similar growth through the rest of the year that you saw in the first quarter? Yes, we are with substantially increased margins. And it ties into your question and the question earlier on soft that Mike Crawford asked on the software.
Speaker 3: that these contracts that we've won have been awarded the RACs executing on. They are ramping. We're going up the Bell Curve. As we go up the Bell Curve, as Deanna mentioned.
Speaker 3: scheduled in the deliveries in the second half of the year are license fees for software and software products, which will be increases in margin embedded in those programs for us.
Speaker 10: I'll stop there and pass it back. Thanks, Eric. Thanks, Ianick. Thank you.
Speaker 10: Thank you. Our next question comes from Pete Skibitzki with Olympic Global. You may proceed. Hey, good afternoon, guys. Eric, you're talking to Sheila about your growth programs in 24. You mentioned mayhem and mock TB, which is a huge part of your career.
Speaker 11: Just I just wanted to run a few things by you. Correct me if I'm wrong, but those are in DRSS I think so Could you maybe level set us you know how big a revenue unit was DRSS last year and it was mayhem and mock TB And I don't know if dark fury is in there too or not. How big is that going to be you know 24 25?
Speaker 11: just want to run a few things by you. Crack me if I'm wrong, but those are in DRSS, I think. So could you maybe level set us, how big a revenue unit was DRSS last year and it was Mayhem and mock TB and I don't know if dark furies in there too or not? How big is that going to be 24, 25? Right, right. Last year.
Speaker 11: Correct me if I'm wrong, but those are in DRSS, I think. So could you maybe level set us, how big a revenue unit was DRSS last year and with Mayhem and Mach-TB and I don't know if Dark Fury is in there too or not, how big is that gonna be, 24, 25? Right, so last year in 22.
Speaker 3: Think of our rocket business as somewhere around 90 million in the ballpark. We're expecting that over the next couple years.
Speaker 3: to get to 150 to 160 million. It's quite a ramp, yeah. And the two you mentioned may have in my TV or the driver's air predominantly. They're not actually. They're two big ones for next year. We are on.
Speaker 3: They're public but I can't talk. We are in some classes. You know it ties into what I said about our launch manifest. Our launch manifest this year and next year. RockCrate Host Rocket Systems.
Speaker 3: multiple, one stage, multiple stage with all different types of payloads for all different types of missions is incredible. That is the number one growth driver for RSS that we see right now. And those are in the bag, if you will.
Speaker 3: multiple one-stage multiple-stage with all different types of payloads for all different types of missions is incredible That is the number one Growth driver for RSS that we see right now and those are in the bag if you will
Speaker 3: is the test bed, the mock test bed program you mentioned, and the mayhem system program you mentioned. And another aspect of it, a way to think about it, is literally every hypersonic program that's out there.
Speaker 3: the mock test bed program you mentioned, and the mayhem system program you mentioned. And another aspect of it, a way to think about it, is literally every hypersonic program that's out there, we are on.
Speaker 11: of the risk. This is kind of what Southern Research brought you, along with some of your organic capabilities. All right.
Speaker 11: This is kind of what Southern Research brought you along with some of your organic capabilities, is that right? That's right.
Speaker 3: That's right. Southern Research is not a home run, it's a grand slam home run. This is truly 1 plus 1 equals 3.
Speaker 11: Okay. And did I say that right? Dark Fury, is that going to be another kind of, you know, test launch vehicle for you to test missile defense systems or did I get that wrong?
Speaker 11: You touched on it real early, but, you know, should we worry about 2023 guidance in the context of the debt ceiling or a full year CR or do we worry more about 2024 with those type of events? We're sure you'll like it.
Speaker 3: I haven't, I'm being very sincere here, I'm not being flippant, I haven't been through a government default.
Speaker 3: So if that were to happen and a debt ceiling thing were to happen, my tummy tells me that would be yucky poo poo for this year. A continuing resolution, you know it just depends on how things fall.
Speaker 3: But right now, if there was a three month continuing resolution, October 1st to December 31st to 23, I don't see that impacting us significantly in 24 at all.
Speaker 3: Right now, if there was a three month continuing resolution, October 1st to 23 to December 31st to 23, I don't see that impacting us significantly in 24 at all. Okay. Okay.
Speaker 3: Okay, thank you appreciate it. Thank you. Our next question comes from Peter Arman with Baird, who may proceed. Thanks, good afternoon, Eric and Diana. Good afternoon. Eric, maybe just a capacity question. There were some comments of this past or last month on.
Speaker 3: kind of the tripling of the workforce in Oklahoma City. Could you give us kind of an update of kind of the capacity that's in place there? And ultimately, I know you mentioned some comments about the tactical drones with the next block, but how are you framing the active kind of production lines with the target and tactical there? Yeah. So
Speaker 3: I'm glad you asked this question, by the way, Peter. Resourcing and the people side, at last quarter's call, I said it was improving. It's significantly improved since last quarter. It continues to improve.
Speaker 3: The number of qualified people qualified in the engineering, the technical, the manufacturing, including those that can get high level security clearances.
Speaker 3: have been increasing.
Speaker 3: has been increasing.
Speaker 3: A big part of that, I believe, based on what we say on top of this, is one of the big primes out there had a major layoff of several hundred people, almost a thousand. And one of our big drone competitors.
Speaker 3: They had a massive layoff, hundreds of people in the past 60 days. One of our big drone competitors, which is providing us an incredible opportunity to help, especially for individuals that want to hypothetically move out of California and go to Oklahoma.
Speaker 3: They had a massive layoff hundreds of people in the past 60 days One of our big drone competitors, which is providing us an incredible opportunity to help Especially for individuals that want to hypothetically move out of California and go to Oklahoma So the backdrop is improved
Speaker 3: precipitously for us over the past six months including the last three months. Now to your question in Oklahoma. In Oklahoma we are producing three systems.
Speaker 3: Two of them I can talk about, Valkyrie and Tactical Fire Jet. The way we set the facility up is there was a base facility and then two adjacent facilities of almost equal size, think about 100,000 square feet each.
Speaker 3: where we had options or first right of refusal to expand in those as the business expanded. We have been exercising those options and we have been moving into them.
Speaker 3: The next step for us, and I think I didn't mention that last call but a couple calls ago, is the long lead item for us to go to the next step is going to be on an autoclave.
Speaker 3: an additional auto play. If things come together the way I believe they're going to come together late this year or early next year, I'll be communicating to you that we have placed the order, I think it's a nine month long lead, for the next auto play for the next step up at the Oklahoma facility.
Speaker 3: That's helpful. Thanks. Thanks, Eric. And just the end. I'm just a quick one on the you know working capital is pretty negative this quarter I know you kind of said it builds throughout the year Can you just give us a little bit of an what you how you see the working capital profile? You know for the balance of the year. Thanks Sure, I I see that use of working capital continuing in the second quarter and then to start
Speaker 1: start improving in the third quarter and improving significantly in the fourth quarter. That's helpful. Thanks so much. Thanks, sir. Thank you, and as a reminder to ask a question, please press star 1 1 on your telephone. Our next question comes from Joe Gomes with Noble Capital. You may proceed.
Speaker 10: Good afternoon and thanks for taking my questions. Hey, Joe. Real quick, and I apologize if I missed this. Last quarter, Deanna, you talked a little bit about the continuing resolution that was from last year was going to negatively impact the first quarter.
Speaker 4: I'm just wondering, what was the size of that impact in the quarter? Yeah, so that reflects what some of the awards were that were delayed, so that then impacted what our revenue guidance was for the quarter. So I don't have a specific...
Speaker 4: value for what that impact was since we looked at that a while ago, but it probably, my recollection is correct, it was probably in the $15 to $25 million range on the top line side. Mark manner.
Speaker 12: Thank you for that. Eric, obviously a lot of the stuff you talk about today and the unmanned satellite, the space, obviously those are going to be the big drivers here. But you do have some other commercial types of products.
Speaker 3: Similar to the other question, Joe, I'm glad you asked that.
Speaker 3: The unmanned ground vehicle business both militarily and commercially.
Speaker 3: Our unmanned ground vehicle business, both militarily and commercially, continues to gain momentum.
Speaker 3: A matter of fact, I think I'm probably going to put something out. We put out a summary today on OpenSpace and what happened at the Space Symposium. I'm thinking in the next month I'm going to put out something that will walk through the number of states that we're in now. We're on the road in states.
Speaker 3: with the ATMA trucks under contract with the states. We're also now in the fields with sugar beets and with other produce.
Speaker 3: And we were targeting, as I said before, we're targeting to continue the the the the the the the the shortage of truckers.
Speaker 3: and reduction in insurance costs, where you could have a man truck and then follow the leader robotic Gradle's trucks behind them, which we're doing, that go out in the field, robotically they're loaded up with the produce, they automatically go to the processing centers, and then they distribute the product for processing. And we're also right now taking a look at the mineral area.
Speaker 3: So we're in stealth mode. The business is millions of dollars now in revenue. It's gonna be several millions of dollars, I think by the end of this year. And then it's gonna do a step function from 23 into 24 based on a couple of these ones I just mentioned to you that we're under contract, we're under agreement with them. So I'm gonna put out, I'm glad you brought it up. I'm gonna do an update on that probably at the next quarter. Thank you. We'll look forward to it, Eric. Thank you and thanks again for taking the questions. All right, thank you, sir.
Speaker 1: Thank you. Our next question comes from Ellen Page with Jefferies. He may proceed. If your line is on mute, please unmute.
Speaker 1: And I'm not showing any further questions at this time. I'd now like to turn the call back over to Eric, the Marko for any closing remarks. Eric, thank you, sir. Thank you for joining us this afternoon. And we'll be circling up with you at the end of the second quarter. Thank you. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you.
Speaker 13: I.